Money & Finance › Fraud, scams & enforcement › Ponzi schemes: paying old investors with new money
Charles Ponzi's postal coupon scheme (1920)
1920· Fraud or scheme
Fact, law or dataA rule, statute, definition or measured number.
In 1920 Boston, Charles Ponzi promised 50% returns in 45 days from postal-coupon trading and paid early investors with later investors' money.
See it on the Money & Finance map →How it works
International reply coupons, bought at a post office in one country, could be swapped for stamps in another. After World War I, a coupon bought cheaply in Italy redeemed for more in US stamps. Ponzi claimed to trade them at scale but did almost none; there was no practical way to turn stamps back into cash. He paid earlier investors from new deposits, raising an estimated $15 million (estimates vary) from roughly 40,000 people in about eight months.
Why it matters
His name became the label for every scheme that pays old investors with new money, and the case showed how fast unverified high returns spread by word of mouth.
Facts, rules and data
Federal and Massachusetts court records, auditors' reports on his firm, and the Boston Post's investigation, which won the 1921 Pulitzer Prize. He was deported to Italy in 1934 and died poor in Rio de Janeiro in 1949.
Debates and risks
He was not the first: William '520 Percent' Miller ran a similar fund in Brooklyn in 1899. Whether Ponzi ever believed the coupon trade could work is unclear.
Connections (2)
▸Charles Ponzi's postal coupon scheme (1920) gave his name to Ponzi schemes: paying old investors with new moneyFact, law or data
The connection
Paying old investors with new money was not new in 1920, but Ponzi's scale and fame made his name the label. Newspapers called it the Ponzi scheme within months, and regulators and courts have used the term since for any fund whose returns come from later investors.
When and why
Boston, summer 1920, when national newspaper coverage of his collapse made the term common.
How we know
Newspaper archives and the Supreme Court case Cunningham v. Brown (1924), about repayments from Ponzi's estate, still cited in Madoff clawback suits.
Debates and risks
Why his name stuck, rather than earlier operators such as William Miller in 1899, is mostly a matter of timing and publicity.
▸Charles Ponzi's postal coupon scheme (1920) was prosecuted for mail fraud by Fraud enforcers: DOJ, FBI and the FTCFact, law or data
The connection
Ponzi took money and sent investors notes and letters through the mail, so federal prosecutors charged mail fraud, a law used against swindles since 1872. He pleaded guilty and got five years in federal prison, then faced Massachusetts larceny charges.
When and why
Boston, after his firm collapsed in August 1920; guilty plea in federal court in November 1920.
How we know
Federal court records and press coverage; postal inspectors helped build the case.
Debates and risks
Whether earlier action by Massachusetts officials, who began investigating in July 1920, could have saved investors money is debated.