| 7 financial crimes that rocked the U.S. | |
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| In December 1919, Charles Ponzi began promising investors a 50% return in 45 days. His pitch: an international postal reply coupon bought in Spain at 1 cent was redeemable in the U.S. at 5 cents. Ponzi would purchase and sell the coupons on behalf of investors. Instead, he simply used new clients' money to pay earlier investors their "profits"—while keeping a significant portion for himself—a type of fraud that came to be known as a Ponzi scheme. | |
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| This is the first email in the series "7 Financial Crimes That Rocked the U.S." Was this newsletter forwarded to you? Sign up here. | |
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 | PHOTO: BETTMANN ARCHIVE/GETTY IMAGES | | | Charles Ponzi: The so-called wizard was an Italian immigrant with a penchant for scams. Before carrying out his eponymous scheme, Ponzi served 2 1/2 years in a Canadian jail on a forgery conviction. Between stints in U.S. prisons for his postal reply coupon swindle, he and his wife found time to commit land fraud in Florida. Ponzi was deported back to Italy in 1934 and died in a hospital charity ward in 1949. | | |
 | PHOTO: EVERETT COLLECTION | | | Clarence W. Barron: Barron was one of the first to cast doubt on Ponzi. Known to some as the father of modern financial journalism, he started the Boston News Bureau in 1887. He bought Dow Jones, The Wall Street Journal's publisher, in 1902, and launched Barron's magazine in 1921; Dow Jones still owns the Journal and Barron's today. Barron also amassed a small fortune and counted President Calvin Coolidge and Charles Schwab among his friends. His obituary notes he kept 18 telephones at his Boston home. | | |
| Joseph Allen: When then-Massachusetts Gov. Coolidge chose the young vice president of Springfield's Union Trust as the state's bank commissioner, Allen was a bit of an outsider. While Allen didn't have the authority to go after Ponzi directly, an investigation of Ponzi's banking practices hastened the schemer's exposure and downfall. When Allen returned to the private sector in 1925, the Journal wrote: "It is an open secret that among Vice President Coolidge's many appointees as governor none pleased him better than Allen." | |
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| $15 million | | The upper range of the amount Ponzi is estimated to have swindled from investors, equivalent to $227.6 million today. | | |
| | How the Journal Covered It | | |
| One of the earliest mentions of Ponzi in the Journal is a July 1920 news article reporting on comments Barron made sounding the alarm about the "exchange wizard." "Right under the nose of Government officials he is paying United States money to one line of depositors from deposits made by a succeeding line," Barron said. His critiques appeared the same day as an article reporting that Gov. Coolidge had ordered an investigation into Ponzi's affairs. A few days later, a Journal editorial jokingly suggested Europe's financial chiefs could use "Ponzied finance" to raise the funds to pay off their debts from World War I: "He could multiply their revenue loaves and fishes." | |
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| Throughout August, hundreds of Ponzi's investors lined up asking to withdraw their funds. Allen, the Massachusetts bank commissioner, ordered Ponzi's bank, Hanover Trust, to stop paying checks signed by the swindler. This led the Massachusetts attorney general to issue a statement on his investigation: "It does not appear that Ponzi has ever received any funds from Europe through either of the institutions he names." Ponzi was arrested in mid-August—but not before he could file a libel suit against Barron for $5 million. The lawsuit never made it to court. In December 1920, Ponzi pleaded guilty to federal charges and was sentenced to five years in prison. While serving time, he received a letter from Barron, which was published in the Journal; Barron pointed out that Ponzi now had the time and opportunity to "study sound, useful economics." While Ponzi was in federal prison, Massachusetts tried him on state charges in 1922. At the trial, the Journal wrote that the con man was stylishly dressed: "Natty as usual, Ponzi was attired in a blue suit with a fine white pencil stripe, a dark colored cravat and the usual bright handkerchief, topped off by dark grey spats." The Journal chronicled his continuing legal woes, but as the initial scandal receded, the paper's interest waned. It didn't cover Ponzi's eventual conviction in his third state trial (he was acquitted the first time around, and the second trial resulted in a hung jury). He was sentenced to another seven to nine years. | |
| Not long after Ponzi was exposed, iterations of his scheme began to make headlines, and "Ponzi" became a shorthand for a certain type of swindler. An article about "A Western Ponzi" in 1921 discussed a group of mining men offering an opportunity to invest in high-grade silver mines by using interest gained from bond investments. The article noted this arrangement would result in unwary participants investing more than they would gain. In 1922, a "Cuban Ponzi" swindled close to $35 million from five different banks after obtaining mortgage loans from each on a sugar plantation worth $1 million—although this wasn't actually a "Ponzi scheme" as we understand it today. And in 1923, British swindlers attracted investors with a promising investment of "25% in 45 days" for exporting Scotch to America, a scheme the Journal noted was reminiscent of Ponzi's "50% in 45 days." | | |
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| This poem appeared in the Journal's "Pepper and Salt" commentary in 1922, shortly after Ponzi was acquitted in the first of three state trials in Massachusetts. | |
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| 🧑✈️ Many of those who invested were working-class citizens: the salespeople at a shop Ponzi's wife frequented, waiters and even Ponzi's chauffeur. After 10 years of legal wrangling, creditors ultimately got back around 37.5% of their total claims, about $1.5 million. 🏦 The con man deposited a large amount of investors' money in Hanover Trust. As the scam came to light, Allen seized the bank and forced it to close. That led to a run on other small trust companies, resulting in the failures of a half-dozen other banks. 🔮 More than 100 years later, financial scam artists are still convincing unwitting victims to invest in their Ponzi schemes. We'll cover one of the largest in history—masterminded by Bernie Madoff—in another email in this series. | |
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| This is an obvious one: Be wary of any get-rich-quick scheme. The Journal wrote that Ponzi "laughed at the small rate of interest the people received from the banks" and claimed he could deliver monumentally higher returns. If an investment sounds too good to be true, it probably is. | |
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| NEXT WEEK: That which we call a con man by any other name would smell as rotten. | |
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