Ponzi's Scheme (11 page)

W
ith the small loan from Daniels, Ponzi began getting organized. Three days later, on December 13, 1919, he pulled on his threadbare coat to ward off the winter chill, left his cubbyhole office, and strolled around the corner to Boston City Hall. More chipper than he had been in months, Ponzi walked past the pigeon-splattered courtyard statues of Benjamin Franklin and the city's second mayor, Josiah Quincy, whose likeness was dressed incongruously in classical Greek attire. Ponzi entered the granite wedding cake of a building through massive wooden doors inlaid with marble circles.

With the help of Boston's assistant city clerk, Ponzi filled out paperwork declaring that he would do business as the International Security Company, with him as sole proprietor. He was pleased that the transaction set him back only fifty cents, little more than the cost of three boxes of his favorite Murad Turkish cigarettes. But Ponzi soon cooled to the name he had chosen for his company. He returned to City Hall the day after Christmas, determined to get it just right. He paid another fifty cents to register a more descriptive and less exotic-sounding name: the Securities Exchange Company. With the new name painted on his office door, he ordered a stack of printed certificates to give to investors. Inside a decorative border, in a style reminiscent of the International Reply Coupons on which the business was based, the certificates read:

Although the certificates said that the 50 percent would be paid in ninety days, almost from the first Ponzi told investors he would shorten the payoff period to half that. As soon as he was ready for business, Ponzi began his hunt for investors who had as little as ten dollars to spare. He instinctively knew he would find them: “We are all gamblers,” he believed. “We all crave easy money. And plenty of it. If we didn't, no get-rich-quick scheme could be successful.” Ponzi called around town, visiting people he knew and people who knew people he knew, talking about his company and describing the coupons-stamps-cash continuum in enticing terms. He made a point of never directly soliciting investments, preferring to whet his listeners' appetites and make sure they knew where to find the offices of the Securities Exchange Company.

A few days after he began spreading his gospel, Ponzi was sitting alone in his office, waiting for the seeds he had planted to take root. Someone knocked on the door, and Ponzi invited him inside.

Customers line up at 27 School Street to invest money
with Ponzi's Securities Exchange Company.

The Boston Globe

C
HAPTER
E
IGHT

“A
SMALL SNOWBALL DOWNHILL
”

P
onzi's visitor was an acquaintance named Ettore Giberti, a grocer in the northern suburb of Revere. During the dozen years since he had come to America, Giberti had followed a sedate path, working steadily and painstakingly to build his business. Married for two years, the thirty-two-year-old Giberti and his eighteen-year-old wife, Edith, a fellow Italian immigrant, had recently welcomed the arrival of a son they'd named Frederick. When he climbed the stairs to Ponzi's office, Giberti's net worth was perhaps twelve hundred dollars. But with a growing family to support, he hoped that would soon change. People were talking about this Ponzi fellow and his investment idea, and Giberti wanted to learn about it firsthand.

Ponzi poured it on thick, just as he had done with Daniels, talking about the Rome treaty writers, fluctuating currencies, and the incredible potential for a visionary like himself who knew the secret of how to turn International Reply Coupons into piles of cash. The one thing he did not explain, the one thing he would never tell anyone, was precisely how he exchanged the coupons for greenbacks. But like a magician who focuses his audience's attention on one hand while performing feats of prestidigitation with the other, Ponzi knew that the details of the transactions were less interesting than the promised results. Indeed, Giberti listened attentively but impassively until Ponzi mentioned the 50 percent return on investments. Ponzi could tell from the expression on Giberti's face that his countryman was doing some mental calculations, pyramiding some imaginary investment over and over again to figure out how much he might have in three months, or six, or a year. Yet the numbers flashing through Giberti's mind were still not enough—or perhaps they were too much—to make him a believer. He told Ponzi he could not afford to invest and got ready to leave.

A shiver of panic raced down Ponzi's spine. He was about to lose his first sale, and with it, he feared, a measure of confidence in himself and his plan. He could not let that happen. Giberti had to be sold. Impulsively, Ponzi came up with an idea that harked back to his time in Montreal during the heyday of the padrone. A man could grow rich and powerful not only by his own hard work but by putting others to work for him. Ponzi made Giberti an offer: Become the first sales agent for the Securities Exchange Company. Surely lots of people came into Giberti's store, and if they trusted his choice in vegetables they might also trust his choice in investments. Ponzi urged the grocer to tell his customers and friends about the Securities Exchange Company and collect investments on Ponzi's behalf. Giberti would be entitled to 10 percent of whatever money he brought in. Giberti accepted.

Before his new agent left, Ponzi gave Giberti a tutorial on what he called “salesmanship and psychology.” He insisted that Giberti never use pressure tactics—“Never crowd a prospect,” he said. “I was selling my dollars at about sixty-six cents,” Ponzi explained. “That's all there was to it. And they were good dollars. Any attempt to force them on a prospective investor would have been to create suspicion rather than confidence.”

Giberti absorbed the lesson and went to work. Winter had just begun, and Ponzi considered Giberti his first snowball of the season; pushed in the right direction it would get bigger and bigger. By early January 1920, Giberti had tempted eighteen people to give the Securities Exchange Company a try, returning several times to the Niles Building to hand Ponzi a total of $1,770. Though the average investment was a hundred dollars, individual amounts varied widely. Giberti put up only ten dollars—just enough to allow him to tell prospective clients that he was an investor.

The day Giberti laid the first wad of cash across Ponzi's outstretched palm marked a pivotal moment in the career of the would-be financier. An angel sat on one shoulder and a demon on the other. The angel's approach was straightforward. Ponzi had the money necessary to determine if his theory about legally exploiting fluctuations in foreign currencies could be put into practice. With the money from his initial investors, he could test whether he could clear the major logistical hurdles facing his enterprise: Who would exchange his dollars for foreign currencies and buy the reply coupons overseas? Would enough be available to operate on a large scale? If so, and if he could get the coupons back to Boston, how would he turn them into cash? If any of the obstacles proved fatal within the ninety-day window Ponzi's notes gave him before the payment was due, Ponzi could admit partial defeat, refund whatever money remained, and hand out IOUs for the rest. Then he could retool his idea, try another approach altogether, or follow Rose's advice to be satisfied with a typical job and a typical life.

The demon's alternative was to secretly abandon any pretense that this was a legitimate business and follow the notorious example of 520 Percent Miller. When Ponzi's first investors came looking for their 50 percent, he would pay them with money from later investors. Those investors might well be enticed to take another spin, bringing friends along with them, to multiply their winnings and keep Ponzi's perpetual-motion machine whirring. When the time was ripe and his wallet was bursting, he would take Rose to Italy, where he remained a citizen. His cash and his home country's fluid extradition practices might allow him to get away scot-free.

Both approaches held a certain appeal. From the moment he'd landed in America, Ponzi had been looking for a legitimate way to get rich and remove the shame he felt over disappointing his mother. Never much of a churchgoer, he believed that the words printed on International Reply Coupons were the gospels that would lead him to financial, and perhaps even spiritual, salvation. Yet as he approached his thirty-eighth birthday, he was bound to wonder how many more chances he might have if this elegant idea failed. He wanted the moon for Rose, wanted to start a family they could raise in comfort, wanted to prove to his elderly mother that he could accomplish everything she had dreamed for him when he was a boy.

Torn, he plotted a middle route: Allow the business to keep growing and enjoy the fruits immediately, while continuing to iron out kinks in the system. Not quite as dangerous, illegal, or immoral as the demon's path, it was nevertheless riskier, less honest, and more unethical than the angel's. If it worked, no one would be the wiser. If it did not, Ponzi would have to come up with a new idea to meet his obli-gations, or he would have to run. Either way, there was no rush. With Giberti's help, business would grow slowly and steadily, Ponzi thought, giving him plenty of time to test, refine, and perfect his cash-for-coupons transfers.

P
onzi took his first step down the path between cautious and reckless abandon within days of Giberti's first cash delivery. On January 3, he returned to Uncle Ned's pawnshop, not to borrow but to claim what was his. He went to the counter and waited for Max Rosenberg to notice him. With a flourish, Ponzi pulled out a wad of cash and asked only for his gold pocket watch. When Rosenberg produced it, Ponzi repaid the twenty-dollar loan, plus a few singles for a month's interest. Ponzi might have had enough money to also claim Rose's diamond rings, but they would have to wait a while longer.

First he needed to keep his other creditors at bay while figuring out how to pay his investors $885 in interest, plus the principal for those who would not let their money ride. Based on current exchange rates, Ponzi thought he could use just four hundred dollars from his initial investors to yield a 50 percent return for all of them, leaving him more than thirteen hundred dollars in “profit.” A more conservative man would have waited to claim even his watch until he'd actually produced that profit, while a more devious man might have immediately claimed the rings as well.

Giberti made himself scarce during the first weeks of 1920, and Ponzi soon realized why: Giberti's friends had trusted him with their money, and he thought it would be wise to lie low until Ponzi made good. In the meantime, word of Ponzi's business plan reached a Massachusetts bureaucrat named Frank Pope, whose job as state supervisor of small loans was to protect the public against lenders who charged obscene rates of interest. Pope dropped by 27 School Street. Ponzi easily weathered his first official inquiry. His investors were effectively lending him money at a rate of 50 percent for anywhere from forty-five to ninety days. Pope's only authority would have been to protect Ponzi from his own investors! Realizing that Ponzi was more than willing to “borrow” money at high rates, Pope returned to his State House cubbyhole. His only action was to call the Boston police, to suggest that they keep an eye on Ponzi and the Securities Exchange Company.

Forty-five days passed and Ponzi somehow began paying his initial investors. When asked how he did it, Ponzi eventually said that he had given the money to a man named Lionello Sarti who worked aboard a transatlantic liner. Ponzi said he'd instructed Sarti to buy as many coupons as possible in Italy and bring them to School Street when his ship returned to Boston. Ponzi insisted that Sarti had showed up in early February with the happy news that coupons were readily obtainable in even the smallest post offices. With advance notice, and perhaps a few well-placed bribes, Ponzi claimed, Italian postal officials could be persuaded to supply them in large quantities.

Over time, skeptics would doubt Sarti's existence, suspecting that Ponzi had borrowed from Peter to pay Paul. They would point out that most of his initial investors did not collect their winnings, preferring instead to reinvest and reap bigger profits. Adding to skeptics' reservations was Ponzi's steadfast refusal to say how he had turned the coupons into cash. Stamps, perhaps. But United States post offices were not in the business of currency exchange using coupons and stamps as mediums. Even if it were possible, it certainly would have caused a stir. Ponzi needed $2,655 to repay his investors with interest. If each International Reply Coupon could be traded in the United States for a stamp worth five cents, it would have taken more than fifty-three thousand coupons to satisfy the first eighteen investors. A stack of two hundred coupons measured about one inch high. Fifty-three thousand coupons would make seven three-foot-high stacks, or enough to fill a steamer trunk.

However he did it, by pleasing his original investors Ponzi sent the first pebble tumbling off a cliff. From that moment on, “Each satisfied customer became a self-appointed salesman. It was their combined salesmanship, and not my own, that put the thing over. I admit that I started a small snowball downhill. But it developed into an avalanche by itself.”

A
s Ponzi expected, most of his initial investors returned. In February, the Securities Exchange Company recorded $5,290 in new investments, from seventeen investors. The biggest sum came from the life savings of John S. Dondero, at forty-four a trim, square-jawed man with a well-tended mustache and a fondness for three-piece suits. Married to Rose Ponzi's aunt Jennie, Dondero was therefore Ponzi's uncle by marriage. On February 24, he handed Ponzi two thousand dollars, a year's wages. Dondero had earned the money in a North End liquor business that had dried up with Prohibition. A few weeks later, Dondero's cousin John A. Dondero entered Ponzi's good graces by investing the same amount.

Ponzi claimed that after John S. Dondero's two-thousand-dollar investment, he gave Sarti money for another trip to Italian post offices—though no one had ever seen Sarti except for Ponzi. If Ponzi did hand money to Sarti, he made sure he kept plenty on hand for himself. Three days after John S. Dondero trusted his money to the Securities Exchange Company, Ponzi returned to Uncle Ned's. This time, Max Rosenberg noticed something different about his customer. Long eager to relive the sartorial splendor of his college days, Ponzi had decked himself out in a sharp new suit at the height of fashion. Rosenberg thought the undersized financier looked like a prosperous businessman straight from State Street, the heart of Boston's financial district. Ponzi flashed a wad of big bills and peeled off a few to redeem Rose's diamond rings, again urging Rosenberg to invest in his coupon business. But appearances meant little to Rosenberg. His world was concrete—loans made against collateral he could literally hold in his hand—while Ponzi dealt in the abstract. Once again the pawnbroker declined. Ponzi walked out of Uncle Ned's door for the last time.

As pleased as she was to see her husband prospering, and as happy as she must have been to have her rings back, Rose was distracted from Ponzi's growing success by the death of her father. After suffering in brief succession the losses of his wife and his business, John Gnecco had no fight left in him. He died on February 13, 1920, leaving Rose heartbroken but binding her even more closely to her husband of two years.