A Ponzi scheme is a “rob Peter to pay Paul” financial scam in which early investors are paid returns with money from later investors rather than legitimate investment activities. The most notorious perpetrator of this type of fraud is New York financier Bernard Madoff, who in 2009 pleaded guilty to masterminding a decades-long, $65 billion swindle. The Ponzi scheme is named for a real person, Charles Ponzi, who in 1920 bilked thousands of people out of some $10 million before he was caught.
Born in Italy in 1882, Ponzi arrived in America nearly broke in 1903 and went on to work various jobs in the United States and Canada, along with a stint in prison for forgery and smuggling. Then, in late 1919, the charismatic Italian opened a business in Boston to promote a scheme involving international reply coupons, which could be used to buy postage stamps in different countries. Ponzi’s plan was to purchase the coupons in bulk in Europe and then redeem them in America, where they were worth more, and reap a hefty profit.
Seeking cash to pull off his idea, Ponzi promised a 50 percent return on investment in 45 days and people soon were lining up at his office to hand over their money. However, when Ponzi couldn’t make the logistics of his ploy work, he began using funds from new investors to pay purported earnings to older ones.
After journalists started investigating Ponzi’s too-good-to-be-true operation, it collapsed in August 1920 and Ponzi was arrested. He was convicted, sent to prison and later deported to Italy in 1934. Ponzi died in poverty in Brazil in 1949.
While Ponzi is the namesake of the form of the get-rich-quick scheme he carried out, he was not its inventor. At least one prior practitioner was New Yorker William Miller, who in 1899 guaranteed investors a whopping 520 percent annual return and collected some $1 million from them before his con was exposed.