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New Haven’s Jared Flagg Launches One of the First Ponzi Schemes

In 1926 the fraud police had Jared Flagg under questioning. It wasn't the first time the flimflam man was in trouble with the law. But it would be the last. As the investigators pushed for answers about a particular fraud, Flagg began struggling for breath. The attorneys suspected it was a trick to slow them down. But for once in his scandal-plagued life, Jared Flagg was playing it straight. He collapsed and died.

Just short of 70 years old, Jared Flagg left his estate to his wealthy and better-known brother Edward, who was a highly regarded architect and landlord in New York City. The Flaggs were relatives of Cornelius Vanderbilt, and Vanderbilt money had paid for Edward's education and launched him as a successful architect. At the time he died, Edward was a major landowner on Staten Island and, his obituary noted, had the design of the Corcoran Gallery of Art in Washington, D.C. among his notable credits.

Jared's obituary, meanwhile, simply noted he "collapsed on the grill," in the offices of the New York State Bureau of Fraud Prevention. The Flaggs were from a fine family. Their grandfather had been a five-term mayor of New Haven and their father was a respected minister and artist. So as the oldest son, high hopes were place on Jared.

Jared Flagg in 1910

Jared Flagg in 1910

Flagg's career began in 1886 when started developing his system of Flagg Flats. He had left New Haven for New York. Working as a furniture salesman Flagg had a singular insight. He would talk with a young married couple looking for furniture. He would tell them that to buy furnishings for their apartment, they would need to pay ten percent of the furniture's cost up front and could make payments for the rest.

But the ten percent up front was a barrier to young people facing deposits for rents and utilities. Why, he wondered, if a company was willing to loan out 90 percent of the price of the furniture shouldn't it loan out the whole price, since customers rarely defaulted? That would let the buyer get more furniture, which would in turn mean greater profits over time.

Flagg took the idea to his bosses, who were curious. They offered him a deal. If he himself would pay the ten percent deposit, once it was recouped he would get ten percent of the total return. So, for instance, if a couple bought $100 worth of furniture and paid for it over three years, Flagg would pay the $10 up front. Over time he would get his $10 back plus $17 profit.

Flagg agreed, and he ran a small notice in the newspapers advertising his "no down payment" furniture plan. He was quickly overwhelmed with customers. With his cash in short supply, Flagg initially had to borrow money to keep the system going. But over time, as his customers grew and began making payments, he began grinding out a profit. One hundred of his Flagg Flats generated $400 per week in profits. By 1894, the city was awash in Flagg Flats and Flagg had contracts with all the major furniture stores in the city.

As other companies caught onto the "no money down" plan, profits became harder to get. So Flagg tweaked his approach. He began accepting payment from the furniture companies in furnishings rather than cash. He would buy apartments using a mortgage, furnish them and rent them. This evolution made Flagg a large landlord and at one time he had 480 Flagg Flats.

But as any landlord knows, managing tenants and collecting rents can be a headache. Flagg Flats began to get a reputation for renting to the less upstanding members of New York society. Flagg would argue, with some truth, that he was the victim of New York's police department, which was notoriously corrupt in the 1890s. The police demanded $100 month in bribes. Flagg refused. He found his flats being raided and searched for illegal activities. Flagg was prosecuted for renting out his flats to prostitutes. Despite his protests, he was convicted.

Flagg lashed out by publishing a book, Flagg’s Flats, that aired out his disputes with the police and corrupt New York politicians:

If there is anything in this wide world that will make a blackmailing policeman wince it is a jury. He recoils from a jury trial as the Devil would from holy water.

Gradually, Flagg left the landlord business. But his next venture would prove even more controversial.

The profits available in the stock markets attracted Flagg as a young man. But lacking capital, he could not become a major investor. Instead, he wrote a stock trading manual: "How to Take Money Out of Wall Street." The book languished for some time, but eventually Flagg came up with a use for it. He began presenting it to potential investors and opened up his operation as a stock trader in 1908.

Soon he began engaging "partners" to direct customers to him. The biggest name in his list of partners was Daniel Morgan, president of the City National Bank of Bridgeport. Morgan had served as mayor of Bridgeport and U.S. Secretary of the Treasury. Morgan's role in Flagg's operation was simply to round up investors. For everyone he directed to Flagg, Morgan received a commission.

But Flagg had enemies. On September 23, 1911, postal inspectors raided his offices. The charge was that he was running a Ponzi scheme -- though the word was not yet known, as Charles Ponzi didn't gain his notoriety until years later. What the postal inspectors were upset about was Flagg's mailings to customers in which he promised (Flagg said he only implied) that investors could make a profit of one percent per week on money invested with him.

What postal inspectors found was that Flagg was depositing checks in his investor’s accounts for money they had not earned. In fact, many would have lost all their money if Flagg had told them the truth. Flagg was arrested, and he soon published a defense of his actions. He had 850 customers, he noted, some had poured more than $100,000 into his firm. Prosecutors, he noted, had to beat the bushes to find a single unhappy client.

He tried to exonerate his "partners" by arguing that their commissions were not a sign that they were partners, as they never shared in any losses. And as to the essential charge? He basically admitted it.

Why did he pay out money to clients even when they had lost everything? He asked and answered the question in a book he published to clear his name:

Was it to tempt them . . . to come up with more money? Was it to induce them to bring in their friends? Was this my motive?

It Was.

How is a man to build up any honest business if he does not, be treating his customers well, "tempt" them, not only to continue doing business with him but to refer their friends to him?

Flagg's arrest made for sensational news stories. Daniel Morgan's involvement made it even juicier, as the idea of a former treasury secretary and bank president being hauled off to jail astounded the public. Further spicing the story, Flagg's young secretary had fled the country and was beng chased by government agents. Her departure was all a misunderstanding, Flagg insisted. He had sent word to her not to visit him in prison, he said. But while he meant to simply say, stay away, his message had been grossly mistranslated into: Run away and get out of the country.

Not surprisingly, protestations aside, Flagg was convicted and sent to federal prison in Atlanta.

Flagg argued that his prosecution was simply because of the enemies he had made in publishing the story of his Flagg Flats. He noted that no one had come forward to complain of losing money.

Prosecutors argued that the losses were inevitable and simply had been postponed as long as Flagg could continue rounding up new investors to prop up his scheme.

In 1920 Flagg successfully had his conviction overturned when judges ruled that his records had been seized by the government without an adequate warrant.

Fittingly, Flagg's final breath came in 1926 when he was being questioned by investigators over a fraudulent mortgage scheme he was suspected of being involved in. He began gasping for breath. Investigators initially suspected he was simply trying to duck out of the interview to avoid the truth. Instead, he died of a heart attack.

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