A plaque remaining from the Big Apple Night Club at West 135th Street and Seventh Avenue in Harlem.

Above, a 1934 plaque from the Big Apple Night Club at West 135th Street and Seventh Avenue in Harlem. Discarded as trash in 2006.

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Entry from October 07, 2011
Ponzi Scheme

A “Ponzi scheme” is the method developed by Charles Ponzi (1882-1949), using international reply coupons for postage stamps, to allegedly make money for investors. Ponzi’s method was a pyramid scheme that did not make money, but used money from new investors to pay off old investors. The name “Ponzi scheme” was cited in print on July 29, 1920.

Other pyramid schemes—not involving Charles Ponzi—were called “Ponzi” schemes by at least October 1920 and later in the 1920s.


Wikipedia: Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920. Ponzi did not invent the scheme (for example, Charles Dickens’s 1844 novel The Life and Adventures of Martin Chuzzlewit described such a scheme), but his operation took in so much money that it was the first to become known throughout the United States. Ponzi’s original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors’ money to make payments to earlier investors and himself.

Wikipedia: Charles Ponzi
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy he became known as a swindler in North America for his money making scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term “Ponzi scheme” was coined because of it and the term now refers to scams which pay early investors out of the investments of later investors. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.

Free Merriam-Webster Dictionary
Pon·zi scheme noun \ˈpän-zē-\
Definition of PONZI SCHEME
: an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks
Origin of PONZI SCHEME
Charles Ponzi †1949 American (Ital.-born) swindler
First Known Use: 1973

(Oxford English Dictionary)
Ponzi scheme, n.
Etymology:  < the name of Charles Ponzi (1882–1949), Italian-born criminal, who perpetrated such a fraud in 1919–20 + scheme n.
orig. and chiefly U.S.
A form of fraud in which belief in the success of a non-existent enterprise is fostered by payment of quick returns to first investors using money invested by others; any system which operates on the principle of using the investments of later contributors to pay early contributors.
1920 Lancaster (Ohio) Daily Eagle 20 Aug. 1/6 Dondero‥was arraigned, charged with larceny of $600 on three counts in connection with the Ponzi scheme.
1957 Encycl. Brit. IX. 708/1 The Ponzi Scheme‥. Beginning in Dec. 1919 Ponzi‥produced a scheme involving the purchase of International Postal Reply coupons in countries where the exchange was low, trading them in for postage stamps at their face value in a country where the rate was high, and then selling the stamps at a great profit‥. The slogan of the swindle was 40% in 90 days‥. Actually‥Ponzi made no purchases whatever of International Postal Reply coupons.
1976 National Observer (U.S.) 10 July 8/3 ‘He was operating a Ponzi scheme,’ says Michael Mustokoff, chief of the unit. The first few investors were paid ‘dividends’ out of the money invested by people who came in later, and word spread that the club was raking in the bucks.

29 July 1920, Wisconsin State Journal (Madison, WI), pg. 1, col. 2:
U. S. ACTS TO HALT
HUGE MONEY PROFITS;
HITS PONZI SCHEME
New Rates for Conversion of Foreign Currency An-
nounced After Boston Man Makes Millions;
State Investigation of Business Ordered


Chronicling America
29 July 1920, New York (NY) Tribune, “U.S. to Audit Ponzi’s Books,” pg. 17, col. 1:
A group of men who have been made rich through the Ponzi scheme have organized “The Ponzil Alliance,” and placed their wealth at the disposal of the modern Midas should he need it.

13 August 1920, Baltimore (MD) Sun, pg. 1: 
$15,000,000 PUT IN PONZI SCHEME BY INVESTORS
His Debts Placed At More Than $7,000,000--Out On $35,000 Bail STATE MAY LOSE $125,000 DEPOSIT Capital Of Hanover Trust Company Probably Wiped Out

13 August 1920, Boston (MA) Daily Globe, “Hush of Note Holders to State House,” pg. 2, col. 1:
Members of the Attorney General’s department are studying the law to see whether it would be necessary to prove whether these agents knew the Ponzi scheme to be a fraud or not.
Pg. 2, col. 2:
He said that he had $1650, which he had saved to buy a home, and that he had put it all into Ponzi’s scheme.

10 October 1920, Seattle (WA) Daily Times, Classifieds, pg. 3, col. 2 ad:
NOT A “PONZI SCHEME”
But 50 per cent to 100 per cent profit in very short time; close-in Rainier Boulevard business properties that are genuine.
(James G. Jones Co.—ed.)

11 October 1921, Kansas City (MO) Star, pg. 3:
A “PONZI” SCHEME IN CHICAGO.
Three, Who Promised Big Interest to
Foreigners, Disappear.

CHICAGO, Oct. 11.—Police are searching for Sidney G. Mahrata and two assistants who are alleged to have borrowed $75,000 from foreign born persons, promising high interest rates, but to have disappeared later from the office they had established.

Google News Archive
4 March 1926, Miami (FL) News, pg. 1, col. 3:
PONZI SCHEME
CASE DELAYED

13 August 1926, Daily Kennebec Journal (Kennebec, ME), pg. 5, col. 4:
Testimony of Sing
Sing Trio Reveals
New Ponzi Scheme

New York, Aug. 12.—(AP)—Three men in Sing Sing prison have revealed a scheme whereby they and others are alleged to have built up a $1,486,816 credit from a $3,000 purchase on credit, by means of juggling diamonds and bank accounts.

17 August 1926, Gettysburg (PA) Times, “‘Pig” Speculator Faces Arrest,” pg. 2, col. 5:
But the Postoffice Department concluded that, although it might be true that “pigs is pigs,” the St. Louis pig business was another Ponzi scheme.

Google News Archive
27 February 1935, Milwaukee (WI) Journal, “Believes 52 Per Cent Profit Is Impossible,” pg. 3, col. 3:
The government contends Huckins operated a Ponzi scheme for paying exhorbitant interest.

Google News Archive
11 March 1972, Bryan (OH) Times, “Lowers is declared bankrupt,” pg. 2, col. 5:
Lowers had claimed he was in some type of salvage business. “We found no evidence that Mr. Lowers was engaged in any business other than his scheme of borrowing money and repaying it at high interest rates, commonly called the Ponzi scheme,” said Clair Whitmer, an attorney, at the Wednesday meeting.

Posted by Barry Popik
New York CityBanking/Finance/Insurance • (0) Comments • Friday, October 07, 2011 • Permalink