Charles Ponzi And the Ponzi Scheme

Who Was Charles Ponzi?

Charles Ponzi was born in 1882 in Parma, Italy, although it is believed he was originally named Carlo Ponzi. Before coming to America in 1903, he attended the University of Rome La Sapienza . After working many odd jobs in the states, Ponzi moved to Montreal in 1907 where he would take a job as a bank teller at Bank Zarossi. The bank was one that catered towards a booming Italian immigrant population in the city, giving out loans that charged high interest rates, which led to the bankruptcy and closing of the bank, leaving Ponzi broke and turning to a life of crime that would become infamous. This landing him in prison on multiple occasions for forgery, and smuggling. After his stints in Canadian Prison he returned to Boston and married Rose Gnecco in 1918. Shortly after he returned to crime, and would start the scheme that would earn his name a place in history. After only two years of running his famous scheme though, Ponzi found himself arrested again, this time for eighty six counts of mail fraud, landing him fourteen years in prison. His wife divorced him in 1937, and all accounts have Charles Ponzi dying, poor, in Rio de Janeiro on January 18,1949. (Biography.com)

What is a Ponzi Scheme?

"The Association of Certified Fraud Examiners describe a Ponzi Scheme as an illegal business practice in which new investors money is used to make payments to earlier investors.(acfe.com) In Ponzi's case, it worked like this. "He would send money to agents working for him in other countries, who would buy IRC's(International reply coupon,) and send them back to the U.S, where he would then exchange them for stamps that were worth more then they paid for them, and sell the stamps."(biography.com) To increase profitability he sought investors, promising returns of fifty percent in forty five days, paying these investors with the money he received from previous investors, and not with profit. Ponzi schemes are still a popular way for criminals to con us today, being named by the ACFE as "the biggest single fraud threat to Americans today."(acfe.com)

Famous Ponzi Schemes

Bernie Madoff

Madoff is known for operating the largest ponzi scheme in US history. In 2008, Madoff’s theft totaled around $65 Billion and landed him with 11 felony charges including fraud, money laundering, perjury, and theft. Madoff ran a wealth management company thank was originally legitimate but then turned into a ponzi scheme all together. He received 150 years in prison which he is still serving in Raleigh, North Carolina. Madoff was not the only one who got charged with this ponzi scheme his lawyer and accountant are both facing 20 years in prison and five of Madoff’s employees were also found guilty. Bernie’s son Mark, who worked at the company, claimed he was not involved in the fraud, but committed suicide in december 2010.(businessinsider.com)

Lou Pearlman

Pearlman had one of the longest running Ponzi schemes. For over 20 years, he convinced people and corporations to invest in two companies that only existed on paper. Pearlman had stolen more than $300 million before being convicted of money laundering and sentenced to 25 years in prison, conspiracy and making false statements during a bankruptcy proceeding. Pearlman in a prison interview stated he had his way to make it right, just never got the chance to do it. He stated “If I was given a chance to put another band together, that would have paid everybody back. But I never had that opportunity, and that's what was very upsetting.”(therichest.com)

Reed Slatkin

Slatkin was a Scientology Minister and the co-founder of a technology company. In 1986 he constructed a ponzi scheme for fifteen years where he promised a 24% return. This scheme was run through an unlicensed “investment club”. Slatkin is known to have many victims in the scientology community such as Greta Van Susteren (news anchor) and Armyan Bernstein (pearl harbor producer). Slatkin was released in July 2013 and died June 2015.(therichest.com)

Why Do They Get Caught

The SEC(Securities and Exchange Commission) says a Ponzi Scheme ends most often because "With little or no legitimate earnings, Ponzi schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out." (sec.gov) Essentially, and this was the case with Madoff, investors will demand a payout that is more then the scheme has on hand, and when they don't get paid, red flags get raised.

What to Watch Out For

  • High Investment Returns With Little or No Risk
  • Overly Consistent Returns
  • Unregistered Investments
  • Unlicensed Sellers
  • Secretive/Overly Complex Strategies
  • Issues With Paperwork
  • Difficulty Receiving Payments -Sec.gov

Bibliography

(n.d.). Retrieved from www.acfe.com: http://www.acfe.com/ponzi-schemes.aspx

(2012, 05 2). Retrieved from www.youtube.com: https://www.youtube.com/watch?v=VXRkfqw67GE

(2013, 10 9). Retrieved from www.sec.gov: https://www.sec.gov/answers/ponzi.htm

Abramovitch, S. (2016, 8 21). Retrieved from www.billboard.com: http://www.billboard.com/articles/news/7480214/lou-pearlman-prison-interview-2014

Lauren, A. (2014, 08 13). Retrieved from www.therichest.com: http://www.therichest.com/rich-list/nation/10-of-the-biggest-ponzi-schemes-in-history/

Valentine, D. A. (1998, 5 13). Retrieved from www.ftc.gov: https://www.ftc.gov/public-statements/1998/05/pyramid-schemes

Yang, S. (2014, 7 1). Retrieved from www.businessinsider.com: http://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7

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