Lest we forget the original

In all the hoohah about Madoff, we might forget that there really was a Ponzi, whose scheme is the basis for everyone else's felonies:

Charles Ponzi was an Italian immigrant to the United States who became one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl Ponzi, and Carlo Ponzi.
By his own account, Ponzi arrived in the United States in 1903 with two dollars and fifty cents in his pocket, having gambled away the rest of his life savings during the voyage. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.
In 1907 Ponzi moved to Montreal, Canada, and became an assistant teller in the newly opened Banco Zarossi, a bank started by "Louis" Luigi Zarossi to service the influx of Italian immigrants arriving in the city. Zarossi paid 6% interest on bank deposits - double the going rate at the time - and was growing rapidly as a result. Ponzi found out that the bank was in serious financial trouble because of bad real estate loans, and that Zarossi was funding the interest payments not through profit on investments, but by using money deposited in newly opened accounts. The bank eventually failed and Zarossi fled to Mexico with a large portion of the bank's money.
Ponzi stayed in Montreal and, for some time, lived at Zarossi's house helping the man's abandoned family while planning to return to the United States and start over. As Ponzi was penniless, this proved to be very difficult. Eventually he walked into the offices of a former Zarossi customer and, finding no one there, wrote himself a check for $423.58 in a checkbook he found, forging the signature of a director of the company. Confronted by police who had taken note of his large expenditures just after the forged check was cashed, Ponzi held out his hands, wrists up, and said "I'm guilty." He ended up spending three years in a Quebec prison. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a "special assistant" to a prison warden.
After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in an Atlanta prison. Here he became a translator for the warden, who was intercepting letters from a famous mobster, Ignazio "the Wolf" Lupo. Ponzi ended up befriending Lupo. However it was another prisoner who became a true role model to Ponzi; Charles W. Morse convinced doctors he was dying by eating soap shavings, and was released early.
When Ponzi was released he eventually made his way back to Boston. There he met an Italian girl, Rose Gnecco, who was swept off her feet by Ponzi's charm. Though Ponzi did not tell Gnecco about his years in jail, his mother sent Gnecco a letter telling her of Ponzi's past. She remained with him nonetheless, and they married in 1918. For the next few months he worked at a number of businesses, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses. Ponzi was unable to sell this idea to businesses, and his company failed soon after.
A few weeks later Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was an international postal reply coupon=, something which he had never seen before. He asked about it and found a weakness in the system which would, in theory, allow him to make money. The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. They were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after the First World War had much decreased the cost of postage in Italy expressed in US dollars, so that an reply coupon could be bought cheaply in Italy and exchanged for US stamps to a higher value. The process was: send money abroad; have coupons purchased by agents; send the coupons to the US; redeem the coupons for stamps to a higher value; sell the stamps. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or profiting by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher, which is not illegal.
Ponzi canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the Securities Exchange Company, to promote the scheme.
Some people invested, and were paid off as promised. The word spread, and investment came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2008 dollars).
By March he had made $30,000 ($328,000 in current terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time investors were being paid impressive rates, encouraging yet others to invest.
By May 1920 he had made $420,000 ($4.59 Million in 2008 terms). He began depositing the money in the Hanover Trust Bank of Boston (a small Italian-American bank on Hanover Street in the mostly Italian North End), in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he did, in fact, buy a controlling interest in the bank. One biographer of Ponzi who wrote eighty years later described the cash price at which the bank's founding family sold their stake as suspiciously high. Having had a fiduciary duty to protect their depositors they were a lasting unindicted beneficiary without direct involvement.
By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested. Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money, but colossal liabilities were accumulating.
Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and brought his mother from Italy in a first-class stateroom on an ocean liner. He was a hero among the Italian community, and was cheered wherever he went.
There were signs of Ponzi's eventual ruin: a furniture dealer, who had given Ponzi furniture when he could not afford to pay, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. There was a run on the Securities Exchange Company as some investors decided to pull out.
Ponzi paid them and the run stopped. In fact, on 24 July 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day.
Despite this reprieve, one of the editors of the Post was suspicious and assigned investigative reporters to check Ponzi out. He was also under investigation by the Commonwealth of Massachusetts, and on the day the Post printed its article Ponzi met with state officials. He managed to divert the officials from checking his books by offering to stop taking money during the investigation; a fortunate choice, as proper records were not being kept. Ponzi's offer temporarily calmed the suspicions of the state officials.
By this time Ponzi was seeking another deal to get him out of the golden trap he had built for himself, but time was running out. On 26 July the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron's financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself wasn't investing with his own company.
Barron then noted that to cover the investments made with the Securities Exchange Company, 160,000,000 postal reply coupons would have to be in circulation. However, only about 27,000 coupons were actually circulating. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each coupon was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.
The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him.
In the short term, Ponzi had hired a publicity agent, James McMasters. However, McMasters quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He went to the Post, calling Ponzi a "financial idiot." The paper offered him five thousand dollars for his story, and ran a headline on 2 August declaring Ponzi hopelessly insolvent. On 10 August federal agents raided the Securities Exchange Company and shut it down. There was no large stock of postal reply coupons. The Hanover Trust Bank was shut down as well.
The Post continued their articles, with one revealing Ponzi's jail record and publishing his Canadian mugshots. By 13 August, Ponzi was under arrest, with a Federal indictment citing 86 counts of fraud. Ponzi's supporters were outraged at the officers who arrested him. 17,000 people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.
On 1 November 1920, Ponzi pleaded guilty to mail fraud, and was sentenced to five years in federal prison. He was released after three and a half years to face state charges. He was again found guilty and sentenced to nine years. Before entering state prison, Ponzi jumped bail and fled to Florida, where he set up a scam to sell "prime Florida property" to gullible investors. The Florida authorities quickly learned of this scheme so he fled to Texas, where he shaved his head, grew a mustache, and tried to flee the country as a crewman on a merchant ship. However, he was caught and sent back to Massachusetts to serve out his prison term.
In the meantime, government investigators tried to trace Ponzi's convoluted accounts to figure out how much money he had taken and where it had gone. They never managed to untangle it, and could conclude only that millions had gone through his hands.
Ponzi was released in 1934 and was immediately deported to Italy because he had never become an American citizen. His flashy confidence had faded by that time, and when he left the prison gates he was met by an angry crowd. He told reporters before he left: "I went looking for trouble, and I found it." Rose stayed behind and later divorced him, as she did not want to leave Boston for his sake. However, they continued to exchange hopeful love letters up until Ponzi's death.
In Italy, Ponzi jumped from scheme to scheme but little came of them. He eventually got a job in Brazil as an agent for Ala Littoria, the Italian state airline. However, during World War II, the Brazilians, who had sided with the Allies, realized the Italians were using the airline to ship strategic materials and shut it down.
Ponzi spent the last years of his life in poverty. He had a stroke in 1948, and died in a charity hospital in Rio de Janeiro on 18 January 1949. His life was characterized by outlandish, wild and criminal ventures which inevitably led to his downfall. In the charity hospital, Ponzi granted one last interview to an American reporter, and commented about the wild ride he had given Bostonians: "Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over."

Rico says that, even with inflation, Ponzi never did fifty billion worth; Madoff is the champion, so far...