#8
What?
Origin of the Ponzi Scheme
Who?
Charles Ponzi (1882–1949) - an Italian immigrant living in Boston.
When?
It happened in 1919.
Crime in one line
Ponzi conned investors into giving him millions of dollars and paid them returns with other investors’ money.
What did he do?
He came up with a scheme to get rich by purchasing international reply coupons (IRC) for a low price abroad and then selling them for profit in the US.
What’s a reply coupon?
It’s a coupon that can be exchanged for several priority airmail postage stamps from another country.
What was the problem?
Though Ponzi was able to repay his investors their money, via subsequent investors, he had not yet figured out a way to actually convert the IRCs to cash. He then realized that changing the coupons to money was logistically impossible.
What this led to
The ‘Ponzi scheme’
In short: “robbing Peter to pay Paul”
Damages and Impact
In order to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 were in circulation.
In August 1920, Ponzi was declared hopelessly insolvent, reporting at least $2 million in debt. It was later found that he was actually $7 million in debt.
Magnitude of losses
Ponzi’s investors were essentially wiped out, receiving less than 30 cents to the dollar. They lost about $20 million in 1920 dollars (approximately $196 million in 2019 dollars). By comparison, Bernard Madoff’s similar scheme that collapsed in 2008 cost his investors about $18 billion, 53 times the losses of Ponzi’s scheme.
Typical Characteristics of a Ponzi Scheme
Scheme:
- Guarantee of high returns with low risk
- Consistent flow of returns regardless of market conditions
Investment:
- Unregistered investments with the Securities and Exchange Commission (SEC)
- Investment strategies described as too complex to describe
Customers:
- Clients unallowed to view official paperwork for their investments
- Clients facing difficulties removing their money
Stay tuned
We’ll later look at some of the Ponzi scheme scandals that took place more recently, like Bernie Madoff, whose name this scheme is synonymous with, and also the Ponzi scheme employed by Sahara’s Subrata Roy to dupe thousands of poor investors.
No comments:
Post a Comment