The Ponzi Scheme and Mental Illness
December 26 1919 Charles Ponzi borrowed $200 to buy some office furniture. By January 1920 he then began telling the people of Boston how he could buy stamps and sell them overseas and give them a 50% return on their investment in 45 days and 100% return in just 90 days. The people came so fast he was able to pay returns of 100% in just 45 days. The word spread quickly and more investors came. Soon Charles had two offices and hired people to take orders for stamps. Shortly thereafter Charles was taking in as much as $1 million a week.
Charles was quoted as saying. "A huge line of investors, four abreast, stretched from the City Hall Annex . . . all the way to my office! . . . Hope and greed could be read in everybody's countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, was reflected in everybody's eyes! . . .To the crowd there assembled, I was the realization of their dreams . . . The 'wizard' who could turn a pauper into a millionaire overnight!" (SSA, 2008)
There was one problem. The profits from the stamps were minuscule. Only a fraction of one cent was the return on these stamps. So where were all these profits coming from?
The investors that invested early received payments from the later investors.
The scam started 26 DEC 1919 and by 26 July 1920 the Massachusetts district attorney shut down the scam. 7 months was all it took to turn a $200 loan into $10 million.
After the word got out about the scam people began demanding their money back. He claimed he could pay the investors back at face value and unmatured stamps at a reduced rate. Ponzi continued paying investors from 26 July until 13 August when he was sent to jail. During his trial it was discovered he paid back $5 million but still owed $7 million.
You might think the investors that bailed out early made out but all of their profits had to be returned to bankruptcy court to pay back the millions still owed. This still wasn’t enough to pay back all the money owed. Investors only received back $.37 for every dollar they invested. (SSA, 2008) A far cry from 50% profit.
August 1924 Ponzi was released from jail but within months he was back in jail on indictments that the state didn’t get him on before. He was sentenced to nine years in prison but remained free during his appeal. (Zuckoff, 2005)
Even this didn’t stop Ponzi. During this time Ponzi and his wife moved to Jacksonville Florida and began a new scam. This time it was land. He borrowed money from friends. Opened a company called Chatpon Land Syndicate. Which play on the name Charles Ponzi. He began to buy up cheap land in Jacksonville. Most of it swampland, and began selling of lots for nearly 500% profit. (Zuckoff, 2005) When Florida found out who he was Massachusetts and Florida teamed up to shut him down again. He was then sentenced to one year in jail for violating securities laws.