Little Waldingfield History Society was delighted to welcome Martin Hedges back to the Parish Room to talk to us about financial misdemeanours of the C19th and their relevance today.
He began by recalling the recent horse-meat scandal before observing that Pyramid schemes were as old as the pyramids themselves, going on to suggest the State Pension was itself a pyramid scheme. Perhaps logically correct, but your writer felt this was not a good comparison; it stems from the fact that the state pension is unfunded, something pretty much every government around the world does. So just what are Pyramid and Ponzi schemes?
Pyramid scheme: A business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments, products or services.
Ponzi scheme: A form of fraud where a purported businessman lures investors but pays profits to earlier investors using funds obtained from later investors. Named after Charles Ponzi - see later
Ponzi scheme participants believe they are earning returns from their investment whilst Pyramid scheme participants know they are earning money simply by finding new participants. Pyramid schemes are therefore more ‘honest’, because participants know what’s happening; essentially they are networking schemes where each person recruited is then expected to recruit more people; so as long as that happens the early scheme participants make money.
The Ponzi Pyramid
Martin then gave us some insights into the developments at the time which lead to new ways of doing business but created opportunities for fraudsters. Businesses were changing from partnerships with personal responsibilities to limited liability companies, banks became larger and more remote from their clients, and money itself was changing as notes being more susceptible to forgery than coins. Into this heady mix stepped one Henry Fauntleroy, who as was widely reported afterwards, ‘Lived in Headley and was Hanged for Forgery’.
Henry Fauntleroy 1784-1824 - A Bad Banker
An English banker who, after just seven years as a clerk in the London bank of Marsh, Sibbald & Company, where his father was one of the founders, was taken into partnership; the whole business was then left in his hands as the partners trusted him implicitly. He was inexperienced and described as a “grave and earnest young man who inspired confidence”. At the time England was at war with France, there was a scarcity of money and, following failure of one of the firms of speculative builders they had advanced money to, the bank was involved in a loss of £60,000.
The Bank of England got wind of the cash flow problem but was reluctant to extend more credit. If word reached the street that it was shaky, depositors would demand their money back, so Fauntleroy had to finance the bank’s loans from elsewhere, through forgery. Among the clients of the bank were many holders of Consols (UK Gov’t debt issues in the form of perpetual bonds), long and short annuities, Navy loans and other Gov’t securities. Fauntleroy had a list of the client stocks and was familiar with all of their signatures. In every case the device was successful and the defrauded proprietor never allowed to discover the theft. Forgery was then used to cover forgery until eventually nearly £400,000 worth of Government stock had been appropriated.
Fauntleroy kept a careful record of his fraudulent activities, in one ledger entry writing “In order to keep up the credit of our house, I have forged powers of attorney for the above sums and parties and sold out the amount here stated, without the knowledge of my partners. I kept up the payments of the dividends, but made no entries of such payments in our books”. Rarely, do fraudsters keep such details of their nefarious dealings, which in this case amounted to the signing of his own death warrant.
He was tried at the Old Bailey, and when the case against him had been proved, admitted his guilt, pleading that he had used the misappropriated funds to pay his firm's debts. He was found guilty and sentenced to be hanged. Seventeen merchants and bankers gave evidence to his general integrity at the trial and, after conviction, powerful influence brought to bear on his behalf, the case then twice being argued before judges on points of law. Unbelievably an Italian named Angelini even offered to take Fauntleroy's place on the scaffold - clearly mad.
The efforts of his many friends were unavailing and he was hanged in November 1824, one of the last few executed for forgery before it ceased to be a capital crime in 1836. The hanging attracted the largest crowd ever to attend a public execution in England; gallows were set up outside Newgate Prison and 100,000 reportedly turned up to watch. A contemporary account in The Newgate Calendar said that “Every window and roof which could command a view of the dreadful ceremony was occupied”. An unfounded scarcely believable rumour was later widely circulated that he had escaped strangulation by inserting a silver tube in his throat, and was comfortably living abroad - no such luck! His case finally put an end to hanging for forgery.
An execution outside Newgate Prison
Someone commemorated the event, modifying a George III ‘Cartwheel Penny’ by smoothing out the central obverse and engraving ‘FAUNTLEROY The Robber of Widows & Orphans, Executed at Newgate’, and around ‘Such be the fate of all Insolvent Bilking Bankers & Agents’.
Re-engraved cartwheel penny
How the mighty fall - Another Bad Banker
Richardson, Overend and Company was was founded in 1800 by Thomas Richardson, clerk to a London bill discounter, and John Overend, chief clerk in the bank of Smith, Payne and Company. At the time, bill discounting was carried on in spasmodic fashion by merchants in addition to their regular business, but Richardson believed there was room for a London house devoting itself entirely to the trade in bills, which proved to be an instant success. Samuel Gurney later joined the firm in 1807, taking control of Overend, Gurney and Co. in 1809.
The bank's core business became the buying and selling of bills of exchange at a discount; it was well respected, expanded rapidly and had a turnover double that of its competitors combined. For forty years it was the greatest discounting-house in the world and, during the financial crisis of 1825, was able to make short loans to many other bankers. The house became known as "the bankers' banker" and secured many of the previous clients of the Bank of England.
After Samuel Gurney's retirement, the bank expanded its investment portfolio, taking on large investments in railways and other long-term investments rather than holding short-term cash reserves. Finding itself with liabilities of around £4 million and liquid assets of only £1 million, in an effort to recover its liquidity, it was incorporated as a limited company in July 1865, selling £15 shares at a £9 premium during the buoyant market from 1864 to 66. Sadly a rapid collapse in stock and bond prices, accompanied by a tightening of commercial credit, soon followed soon, with railway stocks particularly badly affected.
Overend Gurney's monetary difficulties increased and it requested assistance from the Bank of England; this was refused and the bank suspended payments on 10 May 1866. A run on the bank ensued as panic spread across London, Liverpool, Manchester, Norwich, Derby and Bristol the following day, with large crowds around Overend Gurney's head offices in London, reminiscent of Northern Rock 150 years later! The bank went into liquidation in June 1866 and the financial crisis following this collapse saw the bank rate rise to 10 per cent for three months. More than 200 companies, including other banks, then failed. Company directors were tried for fraud at the Old Bailey for false statements in the share prospectus for the 1865 offering. Lord Chief Justice Sir Alexander Cockburn however saw things differently, saying they were guilty only of "grave error" rather than criminal behaviour. The jury acquitted them though the advisor was found to be guilty.
Thus began the Panic of 1866 - an international financial downturn accompanying the failure of Overend, Gurney and Company. In Britain the economic impacts were partially responsible for public agitation leading to the 1867 Reform Act; the crisis led to a sharp rise in unemployment to 8% and subsequent fall in wages across the country. It decimated shipbuilding in London whilst the Millwall Iron Works collapsed; barely 16% of joint-stock companies weathered the tumult.
Panic in the City - The scene in Lombard Street on Friday
To mitigate the panic the Bank of England, then a private bank, extended the largest market-wide lending it had ever done, drawing heavily on its own reserves. Walter Bagehot, financial journalist (later becoming editor-in-chief of The Economist) praised the Bank for accepting its lender of last resort role, writing that the panic now meant "a state in which there is confidence in the Bank of England and in nothing but the Bank of England". Thus was set an expectation that The Bank would act in the same fashion in similar circumstances in the future, and the best way to carry out central bank lending has been the source of considerable academic and policy debate ever since.
Napoleon is dead! The Great Stock Exchange Fraud of 1814
For as long as they have existed, stock markets attract fraudsters. In February 1814, news arrived in Dover that the French had been defeated and Napoleon killed. By the time the London Stock Exchange opened, the city was full of rumours of a great allied victory, the price of government bonds rose rapidly and a syndicate of speculators took the opportunity to offload a recently acquired holding at highly favourable prices.
When the elaborate hoax by R. du Bourg, the alleged Lieut-Colonel and Aide-de-Camp to Lord Cathcart came to light, the stock exchange was stung into action. Attention focused on the syndicate of speculators, which included Lord Cochrane (10th Earl of Dundonald), aristocratic grandee, naval hero and MP, who was a daring and successful captain of the Napoleonic Wars, nicknamed him Le Loup des Mers or 'The Sea Wolf' by Napoleon. He was a popular public figure but his independent spirit and anti-establishment views had not endeared him to the Admiralty.
Along with his alleged collaborators, Cochrane was charged and found guilty of fraud. The case was headline news and caused great controversy, with many believing Cochrane was innocent (*). He was sentenced to one-year imprisonment, expelled from the House of Commons, stripped of his knighthood and delisted from the navy, despite success in virtually all his naval actions.
(*) It appears the judge, Lord Ellenborough, was both harsh and overbearing to counsel, and in the frequent political trials of the time, showed unmistakable bias against the accused.
Cochrane then helped organise and lead rebel navies of Chile and Brazil during their successful wars of independence through the 1820s, also contributing to Peruvian Independence through the Freedom Expedition of Peru. In 1832 he was pardoned by the Crown and reinstated in the Royal Navy with rank of Rear Admiral of the Blue. After several more promotions, he died in 1860 with the rank of Admiral of the Red and the honorary title of Rear Admiral of the United Kingdom. His life and exploits then inspired naval fiction of 19th and 20thcentury novelists, particularly the figures of C. S. Forester's Horatio Hornblower and Patrick O'Brian's protagonist Jack Aubrey.
Brazilian sailors pay tribute, Westminster Abbey 1901
Inventing a country as a way to make money
General Gregor MacGregor was a Scottish soldier, adventurer and confidence trickster. Between 1821 and 1837 he interested British and French investors / settlers in "Poyais", a fictional Central American territory, in one of the most brazen confidence tricks in history. Hundreds invested their savings in Poyaisian government bonds and land certificates, and about 250 physically emigrated to the invented country in 1822–23, only to find an untouched jungle; sadly more than half died.
Map of central America and the supposed location of Poyais
A Poyais Dollar, printed in Scotland!
On his return to Britain in 1821 from years of overseas fighting, MacGregor claimed that King George Frederic Augustus of the Mosquito Coast in the Gulf of Honduras had made him Cazique of Poyais, which he described as a developed colony with an existing community of British settlers. When the press reported on his deception following the return of fewer than 50 survivors in late 1823, some of his victims actually leapt to his defence, insisting that the general had been let down by those he had put in charge of the emigration party. A French court tried MacGregor and three others for fraud in 1826 after he attempted a variation on the scheme there, convicting just one of his associates. Acquitted, MacGregor attempted lesser Poyais schemes in London over the next decade. In 1838, he moved to Venezuela, where he was welcomed back as a hero; he died in Caracas in 1845 aged 58, buried with full military honours in Caracas Cathedral.
But this was not the last time a country was invented. On 1 April 1977 the Guardian produced a seven-page travel supplement on the tiny tropical republic of San Serriffe in the Indian Ocean. The small archipelago with its main islands grouped roughly in the shape of a semicolon was apparently celebrating 10 years of independence. It was an April Fool joke. San Serriffe and the shape of the islands were just the first clues; everything connected with San Serriffe was named after printing and typesetting terms. The name refers to sans serif typefaces; Bodoni, the capital, is a variety of typeface; the two main islands are called Upper Caisse and Lower Caisse; the indigenous islanders are known as flongs, a mould for making type, and the whole Republic is ruled over by the dictator General M J Pica, named after a unit of measurement in type.
San Serriffe by the Guardian
A guide to the Republic of San Serriffe
Tales of deceit - The Ponzi before Ponzi
The Franklin Syndicate began in March 1899 when the president of a prominent Brooklyn church Christian Endeavor Society, William F. Miller, convinced three of his Sunday school friends to give him money to invest in the stock market. Miller promised them a 10 percent return per week on their investments “because he was a party to inside information.” Oscar Bergstrom was the first investor in the Bucket Shop, giving Miller $10 on March 16, 1899, receiving a receipt saying “The principal guarantied against loss. Dividends weekly from $1 upwards till principal is withdrawn”. On April 8, Bergstrom invested another $10 and received an identical receipt.
Mr 520% Miller
Miller quickly expanded the scheme by drawing in the other two men and inducing them to bring in others by promising a 5 percent commission on a deposit from any person they brought into the syndicate. As the con became more successful he branched out from Brooklyn and began advertising in newspapers around the country. In the summer of 1899 Miller spent an incredible $32,000 on advertising in 800 newspapers, also sending out official-looking circulars and letters. Such claims now would bring a federal indictment before ink dried on the paper, but the laissez-faire attitude of the time meant that it was caveat emptor (let the buyer beware) for the investor.
“My intention is to make the Franklin Syndicate one of the largest and strongest syndicates operating in Wall Street, which will enable us to manipulate stocks, putting them up or down as we desire,” he wrote. “We also guarantee you against loss, there being absolutely no risk of losing, as we depend entirely on inside information”. Clearly illegal now but plausible then!
Miller hired Cecil Leslie to place positive articles in the papers. One, submitted as evidence at his fraud trial, carried the headline “Wall Street Astonished. William F. Miller’s Franklin Syndicate a Big Winner. 10 Per Cent a Week Profit. All Former Efforts in Financial Operations Eclipsed by a New Wizard in the Realms of Stock Manipulation”. Throughout summer the Syndicate flourished, with Miller and his now 22 employees knee-deep in money in his store in Brooklyn; cash was stuffed in boxes and drawers as there was not enough room in the small safe Miller purchased.
“Crowds of depositors appeared at the house” wrote one account. “Some to deposit money, and others to receive their dividends. Extending in long lines from the office to the street, awaiting their turn, each in sight of the other, those depositing received encouragement to deposit by seeing the dividend drawers taking their profits” - it was a very persuasive and clever ploy.
At the height of the con there were an estimated 12,000 subscribers, records showing that in October and November 1899 he was receiving anywhere between $20,000 and $63,000 per day!
The Franklin Syndicate was not just Miller’s brainchild. Early on in the enterprise he enlisted the help of Edward Schlessinger, who realizing nothing good lasted forever, demanded his cut - one third of the take in cash each day. This was good for Schlessinger and bad for Miller because it required the men to keep a record of the money. Schlessinger hid his away somewhere but Miller who thought the scheme would last forever, never bothered to squirrel anything away.
Another problem were the receipts given to everyone who deposited money - essentially a signed confession bearing Miller’s name. The third partner brought in, in October 1899, came up with a scheme to ‘get the dupes to return the receipts so the Syndicate could destroy them’. Col. Robert Ammon was a NY attorney with a shady past, often representing the semi-crooked robber baron types who then frequented Wall Street. When the more legitimate newspapers of the city began looking closer at the actions of the Franklin Syndicate, Ammon connected with Miller and offered to run interference. He realized that all of those receipts floating around were ammunition for the law and advised Miller to get them back by incorporating the Franklin Syndicate.
Miller sent out a letter to all depositors alerting them to a forthcoming incorporation; in return for each dollar invested, the depositor would be issued a share of the corporation. “As all depositors are entitled to stock certificates in the corporation, it will be necessary to compare the receipt you now hold with my books, and just as soon as I receive your receipts I will immediately send you your stock certificates” he wrote. Miller didn’t stop there; he promised investors their shares would quickly multiply in value. Not only would they continue to receive their 520 percent annual return, they would also enjoy capital gains from the increase in the price of Franklin Syndicate stock. “It is my belief that Franklin Syndicate shares will be selling at $400 to $500 each before March 1st next”. Miller was even more audacious later “After December 2nd …. I shall open no new accounts for less than $50”. “All accounts which I now have of ….. less than $50 will have to deposit sufficient to make their account $50, or they will not be taken into the new corporation”.
While newspapers continued to accept Miller’s advertisements, their reporters wrote scathing pieces about the obvious con Miller was running, whilst government officials vainly tried to find someone willing to make a complaint against the syndicate. “Post Office Inspector William S. McGuinness has had Miller’s syndicate under observation for several weeks”, wrote the NY Times. “He could find nothing in Brooklyn on which to proceed against the concern, so wrote 250 letters to customers across the US asking if they had any complaints. All replies expressed satisfaction with Miller” - local police had the same problem. “I have yet to hear any of that man’s customers speak against him” said Capt. James Reynolds of the Brooklyn police. “I tell you that even yet I do not know what to make of Miller. The people in the neighborhood all have faith in him and many merchants there honor his checks even now”. Investors blamed the media. “Mr. Miller has never failed us” one woman told the Times. “I put in $100 six weeks ago and have taken $60 out. It’s these newspapers and bankers that are causing the trouble. Nobody believes the papers. It’s envy. They’d like to make money themselves”.
By November 24 1899 the game was up - Miller and Schlessinger were wanted men. Huddled at Ammon’s office to formulate an escape, Ammon advised Miller to flee to Montreal to avoid arrest. Schlessinger said he would head to Europe. Gathering cash in a large satchel he was never seen again - it is thought Schlessinger got away with $145,000, equiv to more than $3 million today.
Ammon convinced Miller it would be safest to hide his money in Ammon’s own accounts - as attorney for Miller Ammon was protected by privilege, so even if Miller was punished for the con, creditors would never see their money again. Miller thought this a good idea and, with Ammon also carrying a suitcase with $35,000 cash, they deposited it in the Wells, Fargo & Co. bank. Miller also transferred a certificate of deposit for $100,000 and a check for $10,000, representing his whole take from the scam. The gullible Miller then turned over $40,000 in government bonds whilst his father gave Ammon $65,000 in NY Central Railroad bonds.
Next day Miller received word he had been indicted in Kings County for fraud with warrants already signed; ducking through a drug store and a Chinese laundry to lose a trailing detective, Miller showed up at Ammon’s office where the lawyer made arrangements to get him over the border. He left his wife and young daughter in Brooklyn and hid out in Montreal for a couple of weeks, until traced by New York police and brought back to Kings County for trial. It was a cut-and-dried event and he was given a 10-year prison term.
Complete collapse of the Franklin Syndicate
Ammon had Miller completely and let him know it; in return for Miller’s silence about Ammon’s involvement in the scam, Miller’s wife and daughter would receive a $5 weekly payment while he languished in jail. For three years the Kings County District Attorney struggled to build a case against Ammon, but without Miller’s cooperation there was nothing to connect the lawyer to the con. Eventually Miller, now seriously ill with consumption, agreed to testify against Ammon, and the support for his family stopped immediately when Ammon was charged and brought to trial.
In 1903 Robert Ammon was convicted of theft of $30,500 and sentenced to four years in prison. It is thought he served his time and went on to enjoy the rest of his ill-gotten gains in comfort, but Miller’s fate is less certain. He was released after serving about 6 years, most reports saying that he was terminally ill with TB.
The Real Ponzi
Charles Ponzi was born in 1882 in Lugo, Italy. His ancestors had been well to do and his mother continued to use the title "Dona", but the family had fallen upon hard times and had little money. He took a job as a postal worker early on but was soon accepted into the University of Rome La Sapienza. Richer friends considered the university a four-year vacation and Ponzi followed them around bars, cafés and the opera. He spent all his money so four years later he was broke and without a degree. As many Italian boys were then migrating to the US and returning rich, his family encouraged him to do the same.
Charles Ponzi - a happy go lucky innocent and butter wouldn't melt sort of guy!
In November 1903 he arrived in Boston with just $2.50 in his pocket, having gambled away the rest during the voyage. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me" he later told The NY Times. Learning English he spent the next few years doing odd jobs, eventually taking a job as a restaurant dishwasher where he slept on the floor. He worked his way up to waiter but was fired for shortchanging customers and theft.
In 1907 he moved to Montreal, becoming an assistant teller in the newly opened Banco Zarossi, a bank started by Luigi "Louis" Zarossi to service the influx of Italian immigrants in the city. Ponzi’s charming personality and French, English and Italian language skills helped him get the job. It was here that Ponzi first saw a scheme of "Robbing Peter to pay Paul". Zarossi paid 6% interest on bank deposits, double the going rate at the time and growing rapidly. Ponzi rose to bank manager to discover it was in serious financial trouble and that Zarossi was funding interest payments from new bank deposits. The bank failed and Zarossi fled to Mexico with a large portion of the money.
Ponzi stayed in Montreal for some time, living at Zarossi's house helping the abandoned family and planning to return to the US, proving difficult as he was penniless. Finally he walked into the offices of a former Zarossi customer, Canadian Warehousing, and finding no one there wrote himself a check for $423.58, forging the signature of a director of the company, Damien Fournier. Confronted by police who had noticed his large expenditure just after the forged check was cashed, he held up his hands and said "I'm guilty." He spent three years at St. Vincent-de-Paul Federal Penitentiary on the outskirts of Montreal, but rather than inform his mother of this, posted her a letter saying that he had found a job as a "special assistant" to a prison warden.
After release in 1911 he returned to the US, becoming involved in a scheme to smuggle illegal Italian immigrants across the border. Caught he then spent two years in Atlanta Prison, becoming a translator for the warden who was intercepting letters from mobster Ignazio "the Wolf" Lupo. After release he went back to Boston looking for work, to meet Rose Gnecco, a stenographer to whom he proposed. Rose came from a family of Italian American immigrants who had a small fruit stall in Downtown Boston and they married in 1918. For the next few months he worked at a number of businesses, including his father-in-law's grocery and the import export company JR Poole before hitting on an idea to sell advertising in a large business listing. Ponzi was unable to sell this idea to businesses and his company failed soon after, so he took over his wife's now failing family fruit company but to no avail as it too failed
By summer 1919 Ponzi decided to stop working for other people and set up his own small office in Boston, coming up with ideas and writing to people he knew in Europe, trying to sell them as opportunities. Some weeks later he received a letter from Spain asking about an advertising catalogue; inside was an international reply coupon, something he had not seen before. Enquiring about the IRC he found a system weakness, which would, in theory, allow him to make money.
Charles Ponzi "at work"
The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed - if values were different, there was a potential profit. Inflation after the Great War greatly reduced postage costs in Italy, as expressed in U.S. dollars, so an IRC could be bought cheaply in Italy and exchanged for US stamps of higher value, which could then be sold. Ponzi claimed the net profit on these transactions, after expenses and exchange rates, was above 400% and completely legal. Seeing an opportunity, he quit his job to set his IRC scheme in motion. He needed a large capital outlay to buy IRCs at cheaper European currencies and first tried borrowing from banks, but they were unconvinced. Undaunted he set up a stock company to raise money from the public. He also went to several of his friends in Boston, promising he would double their investment in 90 days, later shortening this to 45 days at 50% interest, in an environment when banks were paying 5% annual interest. The great returns from IRCs, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.
In January 1920 Ponzi started the "Securities Exchange Company” to promote the scheme. In the first month 18 people invested a total of $1800. He paid them promptly next month with money from the newer set of investors. Word spread and investments came in at an ever-increasing rate. He hired agents, paying generous commissions for every dollar they brought in. In just four weeks between February and March 1920, the total amount invested had risen from $5,000 to $25,000. As the frenzy began building he hired agents to seek out new investors in New England and New Jersey. By June 1920 people had invested $2.5 million, by July he was raking in a million dollars per week and rising, and by the end of July he was approaching a million dollars per day! He began depositing money in the Hanover Trust Bank of Boston in the hope that once his account was large enough he could impose his will on the bank or even be made its president. He bought a controlling interest through himself and several friends after depositing $3 million. By July 1920 he had made millions. People were mortgaging their homes and investing their life savings, with most reinvesting their profits; his company had now set up branches from Maine to New Jersey. Though Ponzi's company was bringing in fantastic sums of money each day, simple financial analysis would have shown the operation was running at a large loss; as long as money kept flowing in, existing investors could be paid - despite Ponzi making no effort to generate profits.
Initial investors consisted of immigrant workers like him, but news travelled upwards and many well to do Bostonians invested. In its heyday, nearly 75% of Boston's police force had invested; He was indiscriminate about who he allowed to invest, which included young newspaper boys investing a few dollars - he was willing to take any cent he could get his hands on. He had not yet figured a way to change the IRCs to cash, before subsequently realizing that changing coupons to money was a logistical impossibility - for the initial 18 investors of January 1920 and their $1800 investment, it would have taken 53,000 postal coupons to realize the arbitrage profits. For the subsequent 15,000 investors, he would need to fill Titanic sized ships with Postal coupons just to ship them to the US. It was not a problem however, because all interest payments were returned to him as investors kept re-investing. Ponzi lived luxuriously, buying a mansion in Lexington, maintaining accounts in several banks across New England and buying a Locomobile, the finest car of the time. He also bought a macaroni company and part of a wine company in an attempt to gain profits that could be used to repay investors of his IRC scheme.
His rapid rise naturally drew suspicion, but when a Boston financial writer suggested there was no way he could legally deliver such high returns, Ponzi sued for libel, winning $500,000 damages - libel law at the time placed the burden of proof on the writer and the paper, thus effectively neutralizing any serious probes for some time. Nonetheless, there were signs of his eventual ruin. Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture he could not afford, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful but it started people asking how he could have gone from being penniless to becoming a millionaire in so short a time. There was a run on the Securities Exchange Company when some investors decided to pull out, but Ponzi paid them and the run stopped.
On July 24 1920, the Boston Post printed a favourable article on Ponzi and his scheme which brought in investors faster than ever - at that time he was making $250,000 a day. Next business day after the article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money. Despite the reprieve, Post acting publisher and city editor were suspicious, assigning investigative reporters to check him out. He was also under investigation by Massachusetts state officials and on the day of the article met with state officials, diverting them from checking his books by offering to stop taking money during the investigation. This offer temporarily calmed the suspicions of the state officials. Why I hear you all asking.
Ponzi now sought another deal to get out of trouble but time was running out. On July 26, the Post started a series of articles asking hard questions about the operation of the money machine. The Post contacted Clarence Barron, the financial journalist who headed Dow Jones & Company, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company. Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation but there were only about 27,000 actually in circulation. The US Post Office also stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin percentage on buying and selling IRCs was colossal, but the overhead required to handle the purchase and redemption of these items sold individually would have exceeded the gross profit. Barron also noted that if Ponzi really was doing what he claimed, he would effectively be profiting at the expense of a government, either that where he bought the coupons or the US, and for this reason Barron argued that even were operation legitimate, it was immoral to take advantage of governments in this manner.
The stories caused a panic run on the Securities Exchange Company; Ponzi paid out $2 million in three days to a wild crowd outside his office, also canvassing the crowd, passing out coffee and donuts, and cheerfully telling them they had nothing to worry. Many changed their minds and left their money with him, attracting the attention of the US Attorney for the District of Massachusetts, who commissioned Edwin Pride to audit the Securities Exchange Company's books.
Meanwhile Ponzi had hired a publicity agent, William McMasters, who quickly became suspicious of Ponzi's endless talk of postal reply coupons as well as the on-going investigation. He later described Ponzi as a "financial idiot" who did not seem to know how to add. The denouement began in late July when McMasters found several highly incriminating documents indicating Ponzi was merely "robbing Peter to pay Paul". He went to his former employer with this information who offered him $5,000 for his story. On August 2 1920 McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article said that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote that Ponzi was as much as $4.5 million in the red. The story set off a massive run, which Ponzi paid off in one day. He then sped up plans to build a massive conglomerate to engage in banking and import/export operations. Trouble now came from Massachusetts Bank Commissioner Joseph Allen. An initial investigation into Ponzi's banking practices found nothing illegal, but Allen was concerned that should major withdrawals exhaust Ponzi's reserves, it would bring Boston's banking system to its knees. Allen's suspicions were further aroused when he found a large number of Ponzi controlled accounts had received more than $250,000 in loans from Hanover Trust, leading Allen to speculate Ponzi wasn't as well-financed as claimed - he was getting large loans from a bank he controlled. Allen ordered two bank examiners to track Ponzi's accounts.
On August 9 examiners reported enough investors had cashed their checks on Ponzi's main account that it was almost certainly overdrawn. Allen ordered Hanover Trust not to pay out any more checks from Ponzi's main account, also orchestrating an involuntary bankruptcy filing by several small Ponzi investors. The move forced Massachusetts Attorney General J. Weston Allen to release a statement that there was little to support Ponzi's claims of large-scale dealings in postal coupons. State officials invited Ponzi note holders to come to the Massachusetts State House to furnish their names and addresses for purpose of the investigation. On the same day, Ponzi received a preview of Pride's audit, which revealed Ponzi was at least $7 million in debt.
On August 11 it all came crashing down. First the Post came out with a front-page story about his activities in Montreal 13 years earlier, including his forgery conviction and his role at Zarossi's scandal-ridden bank; then Bank Commissioner Allen seized Hanover Trust for to numerous irregularities. The commissioner thus inadvertently foiled Ponzi's plan to "borrow" funds from the bank vaults as a last resort. By the morning of August 12 Ponzi knew he was finished; he held a certificate of deposit at Hanover Trust worth $1.5 million, but that total had been reduced to $1 million after bank officials tapped into it to cover the overdraft. Even if he had been able to convert it to cash, he would have had only $4 million in assets. Amid reports he was about to be arrested any day, Ponzi surrendered to federal authorities and accepted Pride's figures. He was charged with mail fraud; originally released on $25,000 bail he was immediately re-arrested on state charges of larceny, for which he posted an additional $10,000 bond. After the Post released the results of the audit, the bail bondsman feared Ponzi might flee the country and withdrew the bail. Attorney General Allen declared that if Ponzi managed to regain his freedom, the state would seek additional charges and seek a bail high enough to ensure Ponzi would stay in custody.
The news brought down five other banks in addition to Hanover Trust. Investors were practically wiped out, receiving less than 30 cents to the dollar and Ponzi's investors were all but destroyed, losing about $20 million in 1920 dollars (some 225 million in 2011 dollars). As a comparison, Bernard Madoff’s similar scheme, which collapsed in 2008, cost his investors about $18 billion, some 53 times the losses of Ponzi's scheme. At last Ponzi had been out-Ponzied!
In two federal indictments Ponzi was charged with 86 counts of mail fraud. He pleaded guilty to a single count before Judge Clarence Hale, who declared "Here was a man with all the duties of seeking large money. He concocted a scheme which, on his counsel's admission, did defraud men and women. It will not do to have the world understand that such a scheme as that can be carried out without receiving substantial punishment." He was sentenced to five years in prison.
Charles Ponzi as a criminal
He was released after three and a half years, almost immediately indicted on 22 Massachusetts state charges of larceny, which came as a surprise to him as he thought he had a deal calling for the state to drop any charges if he pleaded guilty to the federal charges. He sued, claiming that he would be facing double jeopardy if Massachusetts retried him for the same offenses as in the federal indictment. The case, Ponzi v. Fessenden, made it to the US Supreme Court. On March 27 1922 the Supreme Court ruled that federal plea bargains have no standing regarding state charges. It also ruled that Ponzi was not facing double jeopardy because Massachusetts was charging him with larceny while the federal government charged him with mail fraud, even though the charges implicated the same criminal operation.
In October 1922, he was tried on the first ten larceny counts. Since he was insolvent Ponzi served as his own attorney and, being as persuasive as ever, the jury found him not guilty on all charges. He was tried a second time on five of the remaining charges and the jury deadlocked. Ponzi was found guilty at a third trial and sentenced to an additional seven to nine years in prison as "a common and notorious thief. During his various prison terms he continued to receive Christmas cards from some of his more gullible investors, as well as requests from others to invest their money - from his prison cell! After word got out that Ponzi had never obtained American citizenship, despite having lived in the US for most of the time since 1903, federal officials initiated efforts to have him deported as an undesirable alien in 1922.
Ponzi spent the last years of his life in poverty, working occasionally as a translator. A heart attack in 1941 left him considerably weakened; his eyesight began failing and, by 1948, he was almost completely blind. A brain haemorrhage paralysed his right leg and arm, and he died in a charity hospital in Rio de Janeiro on January 15, 1949. Supported by his last and only friend who spoke English, Ponzi granted one last interview to an American reporter, telling him "Even if they never got anything for it, it was cheap at that price. Without malice aforethought, I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.
After a truly marathon session, Martin was thanked for his efforts and tea / coffee was served.
Our next events from our new programme will be at 7.30 in the Parish Room on Wednesday:
17th October: Harvest Home
Memories from the Sudbury/Hadleigh area, as researched by local historian and master story teller Ashley Cooper, of Gestingthorpe Roman Villa and natural history fame.
21st November: History of Silk
With 50 years experience in the local silk trade, Richard Humphries will tell us: Why Sudbury today is the UK Silk capital; How the wool trade gave way to silk in East Anglia; and why it remains the choice of fabric for our Kings and Queens.
Both events are going to be great, and we very much look forward to welcoming guests both new and old to the Parish Room.
Andy Sheppard 21st September 2018