You Can't Cheat an Honest Man - James Walsh [2]
Ponzi was a genius about maintaining certain parts of his scheme. One example: When investors went into Ponzi’s offices to redeem their notes, they had to walk all the way to the back of the place, to one of two or three redemption windows. There were usually long lines at these windows.
Once the investors had their money, they had to walk past dozens of investment windows, with shorter lines and eager people investing hundreds and thousands of new dollars. Most didn’t make it all the way out the front door again. They’d reinvest.
At the height of his liquidity, Ponzi went on manic shopping sprees, buying scores of suits, dozens of gold-handled canes, diamonds for his wife, limousines and a 20-room mansion in the Boston suburb of Lexington. As would hold true for many of the con men who’d follow in his steps, Ponzi seemed most in his element spending money.
By early July 1920, Ponzi was taking in a steady $1 million a week. On one particularly flush afternoon, he walked into the Hanover Trust Co. with $3 million stuffed in a suitcase and bought controlling interest in the esteemed bank. But his success would not last long.
While hundreds of people lined up at Ponzi’s offices every day, an editor at the Boston Post asked the opinions of several financial experts and concluded that—while it might be possible to make a few thousand dollars trading the reply coupons—the Great Idea couldn’t support the amount of business Ponzi was doing.
Soon, skeptical reporters called for interviews. Nervous about the image he would make, Ponzi hired a public relations executive named William McMasters to handle publicity. It was a major misstep. McMasters spent a couple of days in Ponzi’s office, realized the operation was a sham and went straight to state authorities. “This man is a financial idiot,” McMasters said. “He can hardly add.... He sits with his feet on the desk smoking expensive cigars in a diamond holder and talking complete gibberish about postal coupons.”
Ponzi was summoned to the State House in Boston. He was cheered by Italian admirers on the way in, but when auditors got hold of his ledgers they found only an addled mix of names and numbers. His employees, when questioned, had no idea how Ponzi’s huge returns were earned.
A month later, fearing his scheme was about to collapse, Ponzi drove to Saratoga Springs with $2 million in a suitcase. He hoped to win back in the casinos the money he’d spent living like a tycoon. He lost everything.
In August 1920, the Boston Globe published an expose on Ponzi. A near riot ensued, with thousands of angry investors storming Ponzi’s office and demanding their money back. In short, it was a run on the bank. A court would later explain the details:
At the opening of business July 19th, the balance of Ponzi’s deposit accounts at the Hanover Trust was $334,000. At the close of business July 24th it was $871,000. This sum was exhausted by withdrawals on July 26th of $572,000, on July 27th of $228,000, and on July 28th of $905,000, or a total of more than $1,765,000. In spite of this, the account continued to show a credit balance, because new deposits from other banks were made by Ponzi. The scheme was finally ended by an overdraft on August 9th of $331,000. Bankruptcy was then filed.
At the height of his scheme, Ponzi owned only $30 worth of postal coupons—against which he’d borrowed $10 million from 20,000 investors in Boston and New York.
In less than ten months, Ponzi had catapulted to greatness and then crashed back down to ignomy again. Most investors lost their life savings. Ponzi was arrested by federal agents and eventually sentenced to four years in Massachusetts’ Plymouth Prison.
The Supreme Court Offers Its Opinion
A number of lawsuits followed the collapse of Ponzi’s scheme. The most important of these was the civil suit Cunningham v. Brown et al. Cunningham was the heir of one of Ponzi’s investors. Brown was another investor, who’d received preferential treatment—that is, had been paid—by Ponzi. Cunningham wanted the money Brown had received to be returned