“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson

Born in Lugo, Italy,  as Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi came to be known in the U.S and Canada as a con artist and organizer of a scheme to grift thousands out of millions of dollars. He promised clients a 50% profit within 45 days or 100% profit within 90 days by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S.  The scheme relies on a continuous influx of new investors to keep the cycle going, and it eventually collapses when the flow of new money dries up or investors demand their returns. He didn’t invent this form of dishonest financial methodology, but it came to be identified with him and is now known as a “Ponzi scheme”.

 ‘These schemes sell people a dream of making a lot of money quickly, and well above the market rate,’ explains Mark Button, director of the Centre for Counter Fraud Studies at the University of Portsmouth. ‘The bigger the return, the bigger the attraction.’

Ponzi was not an immediate success at fraud.  He was indicted for violating Florida’s trust and securities law for attempting to sell swamp land as “prime Florida property.” He was found guilty and sentenced to one year in Florida State Prison. Later, he moved to Montreal where he learned the art of robbing Peter to pay Paul from working in a bank started by  Luigi “Louis” Zarossi. Zarossi claimed to pay 6% interest on bank deposits, which was double the going rate at the time. He was actually paying clients with funds from newly opened accounts. Eventually, the bank failed and Zarossi escaped to Mexico with bank assets.

Ponzi was penniless and attempted to forge a check from a checkbook that he found. He was confronted by police that were suspicious of the large expenditure. He was convicted and spent three years in a Montreal penitentiary. In 1911, he returned to the U.S., where he became involved in human trafficking, smuggling illegal Italian immigrants across the border. He was caught and spent two years in Atlanta Prison. 

Following his release, he returned to Boston where he experienced a series of failed jobs. He eventually opened an office where he received a letter from a company in Spain which included an international reply coupon (IRC). Postal reply coupons let a person in one country pay for the postage of a replies in another country. The price of an IRC s is the cost of postage in the country where they are bought, but could be exchanged for stamps to cover the cost of postage in the country where they were redeemed; if these values were different, there was a potential profit. World War II had greatly depressed the Italian economy so the value of exchange of postal rates was much lower in Italy, so stamps could be legally exchanged in the U.S. for a higher rate. 

Ponzi saw this opportunity and went to banks to raise capital, but he was unsuccessful. He then went to relatives and acquaintances with the promise to return 100% profit in 90 days. He was able to fill this claim easily with his first handful of clients. As word of initial success of the plan circulated in Boston, new clients furnished enough new funds to satisfy investors. The problem was that IRC exchange earnings were not the profit makers Ponzi had projected to his investors. In fact, the organization itself was operating at a large loss. His initial investors were Boston’s working class, but soon his clients ranged from paper boys to Midwestern bankers. 

The foundation of the plan soon was realized to be built on shaky ground. Ponzi not only did not have an efficient method to exchange IRCs, but the amount he would have needed to even begin to show any profit would have required a warehouse full. For example: for the initial 18 investors of January 1920, for their $1,800 investment, it would have taken 53,000 postal coupons to actually realize the necessary  profits. Ponzi not only continued to expand his scam, but lived in a luxurious manner. Some publicly challenged his finances with little success. In fact, when a Boston financial writer suggested there was no way Ponzi could legally deliver such high returns in a short period of time, Ponzi sued for libel and won $500,000 in damages

At one point, in July of 1920, The Boston Post wrote a favorable column of his exchange company which brought him a wave of even more clients. At that time, Ponzi was making $250,000 a day. Suspicions began to grow as evidence of Ponzi’s lack of  liquidity grew. The U.S. Postal Service admitted during an investigation that the amount of postal reply coupons actually being circulated was only a fraction of what was being discussed as the amount needed to support Ponzi’s exchange commission. 

Public questions of his organization’s legitimacy were growing. Ponzi decided he needed to hire a publicist to turn public opinion. It was this publicist, William McMasters that discovered and revealed Ponzi’s insolvency. Massachusetts Bank Commissioner Joseph Allen felt a run on his exchange commission would ruin Boston’s banking system. However, an investigation was initiated and the result found Ponzi to be at least 7 million dollars in debt. In two federal indictments, Ponzi was charged with 86 counts of mail fraud and faced life in prison. At the urging of his wife, Ponzi pleaded guilty on November 1, 1920, to a single count and was sentenced to five years in federal prison. He was released after three and a half years and almost immediately charged with 86 counts of mail fraud. He was convicted and sentenced to seven to nine years in prison. In September of 1925, he was released on bail as he appealed the state convictions. He shaved his head and grew facial hair in an attempt to flee the country. He was discovered and returned to serve out his prison term. In 1934, He was officially deported back to Italy. He spent the last years of his life in poverty.

I.M.H.O.

Warning signs:

Difficulty getting payouts: If you have trouble withdrawing your investment or receiving promised returns, it could be a sign of a Ponzi scheme. 

• Guaranteed returns: Beware of any investment promising a high return with little or no risk. 
• Pressure to invest quickly: If you feel pressured to invest without proper due diligence, be cautious. 
• Lack of transparency: If you don’t understand how the investment works or can’t get clear information, it could be a scam. 
• Secretive or complex strategies: Be wary of investments that are overly complex or secretive. 

Scams come in all shapes and sizes. There’s a shell game where you have to find the pea or bean. There’s the “long con” ; a confidence game where the mark is slowly drawn into a blanket of trust before being fleeced of their money. Modern gambling websites may be considered cons. Online scams call me every other day. Phishing, Bogus debts, car warranting extensions, shopping spree, home repair

Ponzi schemes are different than the average con. The victim has an element of greed, an amount of naivete and an unnatural belief in get rich quick. Ponzi schemes inflict significant harm on society by causing widespread financial losses, eroding trust in the financial system, and potentially leading to social and political instability. They can also divert savings from productive investments and create fiscal costs if bailouts are needed. The Madoff case, for example, resulted in billions of dollars in losses and damaged public confidence in the financial industry. 

The alarming reality is that the Ponzis and the Bernie Madoffs of the world illustrate the crooks that get caught. The successful ones spin their web, drain their victims and move on to set the next ambush. When did America get so Greedy? Does American society condone or even dare that segment of our culture to hold out the gold ring while another segment reaches out ignoring any dangers to get something for next to nothing?

If it looks too good to be true….

I’m SABear and I approve this blog.

What’s your opinion?