Charles Ponzi's Scam: The Classic Fraud That Is Still Around Today

Welcome to Scams, Hacks, and Frauds, where we retell tales of true crime fraudsters and scams. This week we're looking at one of the big grandaddies of the Scam world: The Ponzi Scheme.

We delve into the world of Ponzi schemes, using the infamous Charles Ponzi as our guide. Discover how these fraudulent schemes operate and the subtle ways you might inadvertently become entangled in one. We explore the fascinating story of Charles Ponzi, who in 1919, turned a seemingly innocent idea into a financial nightmare, promising investors extraordinary returns while simultaneously digging himself deeper into a trap of his own making.

Through an engaging narrative, we break down the mechanics of Ponzi schemes, revealing the telltale signs that could indicate you're about to be scammed. From the allure of doubling your money in just 90 days to the sunk cost fallacy that ensnares both scammers and victims alike, we provide critical insights to help you safeguard your investments.

Join us as we share essential advice on how to avoid falling prey to such scams, emphasising the importance of understanding your investments and resisting high-pressure tactics. Tune in and equip yourself with the knowledge to protect yourself and your loved ones from the dark side of financial fraud.

We publish new content every other Monday. The  10 minutes our episodes may save your wallet, and help protect your family.

If you like shows like "The Perfect Scam" or "Darknet Diaries" then this show might be for you.  

On our website you’ll find more computer hacking, identity fraud, impersonation, consumer rights and Romance Scams.  To find these and to access our transcripts, visit us at www.scamshacksandfrauds.com.

The transcript and spoken audio are available under the Creative Commons, Share Alike, With Attributions license. For more information on this visit creativecommons.org.  

Transcript

In November 2025, David Gentile reported to prison after being convicted of running a Ponzi scheme, and was subsequently pardoned by US President Donald Trump a few days later.  But what is a Ponzi Scheme anyway?

This week we’re going to tell you what a Ponzi Scheme is, how you could end up setting up one of these scams completely by accident, and what are the tell tale signs that you’re about to be suckered into one of these scams, by going back to the O-G of Ponzi Schemes, Charles’ Ponzi’s scheme, because this is the Podcast that keeps you safe from Scams, Hacks and Frauds.

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We’re not going to cover the full history of Charles Ponzi, his background prior to the scheme that took his name is very interesting, and we don’t really have time to cover it.  Instead, let me pitch you a business idea.

We’re running a business in Sydney, Australia and are starting to do business with a customer in Japan.  We can send emails, make phone calls, or send a fax, but there are times when you need a proper handwritten signature for legal reasons, or, for the Japanese, a Hanko stamp, which does the same thing.  So we’ll need to send mail.

At current prices, it costs $3.50 Australian to send a letter to Japan from Sydney.  I’m really keen to show respect to our Japanese partners, and want to also encourage them to reply, so I’d like to pay the costs of their response to me.

I can’t just end them an Australian stamp… One, I don’t know how much postage costs in Japan, and two, I’m pretty confident that Japan Post won’t accept an Australian Stamp.  Luckily there is a solution to that, called the International Reply Coupon.  If you go to an Australian post office, you can buy one of these for $4.80, and the post office on the other end will exchange it for stamps in that country - enough stamps to post anywhere in the world.

Japan sells these coupons, too.  But in Japan the cost is 180 Yen, in Australian dollars that $1.74.  In theory, if we get these coupons from Japan and bring them back to people in Australia, we make a healthy profit by selling them to other companies that need to post to Japan, at a price cheaper than Australia Post charges for postage.

If you’re wondering why we’re not using the US or the UK in this example, many countries have stopped selling these coupons, including those two; however, if they receive one, they’re still required under Universal Postal Union rules to accept it and change it for stamps.

Charles Ponzi noticed this sort of situation in 1919.  Back then, Mail was the main way you communicated over distances or around the globe - the first international phone call was still 8 years away - so these coupons were more widely available and more widely used but still relatively unknown.   Ponzi noticed that the price of the coupon in the US was four times higher than in his home country, Italy.

There were a couple of problems with Ponzi’s scheme.  The first is that he was broke.  He tried the banks, and they all told him no.   So he went to friends, offering to double their money in 90 days.  Word soon got around that Charles was offering such a high rate of return, and more and more people asked to invest in his scheme.  Over time, he’d have enough to buy one of the banks that turned him down.   So that problem was quickly handled.

The second problem was cashing in the coupons.  To start, Ponzi really did intend on buying these coupons overseas and selling them back to the post office in the US.  Turns out you can’t just exchange them for cash, you can only swap them for stamps.  So you’d then have to go and sell the stamps, and who’s going to pay full price for a stamp from Charles?

Plus, selling those stamps is time he could spend getting more investors into his scheme… Come to think of it, so is getting all of those coupons…. and storing them.  Ponzi’s first investment round involved 18 investors; their investment would have bought 53,000 coupons.  This was almost twice as many coupons than were in circulation worldwide.  His next round had 15 thousand investors.. Charles would need to charter entire ocean liners to get that many coupons from Italy.  His scheme was literally a victim of its own success…

The scheme shifted focus.  Ponzi still took in new investment, and still made big promises about the returns available from his scheme.  So how did he keep it running?  Well before Ponzi, these schemes were known as Peter-and-Paul schemes, as in the phrase "robbing Peter to pay Paul."  If you asked for your money back, he’d give it to you, along with the investment gains you were supposed to have recieved, as long as the money keeps coming in - and at its peak, he was taking in 250 thousand US dollars a day - and not too many people ask for their money back, you survive another day.  But eventually, one of two things has to happen: either you run with the money, or the scheme collapses.  Eventually, governments, reporters and even the post office circled and discovered the whole thing was impossible; he’d sold investments almost 6000 times the number of reply coupons that were in circulation.  Although he tried to placate the crowds demanding their money back - and had some success at this - eventually the weight of this all got too much, and the scheme collapsed in August 1920. He had losses to his creditors of 20 million US dollars, or 314 million when adjusted for inflation.  Investors got back less than a third of what they’d pledged.

Justice came for Ponzi. He was charged with 86 counts of Mail Fraud, pleaded guilty to only a single count, and was imprisoned for 5 years, serving 3.5 of them.  However, the courts weren’t done with Ponzi.  The state of Massachusetts then indicted him on 22 charges of Larceny.  He would eventually be deported in 1937, where he spent out his remaining years in Brazil, mainly in poverty.

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Ponzi schemes are almost unique amongst scams in that the scammer themself can also be their own victim.  Ponzi way well have set out with good intentions.  He may have intended to buy these coupons, cash them in, pay his investors, and, let's assume for the sake of argument, that was his intention at least to begin with.

When it became clear to Charles that he was over his head.  He couldn’t exactly return his investors money as they were expecting big gains, and Ponzi had spent much of it on himself.  He was in a trap of his own making, and taking more investment to pay off the initial investors would seemingly buy breathing space.  But it can never actually solve the problem.

As my parents told me - and hopefully yours told you - honesty is the best policy.  Would Ponzi have been embarrassed if he failed at the that point?  Yes, absolutely.  Would he have lost a friend or two?  Probably.  But at the end of the day, it would have just been a bad investment.  It's taking that next step, even in desperation, that turned it into a scam.  If he’d have just stopped digging, nobody would even know the word Ponzi today.

This is an example of the Sunk Cost Fallacy, where you keep putting time, money and resources into something that isn’t working in the hope that it will work, because you don’t want to lose what you’ve put in; it can apply to both those who find themselves in Ponzi’s position as well as actual victims of scams.  Many of our episodes, including one where chasing losses ended up sinking the bank a scam victim was working for, have had people fall into this trap.

It's really important when making decisions, whether it's to continue something or make a new investment, to take time out to really think about it.  If someone is trying to rush you into a decision, it's probably because they don’t want you to think about it.

The telltale sign of a Ponzi scheme is just how implausible it is.  Nobody can offer returns like doubling your money in 90 days consistently.  It might be possible as a one-off long shot bet, like if your horse came in at the races, but day in, day out, no.   As it becomes clearer that there was money to be made that way, the sheer interest would cause returns to drop.  

However, the most important lesson I want to leave you with today is that if you don’t understand what you’re putting your money into… Don’t.   This might mean you miss out on some big deals, but it's better to miss that than lose the lot.  Even Billionaire investor Warren Buffet avoids investing in many technology businesses because he doesn’t understand them and therefore can’t tell how risky it is.  He may have missed out on the tech boom in the 90s, but he also missed the dot-com bubble collapsing.

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In our Next Episode, we’re going to talk in detail about David Gentile’s Ponzi scheme and show you what these schemes look like in the modern world. But for now, remember to like and subscribe, and we’ll see you next time on Scams, Hacks and Frauds.