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Who Was Ponzi & What Was His Scheme?

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What is a Ponzi scheme? And why does it bear this name? First, you need to know a little bit about its namesake, Charles Ponzi.

Anyone can work a simple swindle, but you have to be a special kind of con man to have your name become synonymous with "fraud." Ponzi pulled it off, though. After arriving in the U.S. from Italy in 1903, Ponzi knocked around in a variety of unskilled jobs that usually ended when he got into trouble for theft or cheating customers. A few years later, he moved to Canada, where he spent a hitch in prison for passing a forged check. When he eventually drifted back down to the U.S., he needed a way to make some quick cash.

Making Money via Mail

Ponzi eventually found his way to get rich quick using a vagary of the postal system. At the time, it was common for letters abroad to include an international reply coupon "“ a voucher that could be exchanged for minimum postage back to the country from which the letter was sent. Thus, if you sent your buddy in France a letter, you could include a coupon so he could respond. (This practice still exists but is less common.) As exchange and postal rates fluctuated, though, there was an opportunity to make a profit. You only had to purchase postal reply coupons cheaply in some foreign country, send them back to the U.S. to swap them out for American stamps of a higher value, then sell these stamps. This arrangement was perfectly legal; it was just cleverly gaming the system. Ponzi started buying and selling postal reply coupons using agents in his native Italy, and he was making a good living doing it.

Unfortunately, whatever defect made Ponzi steal from his employers and pass bad checks prompted him to get greedy here, too. He started to recruit investors into his system with the promise of 50% returns in just a few days. Investors would pay their cash in, and sure enough, Ponzi would get them the promised return. Everyone was happy with the results, and word started to spread about this Italian financial wizard. Within two years, he had employees all over the country recruiting new takers for this foolproof investment strategy.

Ponzi was pocketing millions, and he enjoyed a sumptuous life outside of Boston. At his peak, Ponzi was raking in $250,000 a day, which enabled him to collect such necessities as gold-handled canes. He became a celebrity investor, almost like the Warren Buffett of his day.

The Scheme

Why is it hard to think of Ponzi's name without affixing "scheme" to the end of it, then? Ponzi's underlying "business" — the arbitrage on the postal coupons — wasn't actually as sound as he claimed. In fact, there wasn't even really a business. However, since so much money was flowing in from new investors, he could just pay off the returns for the old ones from the new cash. In fact, Ponzi didn't even need to pay off the old investors, since many of them wanted to reinvest their returns in this wonderful business. Ponzi's charms made it easy for him to placate any worried customers, and his con looked unstoppable.

Fuzzy Math

Eventually, though, smarter financial heads started looking at Ponzi's business. Clarence Barron, owner of the Wall Street Journal and founder of the financial magazine that bears his name, realized Ponzi must have been a huckster and went on the offensive. While 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. (Things only got worse when the Postal Service reported that there wasn't a huge flow of the coupons from one country to the other.)

On top of that, Barron noted that 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? Those certainly didn't sound like the actions of a financial genius.

Barron's conclusions ran as front-page news in the Boston Post in July 1920, which would have been damning for most cons. Ponzi was such a charismatic force of nature, though, that many people chose not to believe the paper's report. Few believed that their hero, the man who had "tripled" their life savings, was anything less than 100% legitimate. In fact, the morning that the Post ran Barron's report, investors lined up around the block outside of his office in an attempt to give him more money "“ even after they'd been told that they'd been scammed. Ponzi later boasted that he'd taken in a million dollars in new investments the day the report ran.

The Unraveling

Things were starting to look less rosy for the scammer, though. Although he'd largely placated his investors after Barron's report, 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."

The next month, regulators raided Ponzi's office and discovered that he didn't have a huge quantity of postal reply coupons. Since Ponzi had used the mail to notify his marks of how their "investments" were performing, he faced serious mail fraud charges; in total, the government brought 86 charges against him in two separate indictments. Ponzi pled guilty to one of these charges in exchange for a light sentence of five years.

He served around three and a half years, then got his release to face state charges, for which he received a sentence of nine more years. But before he could go back to jail, he jumped bail and tried to start new scams in Florida and Texas. (You'd think the government would have learned their lesson about trusting this guy.) Eventually, though, his time on the lam ran out, and he served his whole sentence.

Upon his release, Ponzi was deported to Italy and spent the rest of his life in poverty before dying in 1949 in Rio de Janeiro, where he's buried in a pauper's grave.

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Big Questions
Who Was Chuck Taylor?
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From Betty Crocker to Tommy Bahama, plenty of popular labels are "named" after fake people. But one product with a bona fide backstory to its moniker is Converse's Chuck Taylor All-Star sneakers. The durable gym shoes are beloved by everyone from jocks to hipsters. But who's the man behind the cursive signature on the trademark circular ankle patch?

As journalist Abraham Aamidor recounted in his 2006 book Chuck Taylor, All Star: The True Story of the Man behind the Most Famous Athletic Shoe in History, Chuck Taylor was a former pro basketball player-turned-Converse salesman whose personal brand and tireless salesmanship were instrumental to the shoes' success.

Charles Hollis Taylor was born on July 24, 1901, and raised in southern Indiana. Basketball—the brand-new sport invented by James Naismith in 1891—was beginning to take the Hoosier State by storm. Taylor joined his high school team, the Columbus High School Bull Dogs, and was named captain.

After graduation, instead of heading off to college, Taylor launched his semi-pro career playing basketball with the Columbus Commercials. He’d go on to play for a handful of other teams across the Midwest, including the the Akron Firestone Non-Skids in Ohio, before finally moving to Chicago in 1922 to work as a sales representative for the Converse Rubber Shoe Co. (The company's name was eventually shortened to Converse, Inc.)

Founded in Malden, Massachusetts, in 1908 as a rubber shoe manufacturer, Converse first began producing canvas shoes in 1915, since there wasn't a year-round market for galoshes. They introduced their All-Star canvas sports shoes two years later, in 1917. It’s unclear whether Chuck was initially recruited to also play ball for Converse (by 1926, the brand was sponsoring a traveling team) or if he was simply employed to work in sales. However, we do know that he quickly proved himself to be indispensable to the company.

Taylor listened carefully to customer feedback, and passed on suggestions for shoe improvements—including more padding under the ball of the foot, a different rubber compound in the sole to avoid scuffs, and a patch to protect the ankle—to his regional office. He also relied on his basketball skills to impress prospective clients, hosting free Chuck Taylor basketball clinics around the country to teach high school and college players his signature moves on the court.

In addition to his myriad other job duties, Taylor played for and managed the All-Stars, a traveling team sponsored by Converse to promote their new All Star shoes, and launched and helped publish the Converse Basketball Yearbook, which covered the game of basketball on an annual basis.

After leaving the All-Stars, Taylor continued to publicize his shoe—and own personal brand—by hobnobbing with customers at small-town sporting goods stores and making “special appearances” at local basketball games. There, he’d be included in the starting lineup of a local team during a pivotal game.

Taylor’s star grew so bright that in 1932, Converse added his signature to the ankle patch of the All Star shoes. From that point on, they were known as Chuck Taylor All-Stars. Still, Taylor—who reportedly took shameless advantage of his expense account and earned a good salary—is believed to have never received royalties for the use of his name.

In 1969, Taylor was inducted into the Basketball Hall of Fame. The same year, he died from a heart attack on June 23, at the age of 67. Around this time, athletic shoes manufactured by companies like Adidas and Nike began replacing Converse on the court, and soon both Taylor and his namesake kicks were beloved by a different sort of customer.

Still, even though Taylor's star has faded over the decades, fans of his shoe continue to carry on his legacy: Today, Converse sells more than 270,000 pairs of Chuck Taylors a day, 365 days a year, to retro-loving customers who can't get enough of the athlete's looping cursive signature.

Have you got a Big Question you'd like us to answer? If so, let us know by emailing us at bigquestions@mentalfloss.com.

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Big Questions
What Is the Difference Between Generic and Name Brand Ibuprofen?
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What is the difference between generic ibuprofen vs. name brands?

Yali Friedman:

I just published a paper that answers this question: Are Generic Drugs Less Safe than their Branded Equivalents?

Here’s the tl;dr version:

Generic drugs are versions of drugs made by companies other than the company which originally developed the drug.

To gain FDA approval, a generic drug must:

  • Contain the same active ingredients as the innovator drug (inactive ingredients may vary)
  • Be identical in strength, dosage form, and route of administration
  • Have the same use indications
  • Be bioequivalent
  • Meet the same batch requirements for identity, strength, purity, and quality
  • Be manufactured under the same strict standards of FDA's good manufacturing practice regulations required for innovator products

I hope you found this answer useful. Feel free to reach out at www.thinkbiotech.com. For more on generic drugs, you can see our resources and whitepapers at Pharmaceutical strategic guidance and whitepapers

This post originally appeared on Quora. Click here to view.

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