Ponzi's Scheme (19 page)

When the pants-around-the-ankles mark had paid Coakley an exorbitant retainer, Coakley would pretend to use his adroit legal mind and close relationship with District Attorney Pelletier to make all charges, lawsuits, despoiled women, and angry husbands miraculously disappear. Pelletier would take a cut of the money from Coakley, and the game would begin again with a new victim. Pelletier and Coakley had even enlisted Daniel Gallagher in at least one shakedown before Gallagher became a federal prosecutor. Coakley ran the same racket with the district attorney of a neighboring county. Devoted to Rose, Ponzi was immune to sexual shenanigans. But given what Pelletier had read about his millions in the
Post,
Ponzi might be the district attorney's biggest score yet.

While old pals Gallagher and Pelletier welcomed a joint conference, Attorney General J. Weston Allen declined. He preferred to go it alone rather than join forces with two Boston College buddies from the lower social and political classes. Ponzi decided to spend the rest of the day meeting with each one separately, starting with Pelletier and making Allen wait until last.

With his publicity man, William McMasters, in tow, Ponzi made the three-block walk from the bank, past City Hall, to the granite mountain that was the Suffolk County Courthouse on Pemberton Square. En route, Ponzi looked more like a man going to a cotillion than to the gallows, having dressed that morning as sharply as ever in white flannel trousers, silk shirt and socks, white bucks, and a blue coat with a handkerchief poking from the breast pocket. A large diamond pin glinted from the center of his cravat, and a silver-topped walking stick was tucked under his arm. He felt as good as he looked; he believed he was entering the darkness just before dawn. It would take every ounce of his intelligence, creativity, and moxie, not to mention split-second timing and preternatural coolness under fire. But where another man would have seen threats to his livelihood and freedom, Ponzi saw opportunity. This was the moment to begin making his big move.

P
onzi and McMasters entered the courthouse through the Great Hall, walking past marble statues and under a five-story vaulted ceiling adorned by frescoes. They entered Pelletier's office at eleven o'clock and made themselves comfortable. Pelletier began the meeting brusquely, criticizing Ponzi over a false rumor that Pelletier was a Ponzi investor to the tune of twenty thousand dollars. Given his nature, it was entirely possible that, for all his protests, Pelletier mentioned that figure to signal to Ponzi where the bidding for his services should begin. Ponzi made what McMasters considered a cringing apology, then shifted the conversation to say that he was happy to cooperate with authorities despite the fact that no criminal or regulatory complaints had been made against him or his business.

After explaining the postal reply coupon business, overlooking the fact that he was in no such business, Ponzi maneuvered Pelletier into an extraordinary agreement: He would open the books of the Securities Exchange Company to an auditor to be selected by Pelletier and the other authorities. The auditor would establish the extent of his liabilities, after which Ponzi's only requirement would be to prove that he had enough assets to meet them. If Ponzi could do that, he would be declared solvent and all investigations would cease. Ponzi still had not figured out how he would gather enough assets to offset his liabilities, but that would come later. At the moment, what he needed most was to stay in control of his business and buy some time.

Pelletier could see no downside to the deal—it would look as though he had the public interest at heart. He had no proof of wrongdoing by Ponzi, so his leverage was limited. This was probably the best deal Pelletier was going to get, and both he and Ponzi knew it.

Then Ponzi sprang an ingenious trap, a risky but potentially viable way for him to begin his transition out of the postal coupon business for good.

“Mr. District Attorney,” Ponzi said, “it occurs to me just now that it might be an impossible task for an auditor to determine my liabilities, if I should continue to issue notes every day throughout the investigation.”

“I guess it would be, at that,” Pelletier agreed, taking the bait. “Couldn't you stop issuing those notes?”

“I could,” Ponzi said, as though the thought had never occurred to him. “But I haven't had the time to consider whether it would be expedient for me to do so. However, the suggestion has an appealing feature. Because it offers me the opportunity to spike certain insinuations which are being made by the press, I will do it.”

“You will stop issuing notes?” Pelletier asked. “When?”

“Right now,” Ponzi said. “May I use your phone?”

Ponzi called his School Street office, and Lucy Meli answered. He told her to post signs inside and outside their office announcing that, effective immediately, the Securities Exchange Company would take no new deposits but would continue redeeming matured notes with the promised 50 percent interest. Worried investors who did not want to wait for their notes to come due could receive refunds of their initial investments, without interest. Ponzi instructed her to wire or phone the same instructions to all their agents and subagents.

From the courthouse Ponzi and McMasters took the short walk to 85 Devonshire Street, the offices of the United States district attorney. They spent the next two hours in Gallagher's ninth-floor office with the federal prosecutor and two postal inspectors who had been making regular visits to Ponzi's office. The conversation was largely a repeat of the meeting with Pelletier, and Gallagher agreed to consider Ponzi's offer to abide by the findings of a single auditor selected by investigators.

At one point, Gallagher asked why Ponzi had continued to invite the public to invest with him when he had already amassed a personal fortune.

“I don't need the money, but eventually I will need the people,” Ponzi said.

Gallagher asked why and Ponzi said, “I don't know. It is possible I may want to run for office.” Surprised, Gallagher asked Ponzi if he was a citizen. “Almost,” Ponzi replied, when in fact he had never taken out naturalization papers, knowing that his past prison terms might well disqualify him.

Ponzi also spun for the federal prosecutor a tale of his plans for a profit-sharing banking system and hinted at his shipping company idea. He told Gallagher that he intended to make Boston the largest import and export center in the country. Ponzi mentioned casually that he anticipated profits of $100 million, though he added magnanimously that he intended to keep only $1 million for himself and to spend the rest on philanthropy.

Next they headed toward the State House to see Attorney General Allen, but on the way Ponzi wanted to look in on what was happening at 27 School Street. Word was just getting out that Ponzi would accept no new deposits. Scores of nervous investors had begun lining up to cash in their notes well before their maturity dates. Ponzi knew the storm of withdrawals would intensify by the next morning, after news of his stoppage was spread by reporters and by a notice he'd agreed to place on the front page of the
Post.
As a precaution, Ponzi called the Pinkertons to provide added crowd control.

The meeting with the attorney general and his staff took nearly three hours, with no resolution. He was not under oath, so Ponzi tossed out a welter of confusing, exaggerated figures and claims, from how he operated his business to which banks he used to move money in and out of the country, all of which a stenographer duly recorded. Through it all, J. Weston Allen remained uninterested in the auditing deal that Ponzi had made with Pelletier and was likely to be accepted by Gallagher. Instead, the attorney general seemed intent on pressing ahead with his own investigation.

When Ponzi left the State House, a clutch of reporters was waiting for him. No longer would the
Post
be alone on the Ponzi story; competition had arrived en masse. Official action had been taken, and now Ponzi and the Securities Exchange Company were fair game. Not only were reporters from several other Boston papers there, the news had also attracted stringers for out-of-town papers, including the
New York Times.
But if the reporters expected their prey to be frightened or flummoxed by his ordeal, they found the opposite. He merrily waved a slip of paper showing his $1.5 million certificate of deposit in the Hanover Trust Company and airily promised that he had more than enough money to meet all obligations.

“He was the same Ponzi of the day before,” one reporter marveled, “just as debonair, just as dapper, just as smiling.” When the reporters shouted questions to Ponzi, McMasters dragged him away.

“I can't say anything now—I'm hungry,” Ponzi called breezily over his shoulder.

Ponzi poses for a newspaper photographer in his School Street office in August 1920.

Boston Public Library, Print Department

C
HAPTER
T
HIRTEEN

“M
ASTER OF THE
SITUATION
”

T
he next morning, Tuesday, July 27, Ponzi spent the half-hour ride from Lexington to Boston assessing his situation and refining a daring survival plan he had hatched the night before.

Ponzi was certain that his move to suspend deposits and agree to an audit kept him in the driver's seat, “master of the situation,” as he put it. Gallagher and Pelletier seemed willing to wait patiently for the results of the audit while congratulating themselves publicly on pressuring Ponzi to suspend his business. Of course, what they did not realize was that Ponzi welcomed the chance to stop taking investments, as each new dollar he accepted put him deeper into debt. Conversely, his debt fell with each early withdrawal: “Every time I refunded the principal,” he gloated privately, “I would save the 50 percent interest.”

Allen, the attorney general, was a bit of a rogue elephant, but Ponzi was not terribly worried. “He wasn't likely to make any trouble because, with two district attorneys on my side, he didn't have a chance either with the courts or the public.” If the attorney general sought information or tried to demand an audit of his own, Ponzi could simply tell him to speak with the local and federal prosecutors. Ponzi gave no thought to the bank commissioner, believing that he had already allayed Joseph Allen's concerns.

The biggest problem on his mind was what to do when an independent auditor tallied his liabilities and he needed to prove he had enough assets to cover them. At the moment he was well short—Ponzi was dependent on new investors to pay old. When the music stopped, there would be no chair on which to sit.

Ponzi did some rough calculations. He had issued promissory notes for about $15 million. He was not quite sure, but he believed he had about $8 million at his disposal, which meant he was $7 million short. But that was not the whole story. He anticipated massive withdrawals in the coming days by frightened note holders, and he optimistically predicted that those withdrawals would wipe out as much as $4 million of liabilities. Better, but still $3 million in the red.

It was a high-stakes poker match, with millions more at stake than the card games he'd consistently lost during his college years in Rome and aboard the ship that had carried him to America. He was sunk, he reasoned, “unless I happened to have a couple of wild deuces up my sleeve.” Irrepressible as always, Ponzi believed he did. The only thing was, he would have to rob a bank to get them.

Ponzi's wild cards were in the vaults of the Hanover Trust Company. He estimated that the bank had at least $5 million in negotiable securities plus significant reserves of cash. As a major stockholder and the bank's single biggest depositor, he believed he might be able to gain brief access to the vault, remove the cash and securities, and pass them off as his own. After using them to prove that he had more than enough assets to pay his debts, he would stealthily return them to their rightful place with no one the wiser. It was, admittedly, a far-fetched scheme fraught with pitfalls, not the least of which was its utter illegality. But it was his only hope, so Ponzi even mapped out a route and a sequence for the big heist.

Hanover Trust was on the corner of Washington and Water Streets. Gallagher's office was only a half block away, at the corner of Devonshire and Water. Ponzi would press for the showdown with the auditor to take place at Gallagher's office, a reasonable expectation, considering that the federal prosecutor outranked Pelletier and the attorney general had not even signed on to the idea of a winner-take-all audit. When the auditor was ready to disclose the total of Ponzi's liabilities, Ponzi would gather all his bank books and other assets. But he would not go directly from 27 School Street to Gallagher's office at 85 Devonshire. He would stop on the way at Hanover Trust and make a highly unauthorized withdrawal of enough cash and securities to cover any shortfall. Ponzi expected the showdown to last only an hour, after which he would casually drop by Hanover Trust once again to redeposit his borrowed assets.

“The investigation would have ended right there and then. The authorities would have to certify as to my solvency,” Ponzi figured. He would go into a new business with an official stamp of approval. “All considered,” he thought, “I was far from licked yet.”

W
hen Ponzi arrived at 27 School Street, the adoring crowd he'd found a day earlier had been replaced by a larger, edgier horde, their bodies drenched in sweat, their eyes alive with dread and anger. Some carried the morning
Post,
its lead headline triumphantly predicting Ponzi's demise and feeding investors' fears:
PONZI CLOSES; NOT LIKELY TO RESUME.

The story knocked into also-ran status the latest news of the America's Cup races and a report that Pancho Villa was holding an American businessman for ransom. Below the story about Ponzi's agreement to suspend business was the front-page announcement he had promised to buy:

PUBLIC NOTICE
I have made a personal agreement with District Attorney Pelletier to cease receiving funds from the public for investment with the
SECURITIES EXCHANGE CO.
27 School St. Boston and all branches, until after an official audit is made to determine my solvency and satisfy him that my methods of financial operation are thoroughly legitimate. Meantime, I shall pay all maturing obligations as fast as presented. Further, during the auditing of the books any persons holding unmatured notes can receive back their original investment, without interest, if they desire. Signed, Charles Ponzi

Hundreds of people had assembled well before the opening hour of eight o'clock. When Ponzi arrived he could see there were no police officers in sight, the first time in weeks School Street had not enjoyed ample protection. Enraged, Ponzi suspected that the officials investigating him were hoping for a melee they could use as a pretext to shut him down for good. In the absence of the police, even the strong-armed Pinkertons seemed helpless to prevent the crowd from becoming a mob. Temperatures were climbing only toward the mid-seventies, but the crush of bodies made School Street the hottest block in Boston.

Ponzi stayed only a short time at his offices, relying on Lucy Meli and a corps of perhaps two dozen clerks and agents to issue the refunds. His workers had nothing better to do now that Ponzi had suspended taking new investments. Ponzi went around the corner to the Hanover Trust Company, holing up again in Chmielinski's office and plotting his next moves.

He called Eddie Dunn, city editor of the
Post,
to complain about the “Not Likely to Resume” portion of that morning's front-page headline. Neither Ponzi nor the prosecutors had said any such thing. It appeared that the
Post
was trying to speed his demise in order to claim his scalp. Ponzi was agitated. He did not know that Richard Grozier, the acting publisher, was directing the coverage from his father's office, so Ponzi focused on Dunn. The city editor, Ponzi fumed, was “never letting me out of his sight and nothing less than a shower of buckshot would have discouraged him.” Ponzi told Dunn that the newspaper should watch its step or else he would “own its presses.”

At the moment, though, Ponzi had more urgent concerns. A lawyer for one of his investors had filed a motion in Suffolk County Superior Court seeking the appointment of a temporary receiver to take over Ponzi's business as well as an injunction shutting Ponzi down immediately. The investor, a twenty-one-year-old Boston news dealer, Alton Parker, had deposited $500 on June 14—he was due $750 in just two days. If Parker's motion succeeded, Ponzi would be finished, done in by a $250 debt.

Fearing the worst, Ponzi sent men scouring the city for Parker to pay him early and render the suit moot. But Parker was nowhere to be found. In the meantime, Parker's lawyer, David Stoneman, was granted an appearance before Judge William Cushing Wait. Frantic, Ponzi sent attorney Samuel Bailen, a law partner of Judge Leveroni's, to argue that there was no need for a receiver or an injunction because Ponzi was paying all claims and had more than enough assets to weather any run. To Ponzi's relief, Judge Wait lived up to his name and delayed issuing a ruling. But the motion remained active, so it represented a grave threat.

Later that day, just when Ponzi had given up hope of quietly locating Parker and settling the case, Parker surprised him by dropping by Hanover Trust. The young man had grown upset when he'd seen his name and news of the suit on the bulletin board outside the
Post
building. He told Ponzi that the lawyer, Stoneman, had tricked him into signing the complaint. Delighted, Ponzi dragged Parker to Bailen's office, paid him the full $750, and got Parker to sign an affidavit absolving Ponzi of all claims. Stoneman, whom Ponzi suspected of acting as a straw man for Boston bankers who wanted to crush him, quickly withdrew the lawsuit.

Ponzi had dodged a bullet, but he decided he wanted more protection than Leveroni and Bailen could provide. He thought about strolling over to State Street, the heart of Boston's business elite, and picking out “one of those lawyers with a
Mayflower
pedigree. One of those blue-ribbon Pomeranians.” But he remembered how “Ice King” Charles Morse had manipulated the system and gained his release not by complex legal machinations but by well-connected supporters, Clarence Barron among them. Obviously, Ponzi could not hope for help from Barron, so he would get the next best thing. He decided that he needed a lawyer with deep, even intimate knowledge of the men who ran the state. If that lawyer had dirt on the power brokers, even better. Ponzi chose the most connected lawyer in Boston, a friend to the federal and Suffolk County district attorneys, a man who had spent two decades warming the ears of politicians and prosecutors with his whispers: Dan Coakley.

Coakley's boyish face belied a thoroughly grown-up talent for enriching himself at the expense of others. His work helping Curley push Fitzgerald out of the mayor's race and his badger-game exploits with Pelletier and another district attorney, Nathan Tufts, were only part of his repertoire. Born in South Boston in 1865, Coakley had dropped out of Boston College because of illness and become a streetcar conductor on a line that ran from ribald Scollay Square to redoubtable Harvard Square. Fired for inciting a strike for higher wages, he'd found work as a boxing referee and a sports reporter for the
New York Sun
and the
Boston Herald.
He'd later graduated from Boston University Law School and become a personal injury lawyer, specializing in claims against his former trolley-line bosses. Savoring his revenge, Coakley had framed his canceled conductor's license and hung it on his library wall.

As corrupt as he was charming, Coakley saw his own political prospects dampened by voters' lack of trust. He'd spent three terms in the state legislature as the representative from Cambridge before being ousted in his bid for a fourth. Later he'd served in appointed, largely ceremonial posts on the Boston Park Commission and as a trustee of the Boston Public Library. At fifty-four, a married father of five, Coakley had a roguish sense of humor and a stage actor's voice, capable of booming a line to the far seats without losing its rich palette of emotion. Best of all for Ponzi, not only was he in league with Pelletier, he was close with the federal prosecutor, Gallagher, as well.

Ponzi adored Coakley from the moment they met. Confident he had found the ideal advocate, Ponzi agreed to pay Coakley and his partner, former assistant district attorney Daniel McIssac, the extraordinary retainers of twenty-five thousand dollars each, with the promise of more to come. What Ponzi did not fully realize was that although Coakley was a remarkably effective advocate, he came with a boatload of baggage, having made as many enemies as friends in the trench warfare of Boston politics. Moreover, his reach was almost nonexistent when it came to the Brahmins. Coakley held no sway with the attorney general, J. Weston Allen.

T
hinking he had shored up his legal defense, Ponzi returned his attention to 27 School Street. It was turning out to be the busiest day yet for the Securities Exchange Company, but unlike earlier big days, all the money was going out the door rather than coming in.

There was no letup from the moment the business opened at eight o'clock. Lucy Meli and the clerks tried desperately to keep up with the relentless tide, but inevitably they fell behind. As they did, pressure rose along with the temperatures in hallways of the Niles Building. Around noon, a throng of men formed themselves into a flying wedge and forced their way into Room 227 to demand their money, only to be repelled by the men in Ponzi's employ. But with no police in sight, the attackers took another run at the Securities Exchange Company offices, this time heading directly into the glass-paneled door. The door shattered, sending shards of glass flying through the air and into the faces and hands of several members of the invading force. The sight of blood excited the men further. A near-panic ensued as they tried to fight their way to the iron gates of the tellers' windows. Ponzi's clerks fought back again. After ten minutes of shouting and shoving, a fragile peace was restored.