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Ponzi: The Boston Swindler

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Ponzi: The Boston Swindler

Pay Them

There was a time when men played for the love of the game; when competition alone satisfied the male ego. This age of basketball featured greats such as Wilt Chamberlain, Bill Russell, and Oscar Robinson. These gladiators, and those like them, battled repeatedly winning league championships, MVP’s, scoring titles, and other accolades. Then, the product of James Naismith moved into an era where the love continued, but money was added. Clyde Drexler, Charles Barkely, Reggie Miller and Tim Hardaway have become league “poster-boys” for commercials and shoe contracts. Each of them has continued the competitive fire’s burning while adding a flare of green. Today, the league seems to be completely entrenched in money. Multi-million dollar contracts, million dollar endorsements, and billion dollar television deals are the focus of the league now. Some criticize on the players for being so concerned about money while others argue the players should be compensated for their God given talents.

These “some” are mostly owners’ of NBA franchises and the “others” are the players. There are some that petition that the players bring in the money, so they should receive it while others say that they are already compensated enough for a game. In this instance, the “some” are pro player fans and the “others” are allies of the owners. With the large amounts of money that pass through the hands of the owners of NBA franchises and the precedent that has been set by other professional athletic leagues, NBA players should receive substantial compensation for their services.

Employee-Employer relations have been rigid since the beginning of time. For this reason, laborers started labor unions to rectify the problem. Labor unions, are associations of workers for the purpose of improving economic status through collective bargaining, formed out of the Industrial Revolution of the 19th Century (Labor). Collective bargaining is defined as the negotiation between the representatives of organized workers and their employer(s) to determine wages, hours, rules, and working conditions. The conditions under which these former farmers had to work were unbearable. The farmer got tired of the treatment and banded to together. Labor unions sprouted in the US around the 1830’s; however, the first major group was the Knights of Labor that organized in 1869 (Labor).

Within the last six years there has been much discussion about the National Basketball Association and it’s labor agreement. The NBA labor agreement, the cause of the current lockout, does not meet the approval of the owners. The details are tedious, but the overall discrepancy looms over how much the players are worth and how much the owners should pay them. In the summer of 1995 the owners opened the collective bargaining agreement. Their fear, the same fear that caused this year’s lockout, is that the players are receiving too much of the BRI, or basketball related income. In 1988 the collective bargaining agreement allotted the players forty-eight percent of BRI, they earned fifty-two percent. The owners, not happy with these figures, locked the players out until a better contract was agreed upon. The players, eager to play and start the season, accepted a six-year deal that stated:

 The average daily salary will increase from $1.7 million to $3 million over six years (“NBA Votes”).

 The minimum salary will increase from $150,000 to $225,000 next season and will increase by ten percent each season thereafter (“NBA Votes”).

 The creation of a $1 million exception for those teams exceeding the salary cap (“NBA Votes”).

 The retention of the Larry Bird exception, which states that players completing two seasons with a team can re-sign with that team for any amount regardless of the salary cap (“NBA Votes”).

 The elimination of the luxury tax (“NBA Votes”).

 The players shall be allocated forty-eight percent of BRI and the owners have the option of opening the agreement if it reaches over fifty-one point eight percent (“Stern”).

Sixty-three percent of the ninety percent of the player’s union who were present at the meeting voted for this agreement. Two members of the player’s union, union lawyer Jeffrey Kessler and Michael Jordan, foresaw the problems of this agreement. In an interview after the signing, Kessler says, “I still believe it was a terrible vote for the players and they are going to regret it for a long time,”(“NBA Votes”). Jordan had similar, but different thoughts. “I am with the majority as long as two years down the road they can live with the repercussions of what this deal is going to give them” (“NBA Votes”).

Michael Jordan and Jeffrey Kessler jinxed the agreement. On Tuesday June 30, 1998 at midnight the NBA Board of Directors locked the players out. The owners, once again frustrated over the percentage of BRI that the players received shut down all personnel transactions, workout facilities, and summer camps (“NBA Lockout”). The immediate cause of the lockout stems from the $995 million in total salaries, or fifty-seven percent of BRI that the players received instead of their contractual forty-eight percent (“NBA Lockout”). Still, there are other issues that caused the lockout. The league wants:

 A firm salary cap that cannot be broken (“NBA Lockout”).

 The Larry Bird clause to be phased out in two years (“Stern”).

 The annual increase for veterans limited to five percent (“Stern”)

 A guaranteed five-year rookie contract with the right of first refusal for one year (“NBA Lockout”).

 A drug policy that includes heroin, cocaine, alcohol, and marijuana (“NBA Lockout”).

The owners wants are not unwarranted. They feel as though a stern salary cap will curve the large contracts that have recently taken precedence in the league. This will also help control the division of BRI. The rookie contract request stems from the amount of rookies who enter into the league and have excellent initial seasons. The rookies would then leave their drafting teams to the highest bidder where they eventually help their new team compete for a NBA Championship. The owners feel that the mandatory five-year rookie contracts will allow the drafting team to get the better years out of the rookie before he leaves for another team. Last, the owners feel that players are passing the drug tests, but still enjoy alcohol and marijuana. They feel that these substances are just as dangerous as heroin and cocaine and should not be tolerated.

On the other hand, the players have good reasons for their requests, which include:

 The continuation of the Larry Bird clause (“NBA Lockout”).

 More freedom in free agency (“NBA Players”)

 The ability to test their market – value (“NBA Players”).

 Salary scale that increases with tenure (“NBA Lockout”).

The players believe that the Larry Bird clause is essential. This clause allows players the ability to remain with their original team. Many players like the current team that they are playing for and wish to remain in the city where they started their career and raised their families. The players would also like more freedom to move. Players whose contracts expire would like the chance to test their market value instead of being trapped into re-signing with their original team (“NBA Players”). Last, too many players that have endured the National Basketball Association for over ten years are making $500,000 while players who have two-year tenures make millions. This is not ethical and the players’ feel that it needs to be addressed (“NBA Players”).

As of November 20, 1998, the negotiation teams had reached a common ground. They agreed on some issues, but just needed to do some “tinkering” to make them perfect. The league Deputy Commissioner Russ Granik, had this to say about the day’s progress:

We concluded our negotiations I guess about forty-five minutes ago and we””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””ve been since that time meeting with our Labor Relations Committee. We started today at about ten in the morning and went through continuously until that time. It was something I guess over twelve hours of negotiations. I think we can say maybe for the first time that we feel we had a productive day. Unfortunately we are still far apart on a lot of issues but I think we did make some progress. We got closer together on some of the key issues and we just kind of concluded that we had gone about as far as we thought we were able to go for both of us today and that it didn””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””t make any sense to push it any further (“NBA Lockout”).

Russ Granik,

After examining the issues of both sides, any reasonable person would see that the players deserve the millions that they currently earn. If one looks at the basic attraction of the National Basketball Association, the single reason why fans watch the game is to see players. Without the players, the owners would have no product and therefore no revenue. Many ask the question, “Exactly how much money do players bring into the league?” The answer is found in the start of the 1979-1980 season. Two future Hall of Famers and emerging superstars entered the league and took it by storm. Earvin “Magic” Johnson and Larry Bird revolutionized the NBA. Magic and Bird defined the new ideal basketball player as the “versatile big man” (Kertes 63). Both men, six feet – nine inches tall, combined their size with great shooting touch, outstanding ball handling, and tremendous passing. Magic and Bird excited the crowds with their new styles and spectacular plays, as they influenced the rest of the league to change into a league based on their styles of play. More and more fans wanted to see this new style first hand, which garnered more revenue in the ticket office.

Following the entrance of Magic and Bird was another individual who America immediately embraced. In the mid 1980’s, Michael Jordan emerged as one of the most, if not the most exciting professional athlete ever to have competed in sports. His high-flying, acrobatic, and seemingly gravity-defying moves earned him such nicknames as Air Jordan and “Superman in Shorts” (Donnelly 50). Jordan””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s exciting style of play combined with his incredible talent for the game attracted great numbers of previously uninterested NBA fans. Many of these new fans did not care about the games; they just wanted to get a chance to see Michael Jordan in action. From the time that Jordan won the league””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s Rookie of the Year award for the 1984-1985 season, until the end of the ””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””80s, the overall NBA attendance rose forty-seven percent; thus, the Chicago Bulls became the most popular road team in the league (Attendance). Also during this time, the NBA””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s gross revenues nearly doubled to $300 million dollars, and the average attendance rose almost four thousand per game to thirteen thousand four hundred twenty. The Chicago Bulls alone sold out more games in an eighteen month period from 1987-1988 than they had in their twenty-two year history. Almost single-handedly, Michael Jordan””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s fame had brought the league from being mocked as the National Buffoon Association in the beginning of the decade, to one of the most popular sports attractions by the end of the decade (Donnelly 50). At this time, because the media foresaw monumental opportunities ahead from the NBA, they began to reward the league with large amounts of money. The growing interest in the NBA from fans and advertisers caused the networks to shower the league with money. In 1988, the NBA””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s revenue from television exceeded $130 million (Lambert, Stump, and Brown 36). The next year, Ted Turner paid $275 million to keep the NBA on Turner Network Television (TNT) for the next four years (Stump 40). Then, in late 1989, NBC outbid CBS, the network that had broadcasted the NBA for the past seventeen years. CBS””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s last contract was a four-year, $173 million deal. However, NBC offered a new four-year deal worth $600 million. Although this seemed like a great risk for NBC, they were very confident in the NBA. As executive Vice President at NBC Sports, Ken Schanzer said, “Right now, we think the NBA can be enormously profitable for us.” This confidence in the NBA continued throughout the 80’s and continues in the 90’s. However, today’s fan not only wants to see Michael Jordan, but also enjoys the likes of Shaquille O’Neal, Kobe Bryant, Stephon Marbury, Allen Iverson, and many more. It is evident that the players were, are, and will continue to be the reason why the owners grow wealthier.

Moreover, the NBA owners are not suffering financially, but insist on claiming poor and exercising their greed. Every NBA owner has more than enough money to pay these athletes what they want and deserve. A recent article by Forbes Magazine analyzes the entire money situation with all professional athletic teams. The article lists all NBA franchises and their total values. The Chicago Bulls ranked first at $303 million, the New York Knicks ranked second at $296 million, the Los Angeles Lakers ranked third at $268 million, and the Portland Trailblazers ranked fourth at $245 million (Ozanian). The last place franchise, the Milwaukee Bucks, was estimated at $94 million. These values are relatively high and do not correspond to the owners’ claims of poverty. The article also ranked the revenues that each franchise earns annually based on last year’s statistics. The Portland Trailblazers ranked first with $34.2 million, the Detroit Pistons ranked second with $30 million, the Los Angeles Lakers ranked third with $24.8 million, and the Utah Jazz ranked fourth with $20.7 million (Ozanian). These figures show that owners are earning large amounts of money; enough to pay their players. Nevertheless, the Board of Directors reported that sixteen owners claimed losses in revenue last year. Why does this math, not add up? It does not add up because owners do not report all their sources of revenue. According to Forbes, which states that only ten NBA franchises actually lost money, many owners discount revenue from corporate naming rights, advertising, luxury suites, and team merchandise stores (Ozanian).

Two examples of this “fraud” are Jerry Reinsdorf, owner of the Chicago Bulls, the Chicago White Sox, and the United Center, and Phillip Anschutz who owns the LA Lakers, the LA Kings, and the LA Clippers. Reinsdorf beats the system by excluding part of the revenue from United Center, the state of the arena that the Chicago Bulls call home. The United Center houses two hundred sixteen luxury suites that procure $12.7 million in revenue; sixty percent, or $7.6 million, of which he can exclude from revenue (Ozanian). Phillip Anschutz is in the process of building a new arena in downtown Los Angeles. This new arena will house the Lakers, the Kings, and the Clippers. Staples Inc. is giving Anschutz $100 million over twenty years to put their name on the arena. The one hundred sixty luxury suites should accumulate $40 million in revenue and corporate advertising should gain $5 million in revenue; all of which Anschutz will credit to The Staples Center (Ozanian).

In addition to those revenues, the NBA and its television partners have agreed on a contract worth at least $2.4 billion over four years, more than double the current deal (Dubow). The contract breaks down to at least $1.6 billion for NBC and $800 million for Turner Sports. Under the current four-year contract, which expires at the end of this season, NBC paid $750 million and Turner paid $350 million (Dubow). This deal also included a revenue-sharing provision that will net the NBA additional revenue. It is a shame and a disgrace for NBA owners to be “tightfisted” with its players when it is evident that a plethora of money is available for contracts.

The owners of the National Basketball Association handle monumental amounts of money that can be evenly distributed amongst the players and themselves. There is not a reason why already half, and possibly the whole season is in jeopardy of being lost. The Board of Directors and the NBAPA, NBA Players Association, need to research other professional athletic leagues and examine their respective collective bargaining agreements for ideas. For example, the National Football League enforces a complicated, but well thought out collective bargaining agreement. In their system, which expires in 2000, each NFL team is allowed to designate one franchise player and one transitional player within the years of the agreement. Clubs retain exclusive negotiating rights to a franchise player by committing no later than Feb. 13 to a minimum offer of the average of the top five salaries at the player””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s position, or a twenty percent salary increase, whichever is greater. This offer must be presented before the end of the restricted free-agent signing period on April 14. Franchise players offered a minimum of the average of the top five salaries at their position in the 1996 season were able to negotiate with other clubs. In the latter case, the original club may match the offer and retain the player or receive two first-round draft choices as compensation if the original club elects not to match. A transition player designation gives the club a first-refusal right to match an offer sheet given to the player by another club. In addition to the transition player option of franchise designation, each club was permitted a total of three transition designations — two in 1993 and one in 1994. To designate a transition player, the club must offer a minimum of the average of the top ten salaries of 1996 at the player””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””s position or a twenty percent salary increase, whichever is greater. This system, as well as others, seems to work well. The NBA needs to find a remedy for their problem so the players can do what they do best; PLAY BALL!!!

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Home » Boston Swindler » Ponzi: The Boston Swindler

Ponzi: The Boston Swindler

Throughout history, the swindler has financially plagued society. Whether it is the get rich quick scheme or the carnival workers impossible challenge, people have been cheated out of uncountable sums of money. In the 1920s a man named Victor Ludsig, posing as a French official, sold the Eiffel Tower to a gullible scrap ironworker for $50,000. Even today con artists are thriving using the Internet to borrow from Peter to pay Paul. This is a scheme made famous by a crook so successful that his name now graces the age-old fraud, the Ponzi scheme.

Websters Dictionary defines Ponzi Scheme as Any investment program that offers impossibly high returns and pays these returns to early investors out of the capital contributed by later investors. Named for Carlo Ponzi who promoted such a scheme in the 1920s based on a theoretical arbitrage in international postal reply coupons. Fifty percent profit in forty-five days! was the claim of Charles Ponzi. Ponzi was a purported financial wizard. In the summer of 1920, he ran an investment company in Boston. He claimed to reap great profits by trading postal reply coupons. Nonetheless, the investment scheme was a fraud.

Ponzi was using investors’ money to pay off earlier investors, while keeping some for himself. In the end, he had collected $9,500,000 from 10,000 investors. Charles Ponzi was born in Italy in 1882. Born to a wealthy family, Ponzi put off work as long as possible and attended college at the University of Rome. Knowing he was avoiding the inevitable and seeing no appeal in the Italian business world, he immigrated to the United States. In 1903, upon entering the United States at the age of 21, Ponzi proceeded into Canada.

In 1909, he was convicted of forgery in events surrounding the collapse of the Montreal banking firm of Zrossi & Co. f which he was a member. As punishment, he was sentenced to a three-year term in the St. Vincent De Paul Penitentiary in Montreal. Released from Canadian Prison after only twenty months for good behavior, Ponzi entered the United States again on July 30, 1910. Within ten days of his release, he violated immigration laws by illegally bringing five Italians over the border from Canada. For this offense, he served two years in Atlanta, Georgia. After his release from the Atlanta prison he made his way to Boston and toiled in relative obscurity until he developed a postal reply coupon scheme and formed the Securities Exchange Company.

Since colonization, Boston had been infested with so called entrepreneurs seeking to interest small investors by promising big profits. High wages in industrial centers, the climbing cost of living, and below-par quotations on Liberty Bonds, helped make New England a fertile field for those who promised quick and big returns. Many agents found their best argument was that while old banking houses made small returns to their depositors, the banks themselves were able to make enormous profits by frequently turning over their depositors money.

Some agents proposed that small investors share in these big profits by permitting their savings to be invested for them. Ponzi adopted from contemporaries the notion of sharing enormous profits with investors, adding his own twist: trade in postal reply coupons. This idea, the keystone of his swindle, was made more plausible with tales he spun about how he received the brilliant inspiration. On one occasion he said that in August of 1919, when he was considering issuing an export magazine:

I wrote a man in Spain regarding the proposed magazine and in reply received an international exchange coupon which I was to exchange for American postage stamps with which to send a copy of the publication. The coupon in Spain cost the equivalent of about one-cent in American money, I got six cents in stamps for the coupon here. Then I investigated the rates of exchange in other countries. I tried it in a small way first. It worked. The first month $1,000 became $15,000. I began letting in my friends. First, I accepted deposits on my note, payable in ninety days, for $150 for each $100 received.

Though promised in ninety days I have been paying in forty-five days. Ponzi opened his postal coupon business in December of 1919. He filed a certificate with the city clerk citing himself as sole manager of The Securities Exchange Company. In the beginning of the enterprise, Ponzi described himself as everything from President to office boy. On the second day of operation, he explained his business to a visitor from the Chamber of Commerce. The man believed Ponzi’s enterprise could succeed. A short time later the postal inspector stopped by and expressed doubts about the legality of redeeming millions of coupons.

Ponzi claimed that having the coupons redeemed overseas, outside of the federal governments jurisdiction solved this problem. In May 1906, the United States and over 60 other countries assembled in Rome, and revised the Universal Postal Convention of 1897. The UPC provided for the administration of postal services among signatory countries. Ponzi seized upon the mechanism provided by Article 11(2) of the revised Convention. Article 11(2) is as follows: Reply coupons can be exchanged between the countries of which the Administrations have agreed to participate in such exchange.

The minimum selling price of a reply coupon is 28 centimes, or the equivalent of this sum in the money of the country which sells it. This coupon is exchangeable in all countries parties to the arrangement for a postage stamp of 25 centimes or the equivalent of that sum in the money of the country where the exchange is requested. The Detailed Regulations contemplated in Article 20 of the Convention determine the conditions of this exchange, and in particular the intervention of the International Bureau in manufacturing, supplying, and accounting for the coupons.

This provision, with a built-in 3-centime loss on the sale of each coupon (a centime being a hundredth of a franc). Clearly, this did not makeway for profitable arbitrage through these coupons. The purpose of the reply coupon was simply to facilitate the prepayment of return postage when sending mail to another country. The recipient of a reply coupon would exchange the coupon for the appropriate stamp in the recipient’s country, such stamp not being available in the sender’s country.

The value of the coupon was intended to be constant throughout all countries forming the Postal Union, and regulations defined the rate of exchange between each countrys currency and postal reply coupons. Because of economic dislocations caused by World War I, however, some currencies became devalued relative to others, and the postal regulations had not been updated to reflect this. For instance, Ponzi claimed The same amount of American money will buy more value in coupons in Bulgaria in than in the United States.

There did seem to be potential for profit here, and although the aggregate volume of coupon redemption did not indicate abnormal trading activity, postal authorities took steps to prevent speculation. On July 2, 1920, the Post Office Department issued regulations limiting redemption of coupons to ten at one time. The Post Office Department announced new conversion rates on July 28, to be effective August 15. Prior to this, the rates had not been changed since before the war. With characteristic government candor, postal officials denied that the changes were the result of concerns about speculation in reply coupons.

Acting Third Assistant Postmaster General Barrows noted foreign countries had also taken steps to prevent speculation. Regardless, these measures did not hamper Ponzi’s operations, as he was not trading in coupons anyway. The flaw in a coupon trading scheme as Ponzi proposed was that while an individual stamp transaction may indeed yield a 400 percent profit, the amount of that profit would be minuscule in absolute terms. In order to earn the millions of dollars, astronomical quantities of coupons would have to be handled.

One can imagine hordes of Ponzi agents, pushing wheelbarrows full of coupons to post offices, unloading them with shovels or pitchforks. Intuitively, we can see that the transaction costs of purchasing, transporting and redeeming the coupons would exceed any profits from sale, and it is conceivable that Ponzi actually made some trades early on and discovered this fact. Ponzi recognized that the problem of handling large volumes of coupons was a matter of concern to investors and authorities, incorporating this into the mystique of his scheme: My secret is How do I cash the coupons? That is what I do not tell.

Ponzi started his business essentially penniless, and in December of 1920, he borrowed two hundred dollars from Joseph Daniels, a furniture dealer. Ponzi used most of the money to purchase furniture from Mr. Daniels, keeping the rest for spending money. Ponzi paid the note at maturity. Although Ponzi knew the idea would never work, through his charisma and charm people began to invest in his postal reply coupon scheme. He happily accepted money from anyone willing. He even accepted eight hundred dollars from his wife Rose. By March 1920, nearly one hundred people had invested almost $30,000.

Nonetheless, Ponzi owed these investors nearly $45,000. Fortunately for Ponzi, when the notes came due, most depositors kept the money invested to accrue even more interest. At first, most of Ponzis clients were Italian immigrants, but as the good word spread, many others rapidly joined the growing crowds. Policemen, priests, working class mothers with children, and fathers who mortgaged their homes all invested with Ponzi. Shortly thereafter, word spread throughout New England and Ponzi hired agents to operate and accept money throughout the central East Coast.

The smooth and selfish Ponzi had ready answers for every question or doubt. The effervescent Ponzi was able to convince anyone with his sappy chatter. He had not studied finance, yet he had a natural skill in mathematics and had supreme confidence. Ponzi believed that if you overwhelm someone with enough numbers they would at least think you know what you are talking about. As torrents of money flowed daily into the SEC, Ponzi adjusted to his stunning success. He first expanded his office and hired people to stand behind the cages and accept money.

Then within a few days, he hired managers. By that time money was flowing in at such a massive rate that he also hired two Boston Policemen. Every few hours, one of the policemen would carry out a satchel to the bank. By May 1920, one thousand investors had bought nearly $400,000 of SEC notes. The summer of 1920 was sweltering and it was even hotter due to Charles Ponzi and his perceived financial wizardry. Immigrants from all over the East Coast joined the Bostonians in coughing up millions of dollars to double their money in three months by investing in Ponzis postal reply coupon scheme.

With income from his venture growing exponentially, Ponzi invested in the good life for himself. He bought a $500,000 home outside of Boston with central heat and air conditioning and a heated swimming pool. He also spent nearly the equivalent of the cost of his home on furnishings. Ponzi also brought his mother, Emelda, over from Italy via first class ocean liner, donated $100,000 to a local orphanage, and hired a publicity agent, William McMasters, to help with handling the onslaught of notoriety. Ponzi, out for revenge, even bought the Poole Shipping company where he once worked solely to fire his former boss.

Nevertheless, with every dollar he brought in, the mountain of debt he owed his investors kept growing. The crowds outside Ponzis school street office caught curious officials attention. Three policemen came to question the legitimacy of Ponzi. When the officers left, two of them had invested with Ponzi. Six months earlier the Italian was flat broke, now, Charles Ponzi, was basking in his newly found prosperity and notoriety, swarmed by crowds wherever he went. In the Italian neighborhoods he was a god, he was the image of everything they had wished to achieve. In addition, their investment was growing immensely.

He was idolized. The first question involving Ponzis financial armor arose when J. R. Daniels, the furniture dealer who had helped start Ponzis business sued him for $1. 5 million. This brought attention to the fact that Ponzi was occupying this small office with rented furniture, yet he has all these millions of dollars. An article about the issue in The Boston Post brought a swift reaction. People began withdrawing from the SEC. Ponzi alleviated this problem by simply giving the appropriately skeptical investors money back. Ponzi claimed that he could return $200,000 a day to investors and it would not hurt him.

Many people turned away still faithful and more people lined up to invest. However, the Commissioner of Banks and the Attorney General of Massachusetts heard about Ponzis claims and sent investigators. The Boston Press also began to take interest in the man people were calling the financial genius. One particular individual, Richard Grossier, son of the publisher of The Boston Post was perhaps a little more cynical claiming that it was too good to be true. On July 24, 1920, a surprisingly positive Boston Post article hailed Ponzi and his money making scheme.

Consequently, hundreds of people crowded Ponzis SEC to invest. Prior to the articles publication the millions of dollars that flowed into his scheme had arrived purely by word of mouth. Now the SEC was receiving about $250,000 a day. The very same day, Ponzi met with the local bank officials. After concluding that his accounting records were to convoluted to easily sort out, he offered them a plan. Ponzi volunteered to discontinue taking in money, yet he would pay out money while the audit took place. The bank officials agreed, and the SEC remained open.

Meanwhile, Ponzi was developing a strategy to free him from the looming predicament. Ponzi would convince his bankers to provide him with $10 million to purchase a fleet of merchant ship for sale by the U. S. Government. The plan was to transfer all of his companys assets and liabilities to the proposed steam ship company, allowing his investors to trade in their investments for stock in the new company. The plan failed to impress the bankers and it never materialized. By July 26, Clarence Baron, the Wall Street publisher, wrote an article that questioned Ponzis claims.

It stated that if Ponzi could make three hundred percent profit for his investors, a true financial wizard would simply invest in his own company. Meanwhile, Ponzi was depositing all of his revenue into a bank account making three- percent interest. In the next issue, Barons stated that in order for Ponzis scheme to work, 160 million postal reply coupons needed to be circulating. Only 27,000 coupons were circulating in the world. The Post Office also reported that there were no large purchases of postal reply coupons in the United States or overseas. Consequently, hundreds of frenzied investors began withdrawing money from the SEC.

The scene resembled a riot. Two women fainted. Nearly three million dollars were withdrawn from Ponzis school street office in three days. Nonetheless, the positive Ponzi paid everyone back with a smile. In fact, Ponzi served the crowd coffee and doughnuts. Some investors, seeing Ponzis confidence, turned away leaving their money invested. After the articles publication, Ponzi stated that, I only used the postal reply coupon scheme as a blind, I didnt want the Wall Street boys to even get the slightest hint of what my real scheme was. As long as my investors get their money back with profit, I dont have to account to anybody.

Charles Ponzi maintained his exuberant demeanor; nonetheless, the inevitable was soon to follow. The following day Ponzi was summoned by the local bank officials. The State Attorney General was by now estimating Ponzi’s liabilities at three million dollars. Ponzi is quoted as saying, are you saying gentlemen, that I am insolvent? Then I am your prisoner. News of Ponzi’s bankruptcy devastated noteholders who had clung to the hope of getting at least their original investment back. On August 19, Ponzi was brought from jail for a hearing before Federal Commissioner Hayes.

The Federal Building was surrounded by a crowd intent on seeing Ponzi, and the hearing was held in its largest courtroom. When the courtroom doors were opened, people pushed past bailiffs and scrambled for seats. This court appearance found Ponzi relaxed and cheerful. Hands casually in pockets, he nodded to friends. Ponzi sat through an unrelated hearing, and when his own turn came, he waived examination and agreed to no change in bail. The hearing was brief, and Ponzi was remanded to the East Cambridge Jail until his case could be heard in the September term of the Federal District Court.

Ponzi reported receiving $5,000 in his cell from hopeful investors, and again promised he could recoup his losses if allowed an extra 60 days. On October 1, a federal grand jury returned two forty-three count indictments against Ponzi. On November 30, he made a deal with the prosecutors, pleading guilty to a single count. Having dismissed all counts but one, Assistant United States Attorney Shea urged the imposition of the maximum sentence. Shea reminded the assemblees of the extent of Ponzi’s fraud: It is true Mr. Ponzi did collect about $10,000,000.

It is also true he paid back about $8,000,000, leaving a difference of about $2,000,000 between what he took in and what he returned. In imposing the maximum five year sentence for a mail fraud count, Judge Hale added his own stern pronouncement: The defendant conceived a scheme which on his counsel’s admission did defraud men and women. It will not do to have the public, the world, understand that such a scheme as his through the United States instrumentality could be carried out without receiving substantial punishment. 11 With his wife sobbing on his shoulder, Ponzi wrote on a pad of paper which he passed to reporters.

The paper stated Sic Transit Gloria Mundi, (Thus Passes Worldly Glory). After numerous indictments, trials, and appeals at the federal and state level, Massachusetts Superior Court Judge Sisk sentenced Ponzi to a seven to nine year prison term as a “common and notorious thief,” on July 11, 1925. On September 28, 1927 with Ponzi still in a Massachusetts prison, the Immigration Bureau issued a deportation order for Ponzi. After his prison term, he left the United States for Italy. He spent his final days in the charity ward of a Rio de Janeiro hospital, and died on January 15, 1949 at the age of 67.

A legal agent claimed Ponzi’s body and buried him using seventy-five dollars Ponzi had saved from a Brazilian government pension. The man who once possessed nearly ten million dollars, died with barely enough to bury his own body. In modern times, society is still burdened by individuals seeking to get rich quick. Names such as Marty Frankel and Robert Rooney, with their modern form of the Ponzi scheme, have appeared in the news. Although modern con-artists may enjoy the short success Ponzi did, none may ever possess the charm, the demeanor, or the ability to touch the hearts of individuals intended to be swindled.

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