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HS 241 – The Original Ponzi Scheme and How to Spot Bad Deals with Mitchell Zuckoff

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Today’s Holistic Survival Show sees author, Mitchell Zuckoff, as guest to describe how a straightforward swindle was transformed into months of notorious money-making in the hands of Charles Ponzi. We can learn a huge amount from the history and the figures, but Jason Hartman also steers the discussion into a more contemporary tone, asking Zuckoff for his advice on identifying bad deals and how to avoid getting sucked in.

 

Key Takeaways
01.57 – Mitchell Zuckoff takes us through the past of the man who characterized Ponzi schemes.
06.34 – Swindles have existed for centuries, but what makes a Ponzi scheme so specific?
11.57 – Strangely, there is evidence to suggest that Ponzi’s intentions weren’t even as swindling as presumed.
17.34 – The success Ponzi had in such a short time is really mind-boggling. Consider inflation as well and you can understand why he gained such notoriety.
18.08 – It’s important that we learn from these aspects of history to not get caught up ourselves.
22.25 – Unbelievably, people are still getting caught up in scandals involving money in Nigeria. What definition of skeptical do these people live by?
27.38 – Find out more about today’s guest at www.MitchellZuckoff.com

 

Mentioned in this episode
www.MitchellZuckoff.com

 

Tweetables
A good balance of character and personality is a sure way to success in any field.
Use your gut. Investigate and ask ‘Why don’t the laws of financial gravity apply to this?’
So often, things are not quite as they seem. Too good to be true? Probably.

 

Transcript

Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to the Holistic Survival Show with Jason Hartman. The economic storm brewing around the world is set to spill into all aspects of our lives. Are you prepared? Where are you going to turn for the critical life skills necessary to survive and prosper? The Holistic Survival Show is your family’s insurance for a better life. Jason will teach you to think independently, to understand threats and how to create the ultimate action plan. Sudden change or worst case scenario – you’ll be ready. Welcome to Holistic Survival; your key resource for protecting the people, places and profits you care about, in uncertain times. Ladies and gentlemen, your host: Jason Hartman.

Jason Hartman:
It’s my pleasure to welcome Mitchell Zuckoff to the Show, he is a Professor of Journalism at Boston University, he’s the author of the new book, 13 Hours: The Inside Account of What Really Happened in Bengazi, and he’s the author of several other books. We had one of his collaborators for the 13 Hours, the Bengazi book, on the show before, so I really want to focus on one of his works because we’ve never done a show on the man who originated the Ponzi scheme, and that was Charles Ponzi. That book is entitled Ponzi’s Scheme: The True Story of a Financial Legend. Mitchell, welcome, how are you?

Mitchell Zuckoff:
I’m well, Jason, thanks for having me on.

Jason:
Good, good, it’s good to have you. A lot of people refer to Charles Ponzi and Ponzi schemes, but they don’t talk about his own life and his own biography, if you will. Tell us about the book.

Mitchell:
Sure. You know, it’s funny; I like the way you opened because that’s exactly how I was before I got involved in that book. I’d heard of Ponzi schemes, I was actually a financial reporter for the Boston Globe and I just thought it was maybe an Italian word for ‘swindle’. I didn’t realize there was actually a Charles Ponzi that was a guy. I just started researching and I found out that, of all things, the scheme was based here in Boston, where I am, and the book really tells the story of a remarkably charismatic self-deluding guy. He was as much a victim as he was the swindler. Obviously, we know from Bernie Madoff and from others, we know how the scheme originated here in Boston in 1919 and 1920 with this bantamweight Italian immigrant who had a smile as wide as the street, and how he came to personify this particular swindle.

Jason:
Well that’s interesting. I want to ask you about why you say he was a victim because that’s a fascinating take on it, but also, just a comment on con artists in general. They’re always the nicest people, aren’t they? They’re always charismatic because that’s their stock and trade. I remember when a former friend of mine conned me several years ago – he was the nicest guy, everybody loved this guy. He was just very charismatic. I think it boils down to, and Stephen Covey really put it well. I think it was in his Seven Habits of Highly Effective People book where he talked about the personality ethic and the character ethic, and how we both have these two ethics inside of us. The personality ethic opens doors, but the character ethic keeps the door open. Covey didn’t say it that way; I’m saying it that way.

Ponzi – I’m sure he was a very charismatic, very likable guy. Bernie Madoff was probably that way too, and heck, the social security system is where Madoff said he got his idea! It’s interesting.

Mitchell:
I like the association that there can often be a conflict between a person’s personality and his true character. The personality can be inviting and appealing, and yet the character can be rotten underneath. We’ve seen that with a lot of people, and I think that is the core of a lot of great swindles, and even not so great swindles, like your friend.

The swindler has to get over our fear that this is too good to be true. That’s the key to every swindle. There’s something in all of our minds that says ‘Wait a second’ so he/she has to convince you somehow by behavior, by attitude, whatever it is, that this is too good to miss and it has to trump the ‘too good to be true’. Usually, there’s either what we call an ‘affinity’ – you have a personal affinity for this person, or you maybe go to the same church or you are the same ethnic group or the same racial group. You have some reason that convinces you to trust this person and it ultimately does, as you said, Jason, come down to their nature and the outer personality that they’re showing.

Jason:
So tell us about Charles Ponzi.

Mitchell:
Sure.

Jason:
How did he think? Maybe he just got credit and the whole idea’s named after him. What years was Ponzi alive?

Mitchell:
He was born in 1883 and lived to 1949.

Jason:
Okay, so certainly then, and the reason I asked you that just before you go on – there were Ponzi schemes before him.

Mitchell:
Exactly.

Jason:
He’s the one who gave it the name, but certainly there was the idea of the gold exchange where you could come and deposit your gold, they would give you a receipt of your gold – basically, how the US dollar works. Or how it used to work. Now they don’t even pretend it’s backed by gold, it’s just pure fiat money. That was a Ponzi scheme, or it turned into a Ponzi scheme. How did it become named after Charles Ponzi?

Mitchell:
Sure. Well, as you say, these used to often be categorized as robbing Peter to pay Paul, where an early investor would be swindled out of his money. His money would be used to pay later investors, or a later investor would be used to pay an earlier investor. As long as the money keeps coming in, that’s the nature of a Ponzi scheme. When the ball stops rolling is when it all collapses. Certainly, these go back centuries and centuries. What made Ponzi special was that he did it on a scale that no-one had quite seen, and with a certain panache that no-one had seen before, and at a particular moment in time.

He was an immigrant from Italy. His parents were rich in name but not in anything else, and he was a bit of a gad-about at the University of Rome and kind of ran through his money. His Father died and so his Mother and his uncles put him on a boat to America, promising – as so many immigrants thought – that the streets would be paved with gold. Of course, when he arrived, it wasn’t anything of the sort. He actually arrived here in Boston in 1903 and the streets were paved with mud, as you’d imagine.

He went on a journey, he went up and down the East Coast, trying to make his fortune, trying to make his way in the world. He got into trouble in Montreal and actually spent a few years in prison – not really because of his own fault, though. He actually was working for a guy who was a swindler, but I’m maybe being too empathetic and too sympathetic. He created a lot of his own problems along the way, but eventually he washes up back in Boston in 1916. He falls in love with a beautiful, young, Italian-American woman named Rose Gnecco. Rose inspires him. All Rose wants is a family, a nice home to raise a few kids; but he convinces himself that he has to drape her in pearls and wrap her in furs.

And so he starts to do whatever he can to grow rich. You have to remember the time here; the Great War is just about to be over, the stock market is heating up, it’s a time when immigrants believed ‘Okay, finally we’re going to get our share of the pie’. He feeds into all this, and all this is feeding into him as well. One of his ideas is to start basically an import-export advertising newspaper, and he’s going to launch it, it’s going to be called The Trader’s Guide to reach out to people in Europe who are doing business in America. It’s kind of a great idea and it’s sort of a precursor of a lot of great publications that imagined that market.

But he really doesn’t have any capital to get it off the ground. He goes to local banks and they pretty much throw him out because he has nothing to offer. What he does is he rents an office and he’s trying to figure out the next idea when he opens a letter from someone he was corresponding with in Italy about this idea of a traders’ guide. Out flutters a postal reply coupon. It’s a very archaic form of international currency and what it was was there was a postal union (basically an agreement among many countries to respect each other’s stamps so mail could move between countries). If you had one of these little coupons, you could buy a First Class stamp in any country in the world.

Ponzi realized that they were sold at a fixed rate and if you bought this at the same fixed rate, based in Europe where after the war, the currencies were depressed, you could (at least theoretically) sell it for many many times that amount in dollars if you could somehow create this arbitrage idea. You could turn this into cash worth a hundred times its paid-for value in Albania, or Italy. He realizes if he can accumulate enough of these, then turn them into stamps or turn them into cash here in America, he could double/triple/quadruple or go on from there with his money in no time.

Again, he still doesn’t have any capital to go out and buy these things, so he starts raising money, basically on a promissory offer. He offers people ‘Double your money in 90 days’.

Jason:
What year is this?

Mitchell:
This is 1919.

Jason:
Okay, 1919. So it’s four years after the Federal Reserve was created, it’s after World War One, it’s before the Roaring Twenties. Just for some context there, it’s kind of interesting. How much does he raise? Do you know the numbers on this?

Mitchell:
I do. The first month, he raises about $1000.

Jason:
Which, adjusted for inflation, that’s like, I don’t know, probably $90,000 today but I’ll do the math for you while you’re talking. Go ahead.

Mitchell:
Yeah, that’s correct. It’s almost 100-1. From there, it snowballs. In a matter of months, by June, he’s raising $1 million per week. These are unimaginable amounts of money for most people, obviously – if you’re not a Rockefeller – in 1919 and into 1920. For the longest time, for these first few months, I’m sure he’s still convinced because a lot of his behaviors that otherwise would be much different if he thought it was a swindle to begin with. He convinced himself, he was self-deluding, he was sure that it was not going to be the kind of thing where he took the money and ran.

One piece of evidence for that is that in the midst of this, he brings his elderly Mother over to the United States from Italy and installs her in the house that he buys for himself and for Rose in Lexington, Massachusetts. Now, if you’re running a ‘take the money and run’ scheme and you literally – I’m not making this up – he would have a $1 million cashier’s check in his pocket as almost a form of advertising, you don’t install your 70-something year old Mother to slow you down.

He was sure he could make this work, but of course, it was logistically impossible. I calculated the number of these reply coupons he would have needed to turn even a fraction of this money into a ‘Double or triple your money’ operation. It would have filled, I forget the number, but some number of the holds of 10 or 12 ships – the entire hold. There simply weren’t that many in circulation!

Jason:
Wow, amazing. By the way, I calculated the inflation. Now, unfortunately, the only inflation calculator I have handy calculates based on the Consumer Price Index, which is, of course, understated, or at least it certainly has been for the past few decades pretty dramatically. $1,000 in 1919 has the same buying power as $13,724.45 in 2014. That’s kind of interesting.

When you said that basically the dollar’s lost about 96% of its value, most people say, since the Federal Reserve was created in 1915, and so it depends which way you do the math as to how you think of it. That’s interesting. You seem to have some real compassion or empathy for the guy, where most people would hate him. It looks pretty clear to you that by bringing his Mom over and so forth, that he wasn’t really – or at least, he didn’t think he was a conman, right?

Mitchell:
That’s right.

Jason:
Interesting.

Mitchell:
I don’t, for a second, excuse his behavior.

Jason:
Okay.

Mitchell:
And certainly, his investor suffered and people were hurt and people lost their livelihoods. I think he is categorically different than a Bernie Madoff who, by all my reading and by all my understanding, was more sociopathic in the idea that he did not care what he was doing. He didn’t care who he hurt or whose lives he destroyed. Ponzi was certainly guilty of taking money under false pretenses and he hurt a lot of people, but he didn’t set out to do so. Yeah, maybe I have a modicum of sympathy for him as a result.

Jason:
Okay, well that’s an honest answer, and I see that. How much money did he ultimately raise, and how did he raise it? Was it simply networking? Did he give speeches? That was before the Securities Act of 1933. I can’t believe how slow the law changes. It took until 2013 for that to actually change with crowd funding, which is mind-boggling, frankly.

What was his technique?

Mitchell:
It was mostly word of mouth, Jason. Everyone wanted to get in on this as soon as they heard that he was actually paying out the money that he promised. It was 6 months before there was a story in the newspaper about him, but once that hit in the Boston Post in June of 1919, it exploded. I don’t have a final count, it’s impossible, but it could have been 10 million, it could have been 12 million, 14 million – somewhere in that range. They’re extraordinary sums considering it was just people coming up and throwing cash through a window in an office building in Boston, and then he started opening branches.

It was just a classic case of almost like a tulip mania in Boston at the time. This is why his name gets associated with it; everyone was talking about it. His name was on everybody’s lips.

Jason:
Amazing. Was it pretty localized to the Boston area?

Mitchell:
It started spreading. The New York Times started writing about him and people started opening up branches for him up and down the East Coast. When things came to a crashing halt, he was about to open a Texas branch and he was about to take over the world.

Jason:
Fascinating, wow. Okay, so did you have the number on how much he ultimately raised?

Mitchell:
Well, I think I may have mentioned that it’s hard to give you an exact number, and I like to be precise, but it was well north of $10 million.

Jason:
Wow. In 1919, or probably into the twenties. How long did his scheme last?

Mitchell:
Only 7 months.

Jason:
Woah! It was that quick?

Mitchell:
Yeah, it was. It burned out fast, but it was fun while it lasted, for him at least!

Jason:
Sure it was. Boy, that’s mind-boggling. So one of the things I’d like to ask you is – Mitchell, is there anything that our listeners can learn about how to spot a Ponzi scheme today from Charles Ponzi or one of the more contemporary people, like Bernie Madoff or the US government and its social security system. Do you like how I throw that in all the time?

Mitchell:
I do. I’m not going to go with you on that – on another show, we can talk about that.

Jason:
Well, that’s where Madoff said that he got the idea so I’m just quoting him!

Mitchell:
Fair enough. I think there are a number of ways. The Federal Trade Commission – I urge people to go to their anti-fraud site where they have a lot of cautionary recommendations about Ponzi schemes. Some of it is simply your gut. If it sounds too good to be true, it almost certainly is.

Jason:
Well, but wouldn’t the promoter be smart enough to temper the returns and make them intentionally lower and maybe temper the pitch so it’s kind of better than anything else out there, but not incredible so it doesn’t sound too good to be true.

Mitchell:
You’ve really put your finger on it, Jason, because that’s exactly what Madoff did. It wasn’t that his returns promises to his investors were exorbitant – they were metronomic. They were like a metronome; they were steady. You didn’t have to worry. If the S&P Index went up and down, Bernie Madoff would still return 10 or 12% to you every year. It wasn’t this double-your-money kind of craziness because his investors were too sophisticated.

Jason:
Right.

Mitchell:
If Bernie Madoff or anyone else is promising you that no matter what happens, I can give you 10-12%, you really need to investigate how is this possible. Why don’t the laws of financial gravity apply to this guy?

Jason:
You know, it’s just amazing to me the number of people that still get conned. I want to ask you about Nigerian letters in a moment, but nothing is kept a secret very well in today’s very, very interconnected world of lightning speed communications globally. If one guy can do something like Madoff, why can’t everybody do that?

Mitchell:
Very good point.

Jason:
Why can’t every institutional fund return what Madoff could return? It’s not that he had some great secret and JP Morgan didn’t know about it or Fidelity, or Vanguard Funds didn’t know what Madoff knew. That just seems silly to me. I don’t get it.

Mitchell:
If you look closely, every special sauce is really just mayonnaise, mixed with relish.

Jason:
[Laughs].

Mitchell:
It really isn’t something that is so special. You make a great point. There isn’t something that Bernie Madoff, in his backroom is figuring out that JP Morgan couldn’t possibly match. You’re right.

Jason:
Yeah. It’s amazing. Well, okay. Adjusted for inflation, once again, the $10 million in 1919 in the 7 months Charles Ponzi ran his scheme, would be worth $137,234,508.67 today, according to the official inflation stats. That was quite a lot of money in 1919. So what happened to Charles Ponzi? Did he get arrested?

Mitchell:
I’d love for readers to find it themselves, but I will say that these stories don’t end well. He certainly was ultimately arrested, he was tried, he got out for a while and things turned for him. Then he absolutely did run a land swindled down in Florida, where if you like really, really moist land, he had something to sell you. But ultimately, he ends up in prison and then finally, he’s deported back to Italy and ends up dying a pauper in Buenos Aires.

Jason:
Wow, very interesting. So before you go, I’d just like to ask you about the scheme that I cannot believe people actually fall for. It is that email – we’ve all seen it, and we’ve probably got it several times – that someone wants to take a bunch of money out of Nigeria, that maybe they inherited or they’re some banker leaving the country; I don’t even know what the scheme is anymore. They say ‘But I need $10,000 to move the money out of the country, and I’ll split the whole things with you.” Seriously, people believe this?

Mitchell:
On a regular basis, they believe this. It only takes one or two. If they send out something in these little computer shops in Lagos, Nigeria, where many of them originate, if they send out 5,000 or 10,000 or 100,000 of these and one or two people agree to send them just enough money to get them started or good faith money, this is how they suck them in. It seems to be worth their while because they keep doing it. If it wasn’t working, they would stop doing it or they’d do something differently.

I ended up writing a story, I guess an out-growth of my Ponzi work, and I wrote a story about a psychotherapist here in Massachusetts who had, himself, developed a tool that was supposed to determine people’s motives. How ironic is that? He was swept up in one of these schemes, and ultimately was prosecuted by the Federal Government for basically having become a tool of the Nigerian schemers and defrauding two local banks.

Jason:
What did he do? Borrow money from the banks or get the banks to invest in the deal?

Mitchell:
He deposited checks that were clearly forged checks on behalf of these Nigerian schemers.

Jason:
But they would have to know his intent was bad, right?

Mitchell:
Well, they didn’t focus that much on his intent.

Jason:
Because I would look at him as a victim.

Mitchell:
I certainly did, up to a point. There was a point where I started to wonder – did he think that the only way to get his money back, even if he had some suspicions, I think he was trying to get his own money back, and when they offered him these checks to deposit, I think he saw that as a way out. In his desperation, he took these actions that ultimately were bank fraud.

Jason:
Yeah, very interesting stuff. What can we do to avoid schemes like that? It seems so obvious, but apparently a lot of people fall for it, right?

Mitchell:
Well, if you get any email saying that you’ve won a lottery that you didn’t enter, or you’ve won a prize, or someone unknown to you offers you any kind of inducement – specifically money – please hit delete. If you feel like you’ve really missed your big chance, get in touch with me and I will tell you why you didn’t. You’ve missed your chance to get swindled, that’s the only thing you’ve missed.

Jason:
Speaking of online schemes, and there are many of them, but just a couple to mention that aren’t as egregious as the Nigerian scheme, or I should say, as far-fetched. Certainly, people will want to buy something from you on Craigslist, they’ll send you a fake cashier’s check and say that the check is made out for $1,000, but the item’s only $800 so will you send me $200 back. Then you deposit the check, learn it’s fake and that doesn’t work. There’s lots of interesting stuff like this out there. It’s pretty scary that people fall for these things.

Mitchell:
I agree, and the problem is the schemers are always trying to stay one step ahead. Again, your Mother’s taught you this. You can’t get something for nothing, and if it sounds too good to be true.. All of these things are cliches because they happen to be true.

Jason:
Right. And it seems like the people that would fall for the Nigerian scheme are elderly. I would think elderly people would really get the brunt of these schemes. They don’t really always know how the Internet works or understand that people are fake on the Internet.

Mitchell:
I agree with you on that. You’ve really touched on something there, Jason. It’s like ‘If they have my email address, they must know who I am’ – is sadly, the thought of people who are not digital natives. Somebody born before 1960 who’s on the Internet might think ‘Well, they have my address.’ They’re especially vulnerable, and I think again, there have been a number of cases where it’s really tragic how much these people have lost.

Jason:
It certainly is. Well, Mitchell, give out your website or your Twitter handle, whatever you like, and let people know where they can find out about your work.

Mitchell:
Thanks. It’s www.MitchellZuckoff.com. I am on Twitter: @MitchellZuckoff.

Jason:
Mitchell, thank you so much for joining us today.

Mitchell:
Thanks, this was a lot of fun, Jason.

Outro:
Thank you for joining us today for the Holistic Survival Show, protecting the people, places and profits you care about in uncertain times. Be sure to listen to our Creating Wealth Show, which focuses on exploiting the financial and wealth creation opportunities in today’s economy. Learn more at www.JasonHartman.com or search ‘Jason Hartman’ on iTunes. This show is produced by the Hartman Media Company, offering very general guidelines and information. Opinions of guests are their own, and none of the content should be considered individual advice. If you require personalized advice, please consult an appropriate professional. Information deemed reliable, but not guaranteed.

 

Episode: 241

Guest: Mitchell Zuckoff

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