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Introduction

In the summer of 1920, Charles Ponzi and his Boston-based postal coupon enterprise was the talk of the East Coast. Was he truly a financial wizard, or merely an accomplished swindler? The latter was eventually revealed to be true, but before his investment bubble burst, Charles Ponzi had collected $9,500,000 from 10,000 investors by selling promissory notes paying "fifty per cent. profit in forty-five days." (Dunn, 2004)

Comparison of The "Ponzi Scheme from 1920 to 2009

Ponzi claimed he was giving investors just a portion of the 400 per cent. Profit he was earning through trade in postal reply coupons. As Ponzi paid the matured notes held by early investors, word of enormous profits spread through the community, whipping greedy and credulous investors into a frenzy. Investigation later revealed that there were no coupons or profits--earlier notes were paid at maturity from the proceeds of later ones. (Dunn, 2004) The simplicity and grand scale of his scheme linked Ponzi's name with a particular form of fraud. A swindle of this nature, once a "bubble," is now referred to as a "Ponzi scheme." While the postal coupon scheme earned Ponzi his place in history, it formed only the middle of what Justice Taft referred to as "the remarkable criminal financial career of Charles Ponzi" [Cunningham v. Brown, 265 U.S. 1,7 (1923)].

After losing his Massachusetts Larceny appeal, he fled the country on a ship bound for Italy. (Dunn, 2004) When the ship docked in New Orleans, Ponzi was lured ashore, illegally kidnapped by a Texas deputy sheriff, and taken to the Lone Star state. Extradited from Texas to Massachusetts, Ponzi served out his term there and was deported to Italy. He later went to Brazil, dying in the charity ward of a Rio de Janeiro hospital in 1949, leaving an estate of $75 to cover funeral expenses.

The engine of Ponzi's postal coupon fraud was a simple accounting mis-classification. Money paid to investors, described as income, was actually distribution of capital.

One need not, however, invoke accounting terminology to describe the fraud. Bankruptcy Referee Olmstead observed: "It was another instance of robbing Peter to pay Paul, of which the past affords examples," and wryly described Ponzi's business as that of "Borrowing money from investors at usurious rates of interest" [In re Ponzi, 268 F. 997, 1000 (D. Mass 1920)]. Circuit Judge Anderson explained: "His scheme was simply the old fraud of paying the earlier comers out of the contributions of the later comers" [Lowell v. Brown, 280 F. 193, 196 (1922)]. (Zuckoff, 2005)

Although the economics of such schemes are simple, contemporary swindlers conceal this fact with sophisticated marketing. Bankers, lawyers, and wealthy investors are routinely taken in by multi-million dollar Ponzis. While Ponzi was not as sophisticated as latter day practitioners, his skills were certainly commensurate with his contemporaries ["Sufficient unto the day is the evil thereof." Matthew 6:34]. Exuding a relaxed confidence before investors as he frantically scrambled behind the scenes for funds, Ponzi showed himself the peer of swindlers from all ...