Your Money & Your Life

Who is Charles Ponzi, and Why are People Saying Such Terrible Things About Him? 

Our Securities and Exchange Commission (SEC) offers this as a place to begin: “Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s.” This, of course, begs the questions of who Ponzi was and how he came to the attention of the SEC. Back in the 1920s, Ponzi defrauded thousands of New England residents by encouraging them to speculate in postage. He promised investors at least a 40% return every 90 days by taking advantage of the differences in value between U.S. and foreign currencies used to purchase international mail coupons. Again, the SEC: “Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921!” Although he paid off the earliest investors to make the scheme look legitimate, subsequent investigations found that he had only purchased about $30 worth of coupons.

Ponzi was probably not the first to pull off such a trick, but 100 years later, we still use his name to describe schemes that use money from later investors to pay off earlier ones. These early investors inadvertently bring new investors into the fold by sharing stories of their success. “With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive” (quoting Wikipedia this time).

Market corrections have a way of bringing such scams to light. Withdrawals are not a problem for the perpetrator as long markets are doing well and new investors are adding money. However, when things decline, people often decide to take out some of those profits. This leads to increased requests for withdrawals and the sort of implosions we are unfortunately so familiar with.

These frauds often feature recurring themes, such as an affinity group to attract investors. Ponzi was an immigrant and played on his Italian heritage to bring in trusting investors. Beginning around 1990, Bernie Madoff used his Jewish connections to do the same. In other ways, they are different: Ponzi targeted uneducated investors, describing himself as a populist. Madoff famously catered only to the elite. Being a Madoff client carried considerable caché, at least until the fall of 2008, when investors requested $7 billion, and only about $200 million was available. In March of 2024, the SEC “charged 17 individuals for their roles in a $300 million Ponzi scheme that involved Houston, Texas-based CryptoFX LLC and targeted more than 40,000 predominantly Latino investors in the U.S. and two other countries” (quoting the SEC one final time).

Ponzi offered a way for people to get rich quick, while Madoff promised consistent returns regardless of market conditions. Ponzi perpetrated his fraud before the existence of the SEC while Madoff (and many subsequent scammers) basically ignored it. Both of them duped thousands of investors. Neither actually invested the money they raised, as both built unsustainable pyramids which ultimately collapsed.

How do these perpetrators do in the end? Ponzi pleaded guilty to a federal charge and spent about 14 years in prison before being deported. Madoff pleaded guilty to 11 felony counts of orchestrating a fraud and died in prison in 2021 at the age of 82. The CryptoFX prosecution ended with civil and other penalties but no jail time. These famous historical frauds came to mind when I read in the New York Times last week about a Denver pastor & his wife who defrauded parishioners and others of about $3 million through another crypto scheme.

Regular readers of my articles have heard these words before, but in light of ongoing abuses, they bear repeating. If you encounter an investment that seems too good to be true, it almost certainly is.

I’ve been in the world of investing and financial planning for almost thirty years. The first question I always ask myself when considering an investment for a client is “Who will buy this when it’s time to sell?” If I can’t answer that question, I simply stop. The DCM investment process strives to generate gains by attempting to manage losses, not providing extraordinary gains. Our approach is strategic and evolves with the markets. It does not offer a way to “get rich quick,” but then neither do most other investment opportunities, as Ponzi, Madoff, and others so ably demonstrate.

Warren Ward, CFP®
Senior Investment Advisor

To learn more about Warren, you can read a brief biography here. 

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This has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable through its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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