By Uday Chitale, Murtuza Vajihi, Chartered Accountants
Accountant Abroad
Chapter Eight
Ponzi’s Ghost
All scams are basically the same,
and the people running them are typically not very bright,
but they’re brighter than their victims,
which is all they need to be.
— David Marchant, investigative journalist
Carlos Bianchi left Italy in the waning hours of the
nineteenth century, arriving in the New World to change his name from Carlos to
Charles and from Bianchi to Ponsi. By the end of World War I, he’d not only
served time in a Montreal jail for cheque forging, he’d changed his name again,
this time from Ponsi to Ponzi.
Around 1919, looking for greener pastures, Ponzi left Canada
for Boston where, one day, he received a letter from someone in Italy containing
an international postal reply coupon. Still in existence today, it’s a simple
method of paying for postage in one country with the currency of another — if
you will, the global answer to self-addressed stamped envelopes. Because someone
in, say, Glasgow, can’t buy stamps to pay for return postage for his
correspondent in, say, Vancouver, Canada, he buys one of these coupons from his
local post office. Worth a fixed amount, the fellow in Glasgow sends it to his
correspondent in Vancouver who exchanges it at his local post office for a stamp
which covers the postage back to Glasgow.
What caught Ponzi’s eye was that the coupon he received from
Italy had been purchased in Spain. He soon learned that while international
postal reply coupons were priced at fixed rates of exchange, actual currency
rates fluctuated to the point where this particular coupon had cost only about
15% of the value of the US stamps he could buy with it. In other words, coupons
bought in Spain and cashed in the States represented an instant profit of nearly
660%. So Charles Ponzi promptly announced his entry into the international
postal reply coupon business.
However, instead of funding the venture himself, which might
have been legal and would have been profitable, he invited investors to join
him. As he outlined the plan, he would personally travel to Spain to buy tens of
thousands of coupons, bring them back to the States where he would exchange them
for stamps, and then wholesale the stamps to businesses. Promising 40% profits
in just 90 days, he reinforced investor confidence with the old trick of forming
a corporation with a legitimate-sounding name: ‘The Securities and Exchange
Company’, which, of course, abbreviated to ‘S.E.C.’
For the first few months, money trickled in slowly but
steadily. It’s when he upped the promise to 100% profits that the flood-gates
opened and, on good days, hundreds of thousands of dollars arrived at his S.E.C.
In fact, he got so rich so quickly that, within six months, he purchased a large
stake in a New York bank and a Boston import-export firm. The only problem was,
his fortune wasn’t based on postal reply coupons, he was simply spending his
investors’ money.
Towards the middle of 1920, the Boston Post newspaper
began asking questions. Reporters canvassed post offices all over town, only to
discover that Ponzi couldn’t possibly be buying as many coupons as he claimed,
because that many coupons hadn’t been cashed in. The newspaper articles brought
investors to Ponzi’s front door demanding their money back. While fervently
praising the scheme, he obligingly returned investors’ money, plus interest,
paying them with the money sent in by new investors. Robbing Peter to pay Paul
worked for a while, but by August, the Boston Post was claiming that Ponzi was
millions of dollars in debt.
Maintaining a calm and reassuring exterior, Ponzi did what
conmen typically do when faced with the truth — he sued the messenger. He filed
a $ 5 million claim for damages against the Post and then, in the next
breath, announced a $ 100 million international investment syndicate. Before he
could get it off the ground, the Massachusetts State Banking Commission closed
down his bank. Newspapers across the country jumped on the bandwagon, reminding
the public of Ponzi’s earlier scuffles with the Canadian authorities, while
auditors fine-tooth-combed his S.E.C.’s books. They quickly discovered that
legitimate transactions were negligible. In fact, the grand total was a mere
$ 30. It meant that Ponzi never even bothered with his international postal
reply coupon idea.
His house of cards crumbled to the tune of $ 3 million. Ponzi
went to jail for a few years in Massachusetts, was allowed out on parole,
skipped and headed for Florida where he set up a real estate scam which earned
him another trip to prison. At the time he admitted, ‘Only a fool would have
trusted a crook like me.’ Around 1930-31, he was deported home to Italy. From
there he made his way to Brazil, where, eventually, he died penniless. His
legacy is the ‘Ponzi scheme’, and his ghost blithely lives on.
