POSTAL INSPECTORS: THE SILENT SERVICE
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THE GREAT SWINDLER





Charles Ponzi




Image: Charles Ponzi
 

In August 1919 a Spanish businessman included a seemingly innocuous piece of paper with a letter to a Boston man requesting a copy of a foreign trade publication that he had heard of. The publication had died before it was ever printed, but the piece of paper, an International Reply Coupon, was about to give birth to one of the biggest money making schemes in American history. International Reply Coupons were dreamed up by the international Universal Postal Union in 1906 as a way for people in different countries to send return postage to each other. The International Reply Coupon could be purchased in one country and then redeemed in another for the equivalent value of that nation’s stamps; regulations set the rate of exchange, but the massive devaluation across Europe following World War I wreaked havoc with rates.

The Boston man, Charles Ponzi, realized that based upon post-war exchange rates, International Reply Coupons bought in much of Europe were worth more in the United States than what they cost at their point of origination. Ponzi, always scheming to make money, figured that if he could work out a way to deal with the coupons in high quantity, he could quickly become rich off of simply buying and selling them. Ponzi convinced a few investors to give him money, promising a 50% profit in 45 days based upon trade in the coupons. In spite of what he told investors, Ponzi couldn’t quite figure out how to make it work. He asked postal officials if he could exchange the coupons for cash, causing him to receive a visit from postal inspectors who warned him that the coupons were not intended for financial speculation; they were only redeemable for stamps. As Ponzi’s popularity and the number of people investing with him grew, postal inspectors became suspicious of how exactly he was able to ensure the returns he promised. Their investigation showed that worldwide International Reply Coupon sales were not nearly high enough to support Ponzi’s story about trading in them to make a profit. Inspectors were sure that Ponzi was doing something illegal, but despite the fact that he sent messages to his investors through the mail, they couldn’t arrest him for fraud, because at that point no one was being cheated; they could, however, push for further investigation into his business practices.

Following the publication of a newspaper article by Clarence Barron, one of America’s greatest financial authorities, which questioned the validity of his operations, Ponzi went on an offensive that included calling a meeting with federal, state, and local authorities on Monday, July 26, 1920. Ponzi suggested that an auditor be selected to establish the extent of his liabilities so that he could prove that he had enough assets to meet them, thereby dispelling the rumor that he could not meet his obligations. At his own suggestion, Ponzi also agreed to stop taking investments during the audit in order to make the job easier. In an attempt to assure the public, Ponzi caused his own demise. Angry investors crowded his office beginning the next day demanding to withdraw their money, fearing that Ponzi was about to close. At first, Ponzi appeared to be able to pay back everyone who wanted their money back. This ability reassured some investors who decided to leave their money with him, as well as others who desperately wanted to invest for the first time or invest further despite the fact that Ponzi was not open to new investments. Many did continue to withdraw their money until Monday, August 9, when Massachusetts Bank Commissioner Joseph Allen told the Hanover Trust Company to stop honoring Ponzi’s checks and three people who had deposited with Ponzi filed a petition in court to declare Ponzi bankrupt. Unable to pay investors back, Ponzi was finally charged with using the mails in a scheme to defraud, and in November pled guilty and was sentenced to five years in prison.

It finally emerged to the public that Ponzi hadn’t actually been investing in International Reply Coupons; he was using new investors to pay back older investors, and was always hoping that more people would reinvest than withdraw their money in hopes that he could figure out a way to actually pay everyone back. After being found not guilty in two state trials, Ponzi was found guilty of additional charges in a February 1925 trial and sentenced to another seven to nine years. While free on bail, Ponzi headed to Florida where he returned to his old tricks and soon was sentenced to a year in jail for violating Florida’s securities laws before he disappeared while awaiting an appeal. Found a few months later, Ponzi was sent back to Boston to serve out his remaining sentence there, and after being released in February, he was deported to Italy on October 7, 1934.

 
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