Have you read The Glass Hotel by Emily St. John Mandel? One of the threads of the novel involves a Ponzi scheme, based on Bernie Madoff’s arrest and conviction in 2008-2009.

Ponzi schemes are named after an Italian con artist by the name of Charles Ponzi (1882-1949), though he was not the first recorded fraudster to engage in them.

Definition

Ponzi schemes are financial scams in which investors believe they are being paid the profits of a legitimate business, when in reality the funds are coming from later investors. The scheme holds out “as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.”

Pre-Ponzi Ponzi Schemes

Ponzi schemes are described in two Dickens’ novels: Martin Chuzzelwit (1844) and Little Dorrit (1857). What was possibly the first real recorded Ponzi scheme was run by Adele Spitzeder in Germany from 1869 to 1872. In the 1870s and 1880s Sarah Howe ran Ponzi schemes in the U.S. (even after serving three years in prison!). However, Ponzi schemes are named after Charles Ponzi due to the huge amount of press coverage he received. Let’s learn more about him!

Who?

Birth name: Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi

Aliases: Charles Ponci, Carlo, and Charles P. Bianchi

When?

Ponzi was born in Italy in 1882 to a formerly well-to-do family that had fallen on hard times. After wasting his money and leaving university without a degree, he emigrated to the U.S. in 1903.

Where?

Arriving with little money, Ponzi took odd jobs along the East Coast, then in 1907 moved to Montreal. There he worked for a bank set up to serve Italian immigrants, which is where he first saw a “Ponzi scheme” in action. (The bank failed and the founder fled to Mexico).

What happened?

Ponzi turned to various money-making ventures and end up serving several prison sentences:

• Three years in a Canadian penitentiary for forging a cheque
• Two years in Atlanta Prison for smuggling illegal immigrants
• Three and a half years in a federal prison after the collapse of his Securities Exchange Company, in which his investors lost the equivalent of $207 million (side note: Bernie Madoff’s investors lost $18 billion in his Ponzi scheme)
• About nine years for larceny (when released on bail, he tried to flee the country, but was sent back to complete his prison term)

When Ponzi was released from prison in Massachusetts he was deported to Italy, where he tried various schemes unsuccessfully. He eventually moved to Brazil, working for an airline, but its operations there were shut down during World War II. He died in poverty in 1949.