Call Him Ponzi…Charles Ponzi

Charles Ponzi, an Italian national born March 3rd 1882. Ponzi arrived to Boston U.S.A on November 15th 1903. Sixteen years later, he set up an office attempting to sell business ideas to companies in Europe. He received a letter from a Spanish company asking for the advertising catalog which included an international reply coupon (IRC) leading Ponzi to find a weakness in the system. International reply coupons allowed a person in one country to pay for the postage of a reply to a correspondent in another country. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher.  That said, in 1920 Ponzi established “The Securities Exchange Company” to promote his scheme, later known as “Ponzi Scheme”. He promised investors an average return of 45% per quarter; however, he did not invest in IRCs. He paid his current investors’ returns from the money deposited by new investors and by the end of July, Ponzi was receiving a million-dollar of investments per day. If Ponzi was in real business paying back the claimed returns, 160 million stamps should have been in circulation; however, only 27,000 were circulated as stated by the United States post office. Later, suspicion hovered around Ponzi’s illusionary business until the company was audited with no clear evidence for documented business transactions. Charles Ponzi was set to five years at the federal prison.


Charles Ponzi


Source: CNN Business


Later in the 90s a money manager named Bernie Madoff was responsible for one of the most financial fraud to-date. He executed the “Ponzi Scheme” defrauding thousands of investors and collecting billions of dollars relying on his experience in utilizing professional trading strategies, especially since he was well known being an electronic trading guru at that time. Madoff couldn’t pay back his investors when the market traded against him during the 2008 financial crisis. In 2009, Madoff was sentenced to 150 years in prison and confiscation of $170 billion.


Bernie Madoff

Source: The Guardian


The latest Ponzi Scheme took place in 2015 in Singapore when a rumor circulated among wealthy entrepreneurs, former bank executives, senior lawyers and business people about a 34 years investment manager named Ng Yu Zhi promising higher yields than the market through Ng’s Nickel trading fund. During the Covid-19 pandemic, the fund raised $1.1 billion, but the young man transferred approximately $475 million to his personal bank account and returned steady gains to his clients from the remaining cash. Ng has yet to enter a plea in response to 75 charges against him.


Ng Yu Zhi

Source: Bloomberg Businessweek


Greediness, easily earned money, and gluttony for wealth in a short time span are primary reasons for a million Ponzi to catch a breath in the financial industry. Surely, a quantified number of traders and investors could achieve wealth exceptionally in a heartbeat because they are utilizing proper and/or genuine investment strategies associated by money management disciplines or, they luckily had a price strike at market volatility owing it to a rarely occurring economic/political events.


Ideally, an investor shouldn’t rely on industry rumors or a glimmering reputation. Apply due diligence in selecting investments and the people with whom you invest—in other words, do your homework before investing your money. Consult an independent experienced third party in the field, diversify your investment among different money managers, and beware of investment opportunities that offer exaggerated earnings devoid of logic as most likely you will be offering your hard-earned savings to another deceitful, call him Ponzi.      



The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.