Ponzi's Scheme (10 page)

The deal remained a risk for Daniels—there was no guarantee Ponzi would be in any better shape two months hence, and even with the bank on Daniels's side Ponzi might stiff him. On the other hand, Daniels would be giving Ponzi only a relatively small loan, and the alternative of repossessing the furniture held no upside for him.

Still, Daniels was skeptical. He wanted to know how Ponzi intended to pay the note at maturity. Ponzi expected that question, so he outlined his plan to build a financial empire based on International Reply Coupons. He spoke of the meeting in Rome, showed Daniels a coupon, and read a passage from page 37 of the
United States Official Postal Guide
that described how the coupons could be redeemed for stamps in any country that was a member of the Universal Postal Union. Feeling the fish nibbling on the bait, Ponzi let out more line, expounding on foreign exchange rates and fluctuating currencies. He went in for the kill by describing the crux of his business plan: to pay investors 50 percent interest on any amount invested within ninety days, or forty-five days if everything went as smoothly as anticipated.

Daniels listened to the rapid-fire delivery and found himself swept up in Ponzi's excitement. Daniels accepted Ponzi's note and gave him a check for twenty dollars, the first installment of Ponzi's half of the two-hundred-dollar loan. Emboldened, Ponzi pressed his luck by asking if Daniels wanted to invest in the coupon business. Daniels declined—first he wanted to drop by the post office down the street from his store to inquire about postal coupons. Still, for Ponzi it remained a pivotal moment.

Until then, everyone to whom Ponzi had explained the plan had brushed him off—it was impossible, impractical, and anyway, who was this pint-sized immigrant to imagine himself a financial giant? The only person who had believed Ponzi was Rose, and even she had trouble understanding the coupons-for-stamps-for-cash machinations. Although she did not tell her husband, Rose suspected it would turn out to be another of his short-lived inspirations, soon to be replaced by another. But now, by winning Daniels's meager support, Ponzi sensed the possibility of success. And after so many years of failure, he was intoxicated by it. He had convinced a hard-nosed, if not terribly bright businessman that he was onto something. With some polish, he was certain his sales pitch would draw investors in droves.

Just as important, the experience made Ponzi realize that he should launch his company by seeking small sums from large numbers of people. The few big-money types he knew had shunned him, but almost anyone could spare ten dollars, or fifty, or maybe even a hundred, on the promise of a 50 percent gain. Even if they did not grasp the details of how he would do it, or even if they had doubts about him, the possibility of huge returns in such a short time would be too tempting to pass up. If they gambled a small amount and lost, oh well, no great harm. But if the gamble paid off, they might invest more, believing they were on the verge of fulfilling the financial promise of the American Dream: great riches, easily obtained, swiftly delivered.

Put another way, Ponzi had chanced upon what he was certain was a legitimate, foolproof formula to Get Rich Quick.

I
n contrast to con artists who use stealth and subterfuge to target individual marks for big scores, Get Rich Quick promoters generally take a wholesale approach to generating wealth. When critical masses of people have ostensibly prospered, their friends and neighbors come running, setting off a financial frenzy. By the time Ponzi appeared on the scene, the people of Boston and New England had had plenty of experience with Get Rich Quick operators. Unlike Ponzi, however, most promoters paid no attention to the boundaries of legality, focusing only on the greed and gullibility of their audience.

Fast-talking salesmen had promised fortunes from silver fox–fur farming and from engines that supposedly used water for fuel. Some had claimed divine intervention or inspiration. Many had told tales based on high finance—offering stocks, bonds, insurance, and complex loan deals with fraudulent underpinnings. Some had combined elements of several approaches to turn themselves into money magnets. What they'd all had in common was a three-step playbook: splash, cash, and dash. That is, make a big impression, grab as much money as possible, and disappear before being exposed.

In the late 1890s, a handsome Baptist minister named Prescott Ford Jernegan, the scion of a well-known whaling family from Martha's Vineyard, declared that a “heavenly vision” had delivered unto him the secret of extracting gold from seawater. He shared this revelation with several prosperous members of his former congregation in Middletown, Connecticut, who agreed to provide financing to test his discovery. Among them was Arthur B. Ryan, a former city alderman and partner in a successful jewelry company. Less publicly, Jernegan enlisted his boyhood friend, one Charles E. Fisher, a burly confidence man and professional diver from Cape Cod. Minister Jernegan once displayed his true nature in a letter to Fisher: “Money and lust,” he wrote, “have been the two most vexing problems in my life.”

Jernegan needed proof of his “discovery” to attract big money, so one winter night he sent Ryan to a deserted resort on Narragansett Bay in Rhode Island. Swathed in fur coats to fight the chill, Ryan and an associate went out to a pier, cut a hole through the ice, and dropped into the water a box with iron bars and a secret catalyst that Jernegan called an “accumulator.” Jernegan claimed that a current of electricity, carried by platinum wires attached to the accumulator, would attract noticeable amounts of gold within twenty-four hours. While the experimenters waited, Jernegan's accomplice, Fisher, took a back route to the resort on horseback. He slipped into a diving suit and followed the wires through the icy water to the box. He dropped nuggets of gold into the accumulator box and vanished without being seen. When the box was pulled to the surface the next day, Ryan tested the nuggets with tools of the jewelry trade. The gold was real. Ryan believed it had truly been sucked from seawater. He declared the test a rousing success.

Word spread quickly, and soon Jernegan and Fisher began planning the Electrolytic Marine Salts Company in the remote fishing village of North Lubec, Maine. Jernegan said he chose the site because it boasted a daily twenty-foot rise and fall of the tides, which would send an enormous volume of seawater through the huge accumulating equipment he intended to build. He incorporated the company in November 1897 with $10 million worth of stock for sale at a dollar per share. Gold similar to the nuggets pulled from Narragansett Bay were displayed in Boston and elsewhere. Already primed by recent news of the Alaska Gold Rush, investors threw money at the idea. Newspapers throughout the region could barely contain themselves: “The amount of gold in all the oceans is estimated at seventy billion tons, forty-eight trillion dollars,” the
Hartford Courant
breathlessly announced.

After several thousand investors bought stock, Fisher took the familiar path of fast-money magicians. In July 1898, he disappeared with about $100,000 in cash. Jernegan followed soon after, with perhaps twice as much. When a newspaper reporter caught up to him, Jernegan claimed he had left town in search of Fisher, who had stolen his secret formula. Fisher was never found, but Jernegan was struck by an apparent attack of conscience. Two years later, he returned a large amount of money to his dupes—as much as $175,000—and then lived most of the rest of his days in the Philippines.

The gold-from-seawater trick fell into the category of Get Rich Quick stock schemes based on miracles of science, a particularly popular approach for scammers at a time of medical breakthroughs and mechanical sensations like flying machines and Marconi's wireless. Another form of Get Rich Quick stock scheme could be called the exotic-products variety. Several years after Jernegan's scheme, a smooth talker named Ferdinand Borges came to Boston with just such an idea.

For several months Borges lived in obscurity, taking rooms in lodging houses and eating meals at the counters of low-cost lunchrooms. He knew no one would invest with a man living hand to mouth, so he pooled his resources and moved into a suite of offices that he filled with mahogany furniture, oil paintings, and expensive rugs. It was an elaborate stage on which Borges offered to sell bonds of a corporation he called the Consolidated Ubero Plantation Company. The bonds, he said, would allow investors to share in the enormous profits expected from “the four-hundred-thousand rubber trees, the million pineapple trees, and the million coffee trees now under cultivation.”

More than $2 million flowed into the company's coffers, much of it from poor people who appreciated Borges's offer to sell them bonds on the installment plan, investing as little as two dollars a month on the promise that when their account reached five hundred dollars they would be presented with a bond. Unlike Jernegan's gold ruse, Borges's company actually owned some plantation land. But that was never the point. Borges spent only a fraction of the money on the business. He kept the rest for himself, a few close associates, and a cadre of agents hired to sell bonds in exchange for commissions of 5 to 15 percent of whatever they brought in. It took authorities several years to catch up with Borges, but in 1906 he was convicted of conspiracy and seventy-three counts of larceny. Of course, by then most of the money was gone.

A variation of Get Rich Quick schemes was robbing Peter to pay Paul, or benefiting one person at the expense of others. The origin of the phrase is open to dispute, but one account traces it to the 1500s in England, when the lands of Saint Peter's Church at Westminster were sold to fund repairs at Saint Paul's Cathedral in London.

One example came to public notice in Boston on January 3, 1880, when an ad appeared in the
Boston Herald
under the headline:
HOW'S THIS FOR HIGH? EIGHT PERCENT A MONTH PAID TO DEPOSITORS BY A SOUTH END BANK
“
FOR WOMEN ONLY.
”

Below that was a further explanation:

The Ladies Deposit is a Charitable Institution for Single Ladies, Old and Young. No Deposit Received for less than $200 nor more than $1,000. Interest at the Rate of $8 per hundred per month is Paid every Three Months in Advance. The Principal Can be Withdrawn upon Call any day except Sunday. No Deposit Received from Anybody Owning a House.

The ad had been placed by Sarah Howe, a nearly illiterate former fortune-teller with a long history of petty crime and a standing reservation at the State Lunatic Asylum in Taunton. Her past notwithstanding, Howe's “bank” briefly made her the darling of apartment-dwelling Boston spinsters. More than a thousand women made deposits, trusting her with more than a half million dollars. Howe spent lavishly on herself, with a particular fondness for expensive real estate.

Doubts eventually led to a run on the Ladies Deposit, and when the money was gone Howe missed her chance to flee and was arrested. She went to prison as a thief and an insolvent debtor. As the
Herald
later explained, Howe “simply took the money that one set of patrons paid in to meet her obligations to another set. She never invested a penny of income. She took Miss Mary Jane Smith's money to pay off Miss Abigail Brown's claim, and so on to the end of the chapter.”

Howe was a small-timer compared to William Franklin Miller, for years the reigning king of the Peter-Paul scam. In 1899 he was thirty-six, with nothing to show for himself except a five-dollar-a-week job as a brokerage-house clerk. Eager to satisfy his expensive tastes, he devised a Peter-Paul scheme so simple and yet so audacious that it succeeded fabulously, though briefly.

Miller opened for business as the Franklin Syndicate in Brooklyn, New York, with an eye-popping promise: 10 percent a week interest paid on any investment. He soon acquired the nickname “520 Percent Miller,” based on expectations of what investors would receive over the course of a year. Asked how he could possibly pay such unheard-of interest, Miller talked of tapping into the methods of Wall Street barons who hoarded their wealth. He spoke loosely of “inside tips” about mining companies, stocks, and other businesses that supposedly churned out large profits.

A trickle of investors turned into a flood when word spread that Miller was paying the interest every week as promised. Unbeknownst to his customers, Miller was using his new investors' money to pay the interest on the old. Soon a majority of customers were leaving their principal untouched and “reinvesting” their interest, reducing Miller's expenses and increasing his personal bankroll. He used his low-rent office as a selling ploy: “Your money buys neither mahogany desks nor oil paintings. It is put to work for you at 10 percent a week. Our running expenses are small, our profits enormous and sure.”

The New York office proved so successful that Miller opened a Boston branch, operating out of the Hotel Harvard on Main Street of the city's Charlestown neighborhood. Mail from around the country poured into the hotel office with sums for Miller to “invest.” The Franklin Syndicate took in more than a million dollars before Miller was exposed as a fraud by the
New York Herald.
He fled to Montreal but was captured there, returned to New York for trial, and sentenced to ten years in Sing Sing. His creditors ultimately received about twenty-eight cents on the dollar. Miller won a pardon halfway through his term and opened a grocery store on Long Island, eventually earning the moniker “Honest Bill.”

Despite Miller's fall, there was no shortage of other scammers eager to pick up where he left off. Around the same time as Miller's release from prison, an imitator named C. D. Sheldon, alias Wilson, alias Hoyt, alias O. D. Washburn, went to work using the same Peter-to-Paul scheme in Canada. Sheldon's run was brought to a halt shortly before Ponzi arrived in Montreal, though it was still the talk of the town when Ponzi went to work at the Zarossi Bank.

But for every story of a Jernegan or a Borges, every account of a Howe, a Miller, or a Sheldon, there were a hundred tales of up-from-nothing men who had given birth to innovative ideas that legitimately made them rich. Some were inventors, others monopolists, still others financiers. Some worked tirelessly; others got lucky. Those stories, as much a staple of early-twentieth-century newspapers as photos of oddly shaped vegetables, kept alive two dreams in the hearts of millions of working Americans: Let such an idea come my way or, failing that, let such a man cross my path on a day he feels generous.