Wall Street Crime And Punishment: Charles Ponzi

Does crime pay?

This is the first in a weekly series, Wall Street Crime and Punishment. Starting with Charles Ponzi of the famed “Ponzi scheme,” Benzinga's Phil Hall will chronologically profile bankers, brokers and financial ne’er-do-wells to see what happens when ambition and greed criminally collide.

If you have any suggestions, email them to: editorial@benzinga.com and philhall@benzinga.com.

Some people have a propensity for getting into trouble, and Charles Ponzi (1882-1949) was no stranger to running afoul of the law.

Worst Foot Forward: Born in Italy, Ponzi arrived in Boston in 1903 and took several odd jobs before securing a steady position in a restaurant, which he promptly lost after it was discovered he was shortchanging customers and stealing from the cash register.

He relocated to Montreal, where he was arrested for forging a check. After serving two years in a Canadian prison, he returned to the U.S. and got caught in an illegal immigration smuggling scheme that put him back behind bars for another two years.

In 1918, Ponzi married a Boston stenographer named Rose Maria Gnecco. Her father decided to put his new son-in-law in charge of his grocery business, which he promptly ran into the ground. But after this fiasco, Ponzi abruptly graduated from small-scale idiocy to epic miscreancy.

Wait A Minute, Mr. Postman! During this period of time, intercontinental mail was expensive and correspondents sending mail across borders and oceans would share the expense via a postal return coupon. This prepaid coupon would be purchased in the sender’s country, and the receiver could redeem it at their local post office for the cost of postage on the return mail.

Ponzi realized that if these coupons were purchased in countries with weak currencies, they could be redeemed a profit in a country where the currency was strong.

Ponzi launched a Boston-based business called Securities Exchange Company, with the goal of purchasing huge volumes of postal return coupons from overseas and redeeming in the U.S., where the dollar was the world’s strongest currency. Unable to get a bank loan, Ponzi set up a stock company to raise money and promised his investors they would double their investment in 90 days – that later became 45 days.

A Rapid Rise: Ponzi was able to satisfy his original investors due to the volume of investment interest he generated, primarily from Boston’s Italian immigrant community. But word of mouth spread faster than he anticipated, and investors came from all corners of society, including officers in the Boston Police Department. Ponzi set up satellite offices in New Jersey and Maine to handle to the tsunami of investment money that began to flood his operations.

There was a slight problem in Ponzi’s business plan that most people overlooked: postal reply coupons could not be redeemed for cash, only for postage. Ponzi’s first wave of investors were being paid off by the second and third wave of investors who heard about this remarkable venture and tried to get involved belatedly. This type of scheme was not original to Ponzi — a Brooklyn swindler named William F. Miller pulled it in 1899 — but Ponzi’s investors obviously never heard of Miller.

Wreckage And Ruin: Almost immediately, Ponzi’s activities raised suspicions from financial journalists and state investigators. Eager to maintain a proper reputation, Ponzi hired a publicist, but this individual managed to get an in-depth review of Ponzi’s operations and promptly turned his findings over to the authorities.

Ponzi’s reign of audacity resulted in people being swindled out of $15 million, or roughly $250 million in today’s money.

In 1920, he was sentenced to four years in federal prison for mail fraud.

Upon his release, Massachusetts authorities indicted him on 22 charges of larceny. After three trials, Ponzi was convicted on five counts, but while free on bail he fled to Florida, took an assumed name and began pulling new schemes on unsuspecting real estate investors. Florida authorities convicted him of fraud and sentenced him to a one-year prison term, but he escaped while on bail and headed to New Orleans, where he was caught hiding under an alias on a freighter bound for Italy.

Ponzi was returned to Massachusetts to complete his prison term, and in 1934 he was released and deported back to Italy. His later years found him employed by Benito Mussolini’s government as a representative of the Italian airline industry in Brazil. But, when Brazil joined the U.S. in declaring war on Italy in World War II, Ponzi was stranded without work. He died in a Rio de Janeiro charity hospital in 1949 with only $75 to his name — which later became forever linked to the term "Ponzi scheme."

Ponzi may not have been honest about his business dealings, but he was honest about himself. As he told a group of reporters before his 1934 deportation: "I went looking for trouble, and I found it."

Charles Ponzi in 1920 photograph, prior to the collapse of his fraud-fueled business. Photo courtesy Boston Library.