On July 24, 1920, the Boston Post published a story about an impressive investment opportunity that was taking off and making investors wealthy, almost overnight. Within days, however, the story began unraveling and the newspaper began asking tougher questions. It would be the beginning of the end of Charles Ponzi and his remarkable money-making scheme.
The basis of Ponzi’s schemes was nothing more than currency trading, which is still done profitably today. What Ponzi discovered was that you could send someone a postage reply coupon with an international letter, which they could use to pay the postage on a letter in reply.
But if the recipient didn’t want to reply, he could also exchange the coupon for stamps (or cash) through the post office. And if you bought it in a country where it cost one cent to mail a letter and redeemed it in a country where it cost two cents, Ponzi concluded you could make considerable profit.
Like all too-good-to-be-true deals, this one had a catch. Redeeming the coupons took time and paperwork that would easily eat up more than the profits it would yield.
But that didn’t stop Ponzi from soliciting investors. In exchange for using their capital, he promised he would double their money in 90 days. Soon, he had investors lining up to give him money at his newly formed “Securities Exchange Company.”
His scam was simply to pay people their profits by using new, incoming funds. Soon, some of his investors grew nervous and wanted out. Ponzi feared that as word spread, he would soon lose all his backers and would be exposed.
He turned to former Boston Post reporter William McMaster for help. McMaster, acting as Ponzi’s publicist, succeeded in getting the Post to place the positive story prominently in the paper. With the glowing story appearing in a newspaper with enormous circulation, investors stopped fleeing. But even more importantly, it brought in a tidal wave of new cash.
By 1920, however, Ponzi already had a troubled past. He had served jail time in Canada for forging a check. And there were many people skeptical of his claims. The Boston Post soon decided to revisit the Ponzi story, this time with a more seasoned journalist doing the looking: Clarence W. Barron, for whom Barron’s investment magazine is named.
Barron began questioning Ponzi’s story. Then McMaster joined in. McMaster, instrumental in helping Ponzi stabilize his scam, soon realized what he had done and decided he needed to try to put things right.
With people literally mortgaging their homes in some cases to invest, Ponzi was scrambling to find a way to keep his scheme running. He took control of a bank, Hanover Trust, and had hopes of using it as a source of funds to prop up Securities Exchange Company.
But McMaster was soon doing some snooping and some simple math. He concluded that there were not enough postal certificates in existence to be supporting the profits Ponzi was claiming, and soon after the Post bought his story exposing Ponzi. The scam artist sued the paper and covered the payments to his investors who were now rushing for the exits for five days. But with the Post continuing to hammer away at Ponzi, reporting that he had bought no postal coupons at all, the Securities Exchange Company crashed down in August.
Ponzi cost his investors millions and would serve jail time, but he was an unrepentant scammer, moving on to real estate swindles and financial scams in his native Italy, where he returned after being deported. He ended his days in Brazil, a fugitive. But even through to his death at age 66, he still loved the spotlight. In a final interview, he told the reporter:
“Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.”