A Crime Story

Friday, March 11, 2011

In part because my Dad was a cop and in part because such stories illustrate that reality is on the side of the good guys, I enjoy accounts detailing how notorious criminals are eventually caught. That said, it may come as a surprise to learn that I was unfamiliar with how Charles Ponzi, who lends his name to a type of fraudulent investment scheme, was finally exposed.

I ran across a brief account of Ponzi and his scheme recently at Mental Floss and laughed out loud when I read about how a last-ditch effort of his to maintain credibility with "investors" backfired.

Things were starting to look less rosy for the scammer, though. Although he'd largely placated his investors after Barron's report [Yes. That Barron --ed], Ponzi must have realized his window of opportunity was closing. He hired a publicist, William McMasters, but the PR man saw through Ponzi's lies and renounced his client in the press. James Walsh reprints part of McMasters' slam of Ponzi in his book, You Can't Cheat An Honest Man. Of Ponzi, McMasters said, "The man is a financial idiot. He can hardly add... He sits with his feet on the desk smoking expensive cigars in a diamond holder and talking complete gibberish about postal coupons." [emphasis in original, minor format edits]
The gibberish -- which a New York Times blogger incorrectly implies is the essence of the scheme -- was about a perfectly legal (but highly impractical -- search "tape" and "overhead" here) arbitrage scheme Ponzi used to dupe people into handing over their money. Interestingly enough, some research and a little simple arithmetic could have shown anyone that this scheme was not the source of Ponzi's huge returns because it could not have been:
While [Wall Street Journal owner Clarence] Barron conceded that there probably was a way for a person to make a small amount of quick cash on the postal reply coupon scheme, he figured that Ponzi would have to be moving 160 million coupons around to raise the cash he needed to support the business. Since there were only 27,000 postal reply coupons circulating in the world, Ponzi's story didn't check out.
Indeed, Ponzi himself practically offered a public confession, via his actions, to the press once he started becoming famous:
... Ponzi told newspapers he invested his own cash in real estate, stocks, and bonds like any normal investor. Barron pointed out the obvious question here: if Ponzi had this failsafe scheme in which he could make a 50% profit, why was he putting his own money into plain old investment instruments that would give him (maybe) a 5% return? [emphasis in original]
As mentioned above, a 2008 book about Ponzi is titled You Can't Cheat an Honest Man. I am otherwise unfamiliar with the book and exactly why its author chose its title, but it certainly sounds apt: It is plain to me that many of Ponzi's victims could have spared themselves simply by looking into whether and how such an arbitrage scheme could be put into practice on the scale needed to provide a return on a large investment. (Or, failing that, they could have refrained from handing over large amounts of money for investment into something they did not really understand.)

While it hardly makes what Ponzi did any better, many of his victims did, in fact, fail to ask him hard questions or compare notes with someone knowledgeable about international postage reply coupons. To the extent that this failure was due to evasion of the fact that they were risking lots of money, his victims got what they deserved.

-- CAV

No comments: