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Ponzi Scam

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The Italian who created the “pyramid of abundance”, the financial scam that made him a millionaire and landed him in jail

Carlo Ponzi arrived in the United States in 1903 with $ 2.50 in his pocket. He invented “the Ponzi scheme”, a pyramid fraud where investors received the interest originated in the money of new investors and not from genuine profits. His system was the one that he used, many years later, the tycoon Bernard Madoff and for which he ended up condemned to 150 years in jail.

In 1903, Carlo Ponzi was a desperate but also hopeful man at the bottom of his suitcase, crammed into Ellis Island, the first step towards the United States, among hundreds of immigrants tempted by those words they have heard so much in their hunger-stricken towns and villages of Europe: “Everything is possible in America”.

All of them, almost without exception, will leave the island to look for work (whatever it is), earn a few dollars and send some of it to their relatives. Progress, and perhaps fortune, will come sooner or later, sweating, working day and night, because “Everything is possible in America”.

However, among them there is a young man with other plans: Carlo Ponzi, 21, with barely the equivalent in lira (Italian currency of that time) of two dollars and fifty.

He was born in Lugo, province of Ravenna, Italy, on March 3, 1882. His family, more than modest, father postman, has made an effort to send him to the University of Rome La Sapienza…, but he did not last long there. He spends the money on entertainment, wanders, doesn’t speak a word of English, boasts of never having worked, and his family, with one more sacrifice, and ships him to the United States.

Without abandoning his course, making his fortune as soon as possible, he lowers his forehead (head) and is already employed as a waiter, already as a dishwasher in some cities on the east coast, until he gets a job in a bank in Montreal, Canada, from some compatriots.

First stumble. In 1912, he forged a check, and was sentenced to 20 months in jail. But providence (God’s thing) in jail they assign him to work in the internal post office.

There he discovers the Columbus egg: the postal coupon business. Sell them in dollars to investors. Convert those dollars into depreciated currencies: the Italian lira, for example. With that money, buy coupons at a lower price. Send them to countries with stronger currencies to exchange them for stamps, whose value was higher than the original coupon, and convert them into cash money.

In a short time, the ambitious young man from Ellis Island amassed, with that difference, a small fortune, and on that basis, he created the colossal fraud that went down in the black history of finance as “The Ponzi Pyramid”.

What was it?

Classic definition: “An operation that involves paying old investors the interest obtained from the money of new investors.” Example: The investor pays $ 1,000 to the operator, who promises to pay $ 100 per month for the next 12 months.

If the operation were legitimate, the money received by the operator or the Security Exchanges Company, in the case of Ponzi, should be used for other profitable businesses: construction, for example.

But this “finance wizard” didn’t. He limited himself to bagging rivers of dollars: 250 thousand a day, which 16 employees, after entering them in the registry, kept it in closets … and even in garbage cans!

By the way, the controls tuned your magnifying glass.

How was it possible that this Italian who arrived with empty pockets had become a millionaire?

How was he able to offer them 50 percent interest within 90 days?

Quoted by the district attorney, Ponzi stated that he owed his creditors $ 3,500,000, but that his fortune was 8,500,000, “so I have plenty of money to cover the debt, and keep a strong equity.”

However, the pyramid was reeling, and hundreds of creditors flocked to the company. Many, with the intention of lynching him.

But his charisma, his coldness and his cynicism, in principle, could more. Dressed as a dandy and at the wheel of his Locomobile, the most expensive car on the market, he greeted the people in the long line with an immutable smile, asking for their patience: “Everyone will get what is yours, do not fall into the hands of profiteers who want to buy him his promissory notes at half price … to keep fifty percent interest “.

In addition, he confessed to them that he was an enemy of the large financial institutions, and promised them “once I get citizenship in this country”, to found a bank that will distribute the dividends fairly: 50 percent to investors and the same to savers. “And that’s not all: if I manage to earn 100 million, I will keep only one million, and I will allocate the rest to charity”.

And if all that generosity wasn’t enough, he ordered the entire line to receive hot dogs and hot coffee!

Before that siren song, many trusted him and went home. On the first day of August 1920, The New York Times published this note: “After a week of Ponzi research, the public interest in the man and his actions remains unchanged. Followed by hundreds of people when he appears on the street, they greet him like a hero. Although the federal audit of his accounting records has only just begun, his fans see him as having already been vindicated, and are impatient for him to receive funding again. Employees of department stores, factories and large plants have pooled their money and are waiting for the opportunity to invest it with Ponzi in their 50% scheme in 45 days”.

Nevertheless, two weeks later, the federal audit revealed that Security owed its creditors $ 7 million.

Only then did “the magician” confess that he could not face that debt. By then, some 40 thousand investors had put between 15 and 20 million dollars in the hands of the scammer (about 250 million today according to inflation in the United States).

The headlines made their August: Ponzi doomed!

However, for him, the blood did not reach the river: 5 years in prison in a federal prison, of which he only served three and a half.

Years in which he dedicated himself, every Christmas, to sending cards to his thousands of creditors: “When I am released I will return every penny.

And he promised, genius and figure, to act in politics.

Now free, he took refuge in Florida (better airs …) and launched a second edition of his pyramid, but his terrible fame was stronger. A second judicial instance added another 9 years behind bars. Before, he escaped to Texas, and decided, as a last chance, to leave on a merchant ship, he shaved his mustache and head. But he was caught, and he ended up in a Massachusetts prison until 1934.

When he left, a swindled picket wanted to lynch him: the police saved him.

Deported to Italy, he made the last attempt to resurrect his pyramid, but it did not have an echo.

He was employed by an Italian airline operating in Brazil. And there, in Rio de Janeiro and in misery, he died in a charity hospital on January 18, 1949. He was 66 years old.

But his shadow returned in 1960 as Bernard Lawrence Madoff, New Yorker, born 1938, banker, former stockbroker, financial advisor and head of NASDAQ.

That year he founded an investment firm, one of the largest on Wall Street.

In December 2008, he was arrested by the FBI and charged with fraud.

He used the Ponzi pyramid, increased to infinity, and left a trail of victims: those who allowed him to swindle 64.8 billion dollars!

The largest executed by a single person.

On June 29, 2009, he was sentenced to 150 years in prison, plus the forfeiture of 17,179 million dollars.

Charges: securities fraud, fraudulent investment advisor, mail fraud, wire fraud, money laundering, perjury, Social Security fraud, and employee benefit plan theft.

In an interview with New York Magazine, 2010 he stated:

I don’t regret the damage done. Fuck my victims! They were greedy and stupid. I wish they had caught me eight years ago. Prison is a release.



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