Business Ethics - Charles Ponzi

Background

Italian-born American immigrant, Charles Ponzi is a well known con artist not only famous for his exploits in the United States, but also for his swindling right here in Canada. Born in 1882, he established himself prior to his travels to North America as already interested in the world of business - however, he was not particularly strong at it, having had failed on a number of occasions and landing himself into trouble.

It was at the turn of the century in Boston where he set to work developing the unethical business scheme which to this day we still use, the “Ponzi Scheme.”

What IS THE “PONZI SCHEME?”

Fundamentally, Ponzi’s approach was one of investment fraud. He would attract a large number of investors, drawing them initially with wild claims such as 50% in 45 days, or twice that, 100% profit in 90 days - regardless of the state of the market! However, it would involve leg work by way of them bringing in other investors to keep the investment fund pool growing. To put it into practical terms, it would often take the form of a $1,000 return on investment (R.O.I.) for bringing in two investors below them - much like a pyramid scheme or the benefits realized in many multilevel marketing approaches. In the next month, those would have to continue forward, bringing $4,000 of new funds into the pool. The third month would continue forward to see an $8,000 influx, and so forth, and so forth… you can see where this goes.

In reality, any “profits” which were in actuality paid out came directly from the influx of funds by way of the new investors, not from some actualized investments. The system by which he covered the fraudulent activities was convoluted and reflected the purchase and sales of International Reply Coupons on different markets. Ponzi claimed to be effectively buying low and selling high from one market to another - basically he was selling international postage stamps for profit in different countries, a process otherwise referred to as international arbitrage.

A Turn For the Worst For PONZI

Well, ironically, in 1920 Mr. Charles Ponzi founded a little company to promote his plan called the Securities Exchange Company. Within short time he was making more than $1,000,000 per day, and spending QUITE lavishly, buying a mansion in Massachusetts, having a chauffeur and high-end automobile and making advances to purchase banking institutions. Inevitably the plan came to light and his inability to actually turn profits was very apparent, naturally the media (mostly the Boston Post) caught wind and started asking questions. When they noted things such as the fact that Ponzi was not himself in his own company… well… it wasn’t good. When they did the math and looked at the required number of postage stamps which would need to be in circulation to sustain the type of profits his Securities Exchange Commission, the math didn’t add up. That led to the investors making a run on the bank. Ponzi made efforts - literally paying some local investors off in person to the tune of $2 million, and bringing them coffees outside his offices with reassurances, but it was too late; He had caught the attention of the attention of the district attorney who demanded an audit. Apparently, a list of little more than index cards with investor names is hardly a proper method of doing business.

His time in and out of jails is honestly such a mess that I’ll leave it up to you to watch the video detailing his life to explore, or simply encourage you to research him. Beyond that, please read the list below for the warning signs to know what to watch for.

Key Indicators to Look For

In schemes like Charles Ponzi’s there are telltale indications, some of the following are ones to look for:

Consistent returns despite market changes
Unnecessarily complex or vague paperwork
High returns with low or no risk
Little to no regulation or licensing/oversight
Secretive/restricted access to strategies
Unparalleled consistency in returns
Difficulty accessing funds

Assignment

Take some time this period and research some recent Ponzi schemes. Yes, while they seem to be on the decline they unfortunately take different forms and happen ALL THE TIME. Choose one that draws your attention and be prepared as a group to discuss with the class why that specific one is particularly insidious, why people fell for it, and who it affected.