What was the first Ponzi scheme?

In recent years, there seems to have been a surge of authorities busting Ponzi schemes. Arguably the most famous Ponzi scheme in recent memory involved Bernie Madoff, who conned investors out of over $65 billion and now has to spend 150 years in prison. 

With any type of white-collar crime, it begs the question, “What was the very first Ponzi scheme?” The originator of this crime was Charles Ponzi. Born in Italy, Ponzi moved to the United States as an adult, where he developed a system to swindle people out of their savings. Before initiating the scheme, he had a reputation as a criminal, helping Italian immigrants cross the border illegally. Beginning in the early 1920s, Ponzi discovered a way to make money by deceiving others. 

Trading IRCs

An international reply coupon allows people to receive the cost of postage in addition to the letter itself from another country. The person can exchange the coupon for postage. This is only done for international mailings because in the same country, organizations can simply send a self-addressed stamped envelope. 

Ponzi discovered a flaw in this system and realized he could request IRCs from Italy and earn a profit by exchanging them in America. To get the funds necessary for this venture, Ponzi had to convince friends to loan him money with a guarantee return on investment. The system worked. Ponzi was able to pay off all the debts and quickly earned a reputation for himself by offering a much better interest rate than the banks. 

Securities Exchange Company

Over time, Ponzi realized he could pay off the first round of investors with people who invested during the second round. This system went on throughout various stages with no one catching on until a Boston financial writer grew suspicious. While it took some time to finally catch him, Ponzi ended up paying over $2 million to angry investors outside his office as soon as the news broke. Ponzi faced 86 charges of mail fraud. He pleaded guilty and left prison after three and a half years.

 

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