Mr Ponzi & his Astounding Scheme

Carlo Ponzi was born in 1882, but his claim to have come from a wealthy Parma family must be viewed with suspicion – as  Ponzi is now known as one of history’s most colourful and notorious fraudsters.

He left Italy in 1902, arriving in Boston, as legend has it, with only $2.00 in his pocket. He began his life of crime in Montreal, where he served time for forging a check – going on to engage in any number of shady deals. In 1920, back in Boston, he came up with a get-rich-quick scheme involving “international reply coupons” – documents exchangeable for postage stamps – aiming to profit from volatility in international currency values.

He parlayed this plan into a form of fraud that’s become known as Ponzi scheme - promising investors a high and rapid return on their initial investment without any means of actually generating legitimate profits. Any “profits” paid out had to be raised with funds from new victims. At his peak, the charismatic and persuasive Ponzi was raking in about $2 million a week.

It was lucrative while it lasted, but in August, 1920, it all came crashing down when a Boston journalist drew back the curtain on Ponzi’s earlier Montreal shenanigans. When the truth came out – Ponzi was tried in Federal court and sent to prison. Among the jails where Ponzi served time was the federal prison in Altanta, where a certain Bernie Madoff would be processed upon his arrest in 2009.

Deported from the USA in 1934, Ponzi spent his final years in Brazil, dying in poverty in 1949.

Ponzi Schemes & the Great Recession

The unprecedented market upheaval of the last two years has smoked out fraudulent financial schemes that may well have gone undetected for years in more stable times. The high-profile case of Bernard Madoff, who bilked about $50 billion from his clients, is just one of many.

In the USA alone more than 150 Ponzi schemes were exposed in 2009 - up from about 40 in 2008. Associated Press reports that over $16.5 billion was lost in 2009 alone, representing the savings of tens of thousands of investors across America.

The US Securities &  Exchange Commission – the same agency that recently brought charges of fraud against Goldman Sachs – issued 82% more restraining orders against Ponzi schemes in 2009 than in 2008, and its investigations into securities fraud now constitute 21% of its total workload, up from 9 % in 2005.

In Canada the RCMP has a special division – the Integrated Market Enforcement Branch – tasked with investigating financial fraud. Among cases of Ponzi schemes that have come to light in Canada include Weizhan Tang, a Toronto businessman charged with defrauding $30 million, and the Alberta duo of Milowe Brost and Gary Sorenson, charged with running a ten-year fraudulent scheme that bilked over $100 million from investors.

Sources:
1. MSNBC: http://www.msnbc.msn.com/id/34612852
2. CBC: http://www.cbc.ca/money/story/2010/03/24/f-ponzi-faq.html
3. Zuckoff, Mitchell (2005), Ponzi's Scheme: The True Story of a Financial Legend