Ponzi's Scheme (14 page)

Meanwhile, Lucy Meli had begun an index-card system so the company could, for the first time, keep track of the names and addresses of investors, the number of the certificate each was given, the amounts invested, and the due dates of payments. As a courtesy and a confidence builder, she followed up by sending postcards to investors a few days before their notes came due, to let them know the company stood behind its promises. The card file was soon overflowing. In May alone, 1,525 investors placed more than $440,000 in Ponzi's care. They all wanted to see how, as Ponzi put it, “A little dollar could start on a journey across the ocean and return home in six weeks, married and with a couple of kids.”

A
s May drew to a close and his bubble kept expanding, Ponzi faced a decision: Admit defeat and return what money he could; flee with Rose and a small fortune of a few hundred thousand dollars; or plant his feet and keep the ball rolling.

If flight or surrender crossed his mind, Ponzi refused to acknowledge it. His ambition to succeed was blinding, his superficial success intoxicating. “The average man is never satisfied with what he has,” Ponzi reflected. “He does not realize when he is well off. If he has a shirt, he wants two. If he is single, he wants a wife. If he is married, he wants a harem. . . . He is always reaching for the moon and stepping off into space.”

Publicly admitting that he had not been able to perfect the alchemy of coupons for cash would have carried too heavy a cost for him to bear. At the moment, authorities were only vaguely focused on him. But the large number of police who were Ponzi investors would surely lead to swift and severe punishment the moment they learned that some or all of their money was gone. He would suffer, too, a crushing loss of faith among his in-laws and perhaps even his wife. The Gneccos and the Donderos had poured their life savings and inheritances into the Securities Exchange Company—the depositor lists included eight Gneccos and ten Donderos. After the recent losses of Rose's parents and the failure of Gnecco Brothers, it looked as though Ponzi would be their deliverance. He took what might be viewed as a tentative step toward flight by making plans to sail with Rose to Italy on July 1 to visit his mother, whom he had not seen for seventeen years. But there was little chance he would not return, if he took the trip at all.

“What was I going to do? Proclaim my insolvency and face prosecution, or keep up the bluff and trust to luck?” he wondered rhetorically. “I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all of my creditors in full.” Privately, he abandoned the self-sustaining fiction that postal reply coupons might yield millions and accepted the fact that he was redeeming his certificates with money derived from new investors. Robbing Peter to pay Paul. “Not only couldn't I pay the promised 50 percent return,” he lamented, “but I couldn't even refund the principal at more than seventy-five cents on the dollar.”

He consoled himself with a story of a spectacular failure by a fellow Italian that had turned into unparalleled success: “Four centuries before, Columbus had started out from Spain on what he thought was the western route to Asia and the East Indies. On the way over he had discovered America. He didn't know it was there, and nobody else knew it, except the Indians. Yet, he ran smack right into it.” With characteristic self-aggrandizement, Ponzi assessed his attributes—determination, luck, and unlimited confidence in his ability to exploit both—and concluded that he was a spiritual heir to Columbus.

O
nce he decided to stick it out, Ponzi began making the most of his newfound status. A rented apartment in a two-family house in Somerville was no place for a budding Rockefeller and his lovely wife. So Ponzi began searching for a grand house to buy, ideally in a moneyed suburb like the society enclave of Cambridge or the bankers' colony of Winchester. He had already bought himself a car, a cream-colored Hudson coupe, so the commute would be no bother. But he and Rose disagreed about what kind of house to buy. He wanted a mansion, but she wanted a home, not “a big place with great rooms and secret passages.”

Eventually they were steered to Lexington, a dozen miles northwest as the crow flies from 27 School Street. The town prided itself on the two-and-a-half-acre Lexington Battle Green, where the war for independence began with the “shot heard round the world” on April 19, 1775. Since then, Lexington had matured into understated affluence, a home for literary luminaries and comfortable business owners, dotted with stately homes on swaths of land.

Their focus swiftly became a vacant house on Slocum Road, a half mile from the town center. Built seven years earlier, the yellow stucco house had little in common with the white clapboard Colonials popular in town. Situated close to the quiet street, impressive without being overwhelming, the house featured a columned portico and wooden porch at the front entrance, flanked on one side by a round sunroom and on the other by an archway leading to a carport, beyond which was a quaint carriage house. Above the portico was a balcony with a low railing and a flagpole poking out like a ship's prow. Dor-mers sat atop the slate roof, and the windows in the sunroom and the second-floor bedrooms were shielded by striped awnings that snapped and flapped in the spring breeze. The two-acre grounds had grown unruly from lack of care, but through an arbor to the left of the house were a tennis court and a stone fountain in fine shape.

When he first saw the house, Ponzi was unimpressed. “Oh, this won't do,” he sniffed, preferring something more in keeping with his new status. But Rose was smitten. It had the makings of a real home, not a cloistered mansion. Ponzi relented and began negotiating the sale. The home had been built by Richard Engstrom and his wife, Anne, Swedish immigrants who had run into money troubles and had moved out the previous October. The Engstroms had spent between forty and fifty thousand dollars on the house, but the best offer they had received to date was twenty-five thousand, which they had flatly rejected. The Engstroms had never heard of Ponzi—not surprising, considering the absence of publicity for his business and the lack of branches in affluent towns like Lexington. But their lawyer, J. C. Thompson, told the Engstroms that the new bidder for the house was a good prospect who had made “barrels of money.”

Ponzi craved acceptance as much as he loved making deals. He tried to do both with the purchase of the house. He twice invited Richard Engstrom and his lawyer to dinner at the Copley Plaza Hotel and the Boston City Club. Engstrom was not interested. Rebuffed, Ponzi began playing hardball, offering twenty-five thousand dollars, the same amount Engstrom had already rejected. When Engstrom said no, Ponzi raised his offer to twenty-nine thousand. Knowing how much Rose wanted the place, he allowed himself to be pushed up to thirty-nine thousand, but on one condition: the seller would have to become an investor in the Securities Exchange Company.

When they passed the papers on May 28, Ponzi paid for the house with nine thousand dollars in cash plus an orange-colored Securities Exchange Company certificate for twenty thousand dollars, payable as thirty thousand dollars on July 12. Engstrom's lawyer was worried. For security, he persuaded Ponzi to put up a thirty-thousand-dollar certificate of deposit at the Tremont Trust Company, payable to Engstrom in case of a problem with the Securities Exchange Company certificate.

The Ponzis moved into the Copley Plaza for several weeks while Rose and a decorator went gaily and expensively to work making the house a showplace. Visitors walking up the front path might see gardener Cornelius Palmer trimming the hedges and turning the lawn into an expanse of green velvet. Inside, Palmer's wife, Teresa, the Ponzi family cook, would be busily preparing Italian delicacies. A tall, proper butler would open the heavy mahogany door, leading the way into a large foyer with hardwood floors covered by thick Persian and Oriental rugs. To the left was a long living room with damask-covered walls in old blue, a grand piano at one end and a bearskin rug laid out before a marble fireplace at the other. In the center of the room sat a mahogany table, hand-carved in Italy, surrounded by chairs upholstered in velour and damask. In a corner of the room was a tiger-skin rug beneath a Victrola, on which the Ponzis would play “Dardanella,” the hit song whose lyrics Ponzi might have sung to Rose: “There'll be one girl in my harem, when you're mine . . . my star of love divine.” The room's only wall hanging was the Mona Lisa–like portrait of a teenage Rose.

Beyond the grand piano was the entrance to the light-filled sun parlor, a circular room filled with wicker chairs and a round wicker table, with three wire birdcages for decoration. On the other side of the foyer was another small parlor leading to the large dining room, with light gray walls and a walnut table and chairs upholstered in black cloth. At the center of the table stood an impressive cut-glass vase filled with fresh flowers. A butler's pantry at the far end of the entrance hall led to a modern kitchen, which Ponzi had equipped with gas. That alone had cost five thousand dollars, and Rose's purchases at Paine Furniture set him back another fifteen thousand.

Halfway up a curving staircase an alcove housed a tall French clock. At the top of the stairs was a sitting area with a window seat looking out to the street. Four comfortable bedrooms were filled with fine enamel furniture and beds covered by hand-embroidered bedspreads. One room was outfitted with a desk for when Ponzi brought work home at night. Two more bedrooms on the third floor were servants' quarters. It was not as grand as Curley's mansion, but it was close enough. The Ponzi family had arrived.

T
he Slocum Road house provided Ponzi with a respite from the cataracts of cash and the emergence of new threats raining down on him at 27 School Street.

The money spigot opened wider starting on June 9, when Ponzi received his first notice of sorts in a Boston newspaper. The story on the front page of the
Boston Traveler
was headlined
DEAR OLD
‘
GET RICH QUICK
'
POPS OUT OF POSTAL GUIDE.

“You pay us your money, any amount does the trick,” the story quoted an unidentified “salesman” as saying. The paper said he appeared at the door of the office with a postal guide under his arm and proceeded with a quick explanation of International Reply Coupons and monetary exchange rates, then outlined how a globe-hopping agent could buy coupons in Romania, exchange them in Switzerland, and capitalize further on the strength of the United States dollar to spin profits from stamps. Then, printed in all capital letters, was the salesman's claim: “
WE GUARANTEE YOU
50
PERCENT PROFIT IN
45
DAYS!
”

The
Traveler
reporter inquired about the company to a ranking postal inspector, whose answers further excited potential investors. “We, of course, investigated the thing—for months—but there seems to be no violation of law here,” the inspector said. “We haven't figured out how they make their enormous profit, but they seem confident of their ability to do so. And I guess they can keep on so far as the law goes.”

Overall, the story provided a vague but fair representation of what Ponzi and the Securities Exchange Company promised. But in a remarkable feat of flawed journalism, the story did not name Ponzi or his business, and it failed to tell readers where they might go to share in the good fortune. Still, enough Bostonians tracked Ponzi's agents down to swell his income exponentially.

On the other side of the ledger, Cassullo remained as constant a pain as Ponzi's festering ulcer. Ponzi's purchase of a new home only whetted his ex-cellmate's greed. Ponzi mollified Cassullo, at least momentarily, by buying him and his wife, Theodoria, a fine home in the coastal town of Winthrop, directly opposite the Winthrop Arms Hotel. Ponzi paid fourteen thousand dollars for the newly renovated Dutch Colonial, whose best feature was a glassed-in sun parlor and sleeping porch with unobstructed views of the ocean. Still, Cassullo was not satisfied, and he soon took to stealing cash from the Securities Exchange Company, one time stuffing a thousand-dollar bill into his pocket in front of John A. Dondero and declaring, “Charge it to Ponzi.” Dondero could not prove it, but he suspected that this sort of thing happened often. He knew nothing of Ponzi's past relationship with Cassullo, so he could not know why Ponzi was so tolerant.

Ponzi chalked up Cassullo's extortionate demands as the cost of doing business, and he was too busy to worry about a few thousand dollars when millions were at stake. With help from word-of-mouth testimonials by satisfied customers and the
Boston Traveler
story, June was on track to be nearly five times better than the previous months combined. One of the biggest sums of the month came from Daniel Desmond, whose investment of ten thousand dollars was made all the more sweet for Ponzi by the fact that the fifty-year-old Desmond was the treasurer of the Lawrence Trust Company. Ponzi was so eager to gild his books with such a large investment from a banker that he made a personal loan to Desmond in the full amount. But Desmond's investment was dwarfed by one made by Louis and Charlotte Blass, who returned to Ponzi's office when their twenty-thousand-dollar note reached maturity on June 24. Rather than collect the thirty thousand dollars they were due, the Blasses spun the wheel of fortune again, betting it all on a new note that promised to yield forty-five thousand dollars in forty-five days.

Ponzi's loyal bookkeeper, Lucy Meli, in their School Street office.

The Boston Globe

C
HAPTER
T
EN

“I
NEVER BLUFF.
”

W
ith his bank accounts bulging and no postal coupons to buy, Ponzi went on a shopping spree. He resolved that the only way to become a latter-day Columbus was to sail on, all sheets to the wind, until he somehow bumped into a continent of profits. His investments fell into four categories: businesses that were already profitable, real estate, unsecured loans to friends, and, most significantly, attempts to gain control of one or more banks. Then there were a few personal items for himself and Rose.

As summer approached, Ponzi spent sixty-one thousand dollars to buy a thousand shares of the Napoli Macaroni Manufacturing Com-pany, joking that he did so to make sure he “wouldn't run out of spaghetti at home.” He wrote a check for thirty thousand dollars to buy three hundred shares and a controlling interest in the C & R Construction Company. Then one day he wandered past Faneuil Hall and into the offices of his old employer the J. R. Poole Company. After catching up with his former office mates, Ponzi walked unannounced into John Poole's private office for a meeting that Ponzi never grew tired of recounting.

“Have a seat, Charlie,” Poole said. “They tell me that you're in business. Dealing in some sort of foreign securities.”

“That's right,” Ponzi answered.

“How are you making out?” his former boss asked.

“Fairly good,” he replied. “That's what brought me here. To get your advice. I have a few dollars I would like to invest.”

“Why don't you buy a few shares of my preferred stock? It pays 7 percent.”

“I would rather have some common.”

“I'll tell you what I'll do,” Poole said. “I will give you twenty-five shares of each.”

“Is that all?” Ponzi asked coyly. “It hardly seems enough to bother with it.”

Poole wondered if his former clerk was joking. “How much more stock do you want?” he asked.

“I'll take all you have,” Ponzi said casually.

Poole laughed, and then, like a teacher addressing a not terribly bright child, told Ponzi: “Listen, Charlie, it takes a lot of money to buy this company.”

“I figured it would,” Ponzi said. “That's why I waited this long to call on you. I was afraid I wouldn't have enough.”

“And you may still be short of the mark,” Poole said, beginning to wonder.

They dickered a bit over the price Ponzi would have to pay for a directorship, and Ponzi brought out his checkbook.

“I didn't think you meant it,” Poole said.

“J.R., I never bluff.”

Over the next few days Ponzi paid Poole $240,000 for control of the company. He gave Poole five loans totaling $155,000 to launch a major expansion that included opening branches in several foreign countries. In addition to the import-export business, Poole's holdings included a sardine factory in Maine and a meatpacking plant in Kansas City, which Ponzi thought went nicely with the Napoli Macaroni Manufacturing Company. All he needed was some contraband Italian red wine and he could make a meal from his own holdings.

Next he expanded his real estate holdings. He bought a small tenement house in the city's West End that cost him six thousand dollars. He issued loans secured by mortgages ranging from fifteen hundred dollars to thirty-five thousand dollars on homes in East Boston, Brookline, and the city's Roslindale section.

Ponzi also made a series of unsecured loans, given mostly under the same terms as the one he had given Daniel Desmond, the treasurer of the Lawrence Trust Company—money provided to friends or acquaintances to help them buy certificates from the Securities Exchange Company. The biggest was for forty thousand dollars to Charles Pizzi, the young Hanover Trust banker who had landed Ponzi's deposits. The smallest, for five hundred dollars, went to James McTiernan, police chief in the suburb of Sharon. Ponzi did not like McTiernan, whom he thought had “more gall than a brass monkey.” But with postal inspectors still dropping by on a regular basis, Ponzi wanted as many friends with badges as possible.

W
hen Ponzi turned his attention to the banks, he started by spreading his money around. He bought fifty shares of Fidelity Trust for six thousand dollars, five shares of Tremont Trust for five hundred dollars, and one hundred shares of Old South Trust for $12,500 dollars. But little pieces of large institutions did him no good. He certainly was not going to earn his way out of the hole he was in by collecting dividend checks on his relatively small investments. A plan began to form in his mind. If he could gain control of a bank, he might weather any storms that came his way. Given enough time, the plan might allow him to transform his unsustainable business into something more permanently profitable.

He set his sights on Hanover Trust, a bank with about $5 million in assets, small enough for him to have a shot at taking over, yet large enough for it to be worth his while. An added incentive was the chance to settle an old score. Ponzi had not forgotten that when he'd been in dire straits the previous summer and had needed two thousand dollars to keep alive his
Trader's Guide
idea, he'd been shown the door by the bank's president, Henry Chmielinski.

Ponzi began putting his plan into motion with a two-pronged strategy of buying stock and increasing his deposits. On the stock side, he first bought small blocks of shares, seventy-five in all—not enough to gain control but enough for a foothold. At the same time, he endeared himself to several of the bank's Italian stockholders the way he knew best: financially. The largest mortgage loan Ponzi made was to one of those stockholders, Enrico DiPietro, who turned around and invested in the Securities Exchange Company.

By making friends with other Hanover Trust stockholders, Ponzi might eventually control the votes that came with the shares they owned. By Ponzi's count, between his own seventy-five shares and the stock owned by his friends, he controlled about six hundred of the two thousand shares of Hanover Trust stock. At the beginning of June, the bank intended to issue another two thousand shares. If Ponzi could buy fifteen hundred, he would have about twenty-one hundred, a majority of the stock.

At the same time that he was eyeing Hanover Trust stock, Ponzi was depositing more and more money into the bank. Though he kept accounts at more than a dozen other banks as well, he focused his money on Hanover—eventually keeping $2.7 million there, making him easily the bank's biggest depositor. Ponzi knew that the larger his deposits, the greater his leverage over the bank's officers. A bank with $5 million in assets might have access to only one-tenth that amount at any given time. The reason is that money accepted as deposits—which are liabilities on a bank's books because the bank has to pay interest on them and the principal on demand—is not kept in vaults but is put to work making money as loans. Banking in 1920 was not a lot more complicated than that. Some bankers joked about how easy it was, describing their work as governed by the “rule of threes”: Pay 3 percent interest on deposits, charge 6 percent interest on loans, pocket the 3 percent difference as profit, and be on the golf course by 3:00
P.M.
But that apple cart would be upset, perhaps irreparably, if a large depositor like Ponzi suddenly closed his account and withdrew his money without advance notice. At the moment, none of that was on anyone's mind at Hanover Trust. Chmielinski and the bank's other officers—none of whom remembered the poverty-stricken Ponzi who had come to them barely a year earlier—were plainly thrilled to have such a prosperous new depositor. And Ponzi knew it.

One afternoon in early June, he walked around the corner from his office and into Hanover Trust's main branch on Washington Street. This time, Ponzi was ushered into Chmielinski's private office, where bank officials buzzed around him like yellow jackets at a honeysuckle shrub. Chmielinski was a bull of a man, with a large head mounted on a thick neck. At thirty-seven he was almost the same age as Ponzi but twice his size. Chmielinski had emigrated from Poland in 1898. He'd run a Polish-language newspaper, the
Daily Courier,
before getting started in the banking business several years earlier by his brother, a Catholic priest. Father John Chmielinski headed the Polish Industrial Association, a combination bank, steamship agency, and all-purpose service center for Boston's Poles in the North End.

With little preamble, Ponzi promptly offered to buy all two thousand shares of the bank's soon-to-be issued stock. As eager as they were to please, the Hanover Trust officials recognized the danger.

“We cannot do that,” said one, “because we would be selling you the control of the bank.”

“That's just what I want,” said Ponzi.

“We are sorry, but we cannot consider anything like that.”

They went back and forth awhile, but neither side would budge. Ponzi had expected as much, so he played his trump card.

“It seems to me that our differences cannot be bridged,” Ponzi said. “Let's drop the subject. Keep your bank and I'll look for another one.” He slid his checkbook out from his jacket pocket. “Can you tell me what my balance is today?”

Blood drained from the bankers' faces. Fearing the sudden loss of Ponzi's account and the havoc it would play with their books, the bankers hastily offered a compromise.

“We will sell you one thousand shares of the new stock,” one said.

“Nothing doing,” answered Ponzi. With some more prodding, he got the bank's officers to acknowledge what he already knew: Collectively, they controlled roughly fourteen hundred shares. If the votes attached to those shares were added to the votes of the Italian shareholders, who had until then always supported the bank's officers, the current Hanover Trust regime would continue to control a majority. Thinking their reign was safe, the bank officers made another proposal: “We will sell you fifteen hundred shares.” They also agreed to make him a director of the bank, in the belief that he could do no harm. But Chmielinski was unaware that Ponzi had already courted the Italian stockholders. With fifteen hundred shares of his own, Ponzi would effectively control the majority he needed.

“Fine,” said Ponzi, swallowing his excitement to avoid tipping his hand. “I'll take the fifteen hundred shares.”

At the bank's annual meeting of stockholders on June 8, Ponzi was elected a director of Hanover Trust. The next day, at a meeting of the directors, he won election to the bank's powerful executive committee. A week later, Ponzi paid $187,500 for fifteen hundred shares of the bank's newly issued stock. The Hanover Trust Company, which less than a year earlier had denied him a loan for two thousand dollars, had effectively become the Bank of Charles Ponzi.

A
fter so many years of scraping by, Ponzi found he liked the feeling of money passing through his manicured fingers in exchange for a bauble or a building. The more he bought, the more he wanted to buy. As Bostonians became enmeshed in the mania of smashing piggy banks to invest in postal coupons, Ponzi became caught up in the mania of spending their money and making himself the man he had always dreamed of becoming.

He imagined himself a latter-day Count of Monte Cristo, reveling in the parallels he found between his life and the fictional experiences of Edmond Dantès, the title character in Alexandre Dumas's classic. After fourteen years of false imprisonment, Dantès escaped and found a hidden treasure. He appeared mysteriously to benefit the good, wreak vengeance on his betrayers, and expose the ills of society. In Ponzi's version, his fourteen-year ordeal spanned the difficult period from his 1903 immigration to his 1917 return to Boston. It included his two prison terms, both of which he considered as unjust as the trumped-up treason sentence suffered by Dantès. But now, if everything went as planned, he envisioned borrowing a page from Dumas's book. He would use his money, his bank, his businesses, and his savoir faire to upset Boston's caste system.

The money itself, he averred, was secondary to what it could do. Ponzi declared that he wanted to “test its power. To derive from it the thrill incidental to the accomplishment of things called impossible.”

On the other hand, Ponzi's favorite phrase became “Wrap it up, please. I'll take it.” He enjoyed saying it regardless of whether the item was a box of cigars or a building. He grew disappointed if a day passed without a big purchase, and he was feeling that way in mid-June when a car salesman dropped by the School Street office.

“I have a car,” Ponzi told him, testing his visitor's salesmanship.

“A good car?” the man asked with a hint of sarcasm.

“What do you think? Do you think I drive around in a wheelbarrow?”