International Law

How Ponzi Sold Shares in his Securities Exchange

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Ever wonder how Charles Ponzi was able to recruit his first salesman? Remember that Charles Ponzi had failed at every business he had tried, legal and illegal. How does such a failure, at the age of 35, attract and keep a saleman?

First, Ponzi primed the pump. Once he had set up his Securities Exchange to "trade" in postal coupons, Ponzi showed up at he local Italian watering hole and accidently dropped "thousands of promissory notes" to the Securities Exchange. He quickly snatched them up, and to the enquiring minds, he explained to ordinary bystanders that "no doubt some of the elders" could explain the "details of high finance".

The day after this demonstration, a young man showed up at Ponzi's office asking for a job. Ponzi gave his first salesman, and the others that followed, a 10% commission up front.

Whatever doubts the young man had were sufficiently swayed by the promise of $1 for a the sale of a $10 promissory note.

And how did Madoff sell his services?

"Bernard Madoff, the alleged perpetrator of what could be the largest Ponzi scheme in history, relied on a network of leverage providers and controversial fee arrangements built up over more than a decade to feed his operation.

The scandal, which may trigger at least $17 billion in losses, shows how much the hedge-fund business relied on trust and personal relationships rather than the rigorous due diligence typically demanded by institutional investors and lenders that have come to dominate the industry in recent years."

Good to know the tried and true doesn't change over time.

Full post as published by Misleading Advertising Law on December 18, 2008 (boomark / email).