Story of Charles Ponzi the Father of Ponzi Scheme

The Story of Charles Ponzi the Father of Ponzi Scheme

History & Rise

Table of Contents

In 2022, there were accusations that several e-commerce platforms in Bangladesh were stealing a lot of money from customers. Based on those allegations, people started comparing them to Ponzi Schemes. But many may not know what a Ponzi scheme is, the history behind this, and how it’s done. This kind of scam has been happening for over 100 years. One well-known example is Bernie Madoff, who stole 65 billion dollars from investors over 20 years, which is still the largest amount of a Ponzi Scheme in the history of the world.

The Ponzi Scheme

Italian citizen Charles Ponzi was born in 1882 in Lugo, Italy. He started his career as a postal worker. Since the 19th century, America has been known as the Land of Opportunity. Thus, in 1903, like other immigrants, Charles Ponzi also migrated to America in search of fortune. Although he started out with $200 at the time, Charles Ponzi had only $2.50 left when he reached Boston, having spent all of the money on gambling and drinks on the ship. Meanwhile, his family bought him a prepaid train ticket from Boston to a relative’s house in Pittsburgh. But due to his behavior, Ponzi lost all the money to gambling and drinking and never made it to the train station.

Charles Ponzi, an Italian citizen, was born in Lugo, Italy in 1882.
Charles Ponzi, an Italian citizen, was born in Lugo, Italy in 1882.

In order to survive, Charles did whatever work he could get. Even in search of work, he sometimes walked and sometimes rode the train to different cities like New York, Paterson, New Haven, Providence, etc. During this time, he worked as a grocery clerk, road drummer, sewing machine repairer, insurance salesman, and also in factories and restaurants. It’s not like Charles was good at these jobs, in fact, he was fired from many places and Charles quit his job due to the fear of being fired from many jobs. However, while doing these things, his English language skills got better day by day. Meanwhile, in search of new work, Charles arrived in Montreal, Canada in 1907. Even in this new town, Charles arrived with only one dollar bill.

Arriving in a new town, Charles Ponzi once again started looking for work and soon found a bank. The bank named Banco Zarossi was originally owned by an Italian named Louis Zarossi. Ponzi, being Italian himself, quickly struck up a friendship with the bank’s owner, Louis Zarossi, and landed a job at Banco Zarossi. But, Charles Ponzi could not work there for long. Louis Zarossi adopted a new approach to give interest to old customers when the bank faced a liquidity crisis due to bad loans. Louis Zarossi basically diverted a small portion of the money he took from new depositors into his bank to pay off his old depositors. But, when this scheme also collapsed, Louis Zarossi fled to Mexico with all the money left in the bank. This scheme of Louis Zarossi later played an important role in the life of Charles Ponzi. Meanwhile, before the bank collapses, Ponzi creates a fake check so that he can later collect some money for himself. But, Ponzi was caught withdrawing cash from the cheque and was sent to a Canadian prison for three years.

Later, after being released from prison in 1910, Ponzi decided to return to America from Canada. However, on the way back, he brought with him some migrant Italians and was again charged with human trafficking while trying to cross the border illegally. However, Ponzi repeatedly tried to convince immigration officers that he was actually acting as an interpreter for these Italian migrants. But, because he didn’t have any kind of evidence, this time he had to go to an American jail for two years. After being paroled and released from prison in July 1912, Ponzi began traveling from state to state in search of work and doing odd jobs again. In addition to small jobs, he was also trying to do something himself, which did no good to him but failure. Charles Ponzi returned to Boston in 1917 when he got an opportunity to work as a foreign correspondent for an export company. In 1918, at the age of 36, he got married.

He married at the age of 36 in 1918.
He married at the age of 36 in 1918.

But, still, Ponzi had found none of the luxuries he had come to America hoping for. Due to this, Charles Ponzi quit his job in 1919 and founded an export-import firm himself. But, as Ponzi was not well known in America or any other country in the world, the new business was not thriving. As a result, he decided to advertise to increase his exposure and started looking for an affordable publication firm.

But, at the time, publications located on School Street in Boston charged 5 cents for each domestic flyer and 8 cents for foreign flyers, which was quite expensive for Ponzi. He also observed that these publications could only circulate 50,000 copies per month which was not cost-effective. As a result, Charles Ponzi himself founded a publication called “The Bostonian Advertising & Publishing Company” to circulate more flyers at affordable prices, and named his magazine “The Trader’s Guide”. Ponzi’s business idea for this new venture was to print “The Trader’s Guide” magazine in different languages and distribute it for free at home and abroad. However, his main source of income will be from advertising placements of various companies appearing in these magazines. Although Ponzi initially ran into enough content crises to fill the magazine. Besides, he failed to sell enough advertisements. As a result, Charles Ponzi was finally forced to stop this magazine publication. But he may not have imagined for a moment that his “The Trader’s Guide” would later help turn his fortunes around.

Publications on School Street, Boston charged high fees of 5 cents for domestic and 8 cents for foreign flyers.
Publications on School Street, Boston charged high fees of 5 cents for domestic and 8 cents for foreign flyers.

While checking his office mailbox one day, Mr. Ponzi found a letter from Spain. In this letter, a company from Spain asked him for a copy of his magazine. What attracted Ponzi’s attention is an International replay couple or IRC attached to the letter. IRC is mainly sent with letters when the sender expects a review from the recipient and wants to bear the cost of postage. One can exchange or sell that IRC with postage stamps of their country if they want. That Spanish coupon can be redeemed in exchange for a U.S. Postage stamp. But, due to the value difference between the Spanish currency and the US currency, the price of the U.S. Stamp price is 10 percent higher than the coupon issued from Spain. Ponzi sees this as an excellent business opportunity and plans to exploit the entire system.

The cost of the stamp is 10% more than the value of the coupon provided by Spain.
The cost of the stamp is 10% more than the value of the coupon provided by Spain.

He decided to hire agents in countries with relatively weak economies to buy coupons in bulk from them and redeem them against American stamps and sell those at a higher price to generate extra profit from there. Due to the international treaty, buying coupons from one country and redeeming them in another country is legal, so this business idea of Charles Ponzi also does not break any law. In fact, Charles’s idea is similar to arbitrage trade. Thus initially he was able to make up to 400 percent profit by selling some stamps. In 1920, Charles Ponzi founded a company called Securities Exchange Company, hoping to make more profit and business with this idea.

In the beginning, he trained several sales agents on how to attract investors. He offered a 10 percent commission to agents for each new investor onboarding and 5 percent commission for onboarding new subagents. It was through this Securities Exchange Company that Ponzi and his agents began to attract investors by promising returns of the initial investment in 45 days with an additional 50 percent and 100 percent interest within 90 days.

Ponzi and his agents used the Securities Exchange Company to lure investors with a promise of 50-100% interest and a return of the initial investment within 45-90 days.
Ponzi and his agents used the Securities Exchange Company to lure investors with a promise of 50-100% interest and a return of the initial investment within 45-90 days.

At that time, the First World War had just ended, so Americans were willing to invest anywhere for income. As interest rates are high, investors also start investing in Ponzi’s schemes, seeing the possibility of huge profits. Ponzi, meanwhile, claims to attract more investors by creating an extensive network of agents throughout Europe who can buy large quantities of coupons for him. And he needs more investment to buy this coupon. When the coupons come into his hands, he can redeem them and return the money to the investors with interest through stamp sales. But, Ponzi basically took money from new investors rather than buying IRCs or coupons, but instead kept some money himself and paid the rest to old investors who had expired.

The scheme was essentially similar to Louis Zarossi’s scheme in 1907, in which Charles Ponzi was running under the name of buying and selling IRC. However, when the old investors were getting huge returns, those same investors re-invested in the Ponzi scheme in search of higher returns. On the other hand, Charles Ponzi also continued to become rich through this scheme. Whenever he was asked about the operation of the Securities Exchange Company, he would keep all the information secret on the pretext of avoiding competition. Ponzi’s scheme made him so rich that he continued to fulfill his dream of leading a life of luxury by buying new properties.

But, as Charles Ponzi’s personal wealth and his reputation in Boston continue to grow, many doubt his business model. He filed and won a case against a newspaper finance reporter after the reporter claimed Ponzi’s insignia return scheme was impossible. However, after the case was won, the Boston local media increased their scrutiny about Charles Ponzi and his securities exchange company’s activities. One of them was Richard Grozier, then publisher of The Boston Post. At the behest of Richard Grozier, reporters at The Boston Post began a detailed investigation into Ponzi and his scheme.

A July 1920 article in The Boston Post published the findings of an investigation into Charles Ponzi’s scheme. As it turns out, despite offering investors huge amounts of return, Ponzi himself never invested in his scheme, instead, he invested his money in various real estate, stocks, and bonds. In addition, Ponzi had only 27,000 units of coupons circulating as opposed to at least 160 million units of coupons that he actually collected investment. Despite such disclosures, many investors decided to stick with Ponzi’s. However, Ponzi himself was well aware that his scam was slowly coming to light. To get out of this situation, Ponzi hired a then-renowned publicist, William McMasters, to make his image positive. At that time, publicists worked essentially like PR agents today.

Furthermore, Ponzi had only 27,000 coupons in circulation, as opposed to at least 160 million coupons from which he actually collected investment.
Ponzi had only 27,000 coupons in circulation, as opposed to at least 160 million coupons from which he actually collected investment.

This decision of Ponzi’s actually became the worst one for him. When William McMaster realizes his client Charles Ponzi is actually a scammer, he decides to speak out against Ponzi for The Boston Post. In the wake of McMaster’s decision, the Boston regulatory body raided the company’s offices the following month. The audit report of the operation revealed that Ponzi had only $61 worth of stamp coupons at the time. In the same month, The Boston Post published another front-page story detailing Ponzi’s scheme, from criminal activities to human trafficking while in Canada.

Finally, on August 12 of 1920, Ponzi voluntarily surrendered to authorities. By then, Ponzi’s filings stood at $7 million. However, from January to August 1920, Channels Ponzi’s total embezzlement in these eight months was approximately $15 million, which is more than $220 million at today’s inflation rate. As a result, the federal government brought 86 mail fraud charges against him, sentencing 14 years in prison. After serving a full sentence, he was deported to Italy where he spent the rest of his life in poverty till his death on January 18, 1949, in Rio de Janeiro, Brazil.

However, Channels Ponzi's total embezzlement from January to August 1920 was approximately $15 million, which is more than $220 million at today's inflation rate.
However, Channels Ponzi’s total embezzlement from January to August 1920 was approximately $15 million, which is more than $220 million at today’s inflation rate.

This scamming method was named after him as a Ponzi Scheme. This method of scamming became so popular around the world that many scammers started embezzling money from investors and common people around the world. Among them, Van Rossem’s $860 million scam in 1991, Sergei Mavrodi’s $10 billion scam in 1994, and Allen Stanford’s $7 billion scam in 2012 are some of the most infamous Ponzi schemes. However, most notorious of all was Bernie Madoff’s $65 billion scam that was discovered in 2008. Till today, this is the biggest Ponzi scheme ever for which Bernie Madoff was sentenced to 150 years in prison. 

Michael Walker

Michael Walker has made a name for himself as an independent journalist and economist. He is a Stanford University graduate and has built a career as a contributor for MSNBC and The New York Times. Now, he spends his time writing articles for several renowned publications and primarily focuses on the on-goings of different companies, businesses, and the general happenings of the world.