The term "Ponzi" is derived from Charles Ponzi (nee Ponsi), an Italian immigrant, who ran his original scams in Montreal before moving to Boston, where he initially worked as a clerk. He was fascinated by a piece of mail he received concerning postal coupons and the favorable exchange rate with Spain one day as the genesis.

In 1919, he began a pyramid scheme by setting himself up in an office on the second floor of a downtown bank building. Ironically, he called his company the Securities and Exchange Company, and mailed prospectuses in December, 1919, offering a 50% return on investments in 45 days; 100% in 90 days. By the end of June, 1920, he was supposedly receiving $500,000 a day and paying out $200,000 a day.

Thousands of people would circle around the block and climb the stairs to "invest." So much cash flowed into the walkup office that he had to employ 16 clerks to sort and count the money, which was stacked in closets and stuffed into waste paper baskets.

Like most pyramid schemes, when the cash inflow was interrupted, the pyramid collapsed. He was brought down by investigative journalism reports and government intervention. By the time the District Attorney closed in on July 26, 30,195 people had paid in $9,582,591 in 8 months for a promised return of $14,374,818, with an average investment of $300.

Ponzi was arrested, and many of those who lost money blamed the government for their losses for having intervened. He served time in Federal prison, and then jumped bail after being convicted and sentenced to a 7-9 year term in Mass. state prison. He turned up running schemes in Georgia, Texas and Florida (where he sold underwater lots, of course), and was finally captured and returned to Mass., where he served his 7-yr. sentence.

Ponzi was deported to Italy, and was given a job in the Brazilian (Rio) office of the country's new airline by Mussolini. He died in a charity ward of a Rio hospital, partially blind and paralyzed, but had just enough money to avoid being buried in a potter's field (I believe $75). Ponzi was not the inventor of the pyramid scheme in 1919 (indeed, under the names of Ponsi and Bianchi, he had been jailed in Canada in 1908), but was one of the most flagrant promoters, and a good example of a psychopathic scam artist.

Similar illegal pyramid schemes are operated in every type of medium (including *P) every day -- from the most sophisticated investment ploy like Philadelphia-based New Era (the charitable contribution pyramid) to common chain letters. Not only do pyramids live on, but so do the reactions to enforcement. Those who get bilked often blame government officials for intervening as the cause of their misfortune. Many supposed MLMs are really pyramids that depend on the most recent investments to pay off the older obligations. Many of them are doomed because the commission structures are so financially onerous that the only way to meet ongoing product costs and commission payments is to suck in more participants -- sometimes at any price -- to keep the cash flow moving.

Hope that explains the derivation of "Ponzi" scheme. Two cases to watch that are being considered as Ponzi or pyramid schemes by prosecutors: Gold Unlimited Inc., which will most likely not come to trial until next spring in Kentucky Federal Court under 25 civil and criminal counts, and IGN (International Global Network), the LD phone debit card folks, whose operation was halted by the Pennsylvania AG. Actions by the AG are civil.

Sherman Robbins *P Special Contributor