Pining for Ponzi

A CURIOUS THEME is emerging in the current crop of high-profile corporate fraud trials. Call it the Sergeant Schultz defense. Like the bumbling guard from the old ''Hogan's Heroes" television series -- ''I know nothing!" was his signature line -- once-celebrated corporate titans are explaining their failure to stop widespread fraud by claiming they were thoroughly unfamiliar with the businesses they supposedly ran.

ADVERTISEMENT

No clearer example exists than Bernard J. Ebbers, the former chief executive of WorldCom, currently awaiting a jury verdict in his trial for allegedly engineering an $11 billion fraud. To hear Ebbers and his lawyers tell it, his financial education peaked around the time he worked as a milkman in the morning and a bouncer at night.

Though Ebbers is the poster boy for these self-described empty suits, he is hardly alone; legal experts expect a similar script when former Enron Chairman Ken Lay comes to trial.

Juries will determine the truthfulness of these defenses, but their very use makes one pine for the days when a businessman on trial for massive fraud would stand toe to toe with prosecutors and use his intimate knowledge of his company as the cornerstone of his defense. Consider Charles Ponzi, the charismatic scoundrel whose name has become forever associated with a particular kind of investment scam, the Ponzi Scheme.

Ponzi was an Italian immigrant who washed up on the shores of Boston in 1903, a 21-year-old bon vivant who had squandered his small inheritance partying when he should have been studying at the University of Rome.

Seeking his fortune, he bounced up and down the East Coast for more than a decade, enjoying heroic adventures such as saving a burn victim's life and suffering misadventures such as landing in prison for forging a check while working at a bank. Back in Boston in 1919, Ponzi struck upon the idea that would make him famous and, briefly, rich beyond even his outsized dreams.

Like the Enron crew, who claimed to have created huge profits through new forms of trading in mundane securities, Ponzi maintained that he had developed a way to wring enormous sums from what were essentially penny stamps. His idea -- both legal and theoretically doable, though logistically impossible -- involved exploiting disparities in foreign exchange rates on an obscure postal currency called International Reply Coupons. Investors rushed to cash in on Ponzi's promise of 50 percent interest in 45 days, and soon he was collecting millions at a time when the average yearly salary was about $1,300. Despite his best efforts to put his coupon exchange plan into action, Ponzi eventually relied on the old fraud of ''robbing Peter to pay Paul," that is, paying early investors with money from later ones.

The collapse came in August 1920, after a weeks-long clash of wills and nerve that pitted Ponzi against the young editor at The Boston Post (who would win one of the first Pulitzer Prizes for his investigation) and a host of federal, state, and local prosecutors. Hoping to avoid a long prison stay, Ponzi first pleaded guilty to two federal mail fraud indictments. But then, to Ponzi's surprise, Massachusetts prosecutors decided to try him as well. That was where Ponzi made his last stand.

Dapper as ever, in bespoke suits, fine silk ties, and gray spats, he acted as his own lawyer, charming the jury, grilling witnesses (except for women, to whom he was unfailingly solicitous), and running circles around prosecutors with a deceptively simple defense. Its essence: A promise of profits is not larceny, it is merely a promise; when it comes to investments, promises may be broken when circumstances change. Like Ebbers, Ponzi took the stand in his own defense. Unlike Ebbers, Ponzi explained in detail how his business worked and why he was innocent. The jury agreed.

Embarrassed, state prosecutors decided to try Ponzi again and again on different charges based on different investors who lost money. Only on the third attempt, after prosecutors learned from their mistakes and honed their responses to Ponzi's persuasive arguments, was Ponzi convicted. He returned to prison, and later was deported.

They say there is no honor among thieves, or even alleged thieves. But compared with the newfangled ''know-nothing" defense, it is hard not to admire Ponzi's straightforward approach. ''I came into this court to lay my cards on the table," he declared. Perhaps whatever little honor once existed is no more.

Mitchell Zuckoff, a journalism professor at Boston University, is author of ''Ponzi's Scheme: The True Story of a Financial Legend."