Charles Ponzi - The Origins of the Pyramid Scheme

  

 In 1903 Charles arrived in Boston with just £2.50 in his pocket and an enduring entrepreneurial spirit. He travelled around the east coast taking temp work before finally getting a job at a bank in Montreal as a manager. The bank however went bust and left Charles feeling desperate. He forged a cheque to get enough money to head back to the U.S. but was caught and spent three years in prison. He was released and so he headed back to America, where he was incarcerated for two more years for smuggling Italian immigrants into the country. Soon he decided that the crooked lifestyle suited him better. 

 He returned to Boston where he met a young stenographer who he subsequently married. During this time he devised a scheme involving reply coupons containing prepaying international postage, and he realised he could run this to a profit. 

 He acquired a loan and sent the money back home in Italy asking them to purchase postal coupons and send them back to him in the United States. He made more than 400% profit on some of the sales. The scheme was not illegal and so undaunted he began to promise investors he could double their money without truly knowing how to redeem the coupons for actual cash. Many investors paid him as promised, but he just paid them money back from new investors. To add a sheen of legitimacy he opened up a business front but made absolutely no effort to produce any legitimate profits, eventually just deciding to keep most of the money for himself. 

 By June 1920 he had made $2.5 million from 7,800 customers, who were so convinced by his legitimacy some even re-mortgaged their houses or gave him their life savings, it worked in Charle's favour because the majority did not take their profits when offered, but re-invested. 

 This class of scheme which borrows from Peter to pay Paul is known today as a "Ponzi" scheme and Charles was making millions a day and suspicions were not finally raised until a furniture company declared that Charles's cheques had bounced. 

After swatting away state officials twice over it was eventually the Post Office who declared that no one could get rich legitimately from coupons as there was not enough in circulation. He tried to make up an excuse but no one bought it and on the 2nd of August 1920, they published his insolvency. 

 As investors pulled out Ponzi struggled to find them the money that he owed them. He became overdrawn the bank froze his account. He eventually surrendered to the authorities and was charged with no less than 86 counts of mail fraud. 

 Ponzi owed $7 million to investors and ended up bringing down 6 major banks and crippling large companies. On his bail, he fled to Florida where he started a syndicate which was another Ponzi scheme selling swampland to investors. He was arrested for fraud and spent one year in prison but was freed on appeal. 

 In New Orleans, he was captured trying to flee to Italy by boat despite the fact that he had shaved his head and grew a moustache. Immediately he was sent back to Boston to finish his sentence. 

 He moved back to Italy, undeterred by his scrapes with the law and started two new schemes that failed. Cutting his losses he retired to Brazil where he died in 1948 at the age of 66.