Ponzi's Scheme (20 page)

The disturbances slowed payments further, and the line of people seeking refunds, along with a small number holding matured notes, snaked through the corridors, down the stairs, and out into School Street, crowding the sidewalk in front of the Elite Shoe store, Burke & Co. Merchant Tailors, and the Tourist Trunk Shop. Newsboys roamed the crowd, and men huddled in small groups reading the afternoon papers. The heat proved too much for some; as many as a half dozen women fainted in line.

Several speculators hovered on the edges of the crowd, offering to buy Ponzi notes at prices based on when they were due. A hundred-dollar note that would reach maturity within a few days might be worth its face value—the speculator expected to collect the 50 percent interest—while the same note with several weeks until maturity might fetch only seventy-five dollars. But at least its owner would be spared having to wait in line any longer. A small number of people in the crowd were neither note holders nor speculators but would-be investors hoping against hope that Ponzi would relent and take their money.

Reporters from all the Boston papers and several out-of-town newspapers were there to document the scene. While most reporters told the story straight, the writer from the
Evening Transcript
seemed most concerned with the rare mix of well-dressed women and businessmen mingling with lowly stenographers, fruit peddlers, mechanics, and teamsters. Perhaps hoping to reassure his blueblood readership that not all of Boston had gone mad, the
Transcript
reporter added dryly, “Foreigners predominate.”

Halfway through the day, Ponzi made arrangements to take over the old Bell-in-Hand pub, a bar on the first floor of the Niles Building that had been shuttered by Prohibition. Though located in the same building as Ponzi's office, the entrance to the Bell-in-Hand was around the corner on Williams Court. The narrow street, hemmed in by brick buildings and barely wide enough for ten men standing shoulder to shoulder, was better known as Pi Alley. The name derived from the piles of jumbled type, called pi, dumped there by printers from Newspaper Row.

Soon Pi Alley filled with investors. Ponzi's clerks ushered them inside the old bar in groups of five, then led them up a back stairway to the dingy second-floor offices of the Securities Exchange Company. There they traded their notes for checks drawn on Ponzi's accounts at Hanover Trust. Ponzi preferred paying by check rather than by cash, suspecting that at least some of his customers would deposit their refunds at the bank he controlled. “It was a case of ‘heads I win,' and ‘tails you lose,' ” he chuckled to himself. After receiving their checks, the investors were shown the front way out of the building and disgorged onto School Street, a system that created an assembly line of sorts in which Ponzi notes entered one door and money exited another.

At the end of the day, Ponzi invited the assembled reporters to join him in Henry Chmielinski's office at the bank. He sat with them for an hour, laughing, joking, and announcing plans to establish something he called the Ponzi Foundation as a vehicle for his intended philanthropy. As a first step, Ponzi said, he would donate $100,000 to a new orphanage, the Home for Italian Children, scheduled to open the coming weekend in the city's Jamaica Plain neighborhood.

When the reporters asked him about the run of withdrawals, he said casually that he believed he had paid out more than a million dollars, though that was almost certainly an exaggeration. Some reporters automatically downgraded his estimate to several hundred thousand dollars. Ponzi adopted a more sober tone when using the reporters as a means of asking his customers to remain patient when awaiting their money.

“I wish the public would be orderly in presenting their demands for payment because all obligations will be honored. The lack of police protection, which has been withdrawn from me since I have discontinued receipt of investments, should not be taken advantage of by the public,” he said in what amounted to a formal statement to the press. He insisted he was unconcerned by damage to his property, but added, “I do not want any unnecessary crushing, any rioting, or any acts that may be apt to prejudice the welfare of my customers.”

Then, with an absolutely straight face, he criticized the predatory tactics of the men buying notes from his investors at a discount. “I feel I should call attention to the public of this attempt to speculate on their holdings and let them see the inconsistency of giving profit to money sharks who are willing to gamble on the nervous tension of the public.”

Although Ponzi displayed his devil-may-care self with the reporters, the size of the day's run left him shaken. If it continued at this pace, he might run out of money before he could prove his solvency, end prosecutors' inquiries, and regain the upper hand. When the reporters left, Ponzi quietly took a precaution against that happening. Under the terms of the certificate of deposit he had given Hanover Trust five days earlier, Ponzi was required to give thirty days' notice before withdrawing the $1.5 million it covered. Before leaving the bank this day he did just that, hoping he could hold on until he could claim the money on August 27.

Unknown to Ponzi, the commissioner of banks, Joseph Allen, was thinking the same way. Though his investigation had turned up nothing illegal about Ponzi's banking practices, Allen knew that sudden, massive withdrawals could imperil Hanover Trust or any other bank where Ponzi did significant business. If Ponzi were overwhelmed by investors turning in their notes, he and his clerks might write checks for more than he had on deposit. However, because Ponzi was a powerful board member at Hanover Trust and a valued depositor elsewhere, the banks might continue to honor his checks in the expectation that he would deposit more money as soon as possible. But by the time the accounts were settled, Allen suspected, Ponzi's reserves might be exhausted, and the banks would have to dip into their own reserves to balance the books. Given the amount of money Ponzi was dealing with, a small bank that honored Ponzi's checks after his account was overdrawn might find its own capital fatally depleted. When word got out, depositors would likely descend on the bank demanding their money, but there would be nothing left for them. The run would destroy the bank and potentially trigger panic throughout Boston as nervous depositors elsewhere did the same. The result, Allen knew, could be a complete meltdown of Boston's banking system, with banks failing left and right. Bank regulators love nothing better than orderly, even boring operations. The risk that Allen believed Ponzi posed was nothing short of a bank commissioner's greatest fear.

To allay his concerns and lessen the danger, Allen had notified Chmielinski and the Hanover Trust treasurer, William McNary, that, beginning immediately, they were required to report daily to him on the bank's financial status, including how much it had in reserve, the amount of all deposits, and whether any depositors had overdrawn their accounts. Though Ponzi didn't yet know it, that kind of scrutiny would make it far more difficult, perhaps impossible, for him to pull off his temporary heist from the Hanover Trust vault. He would need another way to prove that his assets exceeded his liabilities.

When he finished speaking with the reporters, Ponzi stepped outside Hanover Trust. He had offered Lucy Meli a ride home on his way to Lexington, and she was already in the back seat when chauffeur John Collins pulled up. It had been the longest, most trying day of Ponzi's financial career, but he would not show it. When Collins parked the Locomobile outside the bank office, Ponzi walked to his shiny limousine, put his foot on the high running board, and pulled open the door with his left hand. With his hat tipped back slightly on his head, his tie perfectly in place, Ponzi turned to a waiting
Post
photographer and flashed his best showman's smile.

P
onzi woke the next morning, Wednesday, July 28, and saw that the run on his office was bigger news in the
Post
than the final triumph of
Resolute
over
Shamrock IV
in the America's Cup race series. He could also see that one of his enemies was looking to score points with the public. Simon Swig had taken a front-page ad in the
Post
that did not mention Ponzi by name but might as well have. “Our dividends are paid out of our earned and collected income, and not out of the other fellow's principal,” it read, wooing depositors to Tremont Trust. To drive home the point, the ad continued: “Save and grow rich. Plunge and grow broke.”

More ominously, the
Post
printed another cutting attack by Clarence Barron, who had weighed in again on Ponzi in his latest
Boston News Bureau
circular. Barron posed a series of questions designed to undermine trust in Ponzi. His most incisive question was why Ponzi kept large deposits in local banks paying 5 percent interest, or in the stodgy stocks of banks and companies like J. R. Poole, when he supposedly could use the money to turn huge profits quickly and easily with postal coupons. Barron also hit Ponzi on a question of ethics, suggesting that if Ponzi's claims were true, he would be “sticking” the governments where he bought the coupons or, worse, the United States government.

But if Swig and Barron were hoping to sway public opinion, they failed to recognize that Ponzi, despite his fancy clothes and expensive motorcar, had made himself a man of the people. When the Locomobile pulled up in front of 27 School Street and Ponzi stepped out, the swarm of people began to cheer. He wore a freshly laundered, perfectly pressed copy of his outfit of the day before—blue coat and white pants—but this day he spiced it up with a blue-and-white striped silk shirt and a complementing cravat. Many in the crowd still wanted their money, but something about the elegant little financier had captured their hearts. They had doubts, but they were rooting for him. Certainly they preferred him to the bankers and Barrons of the world. Ponzi acknowledged his fans and, feeling flush, granted reporters a moment of his time. He retold his rags-to-riches story, then offered reporters a populist counterattack against his detractors.

“Bankers and businessmen can easily understand how I could make 100 percent for myself,” he scoffed. “But simply because no one ever made an added 50 percent for the general public they reason that it can't be. You remember the old rube who saw the giraffe for the first time? He stared at it and remarked, ‘There ain't no such animal.' The truth is, bankers and businessmen have been doing plenty for themselves under the present banking system, but they have done little for anybody else.” He outlined yet again his plan for a profit-sharing bank, adding with a touch of sarcasm, “Yes, I know that it is a shock to some of these folks who have been hogging it all, but it is fair and right, and the depositor should get a fair return for his money.”

Gaining momentum, Ponzi made a bid for sympathy by complaining that the deferral of deposits had already cost him dearly: “I would have cleaned up three-and-a-half million dollars this week if the authorities had not asked me to suspend operations pending the result of their investigations,” he said, ignoring the fact that it was he who had volunteered the stoppage. But never fear, he cried—he would not be kept down by the powers that be. “Despite the temporary interference with my business, I intend to continue it on a larger scale than ever. I have opened offices in New York and mean to start branches all over the country. I am in this business to make money. Ethics does not interest me any more than it interests the bankers. They are in the game to make it pay, and I am going to show them up.”

Before he was finished, Ponzi upped his estimate of his personal wealth to $24 million and took a shot at the man who was challenging the
Post
for the title of chief nemesis: “Now please don't think that I'm boasting, but I have forgotten more about foreign exchange than C. W. Barron ever knew.”

But Ponzi was not the only one making statements to reporters. “As I told Ponzi the other day,” said Daniel Gallagher, the federal prosecutor, “he is either a benefactor deserving of the blessings of the public officials and all alike—or he should be in jail. Investigation may show that Ponzi is solvent theoretically, yet an offender against the federal law. We are going to find out.” Still, Gallagher would not confirm whether federal authorities would work with local and state prosecutors or on their own.

The withdrawals continued apace, though with Ponzi's takeover of the Bell-in-Hand the process became more orderly even with the continued absence of the police. On the other hand, the narrow Pi Alley remained uncomfortably crowded and provided fish-in-a-barrel pickings for speculators buying notes below face value. When lunchtime came, Ponzi relieved the tedium, hunger, and thirst by providing free frankfurters, sandwiches, doughnuts, coffee, and cold soda to everyone in line, begging forgiveness for his failure to do so the day before.

“I want to use my customers right,” he told a reporter as the meals were served. “I hope they leave their money with me. There is nothing for them to fear. No one can stop my business, and by leaving their money in my hands those people out there will get the profit they were promised.”

Ponzi added to the circus atmosphere by hiring a sometime vaudevillian with a mop of black hair that looked suspiciously like an animal pelt. For a salary of fifty dollars a week, James Francis Morelli played the role of court jester and private poet laureate, distributing circulars with doggerel in support of his master:

What is all the excitement folks? Why these speculators?

Ponzi's notes are good as gold, so why, these black-hearted raiders?

If they should ask you to sell your notes, step forward and exclaim:

“No indeed, I'm sorry, lad, 'cause my notes bear Ponzi's name.”

Just step in line, and wait with ease, and avoid all sorts of commotion,

For Ponzi has as many dollars, as there are ripples in the ocean.