Ponzi's Scheme

by Mitchell Zuckoff

  Hurwitz, the assistant attorney general, found himself enjoying Ponzi’s company. Like Ponzi, Hurwitz was an immigrant and an outsider, a Russian Jew who had arrived in the United States in 1892, when he was eight years old. Not much taller than Ponzi, with a long face, prominent nose and jaw, and deep-set eyes, he had years earlier made a brief foray into Boston’s Brahmin- and Irish-dominated world of politics. In 1905, he’d run for the Common Council when he was a twenty-one-year-old law student at Boston University. He had run as a Republican and been thoroughly trounced.

  Sitting in the bank commissioner’s office, Hurwitz respected the confidence and ease with which Ponzi carried himself, the touches of humor in his answers. He took note of Ponzi’s impeccable fashion sense, admiring his custom-tailored suit, the sparkling jeweled pin in his tie, and the soft gray spats on his glossy shoes. Ponzi completed the look of success with a gold-tipped cane in one hand and soft gloves in the other. The assistant attorney general was especially drawn to Ponzi’s dark eyes, the way they danced as he spoke, seducing his listeners with what Hurwitz considered “a romantic look.”

  Yet by the end of their talk, Hurwitz detected a note of condescension in Ponzi, a bit of cockiness he found less becoming. At one point, Hurwitz mildly challenged Ponzi, expressing doubt that it was possible to turn large-scale profits from postal coupons. Ponzi retorted that Boston police officers who had held similar doubts had grown so confident that they’d become frequent and successful investors. Ponzi then urged Hurwitz to deposit some of his own money, even offering a loan to get the assistant attorney general started in the business of 50 percent profits. Hurwitz declined, telling Ponzi he was investigating, not investing.

  After Ponzi left, the three state officials and the banker agreed that Ponzi’s business certainly sounded plausible, though Albert Hurwitz and Joseph Allen remained skeptical. By contrast, the banker and Abbott, the other assistant attorney general, declared they were satisfied that Ponzi was a legitimate businessman, solvent, and on the level. Abbott was so persuaded that he proposed a bet: If their investigation showed that Ponzi was a fraud, Abbott would buy Hurwitz dinner. If Ponzi lived up to his claims, the meal was on Hurwitz. Unknown to Hurwitz, Abbott expressed his confidence to Ponzi, privately mentioning that he might drop by School Street with some money to invest.

  A heat wave settled over Boston during the days after the State House meeting, but the sweltering temperatures did nothing to thin the ranks of men in suits and women in long dresses who lined up outside 27 School Street. Now that the Securities Exchange Company had passed the million-dollar-a-week mark, the only question seemed to be how long it would take for Ponzi to surpass two million a week.

  Rising along with the mercury was the intensity of the bank commissioner’s investigation. Allen’s staff of bank examiners focused first on the banks where Ponzi maintained large accounts, particularly Tremont Trust and Hanover Trust. The two were also natural targets because in recent weeks Ponzi had often mentioned them as references to potential investors who questioned his solvency.

  Ponzi had never gotten along well with Simon Swig, who ran Tremont Trust as its vice president and had installed his son as treasurer. Swig looked like a dour European aristocrat, with a thick mustache and a dimple in his square chin. He lived like one, too, in a palatial home on Humboldt Avenue in the city’s Roxbury section, with a live-in Irish maid and a chauffeur. Since arriving in Boston from Lithuania as a teenager in 1880, the fifty-four-year-old Swig had risen from a peddler to a wealthy bank officer. Along the way, he had alienated a large portion of the financial establishment by persuading state lawmakers to pass legislation that helped midsized banks like his compete with the entrenched financial powerhouses run by the Brahmins. At the same time, Swig had tended to ignore laws he did not like, for years making loans that were improper or downright illegal, running misleading advertisements in the newspapers, and issuing more than a half million dollars in loans, many of them dubious, to his own family. Swig’s house was a prime example. In December 1919, he took a twenty-five-thousand-dollar mortgage from Tremont, repaid ten thousand dollars from the bank’s own profits, and then never bothered to make payments on the remaining balance.

  Ponzi thought Swig looked down on him because he was Italian, just as the Brahmins snubbed Swig because he was Jewish. “He was of the opinion that a Jew was better than a wop,” Ponzi said. “I could not agree with him. In my own mind, nothing could be better than a wop. Except two wops.” Some class-conscious Bostonians made no such distinctions, lumping Italians and Jews together as untouchables. “Whenever I gave the name of the Tremont Trust Company as a reference to some supercilious investor,” Ponzi said, “I could read a message on his countenance: ‘Birds of a feather.’ And I would wince.”

  Swig winced, too, when state bank examiners inquired about his relationship with Ponzi, who, by mid-July, had more than $400,000 on deposit at Tremont Trust. Always dubious about Ponzi’s claims, and increasingly uncomfortable with the added scrutiny from regulators, Swig wrote Ponzi a caustic letter on July 21. “If what we have heard about your plan of business is true, then certainly we do not care to accept your deposits, no matter how large they may be,” Swig wrote. “And even if reports are untrue, we do not care to accept your future deposits because you have taken unfair advantage in using our name as you have. We therefore advise you that henceforth your deposits will not be accepted, and you will favor us by closing your account.” Ponzi did as Swig asked, but he refused to take a Tremont bank check. He demanded the money in cash, just to give Swig a taste of his own medicine. Though Ponzi’s account was closed, another $185,000 of his money remained at Tremont Trust, stuck there by the attachment filed by Daniels with his lawsuit.

  With Ponzi the owner of so much stock in Hanover Trust, that bank’s officers could not follow Swig’s example even if they had wanted to. But Hanover president Henry Chmielinski and treasurer William McNary, a former congressman who served as chairman of the bank’s board of directors, felt it essential to take precautions. Only a month earlier, Ponzi had threatened to withdraw his deposits immediately, a potentially catastrophic event, and now the risk was far greater. Lately, Ponzi’s account at Hanover Trust had been rapidly rising, falling, and rising again. It fell when investors in the Securities Exchange Company redeemed their Ponzi notes at 27 School Street, then walked to the bank with checks written against Ponzi’s Hanover Trust account. It rose again when Ponzi deposited piles of cash from his latest depositors. The cycle took place almost daily. But Hanover Trust officials recognized that if Ponzi’s income were interrupted, the danger existed that withdrawals would greatly exceed deposits, and Ponzi’s account would be hugely overdrawn. Unless his account were quickly replenished, Hanover Trust would likely collapse, putting the bank’s officers and depositors at risk of ruin.

  On July 22, with bank examiners breathing down their necks, Chmielinski and McNary insisted that Ponzi provide Hanover with enough security to hold the regulators at bay and guard the bank against the roller-coaster shifts in his account. Ponzi agreed to put $1.5 million in a thirty-day certificate of deposit, enough to withstand any anticipated run of withdrawals on his account. Although it satisfied the bankers, Ponzi realized it put him in a tight spot, tying up a large amount of cash for a minimum of thirty days at the same time the lawsuit by Daniels had frozen some of his other bank accounts. It was more impetus for him to hasten his plan to get out of the faux-coupon business and into something more tangible and sustainable.

  Ponzi took the first step on July 23 by hiring publicity man William McMasters, a former Boston Post reporter who had come recommended by Ponzi’s lawyer, Frank Leveroni. McMasters had earned his stripes by handling publicity for the mayoral campaigns of John “Honey Fitz” Fitzgerald and James Michael Curley, as well as the 1918 governor’s race for Calvin Coolidge. McMasters’s first job for Ponzi was to promote the financier’s dream of becoming a banking magnate, the next J. P. Morgan. At a starting salary of a h
undred dollars a week—fifty less than he had asked for—McMasters’s first move was to place advertisements promoting Ponzi’s contest to increase business at Hanover Trust and his idea to launch a string of banks that would share profits with depositors.

  But Ponzi, and by extension McMasters, was quickly swept up in more urgent business. That same day, a Boston Post reporter dropped by to follow up on the story about Daniels’s lawsuit. He spent the day at 27 School Street, and then Ponzi invited him home to Lexington. The remarkable result appeared in the paper the next day, July 24, 1920:

  DOUBLES THE MONEY WITHIN THREE MONTHS

  50 Per Cent Interest Paid in 45 Days by Ponzi—Has Thousands of Investors

  Deals in International Coupons Taking Advantage of Low Rates of Exchange

  A proposition fathered by Charles Ponzi, as head of the Securities Exchange Company at 27 School Street, where one may get 50 per cent in 45 days, 100 percent in 90 days, on any amount invested, is causing interest throughout Boston.

  Yesterday his offices were crowded with people trying to loan him money on his personal note.

  The proposition has been in operation for nine or ten months, rolling up great wealth for the man behind it and rolling up much money for the thousands of men and women who are tumbling over themselves to entrust him with their money on no other security than his personal note, and the authorities have not been able to discover a single illegal thing about it.

  Ponzi, starting last October or November with hardly a “shoestring,” so to speak, is today rated as worth $8,500,000—purchaser of business blocks, trust companies, estates, and motor cars.

  His investors—and they run the gamut of society, rich men and women, poor men and women, unknown and prominent—have seen their money doubled, trebled, quadrupled.

  The story went on merrily from there, liberally and generously quoting Ponzi recounting the Horatio Alger version of his life, describing the vague outlines and enormous success of his business, marveling at his Lexington home, and detailing the acquiescence to date of federal, state, and local prosecutors. Unaware of the bank commissioner’s interest, the Post made no mention of Joseph C. Allen.

  Everything in Ponzi’s life changed the moment the first newsboy tucked a stack of fresh-printed papers under his arm, stepped onto Washington Street, and yelled with his Boston accent, “Post heah!”

  PART THREE

  Bank Commissioner Joseph C. Allen

  The Boston Globe

  Attorney General J. Weston Allen

  The Boston Globe

  Financial journalist Clarence Barron

  The Boston Globe

  United States District Attorney Daniel J. Gallagher

  The Boston Globe

  Suffolk County District Attorney Joseph Pelletier

  The Boston Globe

  CHAPTER TWELVE

  “MONEY MADNESS”

  When the crowd drawn to 27 School Street by the Post story had gone home, Ponzi returned to Lexington to share the news of the day with Rose. There was plenty to tell. The phone was ringing ceaselessly with well-wishers and would-be investors hoping for a moment of the great man’s time.

  Meanwhile, the reporters and editors at the Post were working well into the night preparing a story to run the next day, Sunday, July 25. The magnitude of what was happening around the corner from the newspaper’s offices had caught Grozier, Dunn, and their reporters off guard. For a journalist, the only things worse than being surprised are being scooped and being wrong, and the Post might soon experience both. The city’s other papers might be preparing follow-up stories of their own, and one might develop information significant enough about Ponzi’s operations, negative or positive, to wrest front-runner status from the Post. The clear goal for Grozier and Dunn was to remain in control of the Ponzi story without overreaching.

  To strike that balance, the story in the Boston Sunday Post was built around a straightforward account of the excitement at the Securities Exchange Company on Saturday. It recounted the opening of the rival business down the hall that claimed to match Ponzi’s rate of return; the ballyhoo man trying to lure away Ponzi’s customers; Ponzi’s anger at his competitors; and the excitement of his investors. The headline, in the lead position on the top right side of the page, was more than twice the size of the one on Saturday:

  PONZI HAS A RIVAL NEXT DOOR TO HIM

  The headline spanned five of the eight columns across the top of page 1 and was accompanied by five photographs: a portrait of Rose and Imelde Ponzi outside the Lexington home on page 1, and on an inside page photos of the home itself, Ponzi alighting from his Locomobile with an armed guard, a “head shot” of Ponzi, and the scene at 27 School Street.

  Beyond the report of what had happened a day earlier, from the crowds to Ponzi’s summoning of police against the rival Old Colony Foreign Exchange Company, the Sunday story dripped with skepticism. Ominously for Ponzi, it began with the report that a federal investigation “is being pushed with vigor.” The story added no specifics but breathlessly told readers that Boston’s federal prosecutor, United States District Attorney Daniel J. Gallagher, “has set in motion all the government machinery to learn whether Ponzi is telling the truth when he asserts that he is able to pay such enormous profits by juggling of International Reply Coupons in Europe.”

  But if the Post wanted its readers to doubt claims that seemed to be too good to be true, the paper was sending a very mixed message. A few pages past the report on Ponzi’s business appeared the headline TO MAKE OLD WOMEN YOUNG. The story described the amazing work of Dr. Serge Veronoff and his wife and assistant, Madame Evelyn Veronoff, who had recently arrived in America from Paris to promote the good doctor’s success in implanting young chimpanzee glands in aged humans “to make them vigorous and hale again.” The reporter, Marguerite Mooers Marshall, guilelessly asked, “Will women be made young in the sense of recovering the beauty and charm of youth, of banishing their wrinkles and gray hair?” Madame Veronoff answered: “It is not inconceivable that fresh, lovely facial tissues should take the place of those that are worn and lined—that even the color of the hair should be changed.” Marshall was sold. “It will be a wonderful thing for women!” she wrote.

  Meanwhile, the other Boston papers were silent about Ponzi on Sunday. The closest any of them came was an item buried in the Boston Sunday Herald about the finances of Lawrence millworkers that blandly mentioned how some put their money “in various other forms of ‘get-rich-quick’ speculation that promises a maximum of return in a minimum of days.” The Herald, the Globe, and Boston’s other papers were paying more attention to an attempt to raise bail for Bartolomeo Vanzetti and the sensational murder trial of dashing undertaker Byron M. Pettibone, accused of poisoning his wife with strychnine so that he could marry a beautiful nurse.

  Even though Ponzi remained overlooked by the other papers, the combined effect of back-to-back page 1 stories in the Post was to instantly make him the most talked-about, sought-after man in New England. People began calling Ponzi “a wizard of finance.” Like most overnight sensations, he had spent decades laying the groundwork for his triumph, and now he wanted to milk it for all it was worth. He would get no rest this Sunday, and that was fine with him.

  The telephone began ringing at daybreak. Western Union delivery boys—“Telegram for Mr. Ponzi!”—soon followed. Ponzi basked in the attention: “Every one of them anxious to get on the right side of me. Because I was a multimillionaire. I received more congratulations than a president-elect!” The Post photo of Ponzi’s house was accompanied by a caption placing it on Slocum Road, so the quiet lane became a destination for a steady stream of motorists taking Sunday drives in the country.

  A Post reporter dropped by the house and ran into Ponzi’s lawyer, Judge Frank Leveroni.

  “As a judge of the Juvenile Court,” the reporter asked, “do you think it a proper thing for a concern of that kind to accept loans from fourteen-year-old boys?” It was a clear reference to Frank Thom
as, the errand boy in short pants who had praised Ponzi to a Post reporter a day earlier on his way to invest ten dollars.

  “Mr. Ponzi,” Leveroni replied, “has given me assurance that his promises to pay are good. I believe him, and on that score I consider it perfectly proper for him to accept loans tendered by anyone.”

  Two men came to the house with a plea: “Will you pose for us?” They were movie men certain that the public would clamor to see newsreel footage of the elegant financier, his family, and their gracious home. Ponzi was only too happy to oblige. He, Rose, and his mother, dressed in their Sunday best, ambled back and forth in front of the house while the cameraman shot several hundred feet of film.

  Out of view of the camera, Ponzi and Leveroni strategized on how best to respond to the threat posed by Ponzi’s imitator, the Old Colony Foreign Exchange Company. Stealing Ponzi’s customers by opening an office down the hall at 27 School Street was bad enough, but Ponzi’s real fear was that his rival would bring additional heat down upon him just as he was racing to go legitimate. And if government officials took a hard look at the men behind Old Colony, “none of them had either the courage or the ability to hold their own in a match of wits. They would have been exposed in no time.” Ponzi could not tell Leveroni or anyone else how he knew, but he was certain the outfit was a rob-Peter-to-pay-Paul scam. That meant Old Colony “constituted for me a greater menace than all of the government agencies put together.”

  To himself, Ponzi rationalized the difference between his Securities Exchange Company and copycat upstarts: “Perhaps my activities were not entirely within the law,” he allowed. “But my intent was honest. I was in a critical position and I had fallen into it without any intention to do wrong. Now that I was in it, I was trying my hardest to pull myself out of it, without hurting my investors. The means I was resorting to, in order to swim out of the hole, might not have been sound and might not have been entirely legitimate. But I felt that the end justified the means, and the end, my purpose, was not dishonest.”