How Ponzi Prospered

Famous Scheme Produced Millions Before Pyramid Collapsed

By Joseph T. Wells, CFE, CPA

Charles Ponzi, an immigrant from Italy to Boston, Mass., wasn't the first to foist an illegal pyramid scheme on the public but he did manage to develop it into a fine art. Most fraud examiners know about his investment swindle (after all, it warrants a dictionary entry) but few know the specifics. This excerpt, adapted from "Frankensteins of Fraud," by Joseph T. Wells, CFE, CPA (Obsidian Publishing Company, Inc. ©2000), describes the scam that bears his name, and his eventual demise. 

Charles Ponzi finally got his payoff by cornering the market in postage stamps. It was 1920. Millions of European refugees flocked to America, Canada, and Brazil. Family members left their kin in the night. They would die apart from everyone, their only contact a letter now and then, with a few dollars enclosed. Families longed for the mails, clutching the crumpled paper like sacred texts.

The Universal Postal Union arranged to move all those letters, business documents and messages across national lines by issuing postal reply coupons. You bought a postal reply coupon in your host country and enclosed it in your letter. Your mother, once she got your letter, exchanged the postal reply coupon for stamps at her local post office. Your reply arrived in a few weeks, or it might take longer - the UPU couldn't work miracles - but it usually arrived.

* * *

Charles told his fellow North-Enders in Boston, that during December of 1919 he had been playing the mails. "Everybody's heard of the Postal Union. They print coupons like these I'm holding here. Postal reply coupons - so you can send a letter back home, or anywhere in the world. You can trade this coupon for a stamp from any country. I send my mother coupons with every letter home.

"Now, in cooperation with certain large businesses in our city, I am making a fortune on the postal reply coupon. Stocks are too risky. Forget it. And bonds, what are they paying? How much, can anyone tell me? Bonds are paying six percent, maybe? Savings accounts at Tremont Trust, they'll give you four and a half cents on the dollar. Give them $100 and they'll give you back $104.50.

"I can beat that into the ground!" Charles shouted, whacking his cane against the floor. "My investors get 50 cents on the dollar! Place a hundred dollars with the Securities Exchange Company, and you take out one-fifty. Put that one-fifty in, you'll get back two-twenty-five. That's right, in six months, you can more than double your money."
How could he pay 50 percent when banks couldn't manage five? "Exchange rates," Charles explained. "Every morning I go down and check to see how the lira is doing against the dollar. Usually you get five lira for a dollar. This morning I checked and with the war just ended, it takes 20 lira to make a dollar." While currency exchange rates were bouncing around like popcorn, Charles pointed out, the postal reply coupon always bought one stamp. "Here's what I do," Charles said.

  • I send my cousin in Parma, Italy, $1.
  • He exchanges the dollar for lira. With the 20 lira (2,000 centesimi) we can buy 66 postal reply coupons (worth 30 centesimi each, the cost of a letter-sized stamp in Italy).
  • Back in America, each of the coupons buys one stamp, face value five cents. I redeem all 66 coupons for $3.30 worth of stamps.
  • The magic happens in the exchange rate. In America, my dollar buys 20 postal coupons. But if I exchange the dollar for lira, and buy the coupons in Italy, then return and buy the stamps in America, I get $3.30 worth of stamps for that same $1. My profit margin is 230 percent!
    "Yeah, but $3.30 worth of stamps is still stamps," an attentive listener offered.
    "Precisely," Charles replied.
  • So I sell the stamps at a 10-percent discount through my contacts with the larger firms downtown. Deducting the discount, I've got $3 cash now from the $1 I started with.
  • Now let's say, I got that first dollar from you. I will pay you back your dollar, plus 50 cents interest. Since I just sold $3 worth of stamps, I have a dollar and 50 cents for myself. I'm going to spend a third of that on my offices and processing overhead, and a third on commissions and bonuses to my salespeople, and then, ladies and gentlemen, I'm going to pocket the other third and take my wife for a stroll.

$ 3.00 Sale of Stamps
-1.00 Initial Investment
-0.50 Interest to Investors
$ 1.50 Overhead and Profit


There you have it, brimming with flim and flam, the original Ponzi scheme, the "Coke Classic" of American crime. What Charles saw in the postal reply coupon tells you a lot about what sort of man he was. The proposal had an element of goofiness about it; the logic held up, provided you didn't dig too deeply. Charles had seen that, while national currencies were fluctuating like crazy, the UPU's coupons were always good for X amount of stamps.

Charles named his concern the Securities Exchange Company, noting with pleasure how the capital letters he'd painted on the office door formed an almost complete circle, with a small dollar sign at the bottom acting as a link.

* * *

When 18-year-old Lucy Meli arrived to take up her secretary's position at the Securities Exchange Company, she answered yes, she knew basic bookkeeping, whereupon Charles dropped his "records" onto her desk. He nodded at the file cards, three or four stacks of them, and snapped open the binder clips on an oblong loose-leaf ledger. Lucy smiled and wondered what to do next.

After a week of reorganizing the "records," Lucy made her report. Charles had matched the $870 he received in December with $900 in January. He brought in $5,000 during February, and now, with the arrival of spring, the pace was leaping to nearly $1,000 a day, almost $30,000 for the entire month! The best Lucy could tell (and who could know for sure?) by mid-April Charles would owe about $53,000 on the notes he'd sold since January.

* * *

In April, 150 souls carried $141,000 into Ponzi's makeshift office. Ms. Meli and the staff of young clerks, some of whom could barely add and subtract, nearly went berserk. Money viewed in bulk massages the viewer's reality. Nothing's the same after you've beheld a chimney stack of dollar bills. Charles' staff gasped at the sight of money towering from shelves and desktops, at the drawers that wouldn't close because they bulged with legal tender. The entire office reeled from the effects, the clerks' voices becoming funhouse silly, their faces stretched tired at the end of the day from laughing.

The haul for May approached $500,000. More than 1,500 new customers placed their funds with the Securities Exchange Company.

* * *

Charles had no time for scratching about in other people's business, but he did have partner problems. He didn't have a partner, it's true. But Joseph Daniels filed a lawsuit alleging that he'd helped found the Securities Exchange Company with a loan of $230 worth of furniture and $200 in cash. Daniels had provided the beat-up desks that first hunkered in the dusty School Street office, and he had let Charles have a couple hundred dollars to spark interest in the postal coupons. It wasn't just a loan, Daniels maintained, now that the spunky promoter was drowning in cash: "We were partners. I put up capital and property." On July 2, deputies handed Charles a notice demanding $1 million.

The Boston Post called. Charles told the reporter, "When I opened, I bought furniture from Daniels; but he never left any money with me for investment." Charles said he had nothing to fear from Daniels' lawsuit.

One of the readers perusing the next morning's Post was Joseph Allen, the newly installed bank commissioner of Massachusetts. "Why have I never heard of this Ponzi?" Allen wondered. "Where did he come from? Who are his associates? How is he doubling people's money?" Commissioner Allen called to ask Boston's hottest financier to drop by the statehouse, a courtesy call to be sure. The Securities Exchange Company didn't refer to itself as a bank or offer any banking services. Therefore, absent a complaint - and there were none - the commissioner's office had no jurisdiction for poking into Ponzi's business.

"We simply have, as they say, a curiosity," the commissioner explained. Allen's curiosity remained unsated even after he and two assistants spent the better part of an hour talking with Charles. After pattering as usual about postal coupons and how money chased money, Charles bade the commissioner goodbye.

* * *

Charles never saw it coming. He stayed so busy puffing his chest and scrambling from one crisis to the next that he didn't anticipate that his enemies - the banking establishment and its cronies - would dare call him a liar. Richard Grozier had recently risen from reporter to city editor at the Boston Post. He had never liked Ponzi's circus barker act, and he knew in his gut the SEC wasn't turning millions on postage stamps.

Grozier took aim at Ponzi's operation by eliciting commentary from one of Boston's premier citizens, the man said to have created financial journalism as we know it, Clarence Barron, owner of Dow Jones & Co. and The Wall Street Journal. On the last Monday in July 1920, the Post frontpaged its story:


Theoretically you could turn a profit on the UPU coupons, Barron admitted. But that's the only truth in the operation. You could never make more than a few thousand, not just because of the trouble of offloading the stamps and tracking the various conversions driving the process, but because there simply weren't enough coupons out there. France, Romania, and Spain had left the system several months before. A cursory check with the UPU showed they had a few hundred thousand dollars worth of stamps in circulation, nowhere near the $10 million to $15 million Ponzi claimed to be trading. So where was Ponzi getting his coupons? Furthermore, the U.S. Postal Service had announced weeks earlier, on July 2, that postal reply coupons would not be redeemed in lots larger than ten. Where, then, was Ponzi turning his coupons into stamps? 

Finally, Barron asked, if Ponzi is doubling everyone else's money, why does he keep his own funds in regional banks? The Post knew that Ponzi kept millions on deposit in seven or eight New England banks, and those accounts were growing. How could a man paying 100 percent interest every 90 days stomach drawing four or five percent a month? 

Barron concluded, "Right under the eyes of our government court officials, Mr. Ponzi has been paying out U.S. money to one line with deposits made by a succeeding line." The so-called financial wizard of School Street turned out to be another goldbrick salesman. It was the beginning of the end.

For Charles Ponzi, the summer of money was ending. All the doors that had flown back on their hinges for Ponzi were slamming shut. The Massachusetts district attorney ordered him to stop his operations, his customers demanded their money back, and the business was insolvent. Eventually, he was convicted of federal mail fraud and served 3 ½ years of a five-year sentence. The state of Massachusetts then sent him back to prison for another seven years (after he had skipped bail and ran shady land deals in Florida), and he was finally deported to Italy in 1934. After several failed schemes in Italy and Brazil, he lived out his days as a stroke victim in a Rio de Janeiro charity ward. 

Joseph T. Wells, CFE, CPA, is founder and chairman of the Board of the Association of Certified Fraud Examiners. 

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