WEBVTT - It's a (Crypto) Ponzi Scheme! 0:00:04.400 --> 0:00:07.800 Welcome to tech Stuff, a production from I Heart Radio. 0:00:12.240 --> 0:00:15.040 Hey there, and welcome to tech Stuff. I'm your host, 0:00:15.160 --> 0:00:18.840 Jonathan Strickland. I'm an executive producer with I Heart Radio 0:00:18.960 --> 0:00:22.480 and a love all things tech, and very recently I 0:00:22.520 --> 0:00:26.600 did some episodes about earth Link, the Internet service provider, 0:00:26.880 --> 0:00:29.400 and I talked about how there was a connection to 0:00:29.480 --> 0:00:33.159 an investor who was later arrested and charged on counts 0:00:33.159 --> 0:00:36.720 of fraud having run a Ponzi scheme, and I very 0:00:36.800 --> 0:00:40.680 briefly covered what a Ponzi scheme is, But today I 0:00:40.720 --> 0:00:44.120 thought we would explore this a bit further because the 0:00:44.159 --> 0:00:48.080 Ponzi scheme is alive and well many decades after it 0:00:48.159 --> 0:00:51.200 first appeared, and often these days we see it used 0:00:51.200 --> 0:00:55.480 in combination with a technology that grabs a lot of attention, 0:00:55.640 --> 0:00:59.200 that being cryptocurrency. So in this episode, we're going to 0:00:59.320 --> 0:01:02.520 explore where of the Ponzi scheme comes from and how 0:01:02.520 --> 0:01:05.920 it works in general, and we'll learn about cryptocurrencies and 0:01:06.120 --> 0:01:08.280 a little bit about what makes them tick from a 0:01:08.360 --> 0:01:11.080 very high level, and then we'll learn how these two 0:01:11.080 --> 0:01:14.840 things came together, kind of like a Reese's Peanut buttercup 0:01:15.319 --> 0:01:19.160 and just as evil. Now, fans of stuff you should 0:01:19.200 --> 0:01:22.600 know might be aware that way back in two thousand nine, 0:01:22.880 --> 0:01:26.640 which was, you know, one year into us doing podcasts 0:01:26.720 --> 0:01:30.399 at all, they did how Ponzi schemes work. It gave 0:01:30.480 --> 0:01:33.520 birth to the phrase it's a Ponzi scheme. And so 0:01:33.720 --> 0:01:37.280 I apologize to those longtime fans who also listened to 0:01:37.360 --> 0:01:41.600 my show, because there's gotta be some overlap between those two, 0:01:41.680 --> 0:01:45.319 right anyway. I know I won't be as entertaining as 0:01:45.400 --> 0:01:48.240 Josh and Chuck, but then there are two of them 0:01:48.360 --> 0:01:51.280 and there's only one of me. However, I will give 0:01:51.320 --> 0:01:54.920 it the old college try. Now. The term Ponzi scheme 0:01:55.120 --> 0:02:00.360 gets its name from a specific man, Charles Scheme. Wait, no, 0:02:00.480 --> 0:02:03.640 I'm sorry, I read that wrong, Charles Ponzi. He would 0:02:03.640 --> 0:02:06.800 be investigated and charged for fraud in the nineteen twenties, 0:02:07.120 --> 0:02:10.959 but the actual method pre dates Chuck Aino by several decades, 0:02:11.520 --> 0:02:14.680 and earlier example of the scheme that Ponzi used was 0:02:14.720 --> 0:02:17.880 the method of choice for one Sarah how in Boston 0:02:17.960 --> 0:02:22.560 in eighteen seventy nine. Even this was not the first instance. 0:02:22.840 --> 0:02:25.880 There were at least two other cases of very similar schemes, 0:02:25.919 --> 0:02:29.720 one in Madrid, Spain, and another in Berlin, Germany, both 0:02:29.760 --> 0:02:33.680 perpetrated by women, and the general idea is much much older. 0:02:33.720 --> 0:02:37.120 But let's explore the story of Sarah How. I'd love 0:02:37.160 --> 0:02:41.040 to tell you all about Sarah How, but historical records 0:02:41.080 --> 0:02:44.520 of her are scant. There are no known photographs of her, 0:02:44.880 --> 0:02:48.920 there are no sketches. Few details are about her past. 0:02:49.040 --> 0:02:52.320 At least a few verifiable details will get to that. 0:02:52.960 --> 0:02:55.360 We do know that in eighteen seventy seven she was 0:02:55.400 --> 0:02:58.120 working in Boston as a fortune teller, so we can 0:02:58.160 --> 0:03:02.440 assume a few things. Now. Pardon me, because I am 0:03:02.440 --> 0:03:06.680 a skeptic. So if you believe in stuff like astrology 0:03:06.800 --> 0:03:09.880 or fortune telling, you're likely going to find what I 0:03:09.919 --> 0:03:13.240 have to say pretty irritating. But people who are really 0:03:13.280 --> 0:03:17.079 good at doing stuff like reading fortunes or doing astrology 0:03:17.160 --> 0:03:20.360 readings tend to be very good at making quick judgments 0:03:20.400 --> 0:03:23.080 about people. And they also tend to know what sort 0:03:23.080 --> 0:03:26.560 of things are part of the commonly shared human condition. 0:03:27.440 --> 0:03:31.560 There's a practice that's called cold reading, and here's how 0:03:31.560 --> 0:03:35.240 it works. You've got your fortune teller or your mentalist 0:03:35.360 --> 0:03:38.760 or whatever, and they spout out a bunch of general 0:03:38.800 --> 0:03:43.160 information towards their mark. Often they are actually addressing a 0:03:43.200 --> 0:03:46.400 group of people, because that increases the odds of getting 0:03:46.400 --> 0:03:48.880 a hit if you're talking to more than one person. 0:03:49.400 --> 0:03:51.880 But the whole goal is to cast a wide net 0:03:52.080 --> 0:03:55.640 so that something that the person ends up saying ends 0:03:55.720 --> 0:03:58.920 up being perceived as relevant, and you make the mark 0:03:59.240 --> 0:04:01.440 do most of the wreck for you. You don't have 0:04:01.520 --> 0:04:04.960 to know anything about that person. As long as you 0:04:05.000 --> 0:04:08.440 get close enough to something that is relevant to that 0:04:08.640 --> 0:04:11.520 person's life, they're likely to do the rest of the 0:04:11.520 --> 0:04:15.720 work for you. So here's kind of an example, you know, 0:04:15.880 --> 0:04:21.839 just as hypothetical. Uh, let's say that the mentalist or 0:04:21.839 --> 0:04:26.400 fortune teller says, I, since you have experienced great happiness 0:04:26.440 --> 0:04:29.400 but also suffered great loss, and I'm picking up on 0:04:29.440 --> 0:04:32.880 a name. It might start with the letter J or 0:04:32.920 --> 0:04:36.720 maybe are. The vision is hazy, and meanwhile you're waiting 0:04:36.800 --> 0:04:38.880 for your mark to fill in the gaps. And people 0:04:38.960 --> 0:04:43.200 tend to be people pleasers, and they want to believe 0:04:43.279 --> 0:04:46.560 in these sort of things, and so they become willing participants. 0:04:46.600 --> 0:04:48.600 So you might have a mark, say I had an 0:04:48.680 --> 0:04:52.560 uncle named Jason, or my sister's name is Rachel or whatever, 0:04:52.960 --> 0:04:55.560 and to the market seems as though you as the 0:04:55.600 --> 0:04:58.719 fortune teller have divined something you couldn't possibly have known, 0:04:59.160 --> 0:05:01.040 but in fact they're the ones who are providing you 0:05:01.080 --> 0:05:03.600 with all the information, and you just go from there. 0:05:04.200 --> 0:05:07.480 And on a similar note, astrological readings tend to follow 0:05:07.520 --> 0:05:10.719 a similar approach by giving out a very general message 0:05:10.800 --> 0:05:14.599 that can apply to nearly anyone. A fun test to 0:05:14.640 --> 0:05:17.120 do is to take a horoscope for a day and 0:05:17.200 --> 0:05:19.520 see if you can figure out which of the horoscopes 0:05:19.640 --> 0:05:22.640 belongs to which sign. That you mix them all up 0:05:22.720 --> 0:05:26.440 so that way you can't see the sign matched with 0:05:26.520 --> 0:05:29.359 the horoscope. You're just getting the messages, and then you 0:05:29.440 --> 0:05:34.000 have somebody else who has an undoctored version of the 0:05:34.040 --> 0:05:36.480 document to see if you can actually match it up. 0:05:36.560 --> 0:05:38.520 And if you do it as a double blind, really 0:05:38.560 --> 0:05:41.479 like if the person who is recording your answers does 0:05:41.520 --> 0:05:45.520 not have access to those answers right away, you're probably 0:05:45.520 --> 0:05:47.520 going to find out that your success rate is about 0:05:47.520 --> 0:05:51.159 what chance would suggest. Double blind tests that try to 0:05:51.200 --> 0:05:54.360 match people with horoscopes show that there's not really any 0:05:54.400 --> 0:05:58.520 correlation there, but hey, what do I know? I'm a cancer. 0:05:59.560 --> 0:06:02.920 There are also warm readings. This is where you start 0:06:03.000 --> 0:06:06.680 already knowing something about the mark perhaps through the help 0:06:06.720 --> 0:06:09.359 of an accomplice. But the reason I even bring this 0:06:09.480 --> 0:06:12.560 up is that Miss How must have had a decent 0:06:12.600 --> 0:06:15.640 knack at reading people, which would come in very handy 0:06:15.680 --> 0:06:19.120 when it came time to fleece them. Later, in eighteen 0:06:19.240 --> 0:06:23.719 seventy eight, How launched the Ladies Deposit Company, which was 0:06:23.839 --> 0:06:29.520 ostensibly a bank. How recognized an opportunity. Unmarried women who 0:06:29.600 --> 0:06:33.520 had no guardian had difficulty establishing an account at traditional 0:06:33.560 --> 0:06:37.839 banks because it was a pretty darn patriarchal society and 0:06:38.000 --> 0:06:41.760 unmarried women were second class citizens. And I should also 0:06:41.800 --> 0:06:44.760 mention that at this time, if you weren't white, you 0:06:44.839 --> 0:06:48.520 had an even more difficult time accessing the basic functions 0:06:48.600 --> 0:06:52.840 of society. Even How, when she was making the Ladies 0:06:52.880 --> 0:06:58.479 Deposit Company was only catering to white unmarried women. Essentially, 0:06:58.960 --> 0:07:01.880 white men had access to everything, and everyone else was 0:07:01.960 --> 0:07:05.640 dealing with an enormous amount of opposition. So How opened 0:07:05.680 --> 0:07:08.719 up a bank that would accept deposits from unmarried women 0:07:08.960 --> 0:07:13.200 and and them alone. And honestly, if How had the means, 0:07:13.240 --> 0:07:15.560 she might have been able to have a successful business 0:07:15.600 --> 0:07:18.560 without the need for trickery. But How was making an 0:07:18.560 --> 0:07:22.960 outlandish promise to her clients, She claimed that deposits would 0:07:22.960 --> 0:07:26.880 see an eight percent interest rate, meaning that depositing money 0:07:26.880 --> 0:07:29.360 with HOW would see an eight percent return on that 0:07:29.400 --> 0:07:32.120 money over time, and she said that if you were 0:07:32.160 --> 0:07:35.480 to deposit on in her bank by years ind you 0:07:35.480 --> 0:07:39.040 would have an additional nineties six dollars earned through interest, 0:07:39.400 --> 0:07:42.160 and she promised that early investors would get the first 0:07:42.240 --> 0:07:46.200 three months of that interest paid in advance. Now that 0:07:46.320 --> 0:07:50.320 interest rate was significantly higher than what banks in the 0:07:50.400 --> 0:07:53.000 general industry were able to offer, and when pressed on 0:07:53.120 --> 0:07:56.880 how she could offer such high interest rates to her clientele, 0:07:57.400 --> 0:08:00.640 she claimed that her bank had the fine anential backing 0:08:00.680 --> 0:08:04.080 of Quakers who were supporting it as a charity for women, 0:08:04.520 --> 0:08:08.280 and her spiel worked, and she advertised all around the Northeast, 0:08:08.320 --> 0:08:11.440 gathering clients all along the way, and a lot of 0:08:11.440 --> 0:08:14.920 the women, when they received their advance would immediately put 0:08:15.000 --> 0:08:18.560 that money into their account with HOW in order to reinvest. 0:08:19.320 --> 0:08:22.480 Historians estimate that she managed to get between two hundred 0:08:22.480 --> 0:08:26.120 fifty thousand and five hundred thousand bucks in eighteen seventy 0:08:26.200 --> 0:08:31.600 nine that would be worth millions of dollars in today's money. Eventually, 0:08:31.640 --> 0:08:34.520 investigators uncovered what was really going on. But it was 0:08:34.559 --> 0:08:37.959 pretty tricky to do because How was strict on our 0:08:38.000 --> 0:08:42.240 policy of only serving unmarried women, which cloaked her from 0:08:42.280 --> 0:08:47.480 most investigations. As this was a male dominated world, reporters 0:08:47.480 --> 0:08:52.760 were nearly always men, and they weren't allowed inside house establishments. 0:08:52.760 --> 0:08:56.120 How claimed this was to protect her customers, these delicate 0:08:56.280 --> 0:09:01.679 unmarried women, which society perpetually viewed as being helpless and 0:09:02.080 --> 0:09:06.480 just a potential victim, perpetually a potential victim. And that 0:09:06.520 --> 0:09:09.560 really showed how clever How was. She had identified a 0:09:09.600 --> 0:09:13.440 target population right for exploitation and at the same time 0:09:13.480 --> 0:09:16.839 figured out how to exclude people determined to investigate her. 0:09:17.640 --> 0:09:20.480 But here's what was really going on. How would bring 0:09:20.520 --> 0:09:22.880 in a round of investors who would give her money 0:09:22.920 --> 0:09:26.120 to deposit into accounts. She then would seek out a 0:09:26.200 --> 0:09:30.240 second round of investors, and using money from that second round, 0:09:30.480 --> 0:09:33.360 she would pay out the advanced interest to her first 0:09:33.480 --> 0:09:36.720 round of investors. Then she would seek out a third 0:09:36.840 --> 0:09:39.000 round and use that money to help pay out the 0:09:39.080 --> 0:09:42.439 second round, and so on. The scheme required How to 0:09:42.600 --> 0:09:46.120 constantly seek out more investors to pay out dividends to 0:09:46.200 --> 0:09:50.200 her earlier investors, and meanwhile, the clock was ticking. She 0:09:50.320 --> 0:09:52.920 was helped out considerably by the fact that many women 0:09:52.960 --> 0:09:56.400 would reinvest their money into the scheme. They were doing 0:09:56.480 --> 0:09:58.439 so because to them it seemed as though they were 0:09:58.440 --> 0:10:01.640 getting an incredible interest eight so more money in the 0:10:01.679 --> 0:10:04.920 account would mean more money and interest down the road. 0:10:05.440 --> 0:10:08.880 Their money would be making more of itself. But in reality, 0:10:09.000 --> 0:10:13.000 this cash was largely going to fund How's new lavish lifestyle, 0:10:13.200 --> 0:10:15.680 while she kept reaching for more investors to keep the 0:10:15.720 --> 0:10:18.880 whole show going strong. She was also helped by the 0:10:18.920 --> 0:10:21.920 fact that the banking industry at the time was largely 0:10:22.000 --> 0:10:25.480 free of regulation, making it something of the Wild West. 0:10:25.679 --> 0:10:28.920 But for money schemes, it was an environment that allowed 0:10:28.960 --> 0:10:32.480 for exploitation with less risk of oversight, and so there 0:10:32.559 --> 0:10:37.760 was opportunity for the enterprising scammer. But How's scheme eventually 0:10:38.080 --> 0:10:43.600 was laid bare, and the press absolutely tore her to shreds. 0:10:43.640 --> 0:10:46.080 And by tore her to shreds, I mean they didn't 0:10:46.120 --> 0:10:50.000 just point out the fraud, but they disparaged How beyond 0:10:50.160 --> 0:10:53.440 what the facts could support. They claimed she was illiterate, 0:10:53.880 --> 0:10:56.160 They said she was uneducated, They said that she was 0:10:56.240 --> 0:11:00.439 hideous to look upon. In fact, How was clearly very 0:11:00.480 --> 0:11:04.359 well educated and witty, and the fact that earlier accounts 0:11:04.360 --> 0:11:08.320 of How never brought into account her looks tells us 0:11:08.400 --> 0:11:11.560 that she was probably, you know, pretty ordinary looking. Not 0:11:11.600 --> 0:11:14.280 only that, but the reports on How began to fabricate 0:11:14.280 --> 0:11:18.760 an entire history of this mysterious woman, complete with salacious 0:11:18.800 --> 0:11:24.199 and frankly racist overtones. So we don't know much about 0:11:24.240 --> 0:11:29.880 How's history. The history that was published was fabricated. I 0:11:29.920 --> 0:11:31.840 won't go into the whole thing here, but to call 0:11:31.880 --> 0:11:35.760 it a smear campaign would be going lightly. Yes, How 0:11:35.840 --> 0:11:38.080 had pulled a fast one, but it seems to me 0:11:38.240 --> 0:11:41.120 that the media was more upset that a woman would 0:11:41.120 --> 0:11:44.640 find such success in what was generally considered to be 0:11:44.840 --> 0:11:48.760 a man's domain than the fact that she did so 0:11:48.920 --> 0:11:54.040 through underhanded methods. In other words, the misogyny was thick here, folks. 0:11:54.720 --> 0:11:59.320 How stood trial for accepting money under false pretenses because 0:11:59.440 --> 0:12:03.319 she had claimed that this was an extension of the Quakers. 0:12:03.360 --> 0:12:06.680 She served three years of a prison sentence, she got out, 0:12:07.000 --> 0:12:09.840 then she did the whole thing all over again. And 0:12:09.880 --> 0:12:12.720 while I don't condone crime at all, part of me 0:12:12.760 --> 0:12:15.560 admires the hell out of a woman who, when faced 0:12:15.559 --> 0:12:19.040 with a society that actively resisted the efforts of women 0:12:19.080 --> 0:12:22.040 to play a part beyond just being surviled two men. 0:12:22.960 --> 0:12:26.360 She rejected that notion and decided to go her own way. 0:12:26.559 --> 0:12:30.680 But the fact that she was targeting other women certainly 0:12:30.720 --> 0:12:32.840 takes the romance out of it, doesn't it. I mean, 0:12:33.280 --> 0:12:36.400 if she were targeting like fat cat businessmen who were 0:12:36.440 --> 0:12:39.280 accustomed to putting the screws to the little guy, this 0:12:39.320 --> 0:12:42.480 would be almost a robin Hood like story. But with 0:12:42.520 --> 0:12:44.840 how it was more like I rubbed from the poor 0:12:44.880 --> 0:12:48.160 and give to myself. She was caught a second time 0:12:48.320 --> 0:12:50.800 and decided to give up the practice, and she went 0:12:50.840 --> 0:12:53.680 back to fortune telling. She lived out the remainder of 0:12:53.679 --> 0:12:57.360 her days in relative obscurity and modest living, still fooling 0:12:57.360 --> 0:12:59.800 people into believing she had some sort of mystical insight 0:13:00.000 --> 0:13:03.400 into their fortunes. It's more like she had a pretty 0:13:03.640 --> 0:13:06.840 regular insight into their wallets. But the heart of this 0:13:06.920 --> 0:13:09.360 scheme is the idea that you get people to pour 0:13:09.520 --> 0:13:12.800 money into what you're claiming is an investment, but in 0:13:12.880 --> 0:13:16.360 fact there's nothing there, and then you use the money 0:13:16.400 --> 0:13:19.320 from subsequent rounds of investors to pay out the dividends 0:13:19.360 --> 0:13:21.839 to the first round of keeping most of the money 0:13:21.880 --> 0:13:25.440 for yourself and to convince people to back something without 0:13:25.440 --> 0:13:28.600 thinking too much about it, you gotta do a few 0:13:29.120 --> 0:13:33.600 fairly simple things. First, you need to promise a lucrative 0:13:33.640 --> 0:13:37.000 return on your investment, and it has to be high, 0:13:37.040 --> 0:13:40.640 but not so high as to be completely unbelievable, but 0:13:40.760 --> 0:13:44.600 you can definitely stretch believability quite a bit. This taps 0:13:44.600 --> 0:13:49.120 into a particularly common human trait. It's called greed, you know, 0:13:49.160 --> 0:13:52.680 the desire for more. Second, you just need to be 0:13:52.760 --> 0:13:55.960 really picky about your clients. Now, this is helpful for 0:13:56.040 --> 0:13:58.920 a couple of reasons. For one thing, by limiting who 0:13:58.920 --> 0:14:02.400 can participate can reduce the chance that someone's skeptical is 0:14:02.440 --> 0:14:05.720 going to catch onto you. For another, by restricting who 0:14:05.720 --> 0:14:09.840 can participate, you create a sense of exclusivity. And people 0:14:10.160 --> 0:14:13.800 love to feel like they are special. They want to 0:14:13.840 --> 0:14:17.160 be part of that exclusive club. There's this rush of 0:14:17.200 --> 0:14:20.200 sarahtonin when you get the sense of acceptance as you're 0:14:20.240 --> 0:14:23.200 brought into the fold of an otherwise exclusive group. You 0:14:23.280 --> 0:14:27.600 made it, you merited inclusion. And then there's the old 0:14:27.640 --> 0:14:31.840 fomo or fear of missing out. People also really hate 0:14:31.880 --> 0:14:35.160 the idea that they were unable to pounce on an opportunity, 0:14:35.440 --> 0:14:37.600 and I feel this one a lot. I can't tell 0:14:37.640 --> 0:14:40.320 you how many times I felt low because I discovered 0:14:40.320 --> 0:14:43.600 too late something that I could have participated in but 0:14:43.720 --> 0:14:46.120 I missed out on. So Hey, if you're trying to 0:14:46.120 --> 0:14:50.280 manipulate me playing upon my fomo works, I'm just kidding. 0:14:50.280 --> 0:14:55.359 Don't manipulate me. I'm onto you. So using these psychological 0:14:55.440 --> 0:14:59.520 tactics and leveraging aspects that most of us share, hucksters 0:14:59.560 --> 0:15:02.800 can gather or an entire population of marks, and through 0:15:02.880 --> 0:15:06.760 careful management in selection, the fraud fiend can keep things 0:15:06.800 --> 0:15:09.600 going for quite a while, at least until the scheme 0:15:09.640 --> 0:15:12.200 grows too large to support it and the whole thing 0:15:12.280 --> 0:15:16.400 crashes down. Because ultimately that's what happens with these schemes. 0:15:16.440 --> 0:15:19.600 They can't work perpetually. You will eventually hit a point 0:15:19.600 --> 0:15:23.320 of saturation where it is impossible to maintain the scheme 0:15:23.400 --> 0:15:26.960 any longer. So you might live high on the hog 0:15:27.080 --> 0:15:30.800 for a while, but eventually you will need an exit strategy, 0:15:31.160 --> 0:15:34.960 perhaps a literal one, if you plan to escape prosecution. 0:15:35.640 --> 0:15:38.720 Sarah how clearly had at least a feel for all 0:15:38.760 --> 0:15:41.520 of this, as her version of the scheme took advantage 0:15:41.680 --> 0:15:44.760 of some of the very limitations that otherwise held her 0:15:44.920 --> 0:15:49.640 and other unmarried women down. She prayed upon affinity, meaning 0:15:49.840 --> 0:15:52.560 she was targeting a group of people who had something 0:15:52.560 --> 0:15:55.400 in common. If you remember my episode about earth Link, 0:15:55.840 --> 0:16:00.080 that investor, or, that scam artist was largely targeting b 0:16:00.200 --> 0:16:04.560 who belonged to the Church of Scientology. Again, affinity. So 0:16:04.720 --> 0:16:08.000 she took the restrictions of society and then turned those 0:16:08.040 --> 0:16:11.560 to her advantage, at least temporarily. But again, it's not 0:16:11.640 --> 0:16:15.480 called a how scheme. It's called a Ponzi scheme. So 0:16:15.680 --> 0:16:19.080 who was Ponzi? Well, despite my habit of mixing up 0:16:19.120 --> 0:16:22.280 people who share similar names, Ponzi was not the guy 0:16:22.320 --> 0:16:25.560 in Happy Days who wore a leather jacket, kicked jukeboxes 0:16:25.640 --> 0:16:28.560 or jump sharks. He was a different person, and I'll 0:16:28.560 --> 0:16:40.800 talk about him more after this quick break. So Charles Ponzi. 0:16:41.360 --> 0:16:44.000 He was born in Italy in the early eighteen eighties, 0:16:44.240 --> 0:16:47.040 while Sarah Howe was serving time in the joint for 0:16:47.080 --> 0:16:52.400 her first foray into financial fraud yea for alliteration. He 0:16:52.480 --> 0:16:56.440 immigrated to North America in the early nineteen hundreds. He 0:16:56.480 --> 0:16:59.200 worked a series of odd jobs and occasionally he got 0:16:59.240 --> 0:17:02.200 in trouble for petty theft, and his dreams were much 0:17:02.280 --> 0:17:06.520 less petty, but still involved plenty of theft. Ponzi himself 0:17:06.560 --> 0:17:10.600 was reportedly a man of small stature, standing only five 0:17:10.640 --> 0:17:14.520 ft two. Reportedly, he knew no English when he first 0:17:14.560 --> 0:17:17.320 traveled to the United States. He learned it through immersion, 0:17:17.520 --> 0:17:20.840 like many other immigrants. Even if he hadn't already shown 0:17:20.880 --> 0:17:24.800 a habit of dipping into criminal activity beforehand, he probably 0:17:24.800 --> 0:17:27.159 would have found it really challenging to stay on the 0:17:27.200 --> 0:17:31.080 straight and narrow because America is in fact a country 0:17:31.119 --> 0:17:33.879 made up of immigrants, but the America of the early 0:17:33.920 --> 0:17:38.159 twentieth century had a pretty nasty xenophobic streak going through it. 0:17:38.600 --> 0:17:42.400 Communities of immigrants, like those from Ireland or Ponzi's home 0:17:42.440 --> 0:17:46.520 country of Italy, were frequently the subject of scorn and suspicion, 0:17:46.840 --> 0:17:51.159 which in turn would become something of a self fulfilling prophecy. 0:17:51.200 --> 0:17:54.520 And when there are very few avenues for legitimate prosperity 0:17:54.600 --> 0:17:58.120 open to you, there isn't much choice but to explore 0:17:58.160 --> 0:18:02.200 the illegitimate pathways. So sure, Ponzi already had a history 0:18:02.200 --> 0:18:04.800 of larceny, but I think even if he was as 0:18:04.880 --> 0:18:08.560 innocent as can be. Before he arrived in America, he 0:18:08.600 --> 0:18:11.920 would face realities that created a lot of, let's say, 0:18:11.920 --> 0:18:16.280 incentives to dip into crime at any rate. That's moot speculation, 0:18:16.480 --> 0:18:19.680 because we know he definitely dove into some illegal activities. 0:18:20.240 --> 0:18:23.200 He would spend three years in prison after being caught 0:18:23.280 --> 0:18:26.600 forging checks, and he spent another two years in prison 0:18:26.680 --> 0:18:29.960 after being caught in an operation that was smuggling Italian 0:18:30.000 --> 0:18:33.880 immigrants illegally across the Canadian border over to the US, 0:18:33.920 --> 0:18:36.720 but that did very little to deter him from a 0:18:36.840 --> 0:18:40.200 life of crime. Rather, his determination to pull a scheme 0:18:40.359 --> 0:18:44.560 was taking shape, largely influenced by his experience working for 0:18:44.640 --> 0:18:48.679 a crooked bank back in Montreal, Canada. The bank was 0:18:48.800 --> 0:18:52.359 essentially following the same practice Sarah Howe had made famous 0:18:52.440 --> 0:18:56.560 decades earlier, paying out extravagant dividends to customers by taking 0:18:56.600 --> 0:19:01.080 money from later rounds of depositors. Ponzi isn't managing that 0:19:01.119 --> 0:19:04.280 particular bank, but he did work there and apparently picked 0:19:04.359 --> 0:19:07.679 up some tricks along the way. In nineteen nineteen, he 0:19:07.760 --> 0:19:10.840 hit upon the heart of his scheme, which involved something 0:19:10.880 --> 0:19:14.879 called international reply coupons or i r c s. And 0:19:14.960 --> 0:19:19.119 here's how they worked. Let's say you immigrated to America 0:19:19.240 --> 0:19:22.560 from Europe and you have family back on the continent. 0:19:23.160 --> 0:19:26.440 You're struggling to attain the American dream. In the meantime, 0:19:26.480 --> 0:19:28.919 your family writes to you to stay in touch, and 0:19:29.040 --> 0:19:32.040 because you're still getting up on your feet, your family 0:19:32.119 --> 0:19:34.879 encloses an I r C in their letter to you. 0:19:35.440 --> 0:19:38.480 The I r C is a coupon for return postage, 0:19:38.600 --> 0:19:41.280 which allows you to write back to your family without 0:19:41.320 --> 0:19:44.600 having to purchase your own postage, thus saving your money, 0:19:44.720 --> 0:19:47.760 so you can, you know, try and prosper. But there 0:19:47.800 --> 0:19:50.439 was a possible disparity in the value of the I 0:19:50.640 --> 0:19:52.879 r C because the cost of the I r C 0:19:53.119 --> 0:19:56.480 was dependent upon the country of origin. So let's say 0:19:56.560 --> 0:19:59.280 your family's in Spain, and let's say the cost to 0:19:59.359 --> 0:20:02.159 send a letter from Spain to the United States is 0:20:02.280 --> 0:20:05.800 five cents, and an I r C costs the same amount. 0:20:05.920 --> 0:20:08.240 So your family spends five cents on an I r 0:20:08.359 --> 0:20:11.639 C to put inside the letter, and then spends another 0:20:11.720 --> 0:20:15.040 five cents to post the letter to the United States. 0:20:15.480 --> 0:20:18.639 But let's say that in the US it costs ten 0:20:18.800 --> 0:20:22.159 cents to send a letter back to Spain. So you 0:20:22.200 --> 0:20:25.520 take this I r C, which remember, your family paid 0:20:25.640 --> 0:20:28.399 five cents for back in Spain, and you redeem it 0:20:28.440 --> 0:20:31.119 in the United States for postage back to Spain. But 0:20:31.200 --> 0:20:33.720 the I r C allows you to get ten cents 0:20:33.720 --> 0:20:36.520 worth of postage. So while the I r C cost 0:20:36.640 --> 0:20:39.160 five cents in Spain, you can redeem it for ten 0:20:39.200 --> 0:20:41.840 cents in the United States. And that was the heart 0:20:42.000 --> 0:20:45.639 of Ponzi's scheme. In a way, it was an extension 0:20:45.680 --> 0:20:48.560 of the basic idea that you should buy commodities at 0:20:48.560 --> 0:20:51.040 a low price and sell them for a high price, 0:20:51.440 --> 0:20:53.800 which generally means you've got to find a place where 0:20:53.840 --> 0:20:56.800 the price of something is pretty low, usually because that 0:20:56.840 --> 0:21:00.360 region produces a lot of whatever the commodity is, so 0:21:00.440 --> 0:21:03.879 supply is high. Then you transport those goods to a 0:21:03.920 --> 0:21:07.359 place that has a higher demand for that commodity and 0:21:07.440 --> 0:21:10.240 you sell it for a profit. Now, over time, this 0:21:10.400 --> 0:21:13.879 can lead to changes in price at both locations. The 0:21:13.960 --> 0:21:18.040 source might start raising prices and the destination might start 0:21:18.160 --> 0:21:21.760 decreasing demand. But for a time there's a lot of 0:21:21.760 --> 0:21:25.200 profit to be made, and this is completely legal and legitimate. 0:21:25.720 --> 0:21:28.639 Ponzi's pitch revolved around this idea that he would be 0:21:28.680 --> 0:21:30.800 able to purchase I r c s for a low 0:21:30.880 --> 0:21:34.080 price in other countries and redeem them for much higher 0:21:34.119 --> 0:21:38.000 returns elsewhere. It wasn't that different from people who try 0:21:38.040 --> 0:21:41.480 to make money in currency markets, relying on the exchange 0:21:41.560 --> 0:21:46.120 rates of various currencies. Ponzi might have originally been sincere 0:21:46.160 --> 0:21:48.800 in his plans, hoping to leverage the market to make 0:21:48.840 --> 0:21:52.160 a profit, but even if you were sincere, the plan 0:21:52.320 --> 0:21:56.200 was never going to work at scale. The actual value 0:21:56.240 --> 0:21:58.760 of I r c s was very low, just a 0:21:58.760 --> 0:22:01.840 matter of a few cents each, So to operate at 0:22:01.840 --> 0:22:04.880 a scale equivalent to the investments that Ponzi would start 0:22:04.880 --> 0:22:08.199 accepting would require more I r c s than the 0:22:08.240 --> 0:22:11.320 market actually had. If I give you a check for 0:22:11.359 --> 0:22:14.040 a thousand bucks and you have promised that you're gonna 0:22:14.040 --> 0:22:17.920 give me a fifty return and interest within forty five days, 0:22:18.280 --> 0:22:22.120 which was what Ponzi was promising people, and it's all 0:22:22.160 --> 0:22:24.399 through buying up I r c s that just cost 0:22:24.480 --> 0:22:26.760 a penny in one place, it can be redeemed for 0:22:26.800 --> 0:22:30.680 five cents somewhere else. That's going to require an awful 0:22:30.760 --> 0:22:33.399 lot of I r c s to make up that fifty, 0:22:33.760 --> 0:22:35.919 And you're gonna owe me in forty five days, and 0:22:35.960 --> 0:22:38.920 I'm just one investor. So this plan just could not 0:22:39.080 --> 0:22:41.879 work at scale, and so Ponzi was going to follow 0:22:41.880 --> 0:22:45.399 in the footsteps of how and others. The premise of 0:22:45.400 --> 0:22:48.560 the scheme was a bit complicated, this whole idea of 0:22:48.680 --> 0:22:51.560 I r c S, but that worked to Ponzi's benefit. 0:22:52.080 --> 0:22:55.159 It helps if the flam flam you're selling to Marx 0:22:55.280 --> 0:22:58.119 is a little bit on the complex side, because it 0:22:58.160 --> 0:23:00.800 makes it harder for people to sell us out that 0:23:00.960 --> 0:23:04.480 it's a scam. If what you're selling is complicated enough 0:23:04.560 --> 0:23:07.600 that the average person can't really follow it, but it 0:23:07.720 --> 0:23:10.840 sounds legit enough to fool them, you've got yourself a 0:23:10.880 --> 0:23:14.080 potential gold mine. You just need to sound like you 0:23:14.200 --> 0:23:17.119 understand how it all works. Even if it doesn't work. 0:23:17.560 --> 0:23:21.359 It puts the confidence in con man. Sound assured enough, 0:23:21.720 --> 0:23:24.520 and folks will tend to think you really got it together. 0:23:25.640 --> 0:23:30.000 Ponzi was promising a pretty incredible return, that return on 0:23:30.080 --> 0:23:33.760 investment within the first forty five days, with future payoffs 0:23:33.760 --> 0:23:37.840 making everyone truckloads of cash. He began the old practice 0:23:37.880 --> 0:23:41.199 of robbing Peter to pay Paul with that old gimmick 0:23:41.240 --> 0:23:44.560