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Ponzi and Other Frauds



Carlo Ponzi was born in Italy and immigrated to New York City in 1893 at the age of 15. Anxious to make lots of money, he set to work figuring out get-rich-quick schemes. He served short stretches of time in both Canadian and Atlanta prisons for various offences, including mail fraud, passing bad checks, and an illegal immigration scheme.

Moving to Boston in 1919, Ponzi (who started using the first name of “Charles”) kept trying to figure out a successful swindle. At the same time, he was writing letters to relatives back home in Italy. Then he hit on an idea, which was essentially a crude form of currency exchange speculation.

In the early 1900s, a person could enclose a coupon with a letter in order to save a correspondent the cost of return postage. An organization, called the International Postal Union, issued postal reply coupons that could be traded in for postage stamps in many countries.

Ponzi theorized that coupons could be purchased inexpensively in nations with weak economies and redeemed for a profit in America. But, when he tried to do it, he found that postal red tape delays absorbed his profits.

However, in the process, Ponzi had mentioned his idea to others—and he found that everyone he spoke to was quite enthusiastic about getting in on the bonanza. It seemed to make sense to people; however, Ponzi was careful not to reveal that he had already discovered the scheme was unworkable.

So it was that Charles Ponzi hit on a multi-million-dollar winner! He stopped buying international postal coupons—and spent his time bringing in investors.

It was not hard to find them. They were everywhere, people who wanted to make quick money they did not earn.

In December 1919, starting with $150, Ponzi began the business of borrowing money on promissory notes. First he invited friends and relatives (he was not concerned about who he swindled) to get in on the ground floor.

His “Ponzi Plan” was simple enough: He claimed that he was making 100% profit on his money in a few months; but, he added, his problem was he did not have enough capital to fully exploit postal rate discrepancies. So he was willing to include investors on his deals.

He told them he had received a letter that contained a reply coupon that cost the equivalent of one cent in Spain but could be exchanged for a six-cent stamp in the U.S.

A few cautious acquaintances decided to risk a few dollars. Ponzi collected about $1,250 from his extended family members, his Catholic priest, and some neighbors. Ninety days later, he returned $750 in interest. Stunned investors realized they had found a bonanza,—and they told everyone! Word spread faster than Ponzi’s meteoric income.

Charles promptly rented an important address in Boston’s financial district. He was now a prominent businessman.

Ponzi was also daring. He would give a promise in writing to repay $150 in 90 days for every $100 loaned. Soon thousands of people had given him millions of dollars. Within eight months, he took in $9 million, for which he had issued notes with a paper value of $14 million. By then he had agents who were paid 10% on every loan they brought in; every loan he paid in full cost him 60%.

A person could go broke quick at this rate, but not Ponzi. As long as he kept signing up more investors, his bank accounts kept getting bigger and bigger.

Within a few months, Charles was taking in $200,000 a day and paying out dividends of 50% in 90 days (he later changed it to 100% in three months). By this time, people were begging him to take their money. Lengthy lines were forming daily outside his office.

In order to slow the return of money, he made investors wait quite a while in long lines at the back his office at one of two “redemption windows.” Once they got their money, they had to walk past lots of windows—each with a short line of people wanting to give Ponzi their money. As a result, few people walked out of the place with any money in their pockets. They kept reinvesting it.

The name of the game was greed. People were willing to part with their hard-earned cash,—all in the hope of getting money that did not belong to them. Go to any racetrack or big city bookie, and you will find the same thing. Whether it be a state lottery, video game machine, or a roulette table at Las Vegas, people want to get money that rightfully belongs to someone else. Because they are willing to steal, God permits Satan to capture their minds.

By early July, Ponzi was taking in $1 million a week. And he kept busy. Charles was buying scores of suits, lots of diamonds for his wife, limousines, and a 20-room mansion in the suburb of Lexington. One afternoon, he walked into the Hanover Trust Co., with $3 million stuffed in a suitcase—and bought controlling interest in the bank!

But then an editor at the Boston Globe began checking into the matter. A financial expert explained to him that it was impossible to make that much profit from postal coupons.

Sensing that the end was near, Ponzi drove to Saratoga Springs and bet $2 million at a racetrack, in the hope of covering some of his expensive living. He lost everything.

In August 1920, only seven months after Ponzi set himself up in business, the Boston Globe published an exposé. The entire fraud was unmasked.

Immediately, terrified investors made a run on his office, demanding their money back. Bankruptcy soon followed.

At the height of his scheme, Charles Ponzi owned only $30 worth of postal coupons,—against which he had borrowed $10 million from 20,000 investors in Boston and New York. Most investors lost their life savings. Arrested by federal agents, Ponzi was sent off to Plymouth Prison.

In an effort to recoup some of the money which had been lost, Ponzi’s collapse spawned many lawsuits. In April 1924, the U.S. Supreme Court ruled that any profit that some investors had made from the fraud must be returned and divided equally among all the investors. That ruling still stands.

When Ponzi got out of jail, he moved to Florida and began selling worthless swampland—until he was arrested and deported to Italy.

In the 1930s, convincing Benito Mussolini that he was a financial genius, Charles was given a high-level job in the Italian Government. It was then discovered that he had difficulty with basic math.

Eluding arrest, Ponzi stuffed stolen cash in several suitcases and boarded a ship for South America. Several years later, he died in Brazil in a hospital charity ward.


From that day to this, Ponzi schemes have been outstandingly successful at pulling in the money. Greedy investors are promised large returns on their money with little chance of losing it. Fast, excited talk of “low risk,” “no risk,” and “quick returns at high percentages” is what you will hear.

Because people are at first rewarded with a little money for their participation, the perpetrator of the scheme is thought to be something of a financial genius. An illusion of a highly successful business is imagined. Those who buy in are considered “smart.” Those who stand outside, questioning, are considered “losers.” In the thinking of those he captures, Satan has a way of turning things upside down.

The number of possible schemes are endless. In one Ponzi-type decision, Kugler vs. Koscott Interplanetary, Inc., the New Jersey Supreme Court wrote:

“Fraud is infinite in variety. The fertility of man’s invention in devising new schemes of fraud is so great, that the courts have always declined to define it . . All surprise, trick, cunning, dissembling and other unfair ways that are used to cheat anyone is considered as fraud.”


Almost all modern Ponzi schemes are based on a semi-plausible business as the explanation for the astounding potential growth of the investor’s money. Here are a few examples:

Amtgel Communications, A San Diego-based telephone equipment leasing company offered to sell pay phones to investors for several thousand dollars and then immediately lease them back, locate them, and service them. The scheme lasted four years (1992 to 1996) and took in over $60,000.

Cynthia Brackett, in Greensboro, North Carolina, told her neighbors that she could sell as many antique furniture items to wealthy people as she could get. Her problem was that she needed money with which to buy more furniture. She offered 10% for a 30-day-note. By 1991, when the scheme collapsed, she owed nearly $1.5 million to over 60 investors.

Joshua Fry owned a small investment advisory firm near Baltimore. A friendly, enthusiastic person, he impressed clients with detailed explanations of a program he developed for investing in the volatile derivatives markets. He claimed to have a method for maintaining the profitable upside of derivatives investments while, at the same time, reducing the downside risk. Fry had told people that his method involved no more risk than investing in General Motors’ stock. Actually, for Fry, there was no risk; for he invested in no derivatives at all, preferring to buy race horses and visit Atlantic City casinos. Nearly 200 investors gave Fry a total of more than $5 million. When the end came, he fled; but he was was arrested 14 months later in Cincinnati.

In the 1990s, a whole new wave of Ponzi schemes began when people began going online. The internet has proven to be a handy means of defrauding people. For more on this, go to A project of the National Consumers League, it was launched in the mid-1990s. NCL president Linda Golodner says, “Our website alone has received more than 300,000 visits from consumers and averaged 25,000 hits a week.” That may not be as many as receives (125,000 a week), but it is still a lot.


The Ponzi scheme may bring quick gains from equipment leases, bridge loans, mortgages, or currency futures. But they are all grandchildren of what Charles invented in 1919. And they all crash nearly as fast.

Once a Ponzi man gets money from a few folk, he then has to bring in a second wave of investors. This is the crucial part. If he succeeds there, the scheme often drives its own growth. So a certain level of word-of-mouth publicity is essential.

Soon a lot of money is moving around, but little or none of it is going to anything that brings a legitimate profit. As soon as the number of new suckers dwindles even slightly, the whole thing collapses. Here is why:

Whether it be a Ponzi scheme or its sisters’ (a pyramid plan or a chain letter), the continuation of the fraud is dependent on each new level of participants securing more persons to join. In a four-level scheme, in order for all of the first group of new participants to be paid, 64 people had to join. But if it increases to 20 levels of new participants, 8,388,608 additional investors would be needed. That would total 16,777,200 people in the scheme! But such numbers are a practical impossibility.

Here are the primary reasons the schemes are successful for a time:

• People are gullible.

• People are greedy.

• A relative or close friend seems to be succeeding, so I can too.

• The actual “business” operation is kept secret.

• People are lonely and want to belong to something.

• People are desperate to solve their problems and willing to take a chance.


Is there any difference between a Ponzi scheme and a pyramid scheme; and if so, what is it?

Although the terms are used interchangeably by most consumer advocates and many law enforcement people, they are not fully the same.

The main difference is that, in a Ponzi scheme, the money is handed over to be invested. But, in a pyramid scheme, the money is handed over for the right to do something. In most instances, this is the right to become a member and solicit new members or to open a franchise of a “fast-growing” business operation.

Ponzi schemes are always illegal. Depending on how they are structured, pyramid schemes may or may not be.

Ponzi perpetrators keep their growing need for new money very quiet while pyramid schemers announce their need as part of their sales pitch. In either case, the scheme has to keep doubling, tripling, or quadrupling in size to avoid collapse.

In a typical pyramid scheme, you pay, say, $5,000 and receive a special label; for example, you become a “junior sales executive.” After recruiting two other such investors, you move up the ladder and become a “senior sales executive.” As those beneath you recruit still more, you keep moving up to “branch manager,” “district manager,” and beyond. Everyone is pouring in money and thinking they are going to get rich. Then the pyramid generally collapses.

The above explanation may sound ridiculous, but only because it is stripped of the high-sounding wording and complicated details (always complicated details!) which makes it seem so plausible to the gullible.

The few pyramid schemes that do not fail are those which, although offering great rewards to those who recruit lower-level workers, manage to remain legal only because they provide low income based on actual product sales to real customers. Amway is an example.


To protect yourself from Ponzi and pyramid schemes, remember the following five points:

• Do not expect to get rich quickly. If an investment sounds too good to be true, it probably is.

• Most bad deals offer high yields and meaningless talk of “guarantees” to “zero risk.” The promise of high returns almost always implies high levels of risk.

• Be suspicious of any investment opportunity that seems inordinately complicated. This often is intentional; for it encourages consumers to make the investment on faith, without really understanding what it is all about.

• Ask an investment adviser or accountant to review the prospectus or offer memorandum with you. Promoters who balk at this kind of review should be treated with suspicion. They always want you to trust them, without seeking professional counsel.

• Ponzi schemes often straddle regulated and non-regulated markets—but reputations are steady things. Check out the promoters with government regulators or industry trade groups.

Before concluding this section, here are a few additional pointers:

• Do not give any personal information to someone who phones you. This includes your bank number, social security number, credit card numbers, etc. Important: if you did not initiate the call, be wary! One such scam is a phone call which is said to be from your bank, and you are told that they need your bank account number to check on something.

• Do not agree to any bargain investment opportunity that you are offered by phone. Several years ago, while working right here at my desk, the phone rang and a mature woman told me about a wonderful currency exchange deal I could get in on. Thinking to myself, “Great, I’ll get a chance to learn more how these scams work,” I replied, “Send me a brochure of your services.” Before I could give my address, the line clicked dead.

• Do not respond to any offer with which you are presented, either by mail or in person. Back in the mid-1970s, while working in another state, I received a phone call from a man with a New York accent, who offered to sell me acreage in Florida. He said it was “an incredible bargain” since ITT had just contracted to purchase some land 80 miles away! I thought to myself, “This is ridiculous.” The man was offering empty land out in nowhere in Flagler County. He seemed astounded that I would turn down such an opportunity.

• Beware of any phone call from someone who needs your credit card number so you can donate by phone to some needy organization. You did not initiate the call, so do not give your credit card number.

In brief, if anyone contacts you—whether in person, on the phone, by mail, or on the internet—and offers you a way to make money a little easier and quicker—it is probably fraudulent. Why is he spending his time trying to make you rich, when he could amass all that wealth for himself?