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BankruptPonzi's operation expanded dramatically in May, June, and July of 1920. As word of early investor's profits spread, people flocked to his offices. By July he was taking in about $1,000,000 a week. Under the capable administrative hand of the 18 year old Miss Lucy Mell, his operation expanded to several other northeastern cities.
Daniels, unable to reach accord with Ponzi over his partnership claim, filed a bill in equity in the superior court on July 2. A procedural feature attendant to the filing of a lawsuit in Massachusetts, the attachment on mense process, allowed Daniels to attach, and essentially freeze, over a half-million dollars Ponzi had in several banks. This process, "peculiar to the New England states," gave plaintiffs the enormous tactical advantage of attaching defendant's assets prior to any judicial review of the merits of their claim. If this seems violative of the due process clause, a three judge federal panel agreed in the early 1970s, finding the Massachusetts pre-judgment attachment laws unconstitutional. Regrettably for Mr. Ponzi, this relief came 50 years too late to help.
Federal, State, and county officials, suspecting Ponzi's business had no legitimate basis, and knowing the aggregate postal coupon volume did not support his declared profits, were nonetheless unable to identify concrete evidence of illegality. Apparently, all investors had thus far been fully paid in a timely manner.
Without any substantial case against Ponzi, Massachusetts District Attorney Joseph C. Pelletier began meeting with him to discuss his postal coupon business. Using some combination of intimidation and charm, Pelletier convinced Ponzi to quit accepting deposits from new investors starting Monday, July 26, and continuing until an auditor could verify the soundness of his operation. Pelletier admitted the agreement was not based on any specific law, but rather on "public policy." Hundreds of eager investors were turned away with money in their hands. It was estimated that Ponzi had been taking in $200,000 a day of new investments prior to the halt.
Ponzi announced he would continue to pay matured notes at face value. non matured notes would be refunded in the amount of the original investment for those not willing to wait. He assured investors and law enforcement personnel that he had millions in banks here and abroad, far in excess of his liabilities.
Both Ponzi and the District Attorney stated the halt was temporary and that acceptance of new investments would resume once the auditor gave Ponzi a clean bill of health. Ponzi's motives in entering into this agreement can only be a matter for speculation. Cutting off new investments, the lifeblood of his business, would cause the collapse of his enterprise. An audit would reveal liabilities far in excess of assets. While in retrospect his demise seemed inescapable, Ponzi may have expected he could eliminate law enforcement pressure and continue his scheme, at least for a time. In some respects, he very nearly succeeded in doing so. It may also be that as a respected and wealthy man, this former table-waiter and convict simply wanted to delay the inevitable, and savor his moment of glory.
Normally in a scheme of this sort, it is the perpetrator's objective to abscond with the funds as the scheme is at its peak. While authorities eventually had Ponzi watched to prevent his premature exit, his failure to flee in late July remains inexplicable. Three weeks would find Ponzi in jail, but he was able to project a facade of respectability right up to the last few days of freedom. We will now proceed with a day-by-day account of the nineteen days preceding his incarceration. During this time he demonstrated a remarkable charm and facility for deceit as he manipulated his finances, investors, investigators, reporters, and the general public.
Monday's announcement of a halt in new investments created a frenzy among investors on Tuesday as the New York Times reported:
Secret selection of an auditor to investigate the affairs of Ponzi, the newest 'financial wizard,' whose promise to 'double your money within ninety days,' has set Boston wild, a near riot in the school street offices of the Securities Exchange Company, in which four women, exhausted by hours of frantic endeavors to reach the inner office to collect their money during one of the periodic attempts of the crowd to force entrance to the rooms; the injury to several men in the crowd who were cut by flying glass from the doors when they attempted a wedge formation to force their way inside, and a constantly growing demand for repayments of credits marked the day's developments in the $8,500,000 financial sensation.
District Attorney Joseph C. Pelletier announced today that he had appointed an auditor to examine carefully into the standing of Ponzi's business venture, but declined to make the name public until tomorrow. Pelletier refused point blank to answer any questions as to why he concealed the name of the auditor or to speculate or comment in any way upon the case.
Shortly before the news was announced of the appointment of an auditor a crowd of persons who had invested money with Ponzi, most of whom were Italians from the South End colony, rushed his offices, forced admittance, and gave the police a merry time before order could be restored.
A second disturbance occurred during the luncheon hour when a flying wedge of creditors jammed the doors of Ponzi's office. A squad of seven policemen fought their way through and threw them, yelling, from the offices. Then followed a ten minute fight to clear the corridors.
So many creditors appeared at the School Street Offices that Ponzi took over the 'Bell in Hand,' famous for years as a barroom in the Alley, and transformed the place into a temporary office. There applicants for return of loans were received, their applications checked, and those approved paid from a hastily constructed cashier's booth within the exit doorway.
At least a thousand claims were satisfied today before the business closed. After the cash on hand in Ponzi's offices had been exhausted, and clerks were paying with bank checks. There was little argument over claims, either for withdrawal at the end of the interest paying period, or for those surrendering notes and receiving face value of the original investment.
A Ponzi note holder petitioned Superior Court Judge Wait for a temporary injunction freezing Ponzi's bank accounts, and sought to have Ponzi's business put into involuntary receivership. After Ponzi's counsel explained that Ponzi was solvent and had met all obligations in a timely manner, the petition was denied and the application for receivership was withdrawn.
The federal authorities also took action. United States Attorney Daniel J. Gallagher issued a statement from Ponzi explaining how he had profited from postal coupon transactions. Gallagher asked Ponzi a question that put the lie to his explanations: If Ponzi had millions in various banks and a profitable scheme, why would he want to solicit additional investment? Ponzi's answer was revealing in its deficiency, but nobody seemed to notice: "[Ponzi] said he did not use the money but would eventually need the people."
The hottest topic of the day, Ponzi held court with attentive reporters. He expounded increasingly grandiose schemes for their benefit. "Almost," a citizen, he would run for office; he would make Boston the largest importing and exporting centre in the world; he would launch a $100,000,000 enterprise, keeping only $1,000,000 and donating the remaining $99,000,000 to charity; he would form a new banking system dividing profits equally between depositors and shareholders.
The most significant developments that day took place far from the public eye. The Commissioner of Banks ordered the Hanover Trust Company to report to him daily "the total clearings, reserves, the total deposits in both savings and banking departments of the trust company, and the amount of overdrafts." Ponzi, anticipating the need for additional funds due to the run, gave notice of withdrawal on his $1,500,000 certificate of deposit. Under the terms of the certificate, the money would not be available for thirty days. As it turned out, the thirty days' wait proved too long for Ponzi.
The run continued Wednesday, July 28, and Ponzi had hot dogs and coffee served to the thousands crowding outside his office to get their money back. Some were so impressed with this gesture that they had a change of heart and went home. He assured nervous investors, claiming $12,000,000 in assets; $4,000,000 in America, and $8,000,000 overseas.
Speculators milled through the crowd purchasing notes from nervous investors at a premium, hoping to redeem them at the full 50 per cent. profit when they matured. Ponzi warned against such predatory practices and repeated his intentions to pay all notes in full. Ponzi estimated he had paid out "more than $1,000,000 up to the close of business today."
Again holding court with reporters, he recounted his early days (quoted above) and repeated his new populist theory of banking. This served the need, shared by every swindle, for an explanation of why the swindler would be inclined to share extraordinary profits with the investor, rather than simply keeping them. Responding to skeptics, he claimed that profits such as his were routinely earned by banks, but they simply declined to share them with depositors.
The day also brought an announcement by United States Attorney Gallagher that the United States Government would audit Ponzi's books. The audit would be separate from the State audit already announced. Authorities were still tentative about their suspicions of Ponzi. Gallagher commented: "As I told Ponzi the other day, he is either a beneficiary deserving of the blessing of the public, and all the like, or he should be in jail. Ponzi agreed to that."
In an odd aside, a group who had profited from Ponzi investments presented themselves at the office of his attorneys as the "Ponzi Alliance." After presenting draft resolutions for adoption at an organizational meeting, they passed into oblivion.
The run continued Thursday, July 29, with an estimated half-million dollars paid out. Again, all investors were paid in full. Daniels continued pressing his claim for a partner's half share of Ponzi's profits, filing an amended motion with Judge Wait seeking to freeze Ponzi's investment in the Hanover Trust Company and a number of other firms.
Miss Lucy Mell estimated that $2,000,000 had been paid to investors since the run began Monday. There was a brief panic as Ponzi's School Street office did not open at the scheduled 9:00 AM. Rumors flew: had Ponzi "skipped out?" The office opened before 10:00, however, and Ponzi waved to a cheering crowd when he finally showed up at 11:00.
Postal officials announced the first change in postal conversion rates since pre-war days. The announcement stated that the new rates were not the result of any schemes by "individuals or corporations to profit by foreign exchange differences."
By Friday, July 30, only a short line of investors were waiting when the office opened. Clerks reported that business was split equally between those seeking refunds and those surrendering matured notes. A firm of auditors appointed by United States Attorney Gallagher began examining Ponzi's books. Ponzi reiterated his confidence that the audits would reveal assets far in excess of liabilities.
Ponzi responded to unfavorable articles printed about him:
Service of a writ calling for an attachment of $5,000,000 worth of real estate belonging to Clarence W. Barton, publisher of the Boston News Bureau, will be made tomorrow morning by Deputy Sheriff Fennessey on behalf of Charles Ponzi, preliminary to the filing of a declaration setting up alleged libel. Ponzi maintains that an article which appeared in the Boston News Bureau this morning, relating to his methods of doing business, is a libel against him, and he therefore calls upon Mr. Barton to make reparation in money damages.
The investigation and other bad publicity did not dampen the enthusiasm of all investors. Ponzi reported he would probably decline an offer of $10,000,000 for investment from a group of New York bankers. He repeated political aspirations, claiming he would be a citizen before city and state elections took place. Alternately, he might pick a "wet" candidate and "back him to the limit."
Sunday brought the first of August with federal auditors working well into the night on Ponzi's books. A continuous line of gawkers drove past Ponzi's Lexington house while his guards turned away those who sought a closer look on foot. Ponzi spent the afternoon motoring with his wife. Let us hope they savored this idyllic drive, as less than a fortnight would find Ponzi in jail, his wife in tears.
He had survived a multi-million dollar run with poise and charm, but the respite was brief. On Monday, August 2nd, a Boston Newspaper published an expose of Ponzi's operations by W. H. McMaster, a former publicity agent for Ponzi. The article, attacking Ponzi's claims of solvency, brought the biggest run on his offices yet. This publication also had legal significance, as all investors receiving payment from Ponzi after this point, were deemed to believe he was insolvent and became liable to Ponzi's receivers in bankruptcy.
Investors began gathering at 6:30 A.M. jamming the street from one end to the other. Ponzi denied the published allegations and claimed he had twice the money necessary to meet all obligations. He greeted the clamoring crowd with his familiar smile and confident assurances that all would be paid. He then went inside and instructed his clerks to pay all claims as quickly as they could examine the notes, count out the cash, or sign checks. He then retired to his office and entertained reporters with more tales of his extraordinary wealth in various banks.
While Ponzi tended to his office, federal officials met in a conference lasting several hours. Those present included the auditor Edwin L. Pride, Assistant United States Attorney Daniel Shea (acting for United States District Attorney Gallagher who was in New York attending a Knights of Columbus convention), several Post Office Inspectors including Chief Inspector Mosby, and a representative of Attorney General A. Mitchell Palmer. Mr. Pride reported that thus far, no evidence of wrongdoing had been found.
The run continued unabated Tuesday, August 3rd, and Ponzi met it with smiles and assurances: "Mountains of money available to pay all claims. All the Boys and Girls have to do is drop in and get it." He described plans for his new $100,000,000 operation which would involve "banking." Mr. Pride remarked that he had never seen so much ready cash in one place in his life and did not expect to again. Ponzi responded by offering Pride a position as chief bookkeeper in the new operation. His response is not recorded. Many waiting in line complained about the slowness of their progress and observed that some were allowed into the office without having to wait in line. Ponzi's finances were showing some strain, as he borrowed $255,000 from the Hanover Trust Company using fictitious names.
Federal and state officials raced to prosecute Ponzi, and tensions emerged. The New York Times reported:
Today, Attorney General Allen sought to name another auditor, Samuel Spring, to cooperate with Mr. Pride in the audit. Pride resented the Attorney General's suggestion and replied that another auditor would hinder rather than speed his work. District Attorney Pelletier today displayed 'feeling' in a statement to the effect that 'He was getting well into the Ponzi case when the Attorney General took it away from him.' Attorney General Allen replied and showed a copy of a letter from Pelletier several days ago, requesting the latter to continue the work on the case.
All note holders were again paid in full Wednesday, August 4th, with the line decreasing throughout the day. By the day's end, the second run appeared to be over. Ponzi became less accommodating toward investigators. Willing to have auditors review his liabilities, he drew the line when J. Weston Allen, state Attorney General, suggested an auditor review his assets: "There is no law which can force me to show my assets. My accounts are in the hands of Mr. Pride to reveal my liabilities and they are going to stay in his hands until he gets through with them. When my liabilities are established, then I will produce enough cash to cover them, and no more." Due to the voluntary nature of the agreement, there was not much investigators could do to press the point.
Only twenty-seven investors were in line when the School Street office opened Thursday morning, August 5th. Investors straggled in throughout the day, mostly presenting matured notes. The federal auditors announced that their audit would take longer than expected.
Responding to rumors, Ponzi denied that he was a bolshevist agent: "No, certainly not. Do I look like one?" His office was quiet for extended periods and a total of $154,379 was paid out on 255 notes, all but 10 having matured.
Ponzi had handled the crisis with no apparent sign of weakness. A New York Times editorial reported public opinion was shifting toward Ponzi and away from his critics and antagonists. The Commissioner of Banks stepped up his surveillance of the Hanover Trust Company, sending over two examiners.
In fact, the run devastated Ponzi financially. A serious problem was the freeze Daniels had placed on some half-million of Ponzi's funds in pressing his partnership claim. On Friday, August 6th, Ponzi resolved to settle with Daniels. Bankruptcy Referee Olmstead related this remarkable narrative in which the swindler received a first-class shakedown from Daniels and his attorney:
Mr. Ponzi sent word to Mr. Daniels, requesting an interview. Thereupon Mr. Daniels met Mr. Ponzi at his office in the building of the Hanover Trust Company on Washington Street. A discussion took place as to the settlement of the suit. Mr. Ponzi was determined to settle at any price as his affairs were becoming desperate and he needed to release this large sum of money from attachment, in order that he might make payments, although he had ceased to take in money on the 26th of July by virtue of an arrangement with the state and federal district attorneys and the Attorney General of the Commonwealth.
Mr. Daniels finally agreed to settle for $50,000. Mr. Ponzi immediately sent to the Hanover Trust Company and obtained $10,000 in case and a certified check for $40,000 payable to Mr. Daniels. He and Mr. Daniels then went to the Cosmopolitan Trust Company to secure the release of certain attachments; his counsel, Mr. Fowler having prepared the papers therefore. At the Cosmopolitan Trust Company the bank officials were somewhat suspicious of the settlement in the absence of counsel; the name of Mr. Daniels counsel appearing on the writ. It was arranged, therefore, that Mr. Harris should be notified, and he accordingly repaired to the bank. After some angry discussion between him and Mr. Ponzi, Mr. Ponzi stated that it was necessary to make a settlement with Mr. Harris in order to secure the release of the attachment, so the sum of $9,500 was paid to Mr. Harris in cash by Mr. Daniels, and an additional sum of $5,000 cash was paid by Mr. Ponzi to Mr. Harris.
Yet the settlement, and its freeing of assets, came a day or so too late. Ponzi's funds from various banks were being channeled through the Hanover Trust Company, and examiners were watching the balances in Ponzi's accounts there closely. At the close of business Saturday, August 7th, Ponzi's balance was $13,391.32. With no significant deposits coning in, the Commissioner expected Ponzi to overdraw his accounts when the bank resumed business Monday, August 9th. In anticipation of this, he sent a representative to the Hanover Trust Monday morning.
On Sunday, August 8th, Ponzi announced he would open his new $100,000,000 venture, tentatively named the "Charles Ponzi Company," on Monday, but as with his current business he would not accept investor's money, until he had received a clean bill of health from the auditors. He dropped out of sight for seven hours, again prompting rumors that he had skipped out. Upon his return he claimed he had been planning his new enterprise in private.
Monday, August 9th brought the effective end of his reply coupon business, even as he announced the opening of his new "$100,000,000 concern for worldwide operations." At 1:45 P.M., the Banking Commissioner's representative reported that the Lucy Martelli Account (fictitious name for a Ponzi account) was overdrawn. The Commissioner immediately telephoned the bank and ordered its officers to stop honoring Ponzi checks. Bank officers refused to comply, and continued honoring his checks until 2:45 P.M. when a written order from the Commissioner was received. By the end of the day, Ponzi's account was overdrawn by more than $300,000. Two deposits were returned unpaid, and by the next day, the overdraft was $441,878.07. The bank's defiance of the Commissioner may have hastened its demise, as he seized the bank 48 hours to the minute after Ponzi's first overdraft. Ponzi was still able to pay the few investors presenting mostly matured notes that day.
Ponzi claimed the commissioner had acted "improperly," and criticized state officials for not allowing him to pay investor's claims. He concluded: "I am sick and tired of the whole mess." Federal auditor Edwin L. Pride announced his audit was complete and passed the results to United States Attorney Gallagher.
Ponzi spoke before the Kiwanis Club on Tuesday, August 10. The invitation to be the club's after-dinner speaker had been extended before the controversy surrounding Ponzi began. Turnout for the luncheon was so great that attendees had to be fed in relays. Ponzi was greeted with a cheering and attentive crowd. His speech revealed nothing new about his activities, and Ponzi was asked why postal authorities could find no indication of high volumes of coupon redemption. He replied that foreign governments profited from issuance of reply coupons and would not disclose to other governments how many coupons they had issued.
Earlier that day, he had ordered his offices closed, telling those seeking payment to come back on Friday. Despite the bad publicity, Ponzi was deluged with applications from prospective investors. He received over a thousand letters, many containing checks, but directed his staff to return the money. Ponzi's criminal record was beginning to come to light. He admitted he had been arrested once in Boston, but stated the case had been dismissed when it came up in municipal court, and refused to elaborate. He denied the report that he had been arrested in Montreal.
As Referee Olmstead had said, Ponzi's business was that of borrowing money at usurious rates. Ponzi investors sought and received assurances from the Attorney General that they would not be prosecuted under the Small Loans (usury) Law which prohibited interest over 3 per cent. on loans under $300.
On Wednesday the 11th, Ponzi's Montreal forgery conviction and resulting prison term, as well as his Immigration law violation and resulting Atlanta prison term were revealed. He denied the Montreal story, admitted it, denied it again, and then, weeping, made a clean breast of both episodes. He expressed fear of deportation. The publicity brought other fears. Concerned about either disgruntled investors or past associates, he began carrying a loaded pistol. He even carried it in his dressing gown pocket before he put his clothes on in the morning, and showed it to reporters from time to time. He announced that his guards had been instructed to "shoot prowlers first and investigate afterward."
Unable to show assets to cover his liabilities as he had promised, Ponzi surrendered to Federal authorities on Thursday, August 12, was arrested and charged with mail fraud He was arraigned before United States Commissioner Hayes who set bail at $25,000. While the warrant formalities were handled and bail arrangements made, Ponzi slouched glumly in the Federal Marshal's private office.
Morris Rudnick, a Roxbury real estate dealer, posted bond and Ponzi was released, only to be arrested by Massachusetts authorities and charged with larceny. Bond was again set at $25,000 and again furnished by Mr. Rudnick. Fearing for his life, Ponzi had his bondsman surrender him to federal authorities the next day and he began residence in the East Cambridge Jail on Friday the 13th.
That evening Mrs. Ponzi entertained friends in their Lexington mansion. Smiling, she expressed her confidence in her husband, unaware of his arrest. He had called from jail and explained his absence by saying he would spend the night in Boston going over his books with the auditor. Knowing the truth, her guests left without revealing it. Ponzi was also allowed to telephone the guards at his home, telling them to keep newspapers and reporters away from the house.