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EpilogueFollowing the news of Ponzi's arrest, on August 12th, the State Attorney General's office was deluged with Ponzi note holders. The staff took information from investors who stopped by, and ended the day with a backlog of several hundred unopened letters.
The federal auditor, Mr. Pride, reported that Ponzi's liabilities were estimated at nearly $7,000,000, and that Ponzi had stated his assets would not exceed $4,000,000. Mr. Pride also said that because of outstanding notes coming in that were not recorded in Ponzi's books, and canceled notes brought in for which Ponzi would receive credit, it would be a while before his liabilities could be stated accurately. A Ponzi note holder again filed a petition of involuntary bankruptcy against Ponzi.
Also that day, Banking Commissioner Joseph C. Allen reported:
There is no doubt whatsoever that the capital of the Hanover trust company is completely wiped out. It should be remembered, however, that the stockholders have a liability of a 100 per cent. assessment, providing such an assessment is necessary to enable the bank to pay 100 cents on the dollar to all depositors. Before the depositors can suffer loss, therefore, the capital stock of $400,000, the surplus of $100,000 and the stockholder's liabilities of $400,000 provided the stockholders can pay, must first be used to take care of the loss.
Ultimately, the full 100 per cent. liability, in the amount of $157,500, would be assessed against Ponzi's estate in bankruptcy.
The following day, Attorney General Allen's office said that those who received payment from Ponzi prior to the crash could be forced to return the money received, to be shared among all creditors. This would be based on the theory that any money Ponzi paid out would be stolen property, and hence recoverable. This theory does not appear to have been pursued, and the only moneys recovered in this manner were those the receivers recovered as preferences under bankruptcy law.
On Saturday, August 14th, hundreds of Ponzi investors again mobbed the halls of the State House, mistakenly thinking they could get their money back there. As the State House closed at noon, note holders were still streaming in.
The day after Ponzi's surrender and return to jail, Saturday August 14th, he began entertaining guests. His wife obtained a pass which granting her visiting privileges Saturday, Sunday, and Monday. Miss Lucy Mell, Ponzi's office manager, also received a pass. The federal auditor, Edwin Pride, stopped by, hoping to review some notes with Ponzi. Mr. Pride also responded to rumors that Ponzi had transferred substantial assets to his wife, promising that such assets were the proceeds of fraud and would be recovered from Mrs. Ponzi, along with any other assets Ponzi was believed to have hidden.
Since entering jail, Ponzi had been receiving letters containing death threats, and American detectives visited Montreal searching for a man who had allegedly made such threats. It may be that Ponzi's American publicity conjured up ghosts from his Canadian criminal past.
Mrs. Ponzi visited the East Cambridge jail again Sunday, spending 45 minutes with her betrothed. She greeted him affectionately and delivered a large care package containing, among other things, haberdashery and cigarettes.
Ponzi's family reported that his attorneys were preparing a defense of "financial dementia." His associates of the past ten to twenty years reported that he obsessively devised schemes for amassing immense wealth. Excusing a swindler based on such "financial dementia" would be like excusing a murderer for being an "angry person," and this line of defense was not pursued.
While Ponzi's arrest put an end to public debate over the legitimacy of his scheme, it gave rise to an equally fascinating intrigue: hunting for the fortune Ponzi was thought to have concealed. Saturday evening, Mr. Pride and a Postal Inspector secretly searched Miss Lucy Mell's home at 27 Temple Street in Revere. The search yielded no riches, and the raiders had to settle for a bundle of papers.
There was also speculation on the streets of Boston as to whether Ponzi was merely a front for an organization which provided the brain power and backing, and received the profits, from the Securities Exchange Company forty-five day notes. While such a thing is not inconceivable, this theory was never elaborated on or substantiated by subsequent events.
On Monday August 16, State Authorities announced that they had discovered a small portion of Ponzi's rumored hidden assets as well as information on how his wealth had been hidden. The only manifestation of this was the seizure of $9,926 from a bank vault and $1,155 from a Ponzi agent. On the federal side, Mr. Pride, United States District Attorney Gallagher, Assistant United States District Attorney Shea, and a postal inspector interviewed Miss Lucy Mell at some length, hoping to locate Ponzi assets.
As the State Attorney General's office had thus far uncovered only $2,121,808 in liabilities (with only 5,000 of the final tally of 10,000 notes identified), investors and authorities were optimistic that Ponzi's assets, once uncovered, would prove adequate to pay his liabilities.
While initially dejected with his latest series of setbacks, Ponzi demonstrated remarkable resilience of spirit. It was reported that he awoke and met the new day with "restored cheerfulness of spirits."
The nadir of the futile search for Ponzi's hidden wealth was probably the seizure, by Internal Revenue agents, of 100 gallons of Italian wine from his Lexington mansion on August 18th. With Mrs. Rose Ponzi's gracious cooperation, investigators searched every inch of the home, presumably knocking on walls and ceilings in search of secret compartments. The seizure of wine was apparently a pretext to search for hidden cash, securities, or clues as to the location of hidden assets.
The State Attorney General was by now estimating Ponzi's liabilities at $3,000,000 while the federal estimate of $7,000,000 was closer to the $6,396,353 ultimately established by auditors. Observers interpreted Rose Ponzi's receipt of a week-long pass to visit her husband in jail as a sign that her husband had given up trying to make bail.
The next day, August 19th, state Attorney General Allen stated that he would seek $100,000 bond, but suggested that if Ponzi revealed the location of his hidden assets, the state might become more flexible on the matter of bail. This amount would be in addition to the $25,000 bond already required by federal authorities.
On Friday, August 20, three prominent local attorneys were appointed as receivers of Ponzi's estate. At this time, the State House reported that 10,550 Ponzi note holders had come forward, their notes representing a face value of $4,308,874.73. The receivers confronted Ponzi with this amount. Ponzi abandoned all pretense and admitted he was bankrupt. He was then taken to Bankruptcy Court and took the bankrupt's oath before Referee Olmstead.
News of Ponzi's bankruptcy devastated note holders who had clung to the hope of getting at least their original investment back, some still planning on collecting the 50 per cent. profit as well. With the face value of known liabilities still some $2,000,000 short of the final tally of $6,396,353, comparatively little was known about Ponzi's assets.
Investigators had thus far uncovered very little in the way of assets, compared to the millions in liabilities, and the task of seeking out Ponzi's assets and sorting out the mess now fell to the receivers. They, and their successors, would spend seven years recovering assets totaling 37 per cent. of Ponzi's liabilities. While some efforts to locate hidden cash would continue, with limited success, the receivers would ultimately make recovery from only two significant sources: the $1,500,000 certificate of deposit at the Hanover trust, and the estimated $5,000,000 received by investors in the run prior to Ponzi's collapse. The receivers would fight most of this battle in the judicial system, winning a significant victory in the United States Supreme Court, and making several appearances before the Massachusetts Supreme Court.
The next day, August 22, in a hearing with federal receivers, Ponzi produced two certificate of deposits for $500,000 and a third for $58,221. These certificates were derived from the original $1,500,000 certificate, created when bank officials desperately sought to cover Ponzi's overdrafts on August 10th. The bank's activities in the final days of Ponzi's run show that it had become an instrument of his criminal enterprise. The story of how the $1,500,000 certificate of deposit became a number of smaller ones provides one such example.
On the morning of August 10th, bank officials calculated the balance of Ponzi's account, finding it overdrawn in the amount of $441,778.07. Hanover Trust officials backdated three $500,000 certificates of deposit to July 22, and substituted them for the original $1,500,000 certificate. The treasurer of the bank then wrote a check in the amount of the overdraft, credited it to Ponzi's account, and made out a certificate of deposit for $58,221.93, the difference between the overdraft and $500,000, substituting it for one of the $500,000 certificates. Bank officials, both in allowing Ponzi to overdraw his account, and then in making available the funds from the certificate of deposit prior to expiration of its thirty day notice period (August 22), to cover that overdraft, violated Massachusetts banking law.
Upon taking the stand at the hearing, Ponzi stated his willingness to make "full disclosures" to assist receivers in recovering assets for his creditors. After some routine questions, counsel for the receivers asked Ponzi if he had told the truth when he told the State Attorney General he had between $6,000,000 and $8,000,000 cash. Finding this question intolerable, Ponzi angrily replied that the subject of the hearing was not his statements to the Attorney General, that if the hearing were not confined to questions about his assets, he would no longer cooperate. Ponzi's counsel echoed these sentiments, claiming the receivers were browbeating his client.
Ponzi's testimony revealed that, remarkably, he did not know many of the details of his operations including the names of his agents, accounts in several banks, and who had been authorized to write checks in his name. He explained that he left such matters to the 18 year old Miss Lucy Mell. Ponzi revealed, as an asset, his 1,575 shares in the Hanover Trust Company, which later turned out to be a liability rather than an asset to his estate. He also estimated that $7,500,000 had been paid out to investors between the July 26 halt in note sales and the closing of his business. Federal auditor Pride then took the stand, repeating his estimate of Ponzi's liabilities at $7,000,000 and stating that he had uncovered no evidence of any trading on postal reply coupons.
On August 23, Ponzi's counsel filed a petition denying Ponzi's insolvency and seeking a jury trial on the issue. This move would invalidate proceedings thus far, but other than delay would have no impact on the inevitability of Ponzi's bankruptcy. A hearing the next day brought some excitement for a standing-room-only crowd. After being criticized for taking exorbitant retainers in the amount of $25,000 each, Ponzi's attorneys Daniel H. Coakley and Daniel V. McIsaacs claimed they wanted all of Ponzi's assets to go to his creditors and challenged the receivers to similarly work without compensation. The receivers declined the offer and Receiver Edward A. Thurston remarked "If you thought this man had a million dollars left, do you suppose anybody thinks you would have got only $25,000?"
Coakley responded, shouting: "You are a liar when you suggest anything like that," calling Receiver Thurston a liar three times. The receiver responding: "Thank you."
On the stand, Ponzi discussed locations of various safety deposit boxes, and responded evasively to questions about his solvency. Miss Lucy Mell took the stand and testified that she only had knowledge of transactions within the office, not of Ponzi's outside dealings. When asked if there were any postal reply coupons in the office, she replied "Yes, one or two for samples." This response caused many to smile, Ponzi looking up from conversation with his wife and laughing.
The next day, Ponzi's receivers visited several banks, unearthing little of interest. The day after that, Ponzi, accompanied by two federal Marshals, guided the three receivers, on another excursion to various safety deposit boxes, as well as his Lexington home. The day's effort yielded $11,370 in cash, $2,000 in Liberty bonds, and 100,000 German marks.
On August 27, symbols of Ponzi's better days, his palatial Lexington home and his three cars, were seized. The home, occupied by Ponzi's wife and mother, was quiet and its shutters closed, the servants and guards dismissed. Mrs. Ponzi did not criticize authorities for seizing the home, but lamented that her "fair weather" friends had deserted her. Regarding her future she stated: "I am penniless and without friends, but, thank God, I am strong and can work." Her cars having been turned over to authorities, she took a street car to visit her husband in jail. She expected to be evicted from the home in the next few days, and would seek a small apartment.
On a lighter note, Daniels who had extorted $40,000 from Ponzi in settlement of his partnership claim, would be forced by receivers to disgorge this money, and in a turnabout of fate, Daniels was on the receiving end of an injunction freezing his assets.
In a report submitted September 3rd, Mr. Pride estimated that Ponzi had taken in $9,814,884.70 and paid out $7,824,650.77. The difference between these sums, $1,990,325,53, if located, was thought to be adequate to pay 50 cents on the dollar of Ponzi's outstanding debts (less any profit).
On October 5th, Charles Rittenhouse, auditor for the federal receivers, reported at a federal bankruptcy hearing that Ponzi had assets slightly exceeding two million. This total included the $1,058,221 certificate of deposit, $110,000 for his Lexington home, and his Hanover Trust Company shares estimated at $200,000.
Ponzi had apparently withdrawn his demand for a jury trial in his bankruptcy proceedings, and he was adjudged bankrupt on October 25. Although receivers worked diligently rounding up Ponzi assets, his creditors would receive a paltry 10 per cent. of their money by Christmas of 1921. They would receive their fifth and final dividend from the receivers seven years later on December 19, 1928, having recovered a total of 37 per cent. of their original investment.
As the auditor's report suggested, the most significant repository of assets potentially available to receivers was the money paid to investors during the run. The mechanism by which lucky investors could be made to share their spoils with those who had lost all was the law of preferences in Bankruptcy, as defined by then § 60b of the Bankruptcy act.
Avoiding preferences in the distribution of the bankrupt's estate is a primary objective of bankruptcy law:
The policy and aim of bankrupt laws are to compel an equal distribution of the assets of the bankrupt among all his creditors. Hence, when a merchant or trader, by any of the tests of insolvency, has shown his inability to meet his engagements, one creditor cannot, by collusion with him, or by a race of diligence, obtain a preference to the injury of others. In the absence of a bankruptcy law, the least suspicion of the insolvency of a debtor, his inability to meet obligations or the like, naturally cause the zealous creditor to institute attachment proceedings and perhaps cause liquidation of the debtor, who, left to his own resources and given reasonable time, would be able to avoid suspension and perhaps ruin.
As the discussion above indicates, preventing the ruinous run is perhaps the main purpose of the law of voidable preferences in bankruptcy. Yet, in a situation like this, the statutory admonition seems no more persuasive than a suggestion. In a mob situation like this, possession is indeed nine tenths of the law. Ponzi's note holders knew it is far better to have possession of the full amount due and wait for the receiver to try and retrieve part of it than to have nothing and wait for the receiver to recover from those in possession. Also, investors here had no reason to believe that, as a certainty, their money would be taken by receivers in bankruptcy. After all, even the Federal courts were divided on this issue.
There are legal hurdles the receiver must clear before recovering any preference, and the law governing this particular situation was not entirely clear until the Supreme Court reversed the lower courts and ruled in favor of Ponzi's receivers. Another hurdle faced by the receivers was the fragmentary nature of Ponzi's records, and doubtless many who had secured refunds, or even profits, were not revealed to the receivers, and benefited fully from their race of diligence.
And aside the time spent and giving up money received, there is no penalty for participating in the race of diligence:
A preference involves no element of moral or actual fraud. It is simply a constructive fraud established by law upon the existence of certain facts and prohibited by it. There is nothing dishonest or illegal in a creditor obtaining payment of a debt due him from a failing creditor; not in his attempting by proper and ordinary effort to secure an honest debt, though such act may afterwards become a constructive fraud by reason of the filing of a petition and adjudication in bankruptcy.
Section 60b of the Bankruptcy Act, as it stood at the time of Ponzi's bankruptcy, provided:
If a bankrupt shall have made a transfer of any of his property,and being within four months before the filing of the petition in bankruptcy[,]the bankrupt be insolvent and the transfer then operate as a preference, and the person receiving it shall then have reasonable cause to believe that the transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person
In the run on Ponzi, most of the statute's requirements were easily met. There was no question about his insolvency; he was insolvent from the day he opened. The run fell within the four month timeframe. Payments to investors depleted Ponzi's assets to the detriment of those not receiving payment, and clearly operated as preferences to those receiving the money. The remaining legal issue, then, became whether, when receiving money from Ponzi, the investor had "reasonable cause to believe" that Ponzi was insolvent and would be unable to pay all investors in full.
The new § 60b, enacted in 1910, liberalized the requirements for finding of voidable preference. The receiver no longer had to prove that the bankrupt knew he was insolvent and intended to make a preferential payment, and that the creditor had reason to believe a preference was intended. Under the new statute, the receiver need only establish that the creditor had "reasonable cause" to believe a preference was intended. This legal standard reflects a very practical concept. As the Supreme Court later pointed out, everybody who participates in a run on an institution has a reasonable cause to believe a preference would result, as that is their whole purpose for standing in line: to get their money back before it runs out. Fundamental to the concept of a run is the belief that all who are owed will not be paid.
The preference is not void, but rather voidable. The receiver must decide whether to pursue the matter. On February 18, 1921, Ponzi's receivers declared their intention to recover all moneys paid to investors, whether refunds or payment on matured notes, to be distributed equally among all Ponzi creditors. They stated $5,000,000 had been paid to investors in the week or ten days prior to the closing of Ponzi's business.
Aside from that handful of investors who, through a sense of community obligation, surrendered up their Ponzi receipts voluntarily, legal compulsion would be necessary to recover the money. To clarify the legal obligations, receivers filed suits involving a small number of investors whose situations would be representative of hundreds of others.
In such one case, three investors admitted having doubts about Ponzi's solvency either after the July 26 announcement of the investigation or the August 2 expose by a former employee. On April 26, the District Court found that these investors, as they admitted, had reasonable cause to believe Ponzi was insolvent, and ordered them to turn their money over to the trustees. Although ruling against them, the court commended the investors for their candor.
Those who were perhaps less candid, and denied they sought refunds because of concerns about Ponzi's bankruptcy, presented a more difficult and probably more typical case. The trustees brought suit against six such note holders who had received refunds. Again, the stated objective of these cases was "to test, in the court of appeals, questions common to many hundred suits now pending and yet to be filed."
The defendants in this case, Ponzi note holders who had received refunds in the run following the August 2nd expose, claimed they had no reasonable cause to believe Ponzi was insolvent. Proceeding upon a complex and confusing theory involving rescission for fraud and constructive trust, the investors claimed their refunds were beyond the reach of § 60b. The District Court, and First Circuit Court of Appeals adopted their theory and ruled against the receivers.
Adopting a simpler and more sensible rationale, the Supreme Court ruled in favor of the trustees on April 28, 1924:
On the morning of August 2nd, when news of Ponzi's insolvency was broadly announced, there was a scramble and a race. The neighborhood of the Hanover Bank was crowded with people trying to get their money and for eight days they struggled. Why? Because they feared that they would be left only with claims against the insolvent debtor. In other words, they were seeking a preference by their diligence. Thus they came into the teeth of the Bankrupt Act and their preferences in payment are avoided by it.
The court disposed of the theory adopted by the courts below:
After August 2nd, the victims of Ponzi were not to be divided into two classes, those who rescinded for fraud and those who were relying on his contract to pay them. They were all of one class, actuated by the same purpose to save themselves from the effect of Ponzi's insolvency.
The court referred to the broader policy of the law of preferences:
It is a case the circumstances of which call strongly for the principle that equality is equity, and this is the spirit of the bankrupt law. Those who were successful in the race of diligence violated not only its spirit but its letter and secured an unlawful preference.
Next to the refunds secured by investors during the run, the most significant asset available to Ponzi's receivers was the $1,058,221 in certificates of deposit issued by the Hanover Trust Company that Ponzi had turned over to the receivers. However, the receivers were not free to distribute this money to investors. The Commissioner of Banks also sought the certificates. As a shareholder of the insolvent Hanover Trust Company, under Massachusetts law Ponzi was also liable to the depositors and other creditors of that institution. The matter was litigated, and on June 5, 1924, the Massachusetts Supreme court found that the receivers could distribute the value of the certificates of deposit to Ponzi creditors, but only after his liability as a shareholder of the bank were set off against the note. This calculation was to be made by a single justice, and on July 12, $456,146 of the total was made available to the receivers and distributed to creditors. This represented about one-third of the $1,500,000 ultimately recovered and distributed to Ponzi creditors.
Frequent visitors to the courtroom, Ponzi's receivers in bankruptcy litigated a variety of other matters involving the estate. One such case involved an agent seeking to recover commissions he had earned selling Ponzi notes to investors. The man, claiming a good faith belief that Ponzi's scheme was legitimate, had invested his commissions in Ponzi notes. When he sought to enforce his claim against Ponzi's estate, the District Court found that the agent's services were not valuable, acting instead to increase Ponzi's insolvency, and hence the agent could not recover against the estate. In another case, Ponzi's estate in bankruptcy was found to be subject to a 6 per cent. tax on earnings levied by the State of Massachusetts.