When Bernie Madoff’s fraud was exposed it was labeled a Ponzi scheme. Madoff was not investing the money as promised. He was using new investment money to pay old promised returns. I thought it would useful to look back at the original Ponzi scheme to see if offered insight to today’s world of compliance. I just finished reading Ponzi’s Scheme: The True Story of a Financial Legend by Mitchell Zuckoff.
When Charles Ponzi sailed from Italy in 1903, his father told him that America’s streets were paved with gold. Ponzi had landed in America at the end of the Gilded Age. He thought he could earn a fortune. He looked for one one get-rich-quick scheme after another and that lead to two stints in prison before settling in Boston.
He tried setting up a international listing of import-export companies and selling advertisements. One respondent requested information and included an international reply coupon. This coupon was effectively a return stamp for foreign correspondence. Ponzi realized that he could theoretically arbitrage the difference in foreign currencies to generate big returns. It was a theoretic return because he would have to find someone to buy the coupons overseas and someone to sell them to here in the U.S. to convert the coupon back to cash.
The idea was solid enough that he could convince investors to give him money. In exchange, he promised a fifty percent return in three months. Eventually, he had investors lined up to give him money. Unlike Madoff, Ponzi carried out his scheme in the open. It was even briefly approved by Boston’s newspapers and financial sector. (If you wonder why private placements could not be advertised for decades, you need to look no further.)
Perhaps it was the wealth of media coverage that got Mr. Ponzi famous enough for the fraud that now bears his name. Of course, he couldn’t have been the first.
In one of the court pleadings, Ponzi’s lawyer states that his client was not a “520 percent Miller.” This was a recall of an earlier fraud by William Miller and his Franklin Syndicate. Mr. Miller was promising a 10% return each week during his heyday of 1899. It was a Ponzi scheme before it was called a Ponzi scheme.
What about before 520 percent Miller? Mr. Zuckoff uses the older expression of “robbing Peter to pay Paul.” That expression refers back to the Reformation when taxes had to be paid to St. Paul’s church in London and to St. Peter’s church in Rome, so people would neglect the Peter tax in order to have money to pay the Paul tax.
Mr. Zuckoff provides a detailed look at the life of Charles Ponzi. Although it is non-fiction, Mr. Zuckoff has written the story in the narrative form, imposing some insight into the thoughts of Mr. Ponzi and those involved. The result is a nuanced and insightful look into a fraud.