“Good Opportunity, Bad Opportunist”

america 300x200 “Good Opportunity, Bad Opportunist”America, the land of opportunity, means different things to different people.  For most, it was a way to improve one’s living circumstances.  If a person has the right credentials, good work ethic, is resourceful, and diligent in their efforts, their situation improves.  Those from other countries find this aspect of America very attractive, especially if their native land severely limits their opportunities towards growth and independence.  One such person came to America in 1903 to seek his fortune.  This person was Charles Ponzi, who the “ponzi scheme” was named after.

Charles Ponzi was born in Parma, Italy and moved across the Atlantic to Boston in his early 20s.  He had little money and spoke no English.  Still, his hopes for prosperity were high.  His first job was a dishwasher at a restaurant, working his way up to waitor, but lost his job for stealing and cheating patrons.

He left the U.S. and moved to Montreal for about four years.  His first position was as an Assistant Teller at the Banco Zarossi.  The need for Italian interpreters gave Ponzi a leg up.  He quickly moved up the ranks to manager, which is probably where he received much of his financial education.  Unfortunately for the owner, the bank went under. What contributed to this is that he paid a high percentage to anyone who made a deposit (over 5%) and was using monies from new accounts (not profits) to pay for interest on real estate loans.  Ponzi lived with the owner for a while before moving back to the United States, but not before getting into trouble again.  He forged a customer’s name (Damien Fournier, Director of Canadian Warehousing) on a check and cashed it for over $400.  A police officer questioned him about it, and he turned himself in.  His next three years were spent in prison.

Lesson not learned, Ponzi became involved in helping Italian immigrants sneak across the U.S. border.  While serving time for that, he befriended the “mobster Ignazio, ‘ the Wolf’ Lupo” and Charles Morse, a “wealthy Wall Street businessman and speculator.”  During this time, Ponzi was put to work as a translator interpreting letters sent to Lupo.

Upon release, he returned to Boston and married Rose Gnecco in 1918. Ponzi’s mother informed Rose of his criminal history but she was not deterred. Charles tried different jobs, including an advertising business, that didn’t pan out. Then, inspiration came along that would forever make him infamous with the Ponzi Scheme.

A letter came to him from Spain that included an “International Reply Coupon” (IRC).  Basically, an IRC is a voucher that can be exchanged for postage.  He had never come across one of these before and realized that through his international contacts, he could exploit IRCs and turn a profit.  At the time after World War I, postage in Italy was dirt cheap, due to inflation.  He contacted affiliates in Italy and sent them money to purchase IRCs and had them mailed back.  Then, he would exchange these IRCs for stamps and turn around and sell them.  Reportedly, he made over “400% on some of these sales.”  Later, he sought out investors to turn even more profits.  He started the company, Securities Exchange Company, based off of this concept, and was making $250,000 per day in July of 1920, when his good fortune would take a turn.

In late July, the Boston Post began questioning how Ponzi was able to turn such quick profits and why he didn’t invest in his own company.  Further speculation showed that he had not purchased enough IRC’s to cover interest payments to investors.  To do so would put his company under.  This statement caused a scare, and he shelled out $2 million to investors to keep them happy.

He was under investigation by the US Attorney General, Daniel Gallagher; William McMasters, who Ponzi hired to handle his publicity; and Massachusetts Bank Commissioner Joseph Allen.  Gallagher was not able to conduct a very successful audit of Ponzi’s books because there was no tracking system of accounts, only names of investors.  McMasters actually proved to be a turncoat.  He provided information to the media showing that he was $2 million plus in the red.  Once again, Ponzi paid out investors.  Then, Commissioner Allen discovered that a lot of “Ponzi-controlled accounts” had borrowed over $250,000.  In August, Hanover Trust ceased making payments on Ponzi’s main account.  A few of Ponzi’s investors were forced to declare bankruptcy, a public statement was issued that Ponzi was $7 million in the hole, and note holders were encouraged to contact their Attorney General.

On August 12, 1920, Charles Ponzi surrendered to authorities, and the rest is history.  Nearly 6 banks were brought down.  Investors received about twenty-eight cents to the dollar on their investments, and overall, $18 million-plus was lost.  He finished the rest of his days either in prison or pursuing get-rich quick schemes, including selling swamp land in Florida, which has become a cliché joke in modern times.

Mr. Ponzi paved the way for future scam artists, but lessons were learned by law enforcement agencies, including the states’ attorney generals, bank commissioners, Better Business Bureaus, etc.  Schemes such as these can be more readily identified.  Better audits of companies are required on a yearly basis.  If a company is not bringing in profits and is simply using investor deposits to pay out interest to other investors, (i.e. Ponzi Scheme), that company will be flagged. While America is the land of opportunity for many, it has also been the land for opportunists.


photo credit: <a href=”http://www.flickr.com/photos/werkunz/4472467821/”>Werner Kunz</a> via <a href=”http://photopin.com”>photopin</a> <a href=”http://creativecommons.org/licenses/by-nc-sa/2.0/”>cc</a>

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About Kristal Heffley

Ad Review and Social Media Specialist of BBB serving Northern Indiana. Kristal spends a great deal of time learning, writing about, and educating the public on scams of the day. She also is quite the social-media enthusiast and community partner. You can follow her posts, i.e. BBB serving Northern Indiana on Facebook, Google Plus, Instagram, LinkedIn, Twitter, YouTube, and of course, our blog.