Thursday, May 13, 2010

The Original Ponzi Scheme

Most people have heard the term "Ponzi Scheme," but many do not know what it is or why it has such an odd name. It was named after Charles Ponzi, who operated the most successful incarnation of the scam until Bernie Madoff took that dishonor last year. It is a scam that requires a constant influx of investors to pay off the original investors.  There is no product and the facade only lasts until the number of investors decreases.  As soon as less money comes in that the month before, the illusion crumbles along with all the investors' finances.  Usually, the originator of the scheme will vanish before the victims know what's happening.

Charles Ponzi

The BBB has combated such schemes for nearly a century. After the BBB diversified its expertise to areas other than advertising, we turned to investigating and raising awareness about such schemes.  In perusing through our archives, I found the following articles written about Ponzi in 1926, after his first prison term and before his second:

Financial Wizard Receives Choice of Two years in State Prison or $1500 Fine

April 5, 1926 

Charles Ponzi, who was indicted February 8, 1926, at Jacksonville, Fla., charged with violating the "declaration of trust" laws of Florida, was found guilty by a jury in a criminal court in Jacksonville, April 2, 1926.  The verdict carries a sentence of two years in the state prison or a fine of $1500.

Ponzi was indicted three days after the announcement of the combined drive against real estate "sharks" by the National Better Business Bureau and the Florida State Chamber of Commerce.  At that time he was circularizing investors offering Units of Indebtedness in the Charpon Land Syndicate for $10 each.  The syndicate offered to its investors a return of 200 percent profit on their investment in a period of approximately sixty days.  Many of the offers were received in this territory and numerous inquiries were received by this Bureau regarding the concern.

The indictments against Ponzi were based on alleged violation of the state statutes regulating trusts.  He is charged with operating without filing a proper declaration of trust, selling without a permit and failure to pay the license fee required.

Ponzi is described by Bugs Baer, newspaper columnist, as the "superman who winds up in the "soup." In an effort to get out of the "soup" Ponzi's attorney has appealed the case.

Judge Peeler Sentences Him to One Year in Penitentiary.

May 12, 1926 

Charles Ponzi, one time resident of a Montreal prison for forgery, Atlanta Penitentiary for violation of immigration laws, and still later serving on a five-year sentence for his guilty plea of using the United States mails to defraud, once more has the platial prison gates beckoning him.

Ponzi came to Florida, organized the Charpon Land Syndicate, and started to market "units of indebtedness" to investors.  Associated with him was Calcedonia Alviti.  the Boston Better Business Commission, when Alviti appeared there, collected evidence which was presented to the state authorities.  Alviti was stopped by his conviction which carried a six months' prison sentence.

The National Better Business Bureau and the St. Petersburg Bureau, with the State Chamber of Commerce, the Florida Association of REal Estate Boards and the Florida Real Estate Commission, investigated Ponzi's activities in Florida.

Evidence presented to State's Attorney Charles M. Durrance led to his indictment on four counts.  Indicted with him were his wife, Rosa Maria Ponzi, and Emma and Calcedonia Alviti.

Assistant County Solicitor M. M. Scarborough represented the state during his trial.  A jury found Ponzi guilty and a motion for a new trial was filed.  Judge Peeler denied this sentenced Ponzi to one year in the penitentiary.  Ponzi has appealed the case.

Postmaster General New on April 28, 1926, issued a fraud order against Charles Ponzi and the Charpon Land Syndicate, charging the obtaining of money through the mails by fraud.  Solicitor Donnelly declared he found the scheme inherently fraudulent and impossible of execution.  Postoffice Inspector Morgan Griswold assisted in this case.

The prompt action of officials probably prevented a recurrence of his Boston fiasco.

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