KENNETH M. CHERRIER,JD, FLMI - Financial Services Institute

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ATTACHMENT VIPublished in the National Society ofCompliance ProfessionalsCURRENTS
Charles Ponzi – The Creator of the Ponzi Scheme? PART IBy:Kenneth M. Cherrier, 1 st BridgeHouse Consulting, LLCIt seems we cannot open up a paper without reading of yet another Ponzi schemeuncovered by industry regulators. It is an unfortunate sign of the times. But what exactlyis a Ponzi scheme and who was the man it was named after? The purpose of this article isnot just to answer those questions, but is written in manner which allows the informationto be pulled and redistributed to your investment advisors and/or registeredrepresentatives via a compliance bulletin, company notice or any other medium for thepurpose of educating your sales force so they can answer the questions we know theirclients are asking them: “What is a Ponzi scheme?”. In answering that question, thearticle will take a very close look at the life of Charles Ponzi and what he did that foreveretched his name in history. 9 Part I of the two part series will look at the rise of CharlesPonzi and his infamous scheme while Part II will take a close look at how one of thegreatest Ponzi schemes in America came crashing down.What is a Ponzi Scheme?A common error committed by many who write about our industry is to apply the term“Ponzi scheme” to any fraud committed by an investment banker, representative orfinancial professional. However, a true Ponzi scheme is a very specific fraud, one inwhich investors’ money is taken in by the fraudster with a promise of high rates of returnbased on an underlying investment which is usually fraudulent or nonexistent. A “wellrun” Ponzi scheme is perpetuated by initial investors being paid promised returns via thefunds received by later investors. In short, a Ponzi scheme is truly a robbing Peter to payPaul scheme. Although the origins of the term “Robbing Peter to Pay Paul” is in debate,some believe it originated in England in the 1500's when the lands of Saint Peter's Churchat Westminster were sold to pay for repairs of Saint Paul's Cathedral in London. Onething is for certain, the scheme of paying initial investors with principal received fromlater investors has been around for centuries.In fact, prior to Ponzi’s name being dubiously anointed to the scheme during the early1900’s, the reigning American king of the Peter/Paul scheme was William FranklinMiller. Working as a brokerage-house-clerk in 1899 for a meager $5 a week, Milleropened a business in New York promising a whopping 10% rate of return on allinvestments – weekly. He was given the name “520 Percent Miller” based on whatinvestors would get over a year. When pressed on how he could pay such unheard ofinterest, Miller spoke of utilizing the tricks of the trade closely guarded by the Wall Streetsharks and utilizing inside tips that the common man did not have access to.Unfortunately, there were no ticks. Unbeknownst to investors, Miller was simply payinginitial investors with new investors’ money. So, when word got around that Miller wasactually paying out the promised interest every week, new investors flooded in. Manyinvestors started to let their initial investments roll over, thus perpetuating the scam. It9 Much of the material in this article including all biographical material on Charles Ponzi is taken from avery well written autobiography appropriately titled, Ponzi’s Scheme, written by Mitchell Zuckoff andpublished by Randon House. I highly recommend the book.
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KENNETH M. CHERRIER,JD, FLMI - Financial Services Institute

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