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MONEY & THE LAW: Beware of modern-day Ponzis

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November 19, 2013 Updated: November 19, 2013 at 7:25 pm
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The legacy of many people includes their name on such public works as street signs, schools, bridges and sewage treatment plants. Only one person has his name on a financial fraud scheme: Charles Ponzi.

Ponzi was born in Italy in 1882 and came to Boston in 1903 with $2.51 in his pocket, having gambled away the rest on board the ship from Italy during his journey.

After various minor financial crimes in Boston and Montreal, and a couple of short trips to jail, Ponzi hit his stride in early 1920 with a business called the Securities Exchange Company, which promised investors a 50 percent return on their investment in 45 days and a 100 percent return in 90 days. The investment involved buying cheap European postal reply coupons and converting them to U.S. postage at a much higher value.

Ponzi performed as promised on initial investments in his company, and the money from new investors came pouring in - at one point to the tune of $250,000 a day. Ponzi, of course, was using new investor money to pay prior investors, and indulging in a lavish lifestyle.

A suspicious financial journalist questioned the legitimacy of Ponzi's business. Ponzi promptly sued for libel and won, giving credibility to his scheme.

However, The Boston Post kept investigating and finally exposed Ponzi's fraud in August 1920, at which time the scheme collapsed..

When the dust all settled, investors had lost $20 million ($234 million in 2013 dollars) and five Boston area banks had failed. By comparison, Bernard Madoff, who perfected the Ponzi scheme idea and took it to a higher level, left $18 billion in investor losses when his enterprise collapsed in 2008.

Ponzi was convicted of a federal crime - mail fraud - and spent three-plus years in prison. When he was released, the State of Massachusetts brought charges against him for larceny. Ponzi took the position that, after having been convicted under federal law, he could not be charged again under state law. Ponzi lost an appeal to the U.S. Supreme Court.

Three trials later, Ponzi, acting as his own lawyer, was convicted in Massachusetts. While his conviction was on appeal, he fled to Florida, where he started a new company, Charpon Land Syndicate, to sell swampland with a promised 200 percent return in 60 days. Ponzi was convicted of financial crimes in Florida and sentenced to a year in prison.

He again appealed and, while out on bond, tried to leave the country disguised as a crew member on a merchant ship bound for Italy. He was caught in New Orleans and returned to Massachusetts, where he served seven years in prison. At his release, Ponzi was deported to Italy and ended up in Brazil where, in 1949, he died penniless at 66.

Ponzi's lesson to us continues: If it looks too good to be true, it probably is.

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Jim Flynn is a private attorney with Flynn Wright & Fredman LLC in Colorado Springs. Email him at moneylaw@jtflynn.com.

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