Charles Ponzi: Origin of the Ponzi Scheme

Charles Ponzi bilked thousands of investors out 20 million dollars back in the 1920s. That 20 million would be worth 225 million dollars today. 

Ponzi’s company, the Securities Exchange Company, promised incredible returns of 100% in 90 days. He was eventually caught and sentenced to 12 years in prison.

Ponzi Particulars 

  • Theme: The Securities Exchange Company, international postal reply coupons 
  • Fraud:$20 million ($225 million in today’s dollars) 
  • Promised Return: 100% in 90 days 
  • Investors defrauded: Thousands (exact number unknown) 
  • Date discovered: 1920s 
  • Where: Boston, Massachusetts 
  • Prison sentence: 12 years

Boston, Massachusetts—1918 

Charles Ponzi glanced around his 5th-floor office in the grimy Niles Building on School Street. His Boston business address could not hide the fact that he was a complete and utter failure. His current business venture had not panned out, the latest in a string of failures. He had no rent money, and his office furniture was about to be repossessed. Worst of all, he had run out of lies to tell his mother back in Parma, Italy. 

His circumstances were not what he had envisioned when he had disembarked from the SS Vancouver in Boston Harbor in 1903 with a few dollars in his pocket and a big dream. Here he was, fifteen years later, his dreams of striking it rich in America in stark contrast with reality. He had little to show for his efforts other than odd jobs and jail time in both the U.S. and Canada. 

He now faced imminent bankruptcy. He had a wife to support and a father-in-law demanding repayment of the loan for his latest get-rich-quick scheme—a business directory. 

But the money for the directory was gone, and he’d have to go back to the drudgery of working for someone else for a pittance. Trouble was, they never paid him enough to support the lifestyle he deserved. He sighed. Why couldn’t he get a break? 

Ponzi lovingly extracted his gold pocket watch from his tweed jacket and flipped it open. Ten minutes until the furniture store man came to re-possess his rented office furniture. He was already behind on his payments by several months and had run out of excuses. The upside to the furniture being gone was that he no longer had to move it when the landlord evicted him for his unpaid rent. 

In a few hours, he would face Rose’s father at dinner. Mr. Gnecco’s already low opinion of him would experience a further decline. The Trader’s Guide had been a sure thing—a free foreign trade publication that earned its revenues from business advertising. With cheaper rates than the competition, he had been sure companies would come running. The ads hadn’t materialized—instead he had received only a half dozen U.S. replies and one from faraway Spain. Worse still, the Spanish reply had mailed him something called an International Postal Reply Coupon instead of the required cash. 

He picked up the coupon and studied it. The Spanish was close enough to his native Italian for him to understand that he could redeem the 30-centavos coupon for 5 cents at any U.S. post office. 


Broke or not, a nickel was hardly worth a trip to the post office. He crumpled the paper in his palm and tossed it into his soon-to-be re-possessed wastebasket. 

As he stared at the trashcan, his brain automatically computed the numbers. Thirty centavos for a nickel was a 6-to-1 exchange rate. Did he read that correctly? 

His pulse quickened as he picked up the Boston Herald from his desk and flipped to the business pages. He opened to the currency page and traced his finger down the narrow column. Halfway down in tiny print was the Spanish peseta, at a rate of 6.6 to one U.S. dollar. He quickly redid the math. The exchange rate on the international reply coupon was 10% better than the rate in the Boston Herald. He could get 5 cents from the post office, when the going rate was only 4.5 cents. 

Five cents for thirty centavos. One IRC wasn’t worth a trip, but 10 percent of a bigger amount could make it worthwhile. How could he get more coupons? 

Ponzi shot out of his chair and retrieved the crumpled coupon from the trash. He unfolded it and read it carefully. Sure enough, the coupon stated it was redeemable for 5 cents, and that the rate was fixed by an international treaty. Irrelevant, since he didn’t know anyone in Spain. 

But if the post office had agreements with Spain, surely it had arrangements with other countries. Was there such an agreement with Italy? All of Europe had sunk into a depression after the war, none more so than Italy. If Spain had a currency difference, so would Italy. Being born there, he knew people in Italy. People who could help him make money. Boatloads of money.

The Securities Exchange Company, Boston MA—1918

Charles Ponzi was born Carlo Ponzi in Parma, Italy in 1882. He arrived in Boston in 1903, stating that he “landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me.” It is difficult to verify his claim that he gambled away most of his money on the voyage to America, given his penchant for stretching the truth. What we do know is that he was constantly on the lookout for easy money.

Working for someone else was not his idea of a satisfactory career. After an entry-level job as a dishwasher, he worked briefly as a waiter. He was soon fired for stealing and shortchanging customers. He worked a variety of jobs, but never seemed to last anywhere. The backbreaking life of a laborer was not for him. 

A stroke of luck landed him a job at the Bank Zarossi in Montreal, where he had moved in 1907. The bank served Montreal’s large immigrant population. Its founder, Luigi “Louis” Zarossi, probably served as Ponzi’s inspiration. Zarossi paid depositors 6% interest—twice the market rate at the time. It turns out that Zarossi paid the interest out of new depositors’ funds. Maybe what we now call a Ponzi scheme should be called a “Zarossi scheme.” The fact that Zarossi named his bank after himself was probably a warning sign of things to come.

Zarossi escaped to Mexico with most of the bank’s money, leaving his family behind and destitute. Ponzi probably never imagined he would do something similar a few years later. Or perhaps, in the back of his mind, he believed that if he ever did such a thing, he’d be far more clever.

Once Zarossi’s scheme was discovered, Ponzi found himself penniless and out of a job. He wanted to return to the United States but needed money to get there. He visited Zarossi bank customer Canadian Warehousing, no doubt to perpetuate some sort of fraudulent scheme. To his surprise, the office was empty and a company checkbook sat unattended on a desk. Always the opportunist, he proceeded to capitalize on his good fortune by writing a check to himself and forging the signature of a company director. Cashing the check earned him a three-year prison sentence. His impulsive and reckless behavior always seemed to catch up with him.

Ponzi was released from prison in 1911 after serving his sentence. He returned to the U.S. and immediately became involved in smuggling illegal Italian immigrants into the country. This crime resulted in another two-year prison sentence.

In Boston, he met his future wife, Rose Maria Gnecco, and also came up with an idea to sell advertising in a business directory. His idea received only a lukewarm response from most businesses, but one of the respondents was a Spanish company that enclosed an International Reply Coupon (IRC). Ponzi was intrigued by the fact that the coupon would allow him to buy the equivalent postage needed to post a letter, regardless of the strength of that country’s currency. For example, the price of the IRC was much lower in Spain, yet it bought U.S. stamps at a much higher value than what the Span-ish company had paid for it. In essence, he could buy these IRCs at a cheaper price in one country and sell them for a higher price in another. This simple arbitrage on currency fluctuations could be his ticket to riches.

Ponzi sent borrowed money to his Italian relatives to buy IRC coupons to send to him. Once he had the coupons in hand, he found that the bureaucratic red tape to redeem them made it hardly worth the effort. However, if he cashed enough of them, it would make the scheme worthwhile. Of course, scaling the idea meant getting other investors to give him money.

Other investors had to provide the capital since it was almost impossible for him to obtain financing. The banks turned him down due to his shady history, lack of a job, and no collateral. He also insisted on keeping the details of his plan a secret, so no one else could move in on his surefire way to get rich. A bank loan meant he would have to divulge his money-making plans. Whomever he told might steal his idea.

He decided instead that it would be easy enough to raise small amounts of money from many different investors, as long as he tempted them with generous enough returns. If he made the investment small enough, they wouldn’t ask too many questions. 

Ponzi did not want to use his own name. Someone might research his background and find out he was an ex-con. He also needed a company name to project the right image of stability and credibility. 

A corporation was impossible because he couldn’t afford a lawyer. That left a partnership, but he couldn’t risk sharing his idea with anyone. So the Securities Exchange Company was born, a “partner-less” partnership, he liked to call it. Except when he filled out the form at Boston City Hall, the registration form required him to list a partner. After a moment’s thought, he listed his uncle, John S. Dondero, confident Uncle John would never find out. Now that his company was registered, he set about finding investors to finance the purchase of the IRCs. He raised small amounts at first, ten dollars or so by issuing promissory notes with a return of 10% in just 90 days. Whatever talent Ponzi lacked in financial acumen, he more than made up for in his understanding of human nature. The mere mention of something as exotic as foreign exchange always drew interest, and adding a 50% return made it irresistible.

He soon employed agents to sell his investments, promising them a 10% cut. There were no regulations to follow, as the Securities and Exchange Commission would not exist until a few years later in 1921. It was an easy sell; small amounts easy enough to take a chance on, and the potential payoff caught people’s attention. In Ponzi’s own words: 

“It might have looked economically unsound as an investment. But it was extremely attractive as a gamble.” 

All he needed were the coupons. That was easily achieved with the help of a friend working on a transatlantic liner. Sure enough, the coupons were available. At this point, nothing was illegal. Once Ponzi’s friend brought the coupons from Italy, he simply redeemed the coupons and returned the money to his investors, as promised. 

Of course, they all wanted to reinvest. So did multitudes of new investors, eager to get rich. When the early investors reaped the profits, word spread quickly. This word of mouth was exactly what Ponzi was counting on. Many more investors lined up with their money, and repeat investors increased their stakes. Rather than $10 or $20, many invested all their savings and even took out loans. 

Ponzi’s cash grew exponentially. In February 1920, the first month of operations, he brought in $5,000. One month later, it increased to $30,000, and just a couple of months after that, $420,000. By July, he was making millions, especially after a flattering article in the Boston Post in late July 1920. That article changed his life. Thousands came to the Niles Building, eager to invest with him.

July 24, 1920 was unlike any other Saturday Ponzi had ever seen. Huge crowds gathered outside 27 School Street after the Boston Post story about Ponzi and his Securities Exchange Company. It seemed to him that almost all of Greater Boston’s two million inhabitants waited outside the building, anxious to get a piece of his lucrative postal reply coupon business. Policemen on horseback held the crowd in check. He was now bringing in a quarter of a million dollars per day. What a difference from only a few months ago when he was broke and down on his luck.

Unfortunately for Ponzi, it also attracted the attention of some skeptics, including Richard Grozier and Eddie Dunn, the acting publisher and editor, respectively, of the Post. They decided to dig deeper and enlisted the services of Clarence Barron, of Barron’s financial paper fame, to provide financial analysis and opinion of the likelihood of Ponzi’s claimed return on investment.

On July 26th, the Boston Post ran a follow-up article. It was less than complimentary. Barron noted the fact that Ponzi was not investing his own money in the Securities Exchange Company. If it was such a great investment, why didn’t he invest alongside his shareholders? 

Barron also concluded that since there were only 27,000 postal reply coupons in circulation, Ponzi’s numbers didn’t add up. He would need to have at least 160 million in circulation to cover his purported investment returns. 

That didn’t stop the crowds from gathering outside his office. However, this time exuberance was replaced by anger and panic. Ponzi tried to placate the crowd with coffee and donuts. That, coupled with a dose of his charisma, seemed to work for some, who decided to keep their money invested. 

However, both Barron’s article and the crowds outside Ponzi’s office had caught the attention of Daniel Gallagher, the U.S. Attorney General. He as- signed Edwin Pride to audit the Securities Exchange Company. Ponzi decided the best defense was a good offense. In August 1920, he 

sued one of the reporters for libel and won a judgment of $500,000. To assuage any doubt about his ability to cash in all the postal reply coupons, he simply stated that his trade secret lay in how he cashed in the coupons. 

Most believed him. He was invincible. 

The immense popularity of the postal reply coupons also brought another set of problems. Even if he could get his hands on enough coupons, the transatlantic return voyage to and from Europe took too long to turn around the investment in the required time frame. 

Meanwhile, the audit went on, and Ponzi continued to insist his success lay in his secret methodology. He temporarily closed the company to new investments, using the audit as an excuse. He also hired a publicity agent, William McMasters, who was a former reporter. 

It is difficult to determine exactly when Ponzi stopped buying the international reply coupons. At whatever point he stopped buying them, the scheme became a fraud. Eventually, though, it became obvious to others besides Barron that there simply weren’t enough international postal reply coupons in global circulation to provide the returns to the multitudes of new investors. 

The audit also turned up irregularities, the most egregious of which was the lack of an adequate bookkeeping system. Ponzi had no accounting system whatsoever. His records consisted of investor names printed on index cards, which was a huge red flag. 

It wasn’t only a few journalists and non-investors who became suspicious. William McMasters, the publicity agent, was shocked at Ponzi’s deplorable lack of financial knowledge, given that he purported to be a financial genius. A little digging confirmed his suspicions that all was not as Ponzi would have him believe. Rather than raking in the profits, Ponzi was actually in the hole for at least $4.5 million.

McMasters, another opportunist, sold his story to the Post for $5,000. The story caused a run on redemptions, but Ponzi somehow managed to meet them. 

Meanwhile, the U.S. Attorney’s audit uncovered even more startling discrepancies. Ponzi was more than $7 million in debt. Matters only deteriorated further when the Post discovered Ponzi’s Canadian criminal record and jail time. The same day the Post revealed Ponzi’s criminal record, the Bank Commission seized Hanover Trust, a bank Ponzi had previously taken over with his millions. 

In all, Ponzi’s scheme caused the failure of six banks and losses of more than $20 million. He was arrested and charged with mail fraud. He pleaded guilty in exchange for a lighter sentence of only five years but served only three-and-a-half years. That was not the end of his troubles, however. Once released from federal prison, the state of Massachusetts brought charges against him. He was too broke to hire a lawyer to defend himself against the 22 charges of larceny, so he represented himself. He used his charm to beat the first ten counts in his first of three trials. 

His next two trials were not as favorable. His second trial was deadlocked. At the third state trial, he was convicted and sentenced to seven to nine years in prison. 

While still out on bail, he hatched another scheme, selling swampland in Florida under the company name Charpon (formed from letters of his first and last name). Once found out, he tried to flee to Italy aboard a transatlantic ship. However, he was apprehended at the ship’s last U.S. port of call in New Orleans. He had his bail revoked and was shipped off to prison to serve the rest of his term. 

Upon Ponzi’s release in 1934, he was immediately deported to Italy. He eventually landed a job with Ala Littoria, an Italian airline. The position was based in Brazil, but that ended with World War II, when flights to Brazil ceased. By his own account, he made $15 million in nine months, only to lose it all in the end. 

His wife Rose finally divorced him, and his health declined after a stroke. Ponzi’s fall from grace was even more rapid than his rise to fame and for- tune. He spent the last years of his life in Rio de Janeiro, where he died alone and in poverty on January 18, 1949.

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