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PONZI: Source of the Scam

By   /   March 3, 2014  /   No Comments

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Ponzi’s pyramid of cash collapsed in August, 1920. His was a hollow pyramid.
Financial analyst, Charles Barron, commissioned by the Boston Post to analyze Ponzi’s scheme, noted that for Ponzi to cover his investments with the Securities Exchange Company there would have to be more than 160 million coupons in circulation. Barron confirmed that there were only 27,000 in worldwide circulation.

The Boston Post stories – the paper ran a series of investigative articles on Ponzi — caused a run at Ponzi’s company, and he had to pay out $2 million to crowds that swarmed his offices.

On August 11th, the Boston Post reported – with fanfare – that Ponzi was a convicted criminal, having served time in both Montreal and Atlanta prisons. The Post also reported Ponzi’s association with Zarossi’s failed bank in Montreal.
Carlo “Charles” Ponzi was charged with 86 counts of federal mail fraud.
More than half-a-dozen banks crashed after Ponzi did.
Ponzi’s investors were fortunate if they recouped any of their principal investments. Many lost everything.
Ponzi, at Rosa’s urging, pled guilty to one count, and was sentenced to five years.

At his sentencing, presiding Judge Clarence Hale, said:

“Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel’s admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out without receiving substantial punishment.”
Ponzi served three-and-a-half years, and was paroled.
Ponzi didn’t stay out of jail for long. After his release, he was immediately arrested on larceny charges in Massachusetts.
Ponzi jumped bail and fled to Texas. He apparently traveled around the Gulf region while on the lam, and was arrested in New Orleans, then returned to Massachusetts to serve his term at Charlestown state prison.
Below is the police description of him when Ponzi went to back to prison in 1926.
Age: 44.
Height: Five feet two inches.
Hair: Dark chestnut mixed with grey.
Eyes: Brown.
Occupation: Thief.
When Ponzi was finally released from state prison in 1934, he was immediately deported back to Italy. The United States government considered him an “undesirable alien.”
Rosa stayed in Boston, remarried, and relocated to Florida.
When Ponzi’s scheme was fully uncovered, it was clear there was no network of coupon-buying agents in Europe, no powerful government contacts, not even that many coupons themselves. A final audit showed Ponzi only had $61 worth of the actual coupons.
Ponzi’s scheme appealed to his investors’ emotions – their deep and personal lust for money – not their sense of prudence. His genius was psychological, not economic.

Ponzi’s scheme was basic. He simply used money coming in as new investment to make payments to earlier investors. This gave the illusion that the investment was successful. And forty thousand people bought the illusion in six months time in 1920.

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