Ponzi's Scheme (15 page)

Shifting his tack, the salesman said, “I have been told that you own a Hudson.”

“It's very true.”

“But you need a much larger and more expensive car.”

“What, for instance?” asked Ponzi. “What are you selling, anyway?”

“Locomobiles,” the salesman answered proudly, spreading out a brochure like a magician fanning a deck of cards. Ponzi saw a photo of a dark blue limousine and jumped to the bait. “How much for that?”

“Twelve thousand, six hundred dollars, delivered,” the salesman answered.

“All right,” Ponzi answered, “send it right over.”

The salesman blanched. The car Ponzi had picked was two weeks away from completion, he explained. Like all Locomobiles it was a custom job, in this case for a New York millionaire. That made Ponzi want it all the more.

“Fine!” he said. “Have it downstairs, in front of the door, by July first.”

“But that car is already sold.”

“Listen, young man, I want that car,” Ponzi said. “And when I want something, I am prepared to pay for it. Have that car here by not later than one o'clock on July first, and I will give you a thousand dollars more for it.”

Done deal.

The person least interested in Ponzi's money was Rose. Though she loved their new home, she missed the simple joys of life in their little apartment in Somerville. Not long out of her teens, she was uncomfortable overseeing a staff as the lady of the house. “The more servants, the less freedom,” she would say. “I like a house where you can talk and not be overheard, where you can say what you like at all times.” And no matter how clean her maid kept things, deep down Rose believed she would have kept them cleaner.

One day Ponzi came home with a glittering diamond bracelet while Rose was entertaining her friend Lillian Mahoney, the wife of Ponzi's agent Harry Mahoney. Embarrassed by his extravagance, Rose insisted that he return the thousand-dollar bracelet for a refund. Another time, Ponzi brought home a string of lustrous pearls. Again she demurred, but Ponzi thought he could outwit his thrifty wife. He agreed to tell her the price, but then tossed out a number that was only a fraction of the necklace's true cost. Rose accepted the necklace, and Ponzi thought he'd carried the day. But Rose had the last laugh. Not long after, she quietly returned them for a full refund. Ponzi had better luck with a much different gift: To keep Rose company during his long days at work, Ponzi surprised her with a Boston terrier puppy they named Beauty.

Ponzi's regular trips to a North End jewelry store led to a friendship with jeweler Alphonso Ciullo. It came in handy one morning when Ponzi was dealing with yet another visit from a pair of postal inspectors. Postal authorities had remained frustrated in their attempts to prove that Ponzi was doing something illegal, but they continued to examine his claims, including the recent statements printed in the
Traveler
about building his business by trading in reply coupons.

“Where do you buy them?” one inspector inquired.

“I am not telling that,” Ponzi answered. “I will merely say that they can be profitably bought in any country having a depreciated paper currency.”

“For instance?” the inspector wanted to know, setting a trap.

“For instance,” Ponzi answered, “Italy, France, Rumania, Greece, and so forth.”

“Exactly,” the inspector said, thinking he had caught Ponzi in a lie. “Now we have information that Italy, France, and Rumania have withdrawn from the postal agreement and stopped the sale of coupons . . .”

Ponzi parried as best he could, but the inspectors seemed to be gaining the upper hand. Just then Ciullo walked up the stairs at 27 School Street with a fat envelope.

“Charlie,” Ciullo said, “I have just received this package of coupons from Italy.” Ciullo wanted to know if Ponzi could transform them into cash. Scarcely believing his luck, Ponzi took the envelope and dumped out three hundred International Reply Coupons. He smiled. The inspectors pounced.

“Where did you get them?” one demanded of Ciullo.

“I got them from my uncle in Italy,” the jeweler answered, not knowing what was going on.

“Who is he?” the inspector asked.

“He is a postmaster in a small town,” Ciullo said.

“When did you receive them?”

“This morning.”

“How?”

“By mail,” Ciullo said.

The inspector examined the envelope and saw that it had been mailed from Italy in May and had only just arrived.

“Well,” Ponzi said, his voice tinged with sarcasm. “I hope you are satisfied now that somebody else beside myself can buy coupons in Italy.”

The inspectors turned tail and left.

A
nd all the while, larger waves of investors kept crashing on Ponzi's shores.

John Elbye of Everett bought a certificate for fifty dollars on June 10, and then his wife put up the same amount the next day. That gave John confidence, so he came back five days later with one hundred dollars. Five days after that he got up his real nerve and plunged in for a thousand dollars. Ernesto Giovino of Boston topped that with eleven hundred dollars on June 11. Giuseppe Albano of Boston deposited two hundred dollars on June 14 and came back two days later to add two hundred more. Catherine Callahan of Cambridge brought in a hundred dollars on June 18, and Samuel Goldstein of Charlestown put in double that the same day. Fred Drener of New Bedford could spare only fifty dollars on June 19. Harry Ash of Roxbury invested four hundred dollars on June 21, while Michael Kennedy of Somerville came in to collect his 50 percent interest on the $175 he had invested forty-five days earlier. He then took the whole $262.50 and bought another Ponzi note.

That same day, the first day of the hot summer of 1920, an unassuming man with a prominent nose and marquee-sized forehead came to 27 School Street from his office around the corner. With two hundred dollars in cash, he bought the 9,641st certificate issued by the Securities Exchange Company. A clerk wrote the man's name on the certificate in graceful script: Principio A. Santosuosso. But nobody called him that. To his friends and colleagues at the
Boston Post,
where he worked as a reporter, he was simply “P.A.”

Post
employees from newsboys to pressmen had been lining up in recent weeks to buy Ponzi notes. There was little doubt that word would spread to a well-liked reporter like Santosuosso. But his visit to 27 School Street was personal, not professional. He was twenty-nine, unmarried, the sole supporter of his widowed mother and his unmarried younger sister, both of whom lived with him in East Boston. The three hundred dollars he was due on August 5 would be a welcome addition to their household finances. If he thought the stream of people hoping to strike it rich at 27 School Street might make a good story for the
Post,
he mentally filed it away and returned to work.

The soaring number of new investments made Ponzi rethink his plan to take Rose on a second honeymoon to meet his mother in Italy. Although he fancied himself Boston's Count of Monte Cristo, Ponzi knew that his sudden success made some people wonder if he modeled himself after a more recent literary character, J. Rufus Wallingford, the creation of author George Randolph Chester.

Chester's 1908 novel
Get-Rich-Quick Wallingford: The Cheerful Account of the Rise and Fall of an American Business Buccaneer,
had become embedded in popular culture with help from a long-running 1910 Broadway play written by George M. Cohan. Wallingford is a consummate con artist who fleeces investors with a scheme based on items even more mundane than postal coupons: carpet tacks. Wallingford is ultimately undone by a small oversight and sent to jail, but he is rescued at the last minute by his devoted wife and a businessman whom Wallingford had swindled. The businessman forgives Wallingford because “you're only the logical development of the American tendency to ‘get there' no matter how. It is the national weakness, the national menace, and you're only an exaggerated molecule in it.” The businessman then hires Wallingford as an executive.

Ponzi had already decided that he would not take the money and run, but he wanted to be certain that no one had any reason to suspect him. Leaving the country was something Wallingford would do. So Ponzi canceled his and Rose's trip to Italy and wired more than five thousand dollars to his mother with instructions that she sail to Boston, first class, as soon as possible. Her only child had struck it rich, and he wanted her to come live with him and his wife. Rose worried that Imelde Ponzi might not like America or, worse, her daughter-in-law. But having lost her parents, and knowing how badly Ponzi missed his mother, Rose accepted the change in plans and began preparing for the arrival of the elder Mrs. Ponzi.

With money rolling in, and the pace increasing from week to week, Ponzi knew that he and his staff of amateur money minders needed professional help. He looked no further than his old acquaintance Roberto de Masellis, manager of the foreign banking department at the Fidelity Trust Company, who two years earlier had planted the seed in Ponzi's mind about fluctuating currency values. Ponzi took de Masellis to dinner at the Copley Plaza, where he described the business of buying postal reply coupons and redeeming them in countries with favorable exchange rates. De Masellis thought Ponzi seemed an honest man with a logical business plan. Practical, even. De Masellis knew nothing about reply coupons, but he had always believed profits could be found in rising and falling currency rates with the right medium of exchange and the money to pull it off in a big way. Based on how well Ponzi dressed, it seemed to de Masellis that his dinner companion had discovered the magic formula.

Ponzi told de Masellis that he should come to work at the Securities Exchange Company as a financial “efficiency expert” who would create a system more comprehensive, or at least less primitive, than the index-card file. To seal the deal, Ponzi agreed to pay de Masellis the princely salary of a thousand dollars a month. In addition, he would deposit ten thousand dollars in de Masellis's name at the International Trust Company, “in case the business stopped or if the rate of exchange became normal and spoiled the investments.” De Masellis was delighted. He agreed to begin work July 1.

De Masellis was hardly the only business expert Ponzi convinced. On June 30, Ponzi invited into his office a representative from the respected credit reporting firm the Bradstreet Company. A stamp of approval from Bradstreet would be a huge boon to Ponzi, and he got it. After hearing Ponzi's account of his enormous success, the company issued a report that outlined the business and concluded authoritatively, “Mr. Ponzi bears a favorable personal reputation.”

Despite talking a good game with de Masellis and the Bradstreet Company, Ponzi was searching more desperately than ever for a way to turn a profit. And he still had not completely given up on International Reply Coupons. As a last-ditch effort, he tried to enlist Henry Chmielinski, president of Hanover Trust, in an effort to obtain coupons from Poland, where Chmielinski maintained ties with government officials. Ponzi promised that they would both reap profits from the deal.

“Henry,” Ponzi told him, “this is your chance of a lifetime to clean up some real dough.”

Chmielinski tried to do as Ponzi instructed, but the deal—implausible to begin with—fell through. With it went Ponzi's last hope of turning postal coupons into cash. “I was left high and dry,” he reflected, “with no coupons and no profits in sight, and no way of meeting my notes, except by the time-honored custom of robbing Peter to pay Paul. It was a case of either sink or swim, and . . . I didn't want to sink. Not just yet, in any event.”

In the meantime, Ponzi's popularity kept soaring. When Ponzi and Lucy Meli tallied the investments from June, they could scarcely believe their eyes. Ponzi knew that deposits had been coming in so fast that his clerks had filled wastebaskets with greenbacks when the cash drawers had overflowed. But no one could have predicted the astonishing total: In June alone, the Securities Exchange Company had taken in more than $2.5 million from seventy-eight hundred customers.

Just as Ponzi was giving up on reply coupons, postal authorities in Washington were finally awakening from their torpor. They prepared an order, to be issued July 2, prohibiting post offices from redeeming more than fifty cents' worth of International Reply Coupons per person at one time. The order made no mention of Ponzi, but it was a clear sign that postal officials still believed he was somehow trafficking in postal coupons. In that sense, postal officials were on a par with Ponzi's investors, who fervently believed that Ponzi had a secret method of turning coupons into cash.

In the meantime, Ponzi continued playing the role of wealthy benefactor. On June 30, he gave a ten-thousand-dollar loan to his brother-in-law George Bertoldi, who was married to Rose's sister Theresa, to buy a note that would be worth fifteen thousand dollars by mid-August. Ponzi also decided to square old debts. The failure of his late father-in-law's wholesale fruit business eighteen months earlier had resulted in losses of about eight thousand dollars to creditors. At the time, that had been a world of money to Ponzi. But now, he collected more in an hour. He paid all Gnecco Brothers' creditors, in full, with a smile.

But Ponzi's grin was about to be sorely tested by another old creditor, one who had already been repaid but who wanted to collect far more.

Richard Grozier, after taking over for his father as
the
Post
's acting editor and publisher.

Mary Grozier

C
HAPTER
E
LEVEN

“L
IKE STEALING CANDY FROM A BABY
”

D
ay after day throughout June, furniture dealer Joseph Daniels had watched streams of people troop down Hanover Street, walk past his store, and climb the stairs next door to the North End branch of the Securities Exchange Company. Several months had passed since Daniels had last spoken with Ponzi, who had repaid Daniels's two-hundred-dollar loan in full and who had no interest in seeing him again. At their last encounter, Ponzi had told Daniels that his plan to wring profits from postal coupons had been a dud, which was technically true. But Daniels did not trust Ponzi. If the Securities Exchange Company was a bust, why would Ponzi open a second Boston office, and why would happy investors be lining up to trade cash for Ponzi notes?

A plan formed in Daniels's mind. He reasoned that the small loan he had given Ponzi the previous December must have been the seed money for a successful enterprise. Surely he was entitled to more than simple repayment of principal and interest. So, at the end of June, he dropped by 27 School Street to see Ponzi, ostensibly to offer to sell him more furniture. But Ponzi saw through Daniels's ruse and delivered a curt message: I am still not making any money. Even if I were, you would not be entitled to any.

An honest man would have let it drop there. Daniels hired a lawyer, Isaac Harris.

On July 2, Harris filed a million-dollar lawsuit claiming that Daniels was entitled to half ownership of the Securities Exchange Company. The claim had no merit, so it did not worry Ponzi. But Daniels's lawyer also filed an attachment against five of Ponzi's bank accounts, effectively freezing about $700,000 in cash, a legal maneuver designed to squeeze a settlement out of Ponzi.

A million-dollar lawsuit was no everyday occurrence, so it caused enough of a stir in the halls of the Suffolk County Courthouse to reach the ears of a
Boston Post
reporter. On page 1 of the paper on Sunday, July 4, the headline over the brief, unbylined story read:
BOSTON MAN IS SUED FOR $1,000,000.

The reporter could not locate Daniels, who was in Vermont for the Fourth of July weekend, but he found a confident, talkative Ponzi on School Street. First the reporter wrote a vague explanation of the business: “The company, which was started in December 1919, claims to be able to pay 50 percent profits out of dealings in foreign exchange through international postal agreements.” Then he turned the story over to Ponzi, whose name was appearing for the first time in a Boston newspaper.

“I haven't the slightest idea why Mr. Daniels brought the suit. So far as I know, he has no claim against me,” Ponzi told the reporter. “The only reason I can see for the suit is a desire to get some money out of me. If Mr. Daniels has a just claim he will have no difficulty in getting it satisfied because I have got two million dollars over and above all claims of investors against me in this country. This does not include funds in foreign lands.”

He rebuffed a suggestion that the lawsuit might hurt his business, turning the question to his advantage. “Anybody who withdraws funds to his credit only increases my profits. At the beginning, when I was trying to establish foreign connections and working out my idea, I needed capital and was forced to depend upon the public for assistance. Happily, my own private fortune is now sufficient to meet all demands upon the business for ready money.”

Privately, though, Ponzi knew he needed to take the lawsuit seriously. For one thing, it was sure to trigger additional scrutiny from postal officials and, quite possibly, law-enforcement authorities. Ponzi needed a good lawyer, and he looked no further than the investor list of the Securities Exchange Company. Frank Leveroni had arrived in Boston from Genoa at age four and had graduated from Harvard and Boston University Law School. A handsome man, forty years old, with an aquiline nose and a high forehead, Leveroni ran his own law firm and served as the first Italian-born judge in Massachusetts, sitting part-time on the bench in juvenile court. What really impressed Ponzi was that Leveroni had invested five thousand dollars during two weeks in June. With a wife and five young daughters to support, Leveroni believed he had found a sure thing.

Although confident he could beat Daniels in court if the suit came to trial, Ponzi instructed Leveroni to open settlement talks with the furniture dealer. Ponzi could not afford to let it distract him from the business at hand, nor could he allow his bank accounts to remain frozen indefinitely. He might need that money to carry out one of his planned switches to a legitimate business. Paying Daniels to go away might be worth it. At first they were miles apart; Daniels was holding out for a bigger payday than Ponzi could stomach. But they kept talking.

In the meantime, Ponzi took the precaution of opening bank accounts in other people's names, to keep them out of reach of Daniels or anyone else. Sometimes the names were fictitious, such as his Lucy Martelli account at Hanover Trust, a name created by combining Lucy Meli's first name with her mother's maiden surname. As a further precaution before Daniels's attachment took effect, Ponzi emptied his account at the Cosmopolitan Trust Company, taking home $283,710.62. He could rebuild the account later; at the moment, he wanted piles of cash on hand.

Ponzi knew the
Post
story would prompt some depositors to demand refunds out of fear that the lawsuit would destroy the Securities Exchange Company and swallow their investments with it. Indeed, the story ignited a two-day “run,” as several thousand nervous investors asked for their original deposits back, forfeiting the 50 percent interest. Ponzi gladly obliged; the result was addition by subtraction. Each refund demonstrated that he was a man of his word, prompting even more investors in the days that followed. By mid-July, Ponzi was taking in more than a million dollars in new investments a week. Each day was better than the one before.

T
he story about Daniels's suit piqued the interest of Richard Grozier. He was especially troubled when he learned that Ponzi's investors included scores of
Post
employees, most notably the low-wage workers in the pressroom. On one of his regular tours through the building, Grozier stopped at the desk of his city editor, Edward J. Dunn, whose soft features and sun-deprived skin masked the steel spine of a no-nonsense newsman. A Boston native, Dunn had joined the
Post
eighteen years earlier, in 1902, and had served as a City Hall and State House reporter, a war correspondent, and a political editor before being named city editor in 1917.

Just as Richard Grozier had abruptly taken over for his stricken father, the forty-year-old Dunn was newly in control of the day-to-day news operations, having stepped in during the summertime absence of managing editor Clifton Carberry. Grozier told Dunn he was intrigued by the story of the lawsuit against this Ponzi fellow. How could anyone promise 50 percent profits in forty-five days? If Grozier was correct in his doubts,
Post
readers and employees were headed for a painful fall. He instructed Dunn to deploy a couple of reporters to look more closely at Ponzi.

Grozier and Dunn both knew they needed to be careful. Four months earlier, when Edwin Grozier had bet the paper against Curley, he had done so with confidence, knowing that no proof existed showing he had sold out the cause of Irish independence. Now, with Edwin Grozier still hospitalized and unable to speak, his son, the untested young acting publisher, was taking a far greater risk. Richard Grozier had just told his city editor to investigate a private businessman, one with seemingly limitless resources and a thriving company to protect. If the paper damaged his reputation with unsupported charges, Ponzi might replace the Grozier family as owner of the
Boston Post.

Recognizing the danger, Grozier had one more message for Dunn: Don't worry about the consequences. I'll take full responsibility if anything goes wrong.

D
aniels's lawsuit made Ponzi realize he could wait no longer to transform the Securities Exchange Company into a legitimately profitable business. He was supremely confident he could do just that, having spent untold hours hatching moneymaking ideas. Now he had the distinct advantage of wheelbarrowloads of cash lined up behind him, and one thing Ponzi believed above all else was that money made money.

One approach might have been to sell the Securities Exchange Company to one of the many suitors who had begun showing up at 27 School Street. Once the deal was done, he could disappear to Italy with the money. But that was never Ponzi's style. Much more creative ideas were percolating, all of them seemingly grounded in reality yet each more fantastic than the next.

Over their initial dinner at the Copley Plaza, Ponzi's new financial manager, Roberto de Masellis, had suggested that Ponzi consider going into the banking business. Ponzi had taken a step in that direction with his investment in the Hanover Trust Company, but now he hoped to go further. He imagined turning Hanover Trust from a sleepy, midsized bank into a financial powerhouse, which in turn would make his nearly 40 percent ownership of the bank soar in value. The first step, he thought, would be to sap the deposits of other banks and draw them to Hanover Trust. Once the bank had more deposits, it could make more and larger loans, which would burnish its balance sheet and ratchet up the stock price.

First, Ponzi planned a contest with a monthly prize of one thousand dollars to the person who brought the most new business to the bank. To determine a winner, Ponzi would print up thousands of what he called “introduction cards,” each one with spaces for the signatures of a contestant and a new depositor. A card would be turned in whenever a new account was opened, and the contestant with the most cards at the end of each month would win the prize. To get the ball rolling, Ponzi hung a sign outlining the contest on a wall at the Securities Exchange Company office. At about the same time, he quietly paid his debt to Fidelity Trust, settling the lawsuit the bank had filed against him in March and for the moment putting himself on good terms with Boston's banking community.

A second piece of his plan involved increasing Hanover's attractiveness to depositors and shareholders by creating a power- and profit-sharing program. It was a radical notion, one that Ponzi knew would be branded a Socialist plot by Brahmin bankers and their supporters.

The third element of Ponzi's plan was to monitor which banks lost the most depositors and, as a result, suffered the steepest decline in stock price. Ponzi would then buy large blocks of those banks' stock at a rock-bottom price, replenish the banks' vaults with deposits of his own, and reap the benefits when the stock price rose again.

As usual, Ponzi ignored or understated the obstacles. “There was absolutely nothing to it. It was a cinch,” he believed with his trademark optimism. In his mind, his quick-and-easy realignment of Boston's entire banking structure represented “an opportunity to switch, gradually, from the coupons venture into a more conservative line of business. . . . To get out from under all together, and retire a multimillionaire, in a non-distant future.”

An even more elaborate scheme sprang to Ponzi's mind when he saw an announcement that the United States government was seeking bidders for several thousand mothballed freight and passenger ships that had been built during the Great War and declared surplus afterward. By Ponzi's calculations, the ships were worth $2 billion but could be had for the bargain price of $200 million. Ponzi figured he could raise the money within a month simply by expanding the Securities Exchange Company from the Northeast to the entire nation.

The bigger challenge, he thought, was figuring out how to make a profit from a fleet of three thousand ships. He lay awake for several nights before latching onto an ingenious, if impossibly impractical idea. Ponzi figured the ships would actually cost him $320 million—the $200 million price tag, plus $100 million for the 50 percent interest on the money he was “borrowing” from investors, plus $20 million in commissions to the agents who collected the initial $200 million.

To repay that sum, he would form two companies, the Charles Ponzi Steamship Company, which would own the fleet, and the International Shipping & Mercantile Company, which would lease and operate the ships. He envisioned a complicated series of stock sales, bond offerings, equity swaps, and lease deals that would take a team of accountants years to untangle. The immediate result would be the paying off of all debts of the Securities Exchange Company, at which point Ponzi would abandon the postal coupon business forever. He would then spend a decade as an unimaginably rich shipping magnate with a decidedly patriotic bent. The passenger ships, he declared, would double as “floating sample rooms for American products.” They would travel from port to port, their holds brimming with huge cargoes of made-in-America goods. Each time the ships dropped anchor, teams of salesmen would burst forth onto foreign soil and drag local merchants aboard. The salesmen would expertly display their wares and offer immediate delivery of goods from the below-decks warehouse.