Ponzi Scheme

History of Ponzi Scheme
Who was Charles Ponzi?

Ponzi started out working odd jobs, including as a dishwasher in a
restaurant. In 1907, he moved to Montreal, where he found a job as a teller at
Bank Zarossi. The bank was formed to cater to the new Italian Immigrant
population, charging high interest rates.
When Bank Zarossi went bankrupt because of bad loans, Ponzi was left
penniless. He was sentenced to three years in a Quebec prison after he was
caught forging a bad check. Rather than tell his mother in Italy that he was in
prison, he wrote to her in a letter that he was in prison. When he was released
from jail, Ponzi got involved in yet another criminal venture, smuggling Italian
immigrants across the border into the United States. This too landed him in jail-
he spent two years behind bars in Atlanta.
Ponz returned to Boston, where he married stenographer Rose
Gnecco in 1918. He worked various jobs, including at his father-in-law’s
grocery store, but none of those positions lasted long. It was during this
time that Ponzi got the idea for the great scheme that would earn his
name a place in history. He received a letter in the mail from a company
in Spain that contained in it an International Reply Coupon (a coupon
that can be exchanged for a number of priority airmail postage stamps
from another country). Ponzi realized that he could turn a profit by
buying IRCs in one country, and exchanging them for more expensive
stamps in another country.
Ponzi’s racket worked like this: He would send money to agents
working for him in other countries, who would buy IRCs (International
Reply Coupon - The purpose of the IRC is to allow a person to send
someone in another country a letter, along with the cost of postage for
a reply) and send them back to the United States. Ponzi would then
exchange the IRC for stamps worth more than he paid for them, and
sell the stamps. Ponzi reportedly made more than 400% on some of
these sales.
Not satisfied with running the profitable scheme on his own, Ponzi
began to seek investors to turn even higher profits. He promised
investors outrageous returns of 50% in 45 days, or 100% in 90 days.
Ponzi paid these investors using money from other investors, rather
than with actual profit- as in the criminal scheme of Bernie Madoff.
Ponzi’s manipulation made him very rich- he bougjt a mansion in
Lexington, Massachusetts, with air conditioning and a heated
swimming pool. He reportedly made $250,000 a day.
Downfall to Death
Ponzi’s scheme began to unravel in August 1920, when The Boston
Post began to investigate his returns. The investigation set off a run on
Ponzi’s company, with investors trying to pull their money out of it.
Charles Ponzi was arrested on August 12,1920, and charged with 86
counts of mail fraud. Owing an estimated $7 million, he pleaded guilty
to mail fraud, and subsequently spent 14 years in prison. Rose divorced
him in 1973, and Ponzi died penniless in Rio de Janerio, Brazil, on
January 18,1949.
Characteristics of a Ponzi
scheme
Typically, Ponzi schemes require an initial investment and promise above
average returns. They use vague verbal guises to describe their income
strategy. It is common for the operator to take advantage of a lack of investor
knowledge or competence, or sometimes claim to use a proprietary, secret
investment strategy to avoid giving information about the scheme.
The basic premise of a Ponzi scheme is “to rob Peter to pay Paul”,
meaning “to take from someone and give it to someone”. Initially, the
operator pays high returns to attract investors and entice current investors to
invest more money. When other investors begin to participate, a cascade
effect begins. The schemer pays a “return” to initial investors from the
investments of new participants, rather than from genuine profits.
Often, high returns encourage investors to leave their money in the
scheme, so that the operator does not actually have to pay very much
to investors. The operator simply sends statements showing how much
they have earned, which maintains the deception that the scheme is an
investment with high returns. Investors within a Ponzi scheme may
even face difficulties when trying to get their money out of the
investment.
Operators also try to minimize withdrawals by offering new plans to
investors where money cannot be withdrawn for a certain period of
time in exchange for higher returns. The operator sees new cash flows
as investors cannot transfer money. If a few investors do wish to
withdraw their money in accordance with the terms allowed, their
requests are usually promptly processed, which gives the illusion to all
other investors that the fund is solvent and financially sound.
Red Flags or the things to you need to
remember that the investment might be a
Ponzi scheme
• High investment returns with little or no risk.
• Overly consistent returns.
• Unregistered investments.
• Unlicensed sellers.
• Secretive or complex strategies.
• Difficulty receiving payments.

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Ponzi Scheme

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History of Ponzi Scheme

Who was Charles Ponzi?

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