Define Ponzi Scheme: Charles Ponzi
The definition Ponzi scheme comes from Charles Ponzi who in 1920 swindled numerous investors totaling $420,000 which in today’s terms is nearly $5 million American dollars. To define Ponzi scheme refers to using monetary investments acquired from new investors and give them to earlier investors instead of from the actual money made from profits.
Who was Charles Ponzi?
Ponzi was an Italian business man and American con artist. According to records, he was born to a well-to-do family in Parma, Italy, an Italian city in the Emilia-Romagna region. Ponzi attended the University of Rome La Sapienza. In 1903 he arrived in the United States via the S.S. Vancouver. He apparently had only two dollars in his possession because he gambled his life savings away during the voyage to the United States.
Ponzi: The Early Days
He began working his way by taking on odd jobs throughout the East Coast. On one particular job, he worked as a dishwasher in a restaurant, sleeping on the floor and gradually was promoted to waiter, but was fired when he was caught shortchanging the customers and stealing from the restaurant.
In 1907 Charles Ponzi fled to Montreal and found a job working as a bank teller for Banco Zarossi. Ponzi worked with incoming Italian immigrants setting up bank accounts and was paid 6% for every new bank account opened. Ponzi charmed his way and rose the corporate ladder to bank manager. However, he later found out that the bank was doing it’s own early version of a Ponzi scheme by paying investors not from profit earned through investments, but from money deposited into new bank accounts. The bank soon failed and Ponzi fled to Mexico for a significant portion of the bank’s money.
Later he was caught by the police and arrested after cashing a check for nearly $500 that he forged from one of Zarossi’s former customers, Canadian Warehousing. He spent three years in the St. Vincent-de-Paul Federal Penitentiary. After he was released, he returned to the United States in 1911 and became involved in a scheme for smuggling illegal Italian immigrants into the United States. He was caught and spent another two years in a prison in Atlanta, Georgia. While in the Atlanta prison, Ponzi befriended Ignacio “the Wolf” Lupo, a mobster and found a role model by the name of Charles Morse who was a wealthy Wall Street businessman and swindler. Ponzi made a point of always learning new ways to cheat the “system” and gain wealth through taking advantage of others.
Ponzi: Started Securities Exchange Company
After his release from prison, Ponzi met and married his wife Rose Maria Gnecco in 1918. Ponzi one day received a catalog from Spain that had an international reply coupon. He had not seen one before and began inquiring about it and discovered a weakness in the system. The postal reply coupon would be sent to someone and that person could send something back in return and use the postal reply coupon as postage. The postal coupons could be traded in for postage stamps equivalent to the cost of postage within the country in which it was exchanged. The weakness is with the difference in cost of postage stamps in different countries. You could purchase postal reply coupons in a country in which they were inexpensive and exchange them in another country for which you could get top dollar for them, thus making a nice profit. This form of business is called arbitrage which is completely legal.
He used this as a basis to start up his own company called Securities Exchange Company. He was able to obtain initial investors rapidly and quickly became very wealthy. He was continually receiving new investors at incredible speeds and thus he was easily able to take money from the new investors and pay the earlier investors telling them that they were profits from their investments, which they were not.
The Fall of Ponzi
Clarence Barron, a financial journalist who headed up Dow Jones & Company began researching and investigating the Ponzi money making scheme and came to some alarming conclusions. In order for the profits to be what they were, there would need to be 160 million international postal coupons in circulation and there were only 27,000. Later Ponzi’s scheme reached the attention of Daniel Gallagher, the District Attorney General of Massachusetts who was able to commission Edwin Pride to audit the Securities Exchange Commission.
To head off the increasing heat Ponzi was receiving, he hired a publicity agent, William McMasters. However, McMasters became suspicious very quickly when he discovered incriminating documents proving that Ponzi was “robbing Peter to pay Paul.”
Ponzi’s Arrest
On August 11, 1920, the newspaper published an article about the discoveries and included his past involvement with the Zarossi bank scandal and the check forgery. Everything was laid out in this article and Ponzi scheme was now out in the open. Ponzi surrendered to federal authorities the day after the newspaper printed the article, August 12, 1920. Ponzi was charged on 86 counts of mail fraud.
It is estimated that Ponzi’s investor’s lost $20 million in 1920, which is the equivalent to $225 million in today’s market.
And thus, the term Ponzi scheme was born and is still used today.
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25 thoughts on “Define Ponzi Scheme: Charles Ponzi”
That was an interesting post. The issue with the Ponzi schemes is that will always exist. Maybe in a slightly different form but they are always out there. People always want to believe that a lot of money can be made fast. And someone is always there to take advantage of that.
Is it “shocking” that he first learned how to con people working in a bank?
Just a coincidence of course.
Thank for taking the time stop and read the article about where the term Ponzi scheme came from. And yes, there are always going to be people out there who will want to make lots of money fast and there will always be people out there who will be gullible enough to take advantage of. The schemes make change but the concepts won’t. You are right.
Hello Steph, thanks for the brief history lesson. I’ve heard of Ponzi schemes before, but always associated them with multi-level marketing where the folks you sign up pay for the ones behind you, like a pyramid scheme…the guys at the top make all the money. I also never knew the meaning of Arbitrage, which is legal you said. I wish you much success in the future with your site.
Hi Susan:
I am glad you enjoyed the article about ponzi schemes and yes, ponzi schemes are very much like pyramid schemes. You are correct that many MLM (multi-level marketing) programs are pyramid schemes. Herbalife for instance was in the news not that long ago for being accused of operating a pyramid scheme.
Have a wonderful day!
Steph
Hi Steph, this is a great article.
Would I be correct in saying that a multilevel-marketing strategy is based upon a Ponzi scheme – the difference being actual goods are being traded?
I can confirm Wealthy Affiliate is unrelated to either of these definitions – instead providing you with excellent learning resources and tools to build your own online business.
Dan.
Hi Dan:
Thank you for stopping today and leaving a comment. You are correct. I personally think that MLM schemes are based upon the Ponzi Schemes. Herbalife, a well known MLM, was recently in the news as being accused of running a pyramid scheme. And yes, the program I recommend to all of my readers is not a pyramid scheme or ponzi scheme. Wealthy Affiliate is completely legitimate and offers high quality training at an very reasonable price. I recommend WA for your web hosting needs as well as tutorials that are unbeatable. I myself am a frequent creator of tutorials on the Wealthy Affiliate platform. And all of my tutorials I designed are available for free members.
Steph
Hi Steph
I have seen so many Ponzi Schemes come and go through the year and I still cannot believe that most people are still falling for them.
Some companies even uses the term donation exchange to mask the fact that it is a Ponzi. Pyramid schemes and Ponzi’s are very alike.
Hi Viljoen:
Thank you for visiting and reading my article on Ponzi Schemes. I too am amazed at how many people still continue to fall for them. There are so many scams out there and one can never be too careful. You are right in that Pyramid Schemes and Ponzi Schemes are similar but they still have differences as well.
One of the differences is that many MLM companies are actually Pyramid Schemes. Herbalife was recently all over the Internet and the news being accused of running a Pyramid Scheme. A Ponzi Scheme is an investment fraud much like the one Charles Ponzi created. I personally do not like MLM schemes because I do not like the idea of recruiting your friends and family. That seems unethical to me.
A program that I joined about nine months ago which is not an MLM and does not involved recruiting your friends and having silly parties is Wealthy Affiliate. You are trained in the art of web design and affiliate marketing and you work at your leisure.
Thank you for visiting today. Have a wonderful day! ~ Steph
Hey there
You have laid out a great article relating to ponzi schemes. It relates to people like me who are often on the lookout for online opportunities.
I don’t wanna be falling back into the same trap over and over again. They try to hook you on with attractive screenshots of dollar notes & overpromise their package.
Thanks for the review!
Zhi Wei
Thank Zhi Wei for leaving a comment. There are so many of us whom have falling victim to one scam after another. One of the main reasons I started this website was to combat some of those companies that are out there with these fancy screenshots showing viewers dollar signs and making it sound super easy. The bottom line is success does not come easily. It comes with perseverance and not giving up. Success is not final. Failure is not fatal. Continuing with your mission is what counts.
Hello Steph!
Great read about the man himself “Charles Ponzi” and the concept of the Ponzi scheme. It’s unfortunate that most Governments are allowed to legally use similar methods to create the illusion of wealth and success for their mishandling of their countries economic affairs.
When a common criminal gets caught doing this he goes to jail, when politicians do it, it is called some fancy new financial term. (Quantitive easing, inflationary pressures, Financial stimulus etc, etc)
When they finally catch Bernie Madoff, do they fire the regulators who are supposed to be watching out for this type of thing? Or do the government employees all keep their jobs? How could such blatant theft / scam go on in today’s high tech age????
Anyhow thanks for highlighting these concepts and making your readers aware of this concept of robbing Peter to pay Paul. Cheers 🙂
Hi Peter:
Thank you for reading my article on the history behind the term Ponzi Scheme and the man who the scheme was named after – Charles Ponzi. The first of this type of scheme started with Charles Ponzi, however, modern day crooks are at large. You brought up a great example with Bernie Madoff. Five years ago Madoff was finally caught running the largest fraudulent scheme in the history of the United States. He is now serving 150 years in prison for his crimes. He will likely die in prison. Today, only a very few of his victims recovered some of their losses.
You brought up a great point about the accountability of governments of which there seem to be very little. Ponzi schemes and pyramid schemes are very destructive to a nation’s economy. If there were less scams out there and more honest companies out there, our economy would be a better place. When honest companies are available, too few people actually trust them because of the all of the scams we have out there, especially in the internet marketing business. One such company that is running an honest platform is Wealthy Affiliate Open Education Project. It is probably one of the few legitimate online opportunities out there today.
Thank you again for reading my article today. Please check out some of the other reviews, tutorials and resources I have available on my website.
Steph
This was a great read. I had no idea until now how the Ponzi scheme came about…it really does seem like such a simple way to con but the question I always find myself asking is what type of person could bring them-self to steal such large sums of money from people without care or concern for the damage they are and have done.
Hi Seviedean:
Thank you for visiting my site today. I think most people have no idea how and when we defined Ponzi scheme. Charles Ponzi was indeed a crooked individual with no care or concern for the money he stole from banks and other innocent people. I am glad you found it enjoyable to read.
Steph
Hello Step Hill, what a nice trip down memory lane and a nice education into what a ponzi scheme really means.
This Charles Ponzi sure was a very clever trickster, seeing his ability to swindle investors of their hard earned cash. How long did he stay in prison, was he ever released or did he die in prison?
But if the idea about ponzi schemes is to rob peter to pay paul, how can we identify a ponzi scheme in today’s world?
Hi Emmanuel:
I am glad you enjoyed reading the article on Define Ponzi Scheme and the history behind the scheme to include how it got its name. Charles Ponzi was a clever trickster as you said.
In answer to your question, Ponzi did not die in prison. Initially he spent only five years in prison due to the federal charges of mail fraud. When he was released, the state of Massachusetts charged him with 22 counts of larceny for which Ponzi was surprised and he sued the state claiming it was double jeopardy and that he already served his time. The judge said it was not double jeopardy because the federal charges were for mail fraud and the state charges were for larceny. He was then given a trial by jury for ten counts of larceny and using the same charismatic ways in which he swindled his investors, he was able to persuade the jury to find him not guilty. The state attempted to have a second trial with different accounts of larceny the jury was deadlock. At a third trial, Ponzi was found guilty and served about nine years in prison.
He was later deported back to Italy as he never obtained United States citizenship. He bounced from one scheme to another while in Italy.
As far as being able to dictate a ponzi scheme today, there was actually one recently known as the Bernard Madoff scheme that was found out after many years and collapsed in the year 2008 when the recession uncovered the massive ponzi scheme that Madoff had been running.
Ponzi schemes are very similar to pyramid schemes and many MLM companies operate as a pyramid scheme, such as Herblalife which is currently under FBI and FTC investigations for crimes associated with running a pyramid scheme.
It is hard in today’s world to be able to detect the legitimate online opportunities from the illegal and unethical ones. One company which I do recommend and know for certainty is a legitimate and honest opportunity for those seeking to further themselves is Wealthy Affiliate.
Thank you again for visiting. Have a wonderful day!
Steph
Hey, i loved reading this article as its just interesting how the ponzi scheme all began and its origins. I had heard of the pyramid scheme but not ponzi scheme. They sound a lot alike. I also really enjoyed you site structure, well done and i forsee amazing things for your website
Hi Jazzi:
I am glad you enjoyed the article about Charles Ponzi and now the definition Ponzi scheme came to be. I enjoy telling stories and relating to my readers by connecting through content. Thank you for the amazing compliments on my website as a whole. I certainly hope for amazing things to begin to take shape.
Steph
Interesting bit of history! I didn’t know too much about the definition Ponzi scheme, so I liked being informed about how he started out and how far he went. I wonder how he felt about being a household name, for all the wrong reasons.
And I never knew about that little trick with postal reply coupons! Oh, the strange little loopholes people find.
Hi Samantha:
I too learned recently about the international postal coupons. I too am always amazed by the loopholes people will discover and try to maximize to their advantage. I am really glad you found the article on Charles Ponzi and how the definition Ponzi came to be interesting and enjoyable to read. Thank you for visiting today and I hope you return soon.
Steph
Hi Steph,
Thank you for this post. Well, I can only say that this knowledge appeared shocking to me as I have never imagined someone would think of this scheme, much less heard of it. Thanks for sharing this information and it remains a challenge still to educate people on how to avoid these scams.
Best,
Gin.
Hi Gin:
I am happy you learned the history and the definition ponzi scheme. It is true that there are many schemes out there today and one of the goals of my website is to report on various pyramid and ponzi schemes that are there. Herbalife is one of those schemes that I recently wrote an article on. Some people make think with all of these scams and various unethical business practices out there that it is next to impossible to find an honest legitimate online opportunity. However, one of the few and probably the best #1 recommendation I have is Wealthy Affiliate. This is perhaps one of the few programs out there that you can truly count on.
Steph
Hi, I do think this is a great website. I stumbledupon it 😉 I will return yet again since I bookmarked it.
Money and freedom is the greatest way to change, may you continue to be rich with your generosity of your time and knowledge
and continue to help other people. I had heard of the ponzi scheme. Famous authors such as Charles Dickens wrote about in his The Life and Adventures of Martin Chuzzlewit which was published in the 1800’s.
This was a very interesting and entertaining post. Great research on the biography of one of the infamous sultans of shame. I had read and studied about his despicable scheme in the past. You really brought to light just how much of a rotten apple this man was.The master of robbing Peter to pay Paul. Just think of what this man could have accomplished if only he had used his skills for the good of mankind?
Hi Ronn:
This was definitely a very seedy underhanded individual who managed to steal millions of dollars from families, women and men who were only trying to better themselves. This scheme is still occurring in today’s world and there are many similar dishonest programs out there. If you are wishing to learn how to operate a legitimate business, check out Wealthy Affiliate. You will learn skills that will help you to build a legitimate honest business online and also give you the opportunity to help others do the same. And I agree, it is definitely a horrible tragedy that he did not use his skills for the good of mankind.
Steph