January 17, 2009
The fraudulent investment network masterminded by Bernard L. Madoff has put the Ponzi scheme back on the front page. Sometimes news accounts explain the nature of such scams — dubbed for Boston financial charlatan Charles Ponzi — that pay out profits to early investors using receipts from later ones. But more often there’s little, if any, background provided.
Journalists, though, might be interested in the deeper role that Charles Ponzi’s 1920 fraud plays in the story of the modern American press. It was the object of the first investigation to be honored for public service by a then-new system of literary and journalism awards called the Pulitzer Prizes.
First awarded in 1917, the Pulitzers had been established at Columbia University through the will of press pioneer Joseph Pulitzer, who died in 1911. But the prizes took a while to catch on in a society that still regarded the press with suspicion. After all, newspapers were just coming out of the era of Yellow Journalism, the centerpiece of which was the sensationalist circulation war in the late Nineteenth Century between Joseph Pulitzer’s own New York World and rival William Randolph Hearst’s New York Journal.
Indeed, the creation of the prizes — first imagined in 1902 at Pulitzer’s Bar Harbor, Maine, retreat — doubtless reflected an attempt to restore his former reputation for using journalism on behalf of the public good.

Through the years, the public-service Pulitzer has honored some of the greatest of journalistic endeavors. Recipients include, to name only a few, The New York Times for its Pentagon Papers coverage (the 1972 winner), The Washington Post for its Watergate disclosures (1973), and The Boston Globe for exposing the Catholic Church coverup of sexual abuse of young parishioners by priests (2003.)

But looking back at those early years, it’s not a stretch to say that the extraordinary journalism honored with Pulitzers back then — starting with the old Boston Post‘s Ponzi expose — offered newspapers across the nation the first real national model of public service worthy of emulation.
The following is adapted from Pulitzer’s Gold: Behind the Prize for Public Service Journalism,” my journalism history published last year by the University of Missouri Press.
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A Story for the Jazz Age

There could not have been a better newspaper story for the Jazz Age — or one that grew more powerfully from the anything-goes spirit infecting America — than the story that the Pulitzer Prize Board cited in its 1921 Public Service award. The Pulitzer jurors had nominated the Boston Post “for the pricking of the Ponzi financial bubble, in investigating his claims to be operating in foreign exchange and throwing doubt on him at a time when the public officials were inactive and other newspapers were either ignoring him or treating him as a genuine financial wizard.” The work was undertaken “at great risk of incurring heavy damages.”

The 38-year-old, slight-of-build Charles Ponzi, nattily dressed in his trademark boater hat and cane, had a flair for selling and a wonderful head for business — as long as that business was crooked. Unbeknownst to Bostonians who first heard his get-rich-quick promises in early 1920, he had a past full of fraud and forgery, having served prison terms in Montreal and Georgia. Almost as ardent a stamp collector as he was a con artist, he had devised a plausible-sounding investment plan — with implausible returns of 50 percent in 90 days — based on foreign exchange rates in the post-war Europe of collapsing currency values.

To get those returns for investors, Ponzi pledged that he would put their dollars into humble-sounding instruments called “International Reply Coupons,” or IRCs. These actually did exist; IRCs had been created by a global agreement before the war to help governments fix values at which their nation’s postage stamps would be redeemed. Countries designed coupons with floating redemption rates, reflecting what currency was being used in the transaction, to allow the international mailing of letters. Thus, mail posted at a certain rate in, say, the United States, would be delivered to Spain or Italy, no matter what happened to rates in those countries when the U.S. mail was sent.

In 1919, Ponzi examined one of the IRC certificates that an associate in Spain had sent him, and began to think. We know something of his thought process because of accounts he gave about the adventures later in life. As Boston journalist Mitchell Zuckoff writes in his 2005 book “Ponzi’s Scheme,” “in a flash of insight, some might even say genius, Ponzi saw something more, a global currency whose value fluctuated wildly depending on where it was used.” Ponzi did some calculations: If one U.S. dollar could purchase five IRCs in Boston, it could buy sixty-six IRCs in Rome, once the dollars were exchanged for the severely devalued Italian lira.

It was a moment reminiscent of “The Producers”‘ Max Bialystock, plotting with Leo Bloom how they might make more money with a flop than a Broadway hit. To make money with this kind of exchange himself, Ponzi would have to start with a hoard of original dollars to buy the IRCs in countries with devalued currencies, a hoard he did not have. Then he would have to buy and transport the huge bundles of coupons that would have to be involved if any meaningful profit was to be produced. That’s if it was even legal. “But those critical details would wait for another day,” Zuckoff writes. Ponzi decided instead to use his brainstorm to sell others on investing in Ponzi’s own securities. That would get him his bankroll. He would then deliver the promised returns by paying them off with the investments of later investors.

His international trade in IRCs never began. What did begin was a promotion based on persuading others that Ponzi could manipulate the system to turn a huge profit for them. New ways had to be found to keep drawing investors, and Ponzi found them. He cut the payout time in half, and touted that “a little dollar could start on a journey across the ocean and return home in six weeks, married and with a couple of kids.”

On July 4 the Boston Post got involved, beginning a two-month flurry of stories about Ponzi. Editor Richard Grozier, incredulous at the profit claim, asked Post city editor Edward J. Dunn to have some reporters look into Ponzi and his company more closely. He put two reporters, P.A. Santosuosso and Herbert L. Baldwin, on the case. They turned to Clarence Barron as a source. At 65, the owner of the successful Boston News Bureau, along with New York’s Dow Jones & Co. and its main product, The Wall Street Journal, had established himself as quite a Boston character. The short, 330-pound, bearded Barron had a reserved suite at the Ritz Carlton, across from the Boston Public Garden, to go with his Beacon Hill home and an estate in the posh South Shore community of Cohasset. Identified by the Post as being “recognized internationally as among the foremost financial authorities of the world,” Barron was quoted as saying, “No man of wide financial or investment experience would look twice at a proposition to take his money upon a simple promise to pay it back with a 50 percent increase in three months.”

The public reaction to all this cold water on the hot investment? The biggest rush yet from people wanting to buy. When Edward Dunn walked around the corner from the Post to check on the scene, his observation was: “Pigs being led to the slaughter.”

The scenario was to play out for several more weeks, each new skeptical story seeming to stimulate business, rather than stifle it.

On August 8, Ponzi was comfortable at home in his bathrobe as he settled in for two hours with Post reporter P.A. Santosuossa. The questions were about his life before coming to Boston. There were holes in the story — holes that Santosuossa was looking for, because he had heard rumors that Ponzi had a criminal record in Canada. Still, the reporter didn’t have enough to confront Ponzi about it. After the interview was over, though, the Post‘s Montreal correspondent provided the tip the paper had been itching for: that someone named Charles Ponsi, spelled with an “s,” had been imprisoned there a decade earlier for forgery. The charge had stemmed from his employment at Banco Zarossi. Santosuossa called Ponzi back at home with his follow-up. Ponzi laughed off the direct question of whether he was the same Ponsi, who also used the alias Bianchi. Had he been in Canada at that time? Yes. Had he worked at that bank? “I might have.”

For the Post, the next step was immediately dispatching a reporter to Montreal named Herbert Baldwin to nail down the report once and for all. His interviews were successful, bringing numerous confirmations from the Ponzi photo Baldwin displayed. With the addition of a mustache, he was told, it was the same man: the forger Ponsi, alias Bianchi. Or, as one said, “Bianchi, the snake!”

Being Ponzi, the trader still made efforts to deny it, even after a bylined story by Baldwin ran August 11 with the headline “CANADIAN ‘PONSI’ SERVED JAIL TERM, and with details of the forgery conviction. When he was told what the story would say, and was asked to comment, Ponzi told the Post reporter: “…you are going to get the presses ripped out of your building.” But the bravado didn’t last.

“It was this revelation that finally burst the bubble,” said the Post in its nomination letter to the Pulitzer Board. “Practically the last doubts were swept away.”

Ever chatty, Ponzi said to the Post‘s Baldwin at a moment toward the end of the trial: “You did a fine job on me. If it hadn’t been for that story in the Post, maybe things would have been a lot different for me today.” Much later, Ponzi was to detail the entire scam. “My business was simple. It was the old game of robbing Peter to pay Paul,” he said.

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Roy Harris, a former Wall Street Journal reporter, is the author of Pulitzer's Gold: A Century of Public Service Journalism. Among his contributions to Poynter…
Roy J. Harris Jr.

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