As defined by the Securities and Exchange Commission (SEC), a Ponzi scheme is a type of illegal pyramid scheme named after Charles Ponzi. So who is Ponzi and how did he manage to get an investment scheme named after him? He used postage stamps.
Back in the 1920s, Ponzi duped thousands of New England residents by encouraging them to invest in a postage stamp speculation scheme, according to the SEC. Ponzi told investors he could provide a 40% return in just 90 days. He thought he could take advantage of the differences between U.S. and foreign currencies used to buy and sell international mail coupons.
The SEC uses an exclamation mark to explain how well his scheme worked at first: “Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921!’ Ponzi, an Italian immigrant, paid off a few early investors to make the scheme look legitimate. Later the investigation found he had only purchased about $30 worth of the international mail coupons.
And that is why, almost a century later, we use Ponzi’s name to describe the “rob-Peter-to-pay-Paul’ principle in which money from new investors is used to pay off earlier investors “until the whole scheme collapses,’ the SEC said.
Bernard Madoff was the latest famous fraudster to use Ponzi’s principles on a much more sophisticated scale. Madoff recently pleaded guilty to 11 felony counts for orchestrating a massive fraud of at least $50 billion (see “Madoff Does Not Pass Go’). Madoff ensnared investors—including large institutions and pension plans—and invented fictitious trades while using new investors to pay off old investors.
Ponzi was convicted of mail fraud and served time before he was deported to Italy. Madoff is currently in jail and waiting his sentencing this summer.
Here’s a comparison of Madoff and Ponzi, according to various reports:
Ponzi: Promised huge returns quickly.
Madoff: Promised steady, above-average returns over time.
Ponzi: Perpetrated his fraud before the SEC existed.
Madoff: The SEC existed and he still found a way to perpetrate his fraud.
Ponzi: “A dandy in a straw boater with spats and a showy gold-tipped cane,’ according to a recent article in The New Yorker.
Madoff: Obsessed with the color black, an employee told The Daily Beast.
Ponzi: Once worked as a dishwasher and grocery store clerk.
Madoff: Once worked as lifeguard.
Ponzi: Embraced by the Boston Italian community.
Madoff: Embraced by the New York Jewish community.
Ponzi: Marketed himself as a populist, targeting uneducated investors.
Madoff: Marketed his firm as exclusive, targeting elite investors.
Ponzi: Attracted thousands of investors.
Madoff: Attracted thousands of investors.
Ponzi: Never did buy many postal coupons.
Madoff: Never did make any trades, according to reports so far.
Ponzi: Built a pyramid that would ultimately collapse.
Madoff: Built a pyramid that would ultimately collapse.
Ponzi: He died maintaining that he had acted in good faith, his biographer told The New York Times.
Madoff: He recently said in his testimony that he was “deeply sorry and ashamed’ for his crimes.
Would Ponzi’s scheme have made it so far in the 21st century? Who knows, but it’s probably safe to say postage stamps probably wouldn’t have been his investment scheme of choice. Maybe he would’ve been an e-mail scammer.