Wednesday's Weird But True Legal Cases - Vol XXXV

Tonight's weird (but true) legal case takes a look at one of the myriad of bankruptcy cases involving victims of a Ponzi scheme. But rather than just examining the johnny come latelies, I thought that it would be apropos to look at the original Ponzi bankruptcy matter.

In Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924) the Supreme Court of the United States reviewed six suits in equity brought by the trustees in bankruptcy of Charles Ponzi to recover payments made by Ponzi within four months prior to the filing of the petition in bankruptcy on the ground that they were unlawful preferences.

The case itself contains the fascinating details of Ponzi's history, as the Court noted:

The litigation grows out of the remarkable criminal financial career of Charles Ponzi. In December, 1919, with a capital of $150, he began the business of borrowing money on his promissory notes. He did not profess to receive money for investment for account of the lender. He borrowed the money on his credit only. He spread the false tale that on his own account he was engaged in buying international postal coupons in foreign countries and selling them in other countries at 100 per cent. profit, and that this was made possible by the excessive differences in the rates of exchange following the war. He was willing, he said, to give others the opportunity to share with him this profit. By a written promise in 90 days to pay them $150 for every $100 loaned, he induced thousands to lend him. He stimulated their avidity by paying his 90-day notes in full at the end of 45 days, and by circulating the notice that he would pay any unmatured note presented in less than 45 days at 100 per cent. of the loan. Within eight months he took in $9,582,000, for which he issued his notes for $14,374,000. He paid his agents a commission of 10 per cent. With the 50 per cent. promised to lenders, every loan paid in full with the profit would cost him 60 per cent. He was always insolvent, and became daily more so, the more his business succeeded. He made no investments of any kind, so that all the money he had at any time was solely the result of loans by his dupes.

By July 1st, Ponzi was taking in about $1,000,000 a week. Because of an investigation by public authority, Ponzi ceased selling notes on July 26th, but offered and continued to pay all unmatured notes for the amount originally paid in, and all matured notes which had run 45 days, in full. The report of the investigation caused a run on Ponzi's Boston office by investors seeking payment, and this developed into a wild scramble when, August 2d, a Boston newspaper, most widely circulated, declared Ponzi to be hopelessly insolvent, with a full description of the situation, written by one of his recent employees. To meet this emergency, Ponzi concentrated all his available money from other banks in Boston and New England in the Hanover Trust Company, a banking concern in Boston, which had been his chief depository. There was no evidence of any general attempt by holders of unmatured notes to secure payment prior to the run which set in after the investigation July 26th.

The money of the defendants was paid by them between July 20th and July 24th and was deposited in the Hanover Trust Company. At the opening of business July 19th, the balance of Ponzi's deposit accounts at the Hanover Trust Company was $334,000. At the close of business July 24th it was $871,000. This sum was exhausted by withdrawals of July 26th of $572,000, of July 27th of $228,000, and of July 28th of $905,000, or a total of more than $1,765,000. In spite of this, the account continued to show a credit balance, because new deposits from other banks were made by Ponzi. It was finally ended by an overdraft on August 9th of $331,000. The petition in bankruptcy was then filed. The total withdrawals from July 19th to August 10th were $6,692,000.

The decision itself involving the claims for voiding a preference is unremarkable. The reported criminal cases in which he was charged in state and federal court (he pleaded guilty in federal court less than two months after being indicted) are also not earth shattering. But seeing how Ponzi built his house of cards is fascinating (sort of like watching a train wreck occur, but without the blood).

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