Ponzi Scheme: History Of Famous Italian Fraudster (Part 2)

This is the Part 2 of the “Ponzi Scheme: History Of Famous Italian Fraudster” article. Read the Part 1

In 1919 Charles Ponzi got a business idea. He decided that he might publish an international journal. Without a second thought, Ponzi sent a letter to a Spanish company to find out details about cooperation in the field of journal business. In response, Charles received a letter with international exchange coupons inside.

Any person could exchange these coupons for stamps, and send the letter back. But the interesting thing was that you could get only one stamp for one coupon in Spain, and as many as six in the US. The situation was similar with other European countries.

Ponzi quite quickly realized that he could play on it. Thus, the essence of “Ponzi scheme” is that he offered people to make a simple arbitration or CFD (contract for difference). The concept of arbitration /CFD may not be familiar to you, so I will try to explain it in detail. arbitration /CFD is the purchase and sale of goods in different geographical dimensions.

For example, imagine a situation where one company buys grain in England and at the same time sells it in France (hypothetical example). At the same time a sales agent of the company in France finds a buyer in this country for 10 tons of grain, and then calls the English branch of the company, and requires purchasing 10 tons of grain. The whole point of this scheme lies in the price spread. In this case, the company buys 10 tons of grain in England which is less than when it sells it in France. They earn on this difference.

In the case of Ponzi scheme the Italian fraudster was going to earn on international coupons in a similar way. The exchange rates contributed to this. Alas, there was an obvious problem – there were not so many exchange coupons to meet future demand for Ponzi scheme services.

But Charles himself didn’t think about this. In the end, he was not going to deal with arbitration. His goal was to create a simple pyramid scheme where money of new depositors was paid to the previous ones. So, in the same year, Charles Ponzi borrowed $ 200 from a furniture maker Daniels. With this money he rented an office, got a table and two chairs (according to the legend that he spent the remaining money on dinner). Then he got the company registered, with him being the only employee at the moment.

Ponzi’s offer was unexpected for many people in Boston – he offered to invest in his papers, and to get 150% of the investment in 45 days. Ie if a person invested $ 100, then 45 days later he could receive $ 150, and 90 days later- as much as 200. But Ponzi’s situation differed greatly from what was happening in Russia in the 90s. The Italian spoke in detail about how he was going to earn, sharing his idea as for arbitration with people .

And people ate up. Crowds came to Ponzi – Officials, policemen, ordinary citizens. Charles increased interest in his company due to ordered articles in the press. And people were attracted for the simple reason that everyone (regardless of nationality) wanted to become rich in no time. Ponzi became known. He was trusted as the first investors really got their money. Such newspapers as The New York Times interviewed Ponzi. In general, the ball started rolling.

By spring of 1920 the company employed 30 people, and 18-year-old Lucy Martelli dealt with operational management. Ponzi himself withdrew from direct running of the company. In addition, at this time Charles Ponzi got a depository account opened in Hannover Trust Company. It was through it that almost all Ponzi’s money was transferred. Many believe that the HTC management was perfectly aware of this scheme, and even helped Ponzi.

In May 1920, Charles made his dream come true – bought a huge house for 35 thousand dollars. There were 22 rooms in the mansion (it was it) and it was located in the area of Banking region of Lexington. But he was happy not for a long time. After a couple of months “Ponzi scheme” was disclosed.

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