ABSTRACT

Financial history is full of Ponzi schemes, where pyramids of investors invest in notes with no or scant underlying assets. The scheme Carlo Ponzi devised in 1919 is today called a “Ponzi Pyramid.” In December, Ponzi initiated an “investment” fund in Boston, establishing his business as The Security Exchange Company. He promised 50 percent interest in 90 days on his notes. Ten thousand initial investors purchased the Ponzi notes. At first, all were redeemed at maturity, and many rolled over. The word got out. New investors beat a path to his door, their cash permitting redemption of his first issues. He had a gimmick that attracted gullible investors, arguing that he could buy international postal reply coupons, then exchange them for US postage stamps of three to four times what he paid. According to Ponzi, the arbitrage opportunity was due to misalignment of postal exchange rates. He claimed to cash in the stamps, thus profiting by up to 400 percent. After fees, he could “plausibly” pay 50 percent semi-annually, yet keep about 200 percent in profits-so he said.