Charles Ponzi

By Lamar Hogan

Background

DOB – March 3rd, 1882 Born in Lugo, Italy Studied at the University of Rome, but dropped

out in order to move to the United States Arrived at the Boston Harbor, November 13,

1903 Then moved to NY and worked odd-jobs. Eventually started working as a bank clerk at

the Banco Zarossi Arrested for forgery of check

Background(continued)

Released from prison in 1911 Soon after was arrested for smuggling Italian

immigrants into the United States When he was released he moved back to

Boston and married Rose Maria Gnecco, in 1918

Definition

"A Ponzi scheme is a type of securities fraud where the promoter makes some sort of false or misleading statement about an investment (often including a guaranteed high rate of return) and pays off older investors with newer investor's

monies. Eventually, when the promoter can't find any new investors, the scheme collapses" -

American Bar Association

The Crime

Charles Ponzi was struggling in the United States Ponzi had a failing international advertising

business Ponzi received a letter in the mail from a business

in Spain On the letter was an International Reply Coupon

that could be redeemed in any country, and you could redeem them for the price that they were being sold for in the country that you were in, no matter if you paid less in another country

The Crime(continued)

Charles Ponzi's idea was to buy the International Reply Coupons in bulk from Italy for a lower price then they were being sold in the United States

Then redeem the IRC Coupons in the United States

Ponzi started a business called the Securities Exchange Company.

Started the SEC to gain investors, in-order to make as much money as possible

The Crime(continued)

Ponzi promised investors 400% profit on investments

The Securities Exchange Company grew quickly

By 1920 the company was making millions But the money was going directly to Ponzi, not

the Securities Exchange Company Charles Ponzi then buys a mansion

The Crime(continued)

A furniture dealer from Ponzi's past hears about Ponzi becoming a millionaire

The furniture dealer had given furniture to Ponzi in the past but Ponzi did not have money at the time

The furniture dealer sues Ponzi but loses Investors start to question how Ponzi became a

millionaire so quickly Investors start to leave the company because

they are not getting paid and are fearful

The Crime(continued)

Ponzi pays off the beginning investors after they rushed into the Securities Exchange Company

Boston Post does a positive article on Charles Ponzi

The article brings more investors to the company Boston Post investigates the Securities Exchange

Company and finds that Ponzi is under investigation by the Commonwealth of Massachusetts

The Crime(continued)

Boston Post receives help from Clarence Barron, the publisher for Barron's Financial Paper

Barron found that Ponzi was not investing into the Securities Exchange Company

Barron also found out that there would have to be 160,000,000 IRC coupons in circulation for the scheme to work, but there are only 27,000 in circulation

Barron also contacted the Post Office and found out that no IRC coupons were being bought in bulk

Barron concluded his findings by saying that the scheme would not work because the overhead required to buy the IRC coupons and redeem them would end up making the profit margin minuscule

The Crime(continued)

August 2, 1920, Boston Post Publishes the Barron Investigation

August 10, 1920, federal agents raid the Securities Exchange Company

August 12, 1920, Ponzi was arrested on 86 counts of fraud.

Estimated 17,000 people had invested into the Securities Exchange Company

Millions of dollars were invested Most lost all of the money invested

Outcome October 1920, Ponzi was found innocent on 10

counts of fraud and larceny charges Ponzi found guilty on mail fraud, served four

years in a federal prison Ponzi was let out on bail, and fled to Florida In Florida, Ponzi started another scheme, which

was to sell 'swampland' to tourist In 1924, Ponzi and his wife, were arrested for

violating Florida trust and securities laws Judge grants Ponzi bail, and Ponzi flees to a

ship that is going to Genoa, Italy

Outcome(continued)

Ponzi is arrested in Houston, Texas In 1925 he is sentenced to five years in a

federal prison, after this sentence he is moved to a Massachusetts federal prison and serves seven more years

Ponzi moves to Italy and works at an italian airlines company

Ponzi then moves to Rio De Janeiro, and gave english lessons until he died in 1949

Red Flags

Not enough International Reply Coupons in circulation for the scheme to work

Charles Ponzi never invested into the Securities Exchange Company

Large overhead for the scheme to work Ponzi had a past criminal history for forging

checks Only a small amount of investors were paid Ponzi guaranteed profits

Preventing Ponzi Schemes

Educate the Public People need to ask questions when a large

amount of money is being invested Require documentation from the investment

managers Be weary of “chance-of-a-lifetime” opportunities Be weary of investors who require cash

What has been done To prevent future frauds the government has tried to

educate the public by creating websites against Ponzi and Pyramid schemes.

The government has set up several websites to check on Ponzi Schemes such as the FTC, SEC, FBI, IRS, DOJ.

On the Federal Trade commision website the government allows people to submit complaints against possible Ponzi Schemes

The government has passed two bills to protect people from Ponzi Schemes. The two bills are the Hedge Fund Transparency Act and the Hedge Fund Adviser Registration Act of 2009. These two bills aim to deal with increasing transparency and registration in regards to private investment funds.