Who Was Ponzi and What Was His Scheme?

Who Was Ponzi and What Was His Scheme?
One of the biggest fears most of us have is our hard-earned money being stolen. It’s bad enough if it’s taken by strangers, but we certainly don’t want it taken by someone we are supposed to trust. However, through time, there have been stories and cases of swindlers taking money from innocent victims, often by positioning themselves as being trustworthy and an expert in financial matters.

One common type of such fraud is a Ponzi Scheme. Many people have heard of it, but there still seems to be a lot of uncertainty about just what this con all entails. Who was Ponzi? And what was his scheme all about?

Who Was Ponzi?

Charles Ponzi was born in 1882 in Italy. He arrived in the U.S. in 1903. After quickly learning English, he worked odd jobs until he landed a position as a dishwasher in a restaurant. Eventually, he was promoted to a waiter, but was fired after it was discovered he was short changing customers.

When he was unable to find success in the U.S., he moved to Montreal and took an assistant bank teller position at the Banco Zarossi. At this point, Ponzi had worked on his personality, becoming incredibly cheerful and charming, and also learned to speak French, making him fluent in three languages (French, English, and Italian).

While working at the bank, he learned from Luigi “Louis” Zarossi, the bank’s founder, the subtle art of redistributing funds to pay off other debts. Ponzi became a bank manager and discovered that bad real estate loans had placed the bank in a terrible financial position. He also discovered that the interest payments on accounts weren’t funded through investment profits, they were funded with money that was used to open new accounts—other customers’ money.

In time, the bank failed, and Zarossi fled to Mexico with large sums of money from the bank. Ponzi stayed behind to take care of his boss’s abandoned family, and when an opportunity presented itself, wrote himself a sizable check from a former client’s account. He was caught and spent 3 years in prison.

What Was Ponzi’s Scheme?

After Ponzi was released from prison, he headed back to the U.S. He participated in a variety of odd jobs, then came up with a scheme in 1919 that would lead to his name becoming synonymous with being swindled out of money.

The scheme involved the U.S. Postal Service and international reply coupons. Senders could pre-purchase postage and mail it with their correspondence. When the receiver got the letter, they could exchange the coupon for a stamp to mail a letter back. As still happens today, postage prices fluctuated constantly, and the price of a stamp in one country varied from the price of a stamp in another country.

Ponzi hired agents to buy international reply coupons for low prices, then send them to him. He would then use those coupons to buy more expensive stamps, which he then sold for a profit.  While this act in and of itself wasn’t illegal and is called arbitrage, Ponzi wanted more.

He developed a business called the Securities Exchange Company and promised investors they would have returns of 50% in 45 days or 100% in 90 days. He’d been so successful with his stamp business, people were excited and willing to send him money. However, Ponzi never invested their funds. He redistributed them, claiming that was the profit. He was successful in keeping up this charade until 1920, when his company was investigated.

What is a Ponzi Scheme?

In essence, a Ponzi Scheme is investment fraud (which is illegal). It promises clients large profits with little to no risk. The goal of companies or individuals who conduct this type of scheme is to continually attract new clients and get them to invest, and then they use the funds from the new accounts to pay the original investors, claiming those are the returns. This scheme will continue until new investors stop giving the company or individual money.

Things to Watch Out for So You Don’t Get Caught in a Ponzi Scheme

Since no one wants to lose their hard-earned money to scammers, there are a few things to look out for so you don’t get caught in a Ponzi Scheme. These include the following:

  • Any promise that guarantees high returns of investment with little risk
  • Returns consistently flowing despite market conditions
  • Investments that aren’t registered with the Securities and Exchange Commission
  • Investment strategies that are kept secret or are claimed to be too complex to be explained
  • The company won’t allow clients to view the official investment paperwork
  • It’s difficult for clients to get their money back from the investment

The next time someone makes you an offer that seems too good to be true, think of Ponzi and his swindling ways.

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Mark Heald
About Mark Heald 159 Articles
Mark Heald is an Associate Product Manager and Sporcle Admin. He enjoys spending time with his family, traveling, and bemoaning the fact the Sonics left Seattle.