Since You Asked

We've been hearing a lot about the "Ponzi scheme" that Bernie Madoff allegedly ran while he bilked investors of $50 billion. Where did this kind of racket get a name like that? Was there a Ponzi?

— Connor O., Grants Pass

Yes, Connor, there was indeed a Ponzi, and since the 1920s his name has been associated with the type of scam that offers big rewards by paying investors with the funds of those who buy in later. Everything works fine, as long as enough suckers keep throwing in new money.

Ponzi was born in Italy in 1882 and emigrated to America in the early 1900s. He went to Canada and found work, but he was convicted of forgery in 1909 and sent to prison. He returned to the United States in 1910, and quickly ran afoul of immigration authorities for smuggling Italians into the country, a crime that won him two years in prison.

His run as a public figure began in 1919, when he began offering investors 50 percent returns in 90 days. By the spring on 1920 he was being hailed as a financial genius.

Ponzi's investment empire was supposedly based on something called an international postal reply coupon, a document that can be used to send a letter to someone in a foreign country and include the cost of postage for a reply. Ponzi led people to believe he could use these coupons to make money on foreign exchange rates. By the early summer of 1920, he was taking in $1 million a week, and his success was the talk of the Northeast.

In theory it made sense, but financial regulators realized the scheme was too good to be true. There was simply no way there could be enough international mail circulating to justify the amount of money that Ponzi was receiving to invest in postal reply coupons. Federal and state regulators began nosing around his business, and by late July 1920, the federal government announced it would audit Ponzi's books.

He survived several runs on his bank at the end of July, paying off scared investors, but the scheme collapsed in August when bank regulators announced his accounts were overdrawn. By Aug. 13 he was in jail. In November he pleaded guilty to mail fraud charges and was sentenced to five years in federal prison.

He had never become an American citizen, and he was eventually deported to Italy. He took a job with the Italian state airline in Brazil, but when World War II broke out, Brazil sided with the Allies and that job disappeared. He died in poverty in Rio de Janiero in January 1949, 60 years ago last week.

You can read more than you ever wanted to know about Ponzi on a Web site created by Mark Knutson, ( who describes himself as a Minnesota computer programmer who graduated law school but never quite got around to being a lawyer.

Send questions to "Since You Asked," Mail Tribune Newsroom, P.O. Box 1108, Medford, OR 97501; by fax to 541-776-4376; or by e-mail to We're sorry, but the volume of questions received prevents us from answering all of them.

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