1920 (26 page)

… Barron wrote, “If Mr. Rockefeller, the richest man in the world, should offer even 50 percent for money and be found to be putting his own money into 5 percent bonds, there would not be much money offered to him by financial people.” In other words, if Rockefeller couldn't deliver a fifty-percent return, no one could. Barron, after whom the highly respected financial newspaper would be named by family members the following year, continued his article by declaring that even if it were possible to continue to pay the kinds of returns Ponzi was providing, it would be “‘immoral' because it would be profiting at the expense of a government. ‘When a man gets money from the government without performing a service, it is just the same as when a man takes money from an individual without performing a service for that money.'”

Something was wrong somewhere with Ponzi's offering; it was just a matter of discovering where. And, as unlikely as it seemed, it was the
Post
that would soon take on the mission.

In part because of Barron's reputation, and in part because of the carefully reasoned critique he had offered—he had been poring over records of Ponzi's dealings for weeks—the Commonwealth of Massachusetts had also begun to look into the dapper financier's affairs; and as if he hadn't a care in the world, which might truly have been his attitude, Ponzi volunteered to help. Without being forced, or even asked, he announced that he would stop accepting investments during the period of the commonwealth's inquiry. He had more than enough money on which to live for an indefinite time, and by showing his cooperation with the investigators, both public and private, he would, ipso facto, be showing his confidence in SEC. In the long run, he thought he just might attract more investors because of his amenability. In the long run, it would be good business.

So, at his own expense and with a broad smile for reporters who asked him about the matter, Ponzi took out an ad in the
Post
:

PUBLIC NOTICE

I have made a personal agreement with District Attorney Pelletier to cease receiving funds from the public for investment with the

SECURITIES EXCHANGE CO.

27 School St., Boston,

and all branches, until after an official audit is made to determine my solvency and satisfy him that my methods of financial operation are thoroughly legitimate. Meantime, I shall pay all maturing obligations as fast as presented. Further, during the auditing of the books any persons holding unmatured notes can receive back their original investment, without interest, if they desire.

Signed, Charles Ponzi.

Ponzi was convinced that the self-imposed suspension would be a brief one, and that the investigation would reveal his methods to be without flaw. How he could have been certain of either is a mystery whose only solution seems to be self-delusion. A later examination of Ponzi's books revealed some of the shoddiest record-keeping the auditors had ever encountered, shoddy enough to raise questions not just about paperwork, but about the ethical basis of the entire company.

The reasons for the criticism of the original Ponzi scheme are complicated, to the point of being beyond the scope of this book. Or, at least, this author. Suffice it to say, in the simplest possible terms, that, as has been the case with later Ponzi schemes of a simpler nature, Charles did not have enough money available to him to pay for a run by investors. This was not illegal at the time, only dubious; after all, runs by investors are most uncommon occurrences in normal-to-better economic times. And had newspapers, starting with the
Boston Post
, not created doubt in the public mind, and, more important, had the Universal Postal Union not changed its regulations concerning International Reply Coupons, Ponzi would have made a lot more money for a lot more people for a lot longer period. Himself notably included.

But the Union was finally catching on to what Ponzi and Old Colony and others were doing; and although it might have been slow to do so, its actions were quick and decisive once they came. There was no way, the Union decided, that it was going to allow its coupons to be used for a free-money swindle in the United States. It tightened its definition of terms so there was not as great a difference in the cash value between one country's stamps and another's. Then, shortly afterward, determining that any difference at all could lead to some kind of fraud, it took the wiser course of eliminating the International Reply Coupons altogether. The result was far more complexity than before in mailing items from one country to another, but far less opportunity for fraud.

It was at this point that any company doing business like SEC or Old Colony went from being dubious to being illegal, from being unethical to being fraudulent—and in fact most such firms went quickly out of business. But foolishly, even though he was accepting no more money for the time being, Ponzi stayed in business and, because of the new rules, quickly found his cash on hand shrinking in comparison to cash owed investors. The new rules were about to cause that dreaded run on SEC; after a brief hiatus, Ponzi was about to become a full-fledged crook yet again.

On July 30, with his firm still under voluntary suspension, the
Post
ran a headline that he might long have been fearing, even with his kindergarten-ish bookkeeping methods:

EXTRA

COUPON PLAN

IS EXPLODED

New York Postmaster Says Not Enough in Whole World to

Make Fortune Ponzi Claims

Ironically, the next story about Ponzi in the
Post
, and the final nail in the coffin of the Securities Exchange Company, was written not by Barron or by Richard Grozier or Eddie Dunn, but by a man Ponzi had himself hired to do publicity for him, a shill who, in effect, turned state's evidence.

William McMasters was one of the few upstanding practitioners in a field full of carnival barkers and con men with the newly proliferating
typewriting machines. Having signed onto the SEC payroll several weeks before the previous headline spread across the
Post
's front page, McMasters was eager to rescue the company's reputation, just as his employer wanted. But he quickly became suspicious, as he heard his boss say one thing in one meeting with potential investors, then contradict himself in the next session with those he was hustling. So sincere in manner and enthusiastic in presentation was Ponzi that McMasters thought he might simply have gotten carried away, becoming so excited about the prospect of new business that he didn't know what he was saying. Either that, or he had forgotten McMasters's presence and didn't realize he was being overheard; or perhaps he had just gotten to the point at which he didn't care anymore one way or the other. In which case he would have looked at McMasters as less a name on the payroll than an accomplice. It was not to be.

McMasters began after-hours searches of Ponzi's office to verify his doubts, and was amazed at what he found. Incriminating information did not just exist, but lay right out in the open—on top of the desk, in unlocked drawers, even in stacks of papers in the corners of the sofa. How the Commonwealth of Massachusetts could have missed this evidence—or, more likely, not understood its significance—is baffling. But just as baffling is the fact that, since the commonwealth's investigation had begun, Ponzi had apparently gotten even sloppier in his methods. Actually, he did not even have methods; he simply had clutter.

McMasters, however, proved himself expert at sorting through it. He collected the most damning evidence, organized it, wrote an introductory summary to it, and then went to Grozier. The summary was all Grozier needed to hear. He told McMasters to stop talking and begin writing. The headline was the worst news yet for the ambitious Italian.

DECLARES PONZI IS NOW HOPELESSLY INSOLVENT

In the following article, McMasters claimed that Ponzi was at least two million dollars in debt; had never earned so much as a penny from outside the United States, as he had claimed; had once bribed a policeman for a gun permit; and had paid thugs to intimidate, either verbally or physically, reporters primed to publish exposés. McMasters quoted banker Simon
Swig, a leader of Boston's Jewish community, as questioning Ponzi's sanity, and further denounced Wall Street officials for not having looked more carefully, if at all, into Ponzi's procedures and his impossibly unheard-of returns.

It is not certain that all of McMasters's charges are true; some seem exaggerated, even for a man of Ponzi's moral shortcomings. It also speaks ill of McMasters, and the
Boston Post
, that the publicist, despite being on SEC's payroll, received the “fabulous sum” of $5,000 from the newspaper. It is one thing to sit on both sides of the fence, quite another to be paid by both.

A disclaimer, which would have explained McMasters's supposed dual allegiances, is a staple of today's journalism. Or, at least, is supposed to be. It would have protected McMasters from later charges of manipulating the truth for financial gain.

One thing, though, was certain from his article: Ponzi had for quite a while now been paying off old investors with money he had taken in from newcomers. Soon both he and his later investors would be broke, and even a giddy self-deceiver like Ponzi must have felt the pressure of living on borrowed time. The famous—although not yet named—“Ponzi scheme” had been in operation now for several months, and its life span was inherently a short one—eight months, in fact, from the first sale to Ponzi's arrest.

The predictable happened as soon as the McMasters edition of the
Post
rolled off the presses. The scheme's lifespan was over. Virtually all of the investors in SEC demanded their money back, and at the promised 50-percent yield. The first few to get to Ponzi made a profit, although less than they had expected. For the rest of the SEC investors, the vast majority of them, it was already too late when the
Post
was delivered to homes and newsstands. The most that an individual in this group of Ponzie's patsies could retrieve from his life savings was twelve cents on the dollar. Not enough to send the butcher Ettore Giberti's children to college. Not even enough to clothe them, or his wife, in such a way that he could be proud.

No longer was Charles Ponzi being mentioned in the same breath as Michelangelo and Columbus.

PONZI SPENT MUCH OF THE
Roaring Twenties, ostensibly America's golden decade, in jail. His Lexington home was gone. His dazzling wardrobe was gone. Most crushingly, his dreams were gone. So vivid had they been, so deeply had he immersed himself in them, that he was barely able to speak when addressed in the courtroom for his first of several sentencings. Writes biographer Mitchell Zuckoff, “The clerk persisted, asking Ponzi if he wanted to plead guilty or not guilty. Again [Ponzi's attorney Daniel] Coakley prompted him, ‘Guilty.'

“Ponzi seemed startled. But in a timorous voice, he said the word: ‘Guilty.'” When a sentence of five years was announced, Rose fainted briefly, then regained consciousness and began to sob. She had to be helped out of the courtroom by friends who were equally morose.

It was F. Scott Fitzgerald who said, foolishly and yet somehow enduringly, “There are no second acts in American lives,” a statement proven false far more often than true. Yet if the five-year sentence was the end of Ponzi's first act in America, there would indeed be no second act in
his
case. He was too notorious, too well known, and too widely distrusted ever again to regain a position of prominence.

Zuckoff deserves to be quoted in detail about the aftermath of Charles Ponzi's appearance in court:

A few days after Ponzi's guilty plea, a
New York Times
editorial offered a remarkably balanced epitaph on the affair. First, it poured on the condemnation, decrying him as “an egregious falsifier and a wholesale betrayer of simple confidences.” But the
Times
recognized that there was more to Ponzi. “There was something picturesque, something suggestive of the gallant about him, and it is almost possible, though not quite, to believe he was as credulous as his victims and deceived himself as much as he did them,” the
Times
mused. “Perhaps the disinclination for being harsh in characterizing Ponzi is due to lack of any sympathy for those whom he robbed. … They showed only greed—the eagerness to get much for nothing—and they had not one of Ponzi's redeeming graces.”

When New Yorkers went to the polls a few weeks later, election officials came across the names of two unexpected write-in candidates for state treasurer: John D. Rockefeller and Charles Ponzi. It was the company he had always hoped to keep.

BY THE TIME HE HAD
managed to repay the last of his creditors, it was December 1930, and he still had more than three years to spend in jail on one of the numerous charges that had been filed against him. Released in February 1934, Ponzi, who had never become a U.S. citizen, which had been one of his dreams, was deported back to Italy. According to biographer Donald H. Dunn,

The deportation scene, despite its tragic overtones, in many ways resembled a farewell party for a successful industrialist. Accompanied by seven uniformed immigration inspectors, several of whom carried his luggage, Ponzi was ferried by government motor launch to the cruise liner in Boston Harbor. Dressed immaculately and waving his cap in salute, he came aboard while newsreel cameras whirred and flash bulbs exploded all about him. In a press conference held in one of the ship's larger suites, he settled his rotund figure into a velvet-covered armchair and explained that friends had provided ninety-five dollars in addition to the $105 paid by the government for a third-class ticket, so that he might travel to Italy first class.

But there would be no more first class for Charles Ponzi after that. He would never know the good life again. In fact, he was about to sink into a gloom more profound than any he had ever known—and, despite his “redeeming graces,” as the
Times
called them, would never rise out of it.