Jul 13, 2011

Ponzi Scheme

Most of us heard of Ponzi schemes and there is an interesting story of how the name began.

Charles Ponzi was an Italian immigrant to the US in 1903. He was a con man and was in trouble with the law many times for his cons. His greatest scam, and the one that begat the name 'Ponzi scheme' is the scam he created with international reply coupons. At the time, it was common for letters abroad to include an international reply coupon (a voucher that could be exchanged for minimum postage back to the country from which the letter was sent). If you sent a letter to a friend in Italy, you could include a coupon so he could respond. This is the equivalent of a self addressed stamped envelope.

As exchange and postal rates fluctuated, there was an opportunity to make a profit. You could purchase postal reply coupons cheaply in some foreign country, send them back to the U.S. to swap them out for American stamps of a higher value, then sell the stamps, and it was legal. Ponzi started buying and selling postal reply coupons using agents from his native Italy, and he began making a comfortable living doing it. Then he became greedy.

He started to recruit investors into his system with the promise of 50% returns in just a few days. Investors would pay their cash in and Ponzi would get them the promised return. Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for his 'investment strategy'.

Ponzi was pocketing millions. At his peak, was taking in $250,000 a day. Many investors wanted to reinvest, so he didn't even have to continue to pay them the profits.

Eventually, in 1920, the Wall Street Journal ran an article debunking the scam. This was followed by a book written by a PR man Ponzi hired, but who also discovered the scam. Eventually the government came down on him for using the mail system to perpetuate his con. He pleaded guilty, spent a few years in jail, followed by another few years from another scam, and was eventually deported back to Italy. He died in 1949 in Rio de Janeiro, where he is buried in a pauper’s grave.