Part 3: The Ponzi Scheme

It is 16 November 1920, and Ponzi receives a letter from Spain asking for a copy of The Traders Guide. The sender is probably unaware that the magazine does not exist, so he encloses a self-addressed envelope and an International Reply Coupon (IRC).

International Reply Coupon

Ponzi has never seen an IRC before, but something tells him it may hold the key to making a lot of money. After a few days of research, he realizes that IRCs purchased in Europe are worth more in the US than in their country of origin. For example, a reply coupon purchased in Italy for $1 can be exchanged for $3 worth of stamps in Boston. He, therefore, concludes he could get rich by buying and reselling the IRCs in large quantities.

Ponzi is cash-strapped but believes his idea is viable. He approaches a few banks for money, but they are all sceptical of his concept and refuse to support it.

One of the banks that declines his funding request is the Hanover Trust Bank. He applies for $2,000, but his loan does not go beyond the loans committee. Since he has an account there, he takes his case to the bank president, who requests Ponzi's account information from a staffer.

The president looks at Ponzi's file, in between cigar puffs, and notices that his balance is nil and has not deposited anything in several months.

"I'm sorry, but I'm not able to authorize the loan," the bank president says coldly. "While we try to accommodate our depositors wherever possible, your account is more of a bother than a benefit to us. Good day, sir."

Ponzi storms out of the office, disappointed but swears to teach that jerk a lesson one day. Interestingly, as fate would have it, Ponzi will be the Hanover Trust Bank's largest depositor and stockholder in less than six months. With deposits of over $5 million and 54% shareholding, Ponzi's voice will be the most powerful at the bank.

When everything else fails, Ponzi decides to solicit funds directly from the general public. He calculates that if someone gives him $100, he can purchase international reply coupons from Italy and sell them for $300 in Boston. He will then return the investor's $100 plus $50 in interest, leaving him with $150 in expenses and profit.

To get started, he borrows $200 in cash and $230 in furniture from Joseph Daniels, a local second-hand furniture dealer. He uses the money he borrowed to register The Securities Exchanges Company (SEC) and rent office space at 27 School Street, Room 227.

The main product of his intended company is the Ponzi Note, a promissory note that he issues to investors in exchange for money. When the notes mature, investors can redeem them for one and a half times the amount they deposited.

Ponzi Note

"The Securities Exchange Company, for and in consideration for the sum of $[amount of money invested], receipt of which is hereby acknowledged, agrees to pay to the order of [name of Investor] upon presentation of this voucher, 90 days from [date invested] the sum of [invested amount + 50%] at the company's office, 27 Schools Street, Room 227, or at any bank."

In other words, for every $100 invested, Ponzi promises to pay $150 after 90 days. The 90 days is the duration he estimates it will take him between collecting investor monies, ordering IRCs from Italy, having them sent to Boston, and redeeming them at Boston post offices.

Ponzi believes his scheme is legal, but he doesn't want to take chances. Given his previous run-ins with the law, he registers the Securities Exchange Company as a "partnerless" partnership, ensuring that authorities will not be able to trace its ownership back to him if something goes wrong. He lists John Dondero and Guglielmo Bertollotti as partners in registration forms and describes himself as the manager. Dondero is his wife's uncle, and Bertollotti was his landlord back in Italy. Ponzi has no idea if Bertollotti is still alive, and Dondero does not know Ponzi has listed him as a partner.

On 26 December 1920, Boston City authorities issue him with the registration certificate.

With the office space secured and enough copies of the Ponzi notes printed, Ponzi is ready for business. He makes random phone calls and personal visits to inform individuals about the Securities Exchange Company, Ponzi Notes, International Reply Coupons, and the 50% interest rate, but he never pressures anyone to invest. He knows that, sooner or later, their curiosity will lead them to his office.