Charles Ponzi's Original Scheme
The Story
Charles Ponzi promised investors 50% returns in 45 days through arbitrage involving international postal reply coupons. The scheme was brilliant in its simplicity and timing. After WWI, America was eager for investment opportunities.
Within months, Ponzi was making millions. He purchased mansions and lived lavishly, which attracted more investors. In reality, he barely purchased any postal coupons. He paid early investors with money from new investors.
When a Boston journalist investigated, a bank run ensued and the scheme collapsed within days.
🚩 Red Flags
- Returns impossibly high and guaranteed
- Vague explanations of business model
- Pressure to recruit new investors
- Lavish lifestyle
- Lack of official documentation
⚖️ The Fallout
Ponzi was sentenced to five years federal prison. After serving, Massachusetts charged him again with 7-9 years. He fled to Florida, tried another scam, was caught, and eventually deported to Italy. He died penniless in Brazil in 1949.
📚 Lessons Learned
This scam was so influential that this type of fraud is now universally called a 'Ponzi scheme.' It established the template: promise high returns, pay early investors with later investors' money, maintain the illusion until collapse.
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