The original Ponzi scheme

Business Times - 16 Dec 2008

As the previous millennium drew to a close, The Business Times wrote, among other things, of the greatest investment scam it had witnessed. 'Ponzi' is now back in the news following the exploits of Bernard Madoff. Here are excerpts from our article on the fraud that spawned scores of copycats:

Charles Ponzi pioneered the scam that bears his name, through which he bilked US$10 million from thousands of investors in the 1920s.

Ponzi was an Italian immigrant to the United States, who hit upon the idea of robbing Peter to pay Paul. A former waiter, he set up a company in Boston grandly called the Securities and Exchange Company (this was before the US market regulator the Securities and Exchange Commission was established). The company would issue promissory notes which paid 50 per cent 'profit' in 45 days. Ponzi claimed he was making his money from arbitrage in international postal reply coupons, when in fact he was merely distributing capital, paying off investors who came later with funds collected from those who came earlier.

For a time in the summer of 1920, he was hugely successful, collecting about US$1 million a week.

Ponzi became the talk of the East Coast of the US and gained a reputation as a financial wizard. People would give him their life savings and even reinvest their 'profits' with him.

He would hold court with journalists, boasting about other great schemes to come, which he would operate on an international scale. Even seasoned bankers would quake in his presence. However, some people were suspicious. It was noted, for instance, that despite claiming to be an expert in postal reply coupons and high finance, he did not know how to transfer US$1,000 from Boston to his mother in Italy.

Moreover, he didn't invest his own money in his scheme, but kept it in the bank. Nevertheless, Ponzi was able to survive several runs on his scheme by adopting a posture of relaxed confidence.

Eventually, the law caught up with him, but not before he had bilked about US$10 million from thousands of investors.

Since his time, there have been hundreds of similar scams. But the Ponzi scheme was the original thing, and the term has become part of the financial lexicon.

In the future, the Net will undoubtedly produce the greatest scamsters of our time. But even then, Charles Ponzi will retain his dark little corner in financial history as one of the great pioneers of fraud.