What Is a Ponzi?

by Bob Osgoodby


We have seen the term "Illegal Pyramid" discussed, but the granddaddy of them all is called a "Ponzie". The term "Ponzi" is derived from Charles Ponzi (nee Ponsi), who was an Italian immigrant and ran his original scams in Montreal.

In 1919, he set himself up in an office on the second floor, of a downtown bank building in Boston. Ironically, he called his company the Securities and Exchange Company, and mailed prospectuses in December of 1919. He offered a 50% return on investments in 45 days and 100% in 90 days. By the end of June, 1920, he was supposedly receiving $500,000 a day and paying out $200,000 a day. Now this was in 1920 dollars - extrapolate this to the value of today's dollar.

Thousands of people circled the block and climbed the stairs to "invest." So much cash flowed into his walkup office, that he had to employ 16 clerks to sort and count the money. He received so much, it was stacked in closets and stuffed into waste paper baskets.

Like most pyramid schemes however, when the cash inflow was interrupted, the pyramid collapsed. He was brought down by investigative journalism reports and government intervention. By the time the District Attorney closed in on July 26, 1920, 30,195 people, with an average investment of $300, had paid in $9,582,591 in 8 months, for a promised return of $14,374,818.

Ponzi was arrested, and many of those who lost money blamed the government for their losses for having intervened, which is a fairly typical reaction when someone is burned by an operation of this type. He served time in Federal prison, and then jumped bail after being convicted and sentenced to a 7-9 year term in the Massachusetts State Prison. He turned up running schemes in Georgia, Texas and Florida (where he sold underwater lots, of course), and was finally captured and returned to Massachusetts where he served his sentence.

Ponzi was deported to Italy, and was given a job in the Brazilian office of the country's new airline by Mussolini, the dictator in Italy. He died in a charity ward partially blind and paralyzed, but had just enough money to avoid being buried in a potter's field.

Ponzi was not the inventor of the pyramid scheme (under the names of Ponsi and Bianchi, he had been jailed in Canada in 1908), but was one of the most flagrant promoters, and a good example of a professional scam artist.

Similar illegal pyramid schemes are operated every day, in every type of arena. From the most sophisticated investment ploy like the Philadelphia-based Foundation for New Era Philanthropy, (the charitable contribution pyramid) and Equinox International (one of the nation's largest multi-level marketing companies) to common chain letters, these operations still thrive.

The Internet has given birth a whole new breed of these scamsters, who now find their prey in the reaches of cyberspace. It has also given birth to a whole new breed of victims, who feel they are sophisticated enough to avoid these scams, but in reality are a willing target. Lured by greed, and the promise they will make millions, they bite "hook, line and sinker".

Not only do pyramids live on, but so do the reactions to enforcement. Those who get bilked often blame government officials for intervening as the cause of their misfortune.

Many supposed MLMs are really pyramids that depend on the most recent investments to pay off the older obligations. Many of them are doomed because the commission structures are so financially onerous, that the only way to meet ongoing product costs and commission payments is to suck in more participants -- sometimes at any price -- to keep the cash flow moving.

Hope that explains the derivation of the "Ponzi" scheme, and if you are ever tempted, pull out this article and read it again. Like musical chairs, when the music stops, someone is out.


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