Bernard Madoff died in prison April 14. He was 82 and was serving a 150-year sentence for having operated the largest Ponzi scheme in history. Investor losses totaled $64.8 billion, inclusive of phantom investment gains appearing on fraudulent account statements.
A Ponzi scheme involves using new investor money to make payments to prior investors, thereby causing everyone to think there is actually a moneymaking business at work when, in fact, the perpetrator is looting the enterprise. What you might not know is where the name “Ponzi scheme” came from. The answer is: Charles Ponzi. He was born in Italy in 1882 and came to the United States — to Boston — in 1903. Ponzi had $2.51 in his pocket at that time, having gambled away the rest of his money on board the ship from Italy.
After various minor financial crimes in Boston and Montreal, and a couple of short trips to jail as a consequence, Ponzi hit his stride in early 1920 with a business called the Securities Exchange Co. This company promised investors a 50% return on their investment in 45 days and a 100% return in 90 days. The investment involved buying postal reply coupons in Europe at a cheap price and converting them to U.S. postage at a much higher value. Ponzi performed as promised on initial investments and the money from new investors came pouring in. Ponzi, of course, was using new investor money to pay prior investors, and indulging in a lavish lifestyle along the way.
A suspicious financial journalist wrote an article questioning Ponzi’s business. Ponzi sued for libel and won, giving credibility to his scheme. However, a Boston paper, the Boston Post, kept investigating the affairs of the Securities Exchange Co. and finally exposed Ponzi’s fraud in August 1920, at which time the scheme collapsed. When the dust settled, investors had lost $20 million ($265 million in today’s dollars) and five Boston-area banks had failed.
Ponzi was convicted of a federal crime — mail fraud — and spent three-plus years in prison. When he was released, Massachusetts brought charges against him for larceny. Ponzi took the position that, after having been convicted under federal law, he could not be charged under state law. This issue went to the U.S. Supreme Court in the case of Ponzi v. Fessenden. Ponzi lost. But it took three trials before Ponzi, acting as his own lawyer, was convicted under Massachusetts law. While his conviction was on appeal, Ponzi fled to Florida, where he started a new company called Charpon Land Syndicate. That company sold swamp land to investors, promising a 200% return in 60 days.
Ponzi was convicted of financial crimes under Florida law 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 eventually ended up in Brazil where, in 1949, he died penniless at age 66.