Everything Everywhere Daily: History, Science, Geography & More - Charles Ponzi and His Scheme

Episode Date: May 2, 2022

In January 1920, an Italian American businessman in Boston started a new enterprise. In order to raise money, he took $100 investments from 18 people and offered them a fabulous return on their money in only 45 days, and he delivered on his promise.  Soon people were lining up to give him their money and everything worked great…. …until it didn’t. Learn more about Charles Ponzi, the man whose name is synonymous with fraud, on this episode of Everything Everywhere Daily. Subscribe to the podcast!  https://podfollow.com/everythingeverywhere/ -------------------------------- Executive Producer: Darcy Adams Associate Producers: Peter Bennett & Thor Thomsen   Become a supporter on Patreon: https://www.patreon.com/everythingeverywhere Update your podcast app at newpodcastapps.com Discord Server: https://discord.gg/UkRUJFh Instagram: https://www.instagram.com/everythingeverywhere/ Twitter: https://twitter.com/everywheretrip Website: https://everything-everywhere.com/everything-everywhere-daily-podcast/ Everything Everywhere is an Airwave Media podcast." or "Everything Everywhere is part of the Airwave Media podcast network Please contact [e-mail] to advertise on Everything Everywhere. Learn more about your ad choices. Visit megaphone.fm/adchoices

In January 1920, an Italian-American businessman in Boston started a new company. In order to raise money, he took $100 investments from 18 people and offered them a fabulous return on their money in only 45 days. And he delivered on his promise. Soon people were lining up to give them their money, and everything worked great. Until it didn't. Learn more about Charles Ponzi, the man whose name is synonymous with fraud on this episode of Everything Everywhere Daily.

What if your perceptions about the past were wrong? ThruLine is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed. It effectively turned day into night. And how it shaped the world now. Time travel with us every week on the ThruLine podcast from NPR. Charles Ponzi was born Carlo Pietro Giovanni Gullimelo Tabaldo Ponzi in the town of Lugo, Italy, He was born to a family which had been quite wealthy, but had fallen on hard times. He was accepted to school at the University of Rome, La Sapienza, but he spent most of his time

drinking and partying and wound up broken without a degree. In the first years of the 20th century, waves of Italians were immigrating to the United States, and some of them were returning back to Italy very wealthy. Ponzi was encouraged by his family to do the same. So in 1903, he set out for America, and he arrived in Boston on November 15th, with a only $2.50 Because he gambled away the rest of his life savings on the ship coming over. He quickly learned English and got a job at a restaurant as a dishwasher. He worked his way up to being a waiter, but was fired because he was short-changing the customers.

And I think you can probably already tell what sort of guy Charles Ponzi was at this point. He bummed around doing odd jobs and found himself in Montreal in 1907. He got a job at a new bank called the Banco Zarosi. Banco Zorozi catered to new Italian immigrants, so it was a net. fit for Ponzi who could speak Italian, English, and French. He worked his way up to bank manager when he discovered something shocking about the bank. Banko Zarosi was offering 6% interest on their deposits, which was double the rate offered anywhere else. As such, a lot of money was coming into the bank. Ponzi found out that the bank had lost a lot of money on some bad real

estate investments. The way they were able to pay everyone their high interest was because they had so much new money coming in. The money from new depositors was being used. The money from new depositors was being used to pay off the interest from the older depositors. This obviously wasn't sustainable, and the bank eventually went under, but not before the bank's owner, Luigi Zarrozi, fled to Mexico, abandoning his family with a small fortune. Ponzi lost all of his money when the bank failed. With no money and no prospects, he then walked into the office of one of the bank's former customers, Canadian warehousing, looking for a job. When he arrived, nobody was in the office, so he helped himself to a check that was sitting on the desk and wrote a check to himself for

$423.58. He was quickly caught, hint, don't write a forged check to yourself, and he spent three years in prison in Quebec. In 1911, he was released and quickly got himself caught up in a plot to smuggle illegal Italian immigrants into the United States from Canada. That landed him a two-year prison term in Atlanta, Georgia. There, he befriended an Italian mobster and a Wall Street con man by the name of Charles Morse. When he was released from prison, he worked his way back up to Boston and took a job as a nurse at a mining camp. While there, there was another nurse who suffered burns from an accident. Ponzi actually volunteered to undergo surgery to have skin removed from his back and his legs to help

the nurse. He developed complications from a surgery and was let go from the mining company, proving that no good deed goes unpunished. He met an Italian woman in Boston named Rose Maria Genko and asked her to marry him, despite not having told her about his time in prison. Her mother found out and told her, but she went ahead with the marriage anyhow. Ponzi started a company where he would publish a directory of Boston businesses, and that failed. He then took over his wife's family fruit stand, and that failed.

It was in the summer of 1919 that he got the idea that would make him infamous. He was sending letters to companies in Europe about his business directory when one of the letters came back with something inside the letter. It was an international reply coupon. For those of you who don't know what an international reply coupon is, and I honestly don't don't know why most of you would, it's something you can buy at a post office in your country that can be redeemed in another country. For example, if I'm sending a letter to Japan, I can put an international reply coupon in the envelope. The person in Japan can then redeem the international reply coupon at their post office for postage to send me a return letter. It serves

basically the same purpose as a self-address stamped envelope would only for international mail. These are actually still available in some countries today, but they're hardly ever used. state stopped issuing them in 2013 and the United Kingdom stopped selling them in 2011. Many countries who would sell them are planning on phasing them out. What Ponzi realized was that the value of the international reply coupon was different in different countries. The cost of postage might be lower in one country than another. That means you could buy an international reply coupon for, let's say, one cent in one country, and then redeem it for a five-cent stamp in another country.

What many people don't realize in the story of Charles Ponzi is that there was, in fact, a small kernel of truth in his initial idea. There was, in fact, some theoretical arbitrage opportunity in these coupons. That being said, a theoretical arbitrage isn't the same thing as a real functioning business. More on that in a bit. In order to kick off his new business venture, he needed money, and given his string of failures, money was something that he didn't have. He went to several banks to get alone, but he was turned down, and can you really blame the banks? He then went to several friends in Boston to raise money and promised that he would deliver 50% returns in just 45 days or 100% returns in 90 days. He explained that the spread on international reply coupons was so great that he could easily get their money back.

In January 1920, he launched his own company called the Securities Exchange Company. He launched a company with 18 investors who invested a total of 18. He managed to pay them all off within a single month. He quickly opened a larger office in a proper office building. In February, the amount of money that came in was 5,000, and in March it was 25,000. He then hired agents who received a commission to drum up more sales. As word of the success of the company spread, more money started to come in, and the area from which they were sending the money grew from just Boston.

By May, the total amount invested was $420,000, and by June it was up to $2.5 million. In the beginning of July, he was bringing in a million dollars a week, and by the end of July, he was bringing in a million dollars a day. The securities exchange company set up offices from Maine to New Jersey. People were mortgaging their houses and putting their life savings into the company. The Boston Police Force invested some of their money. Rich Bostonians eventually caught wind and started investing their money. Ponzi had his money in the Hanover Trust Bank of Boston, which was a small bank that catered to Italian immigrants. He eventually had so much money in the bank that he was able to take it over.

Many of the people who invested with Ponzi didn't even take their money out. They just reinvested it in hopes of greater returns. Ponzi spent his money lavishly. He purchased a mansion and one of the best cars you could buy in 1920. He brought his mother over from Italy and a first-class cabin. He used the money to buy a wine company and a company that made macaroni in an attempt to have some profits that he could pay off his investors. Despite appearances, however, things were not well.

The entire international reply coupon scheme went nowhere. As I mentioned before, there was a theoretical arbitrage opportunity. In practice, however, it didn't work. He, in effect, was able to buy cheap stamps. However, he had no way of converting these stamps to cash in large quantities. He just had a lot of stamps that he paid a below market rate for. Moreover, even if he could convert the stamps to cash, there was no way he could possibly scale the business to a level

to justify the amount of money that was being invested. international reply coupons are really cheap. To cover his investments, he would need multiple ships the size of the Titanic, constantly running back and forth across the Atlantic, filled with international reply coupons. Because the international reply coupon business failed, he kept paying off investors with new money that was coming in from other investors. One financial writer wrote an article calling Ponzi's business a scam. Ponzi actually sued him for liable and won $500,000 in damages.

This was because at the time, whoever made the claim had to prove it, and all the journalist had was ridiculous returns he could point to. On July 24th, the Boston Post wrote a glowing article about the company, but just two days later, their opinion had turned. They actually hired financial experts to do the math. They found out that Ponzi's business would require 160 million international reply coupons, but there were only 27,000 in circulation. The post office went on record as saying that nobody was actually buying

large numbers of international reply coupons, domestically or internationally. Moreover, Ponzi didn't invest his own money into the company, which was a massive red flag. Once the Boston Post articles were published, things began to fall apart quickly. There was a run by investors to get their money out. The government got involved, worried that Ponzi would bring down the entire Boston banking industry. An investigation quickly found out that instead of having $7 million in assets, Ponzi was actually millions of dollars in debt. On August 11th, the story broke about his prior prison sentences,

and on August 12th, Ponzi turned himself into federal authorities. He was charged at the federal level with mail fraud and at the state level with larceny. On November 1, 1920, he pleaded guilty in federal court to one count of mail fraud, thus avoiding a trial with 86 counts and potentially life in prison. He was sentenced to five years in prison and was released after three and a half. As soon as he was out of federal prison, the state of Massachusetts tried him for larceny. He argued that this was double jeopardy because he already served time for the same crime, and his case actually went to the Supreme Court, which ruled against him.

In October 1922, serving as his own attorney because he didn't have any money, he was acquitted. In a second trial on other charges, the jury was deadlocked. Finally, in a third trial, he was convicted. While in jail, believe it or not, he received cards and letters from his investors and still had people who wanted him to invest their money. In 1925 he was out on bail as he appealed his conviction, and he fled to Florida. While there, he did what came naturally, and started up a brand-new scam that promised 200% returns in just two months by buying Florida Swamp Land. He was charged with securities fraud in Florida, went to trial, and was sentenced to a year in prison.

While appealing the verdict, he fled again. This time he shaved his head, grew a mustache, and tried to get on a ship back to Italy. He told one of the crew members on the ship who he was, which is always a bad idea if you're trying to use a fake identity, and was arrested in New Orleans. He was sent back to Massachusetts and served seven more years in prison. When he was released in 1934, he was deported back to Italy. His wife stayed in the United States and divorced him.

In Italy, he bounced around between jobs and scams and lived the rest of his life in poverty. He managed to find some work as a translator, which was something he was actually good at. He got a job working for the Italian National Airlines in Brazil, but when World War II broke out, he couldn't fly back to Italy and was stuck there. He ended up dying in 1949 at a hospital for the poor in Rio de Janeiro at the age of 66. Ponzi's scheme didn't just fail, it became the reference point for almost all future financial schemes.

Many of his investors lost everything, and those who did get money back only received pennies on the dollar. You'd think that people would eventually learn that incredible returns on an investment are just too good to be true, but similar schemes are still run today. The most famous was that of Bernie Madoff. Madoff actually managed to run his con for much longer and made far more money. In inflation-injusted dollars, Bernie Madoff actually took investors for more than 53 times what Charles Ponzi did. So long as people are willing to suspend reason to pursue outsized returns on their investments, there might always be people who are willing to run a Ponzi scheme.

Everything Everywhere Daily is an Airwave Media podcast. The executive producer is Darcy Adams. The associate producers are Thor Thompson and Peter Bennett. Today's review comes from listener Gravy Dave over at Podchaser. He writes, Gary answers those questions you didn't know you needed answered when it comes to history. Easy listening, great info. Thanks, Gravy Dave.

That is one thing about history. You don't know what you don't know, and it's only once you know it that you realize how much you didn't know. Remember, if you leave a review or send me a boost to you too can have it read on the show.