SHEARERS NEED SHEEP:

By definition, a Ponzi scheme is a fraud in which money from one group of people is secretly used to pay promised returns to another group of people. Think of it this way: You "invest" $1,000 in exchange for my guarantee to double your money in weeks. What you don't know is that I don't have a legitimate business with products or services. Instead, I intend to lure more investors (a.k.a. suckers) and use their money to pay you. Eventually, the scheme collapses when I take the money and run, or when withdrawals outpace the influx of new money.

The scheme's namesake was a dashing, diminutive Italian immigrant who arrived in Boston in 1903 seeking fortune and adventure after partying his way out of the University of Rome. During more than a decade of travels around the United States, he became a hero who donated skin from his back and legs to save a nurse burned in an explosion. He became a two-time felon for, on separate occasions, passing a bad check and helping several of his countrymen sneak into the United States from Canada. After serving time, Ponzi returned to Boston. He failed at several businesses, then cooked up his version of what had been known as "robbing Peter to pay Paul."

During the spring and summer of 1920, Ponzi announced that he could pay double-your-money returns using an obscure financial instrument called International Reply Coupons. Snail mail was king back then, particularly for worldwide communications, and those IRCs could be used to purchase a postage stamp at a fixed price in more than 60 countries.

A witty raconteur with a taste for flashy suits, Ponzi claimed he developed a formula to exploit fluctuating currency exchange rates to turn IRCs into profits. For instance, at the time, a person could buy 66 postal coupons for $1 in Rome, where the lira was depressed after World War I. The same coupons would cost $3.30 in Boston, which theoretically meant Ponzi could triple his money after expenses.

Ponzi coyly refused to explain how he purchased enough coupons to fulfill his obligations or turned them into cash, saying it would enable copycats. On paper, Ponzi's scheme was ingenious and technically legal. In practice, it was impossible. During his rise, reporters focused instead on his mansion in Lexington and on his adoring wife.

Thousands of people emptied their wallets at Ponzi's Boston headquarters and at satellite offices. He became the most talked-about man in America and basked in his status as a champion of working men and women. "The truth is," Ponzi told reporters, "bankers and businessmen have been doing plenty for themselves . . . but they have done little for anybody else."

As he scrambled to make good, Ponzi invested in banks and explored buying a fleet of merchant ships mothballed after the war. But his past and The Boston Post caught up with him, winning the newspaper the first Pulitzer Prize for public service and triggering action by prosecutors. It ended poorly for Ponzi and for those who trusted him with their money.

Afterward, The New York Times was more forgiving toward Ponzi than to investors seduced by the promise of easy money: "They showed only greed -- the eagerness to get much for nothing -- and they had not one of Ponzi's redeeming graces."

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