Charles Ponzi Research Paper

Charles Ponzi and His Fraudulent Scheme

The years immediately following World War I were a time of great prosperity for countless individuals in America. The rise of wealth in America caused many people to invest their money in order to obtain a quick fortune. This is significant because it allowed Charles Ponzi to implement an extremely fraudulent scheme that caused the creation of the Security Exchange commission which helps to halt fraudulent investment schemes that occur in the American society. Charles Ponzi was an Italian Immigrant that devised a fraudulent scheme that hoodwinked thousands of investors of millions of dollars in 1919 to 1920, which eventually led the creation of laws to prevent the reoccurrence of similar schemes because these added up to help cause the Great Depression.

In the article by Historic U.S. Events (referred to as HUE from now on)“Charles Ponzi Cheats Thousands in Investment Scheme, 1919-1920” Charles Ponzi was an Italian Immigrant whose origins was that of an affluent family gave him a one way ticket to the United States due to his inability to meet family expectations.  In another article written by DISCovering U.S. History (referred to DUH from now on) “Charles Ponzi Cheats Thousands in Investment Scheme, 1919-1920” Charles Ponzi in 1917 he began to work with his father-in-law as a fruit dealer. In 1919, Ponzi received a business letter holding a international reply coupon that had cost the sender the equivalent of one cent in Spain to send to him. This letter provided Ponzi the idea to take advantage of the exchange rate disparities in the trade of international reply coupons.

In the article by U*X*L Biographies, (referred to as UXB from now on) “Charles Ponzi” Ponzi quit his job to focus solely on exchanging these coupons, which he would buy for one cent in his home country of Italy, and then exchange them for five cents in the U.S for a profit of four cents. In the article by DUH, Ponzi created the Securities Exchange company, a firm which was to perform international reply coupon transactions; consequently, this firm was made to cover the fraudulent scheme Ponzi developed to make quick money off of the investors who were deceived into thinking the coupons would make fast money. This fraud quickly became attractive to investors because it promised high yields of money back to the investors, advertising a 50% return in 45 days. What this deceitful scheme did was to pay early investors with high dividends of money Ponzi had received from later investors or from the investors’ own funds, which encouraged other investors to give Ponzi even more money. Written in the article by UXB, Ponzi collected fifteen million dollars from over forty thousand investors over an eight month period starting from August 1919. 

Many people had also referred to Ponzi as “the greatest Italian of them all” which he modestly denied, which a given reply was “But you discovered money!”; these claims were made because of the great success and popularity he had gained when attracting investors, and returning to them unknowingly their own or other investor money for high dividends. In the DUH article, Ponzi’s success had allowed him to use these proceeds to obtain control of several Boston businesses including banks that had made loans to him. He also had begun to live a lavish lifestyle with a mansion, He had become a hero to the immigrant community and small investors.

In the HUE article, Ponzi’s success eventually attracted the attention of Boston’s legal authorities. In early summer of 1920 Ponzi had successfully passed investigations conducted by the District Attorney’s Office, Postal inspectors, and federal attorneys; as a result, Ponzi utilized their inability to find illegal activity as “official pronouncements to lessen any suspicions that investors might have had”, which resulted in the investors trusting Ponzi with their money.The Publisher of the Boston Post, Richard Grozier doubted Ponzi’s claims, and decided to uncover Ponzi as a fraud. Grozier interviewed Clarence Barron of Barron’s Weekly, in which Barron claimed “it would be impossible for the investing genius [Ponzi] to turn over so much [claimed amount of] money [to the investors].” Ponzi responded with a claim that this scheme was “subterfuge for an even more inventive plan that he had developed and wanted to keep secret from Wall street speculators.” Now, even more investors trusted him with their money. Eventually, the Boston Post received an anonymous tip about Ponzi having been jailed in Canada many years before for a similar fraud to his coupon exchange. A few days later Ponzi was arrested and sentenced to five years in prison by Boston’s federal court, in which he served only forty months. He was then  tried by Massachusetts and sentenced to nine years where he escaped on bail to Florida. He eventually served his sentence back in Massachusetts, and then deported to Italy.

The Ponzi scheme didn’t have instant legal and economic impact on the U.S; however, his scheme did contribute to the stock market crash of 1929, and a close collapse of the banking system. As a result, congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which required registration with the new Securities Exchange Commission (SEC) before securities were able to be sold. Many frauds, but most notably Ponzi’s also led to the Investment Company Act of 1940 , which required licensing and put limitations on the activities of individuals partaking in security sales or distribution. It was easier for the SEC to stop fraudulent schemes by citing technical breaches of SEC regulations than by focusing of the actual fraud accusations. Ponzi scheme imitators still surface because people make investments in the hopes of getting rich quick. Also, the ability for Ponzi like schemes still arise is because of the SEC’s weakness in focusing on fraud with large amounts of money with few investors, while a large number of individuals investing little amounts of money isn’t as much of a focus. The significance of the Ponzi scheme illustrates that many people can be deceived into investing their money poorly, which can lead to harmful effects on the economy later down the road (which could range from a great depression to even no harmful effects).

Works Cited

"Charles Ponzi." U*X*L Biographies. Detroit: U*X*L, 2003. Gale Student Resources In Context. Web. 28 Nov. 2012.

"Charles Ponzi Cheats Thousands In Investment Scheme, 1919-1920." DISCovering U.S. History. Detroit: Gale, 1997. Gale Student Resources In Context. Web. 28 Nov. 2012.

"Charles Ponzi Cheats Thousands in Investment Scheme, 1919-1920." Historic U.S. Events. Detroit: Gale, 2012. Gale Student Resources In Context. Web. 28 Nov. 2012.