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Ponzi Scheme

The APS™ is about protecting the public and since most of the public doesn’t know what a Ponzi scheme is, with thought we should tell you about the story of Ponzi.

“Have I got a deal for you!

I can double your money in just ninety days, guaranteed.

Nonsense, you say!

What? You do not trust me?

I promise that it can be done.”

A man called Charles Ponzi delivered such a promise back in 1920.

We will try to summarize the long story of Charles Ponzi; and when we are done, we think you will understand why we included the story in this book.

Ponzi, after coming over on the boat from Italy, started working odd jobs to get by.  In 1917, he moved to Boston where he took a job answering and typing foreign mail.  In 1919, Ponzi had finally found the investment plan that was going to make him rich.  One day, Ponzi sent a letter to a businessman in Spain; and when the businessman wrote back to Ponzi, he included an international postal reply coupon.  Ponzi took that international reply coupon to the U.S. Post Office and exchanged it for U.S. stamps.

The light goes on!

Ponzi noticed that a postal coupon purchased for one (1) cent (U.S. money) in Spain could be exchanged for six (6) cents in the U.S.   That is when the light bulb went on, and that day the Ponzi scheme unwittingly was born.  Ponzi figured that he could buy $100 worth of stamps in Spain and then exchange them in the U.S. for $600 worth of stamps.  Ponzi then would simply sell the stamps and make a bundle, thinking that there could not be a better investment anywhere in the world.

Ponzi then implemented his plan by converting his U.S. money to foreign currency.  Then he hired agents overseas to buy stamps from certain countries where the exchange rates were favorable when compared to the U.S.  Then the foreign stamps would be exchanged in the U.S. and sold for an enormous profit.  Ponzi claimed to all who would listen that he could create investment transactions where the net profits would be in excess of 300% in a very short period of time (45 days).

Did Ponzi really accomplish his lofty investment goals?  NO.  The red tape of dealing with different postal offices and the long delays in transferring money destroyed all of Ponzi’s imagined profits.

There is one problem!

Even though the scheme failed, because Ponzi had bragged about his great idea to all that would listen, everyone wanted to give him their money; and Ponzi obliged.  Word about the fail-safe investment opportunity that promised to make a 50%+ profit in 45 days spread like wildfire. Ponzi had people waiting in line outside his business just to give him money to invest. Thousands of people purchased a promissory note from Ponzi in amounts ranging from $10 to $50,000 (which in those days was a large chunk of money).

Why would people give Ponzi the money for a flawed plan?

The main reason is because the early investors did see a healthy return on their money as promised.  Ponzi used money from new investors to pay earlier investors, which made even more people want to give Ponzi money as the word spread.  Legend has it that, Ponzi, back in those days, was taking in $1 million a week at the high point of his scheme.  (This is the classic pyramid scheme).

Ponzi, like all newly rich men, lived lavishly.  Unfortunately, all good (or bad depending on your point of view) Ponzi schemes must come to an end; and it did for Ponzi in 1920.

The Ponzi scheme crashes!

The Boston Post published a headline story telling readers of the scheme and how rotten it was, and Ponzi had people knocking down his door to get their money back.   Eventually, all the money Ponzi had (which was not nearly enough to pay all the creditors) was given back to the angry mob; and Ponzi was declared bankrupt in the fall of 1920.

Ponzi was arrested and, after the arrest, admitted that he had a criminal record, which included forgery charges. (Shocking!).  Ponzi spent three-and-a-half years in a federal prison; and after getting out, Ponzi was then sentenced to seven–nine years in a Massachusetts jail.  Ponzi posted bond before going to the Massachusetts jail and then skipped town.

Same old tricks!

You would think Ponzi would see the writing on the wall and would have headed back to Italy.  Nope. Ponzi showed up in Florida where he had a new Ponzi scheme involving real estate. Ponzi was buying real estate for $16 an acre and subdividing each acre into twenty-three lots and selling them for $10 apiece.

While that might sound like good business today, we forgot to add that he promised investors that their $10 investment would turn into over five million dollars in less than two years.

What happened to Ponzi?

After spending time in several different state jails, Ponzi was ultimately deported back to Italy.  Interestingly enough, Ponzi received a sendoff fit for a rock star from many of the fans from his original Ponzi scheme (obviously, the fans were early investors who made money).

Ultimately, Ponzi became a ward of the country of Brazil (the country he lived in when he died) where he died unemployed and broke.

Moral of the story?

We should not have to tell many clients the moral of the story since many high- income clients are notorious for being taken advantage of by scam artists.  The moral of the story is that, if it sounds to good to be true, it probably is.   We run into that to some extent on some of the income tax reduction topics we deal with and take pride in dealing with topics that are not often vetoed by CPAs or attorneys who do true due diligence when reviewing the topics.


Be careful when dealing with investment schemes and “advanced” tax topics.  We have seen many clients get into plans that we know are not legal from a tax standpoint.  Just because a company has nice marketing material (audio tapes and PowerPoint presentations) does not mean the company is credible.

If something does not pass your smell test, find someone you trust has the knowledge to help you review the plan so you can make an informed decision or simply stay away from it altogether. Life’s too short to be swindled by someone pitching a Ponzi scheme.