Charles Ponzi: A Coupon Trade the Supreme Court Called False

What did Ponzi tell his lenders?

In 1924, the U.S. Supreme Court called Charles Ponzi's postal-coupon trade a “false tale.” The words come from Cunningham v. Brown, decided on April 28, 1924, nearly four years after his business in Boston collapsed. Chief Justice Taft wrote for the Court.

According to the opinion, Ponzi began in December 1919 “with a capital of $150,” borrowing money on his own promissory notes. A promissory note is a written promise to repay a set sum by a set date. He did not offer to invest for his lenders, the Court says; he borrowed “on his credit only.”

What he told them, in the Supreme Court's words, was a false tale: that “on his own account he was engaged in buying international postal coupons in foreign countries” and selling them in other countries at a profit of 100 percent. He said the gaps between currency exchange rates after the war made this possible, and he offered to let others share in it.

The terms fit on one line. “By a written promise in ninety days to pay them $150 for every $100 loaned, he induced thousands to lend him,” the opinion says. In practice he paid his ninety-day notes in full after forty-five days, and he let it be known that anyone who brought in a note before forty-five days would get back 100 percent of the loan.

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By dead reckoning, a 50 percent gain in 90 days works out to about 203 percent a year as simple interest, and about 406 percent if a note was paid at 45 days. These are this page's own arithmetic, not the Court's, and they are given only to show the size of the promise.

What was an international reply coupon?

Postal coupons of the kind Ponzi named did exist. A Belgian coupon, dated 1907 on the file page of a collector's scan, states its use on the back in four languages; the English paragraph reads: “This coupon can be exchanged for a postage stamp of the value of 25 centimes or the equivalent of that sum in countries which have adopted the arrangement.” The front repeats the offer in French and Dutch under the heading Coupon-réponse international, or international reply coupon.

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The opinion does not say whether Ponzi ever bought a coupon. It says something wider: “He made no investments of any kind, so that all the money he had at any time was solely the result of loans by his dupes.” The Court gives no count of coupons, no coupon prices and no exchange rates. This page therefore does not try to work out what a coupon trade could have earned.

Where did the money come from?

Ponzi's lenders paid in $9,582,000 “within eight months,” and he gave them notes for $14,374,000, according to the opinion. The notes come to almost exactly one and a half times the cash, which matches the promise of $150 for every $100.

Each loan cost him more than the promise. The opinion says he paid the people who sold his notes a commission of 10 percent, so “every loan paid in full with the profit would cost him 60 per cent.” By July 1, 1920, he was taking in “about one million dollars a week.”

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The Court summed up the business in one line: “He was always insolvent and became daily more so, the more his business succeeded.” Insolvent means owing more than one owns. By the Court's account, all the money he had came from loans. By dead reckoning, the extra $50 on any note paid in full could only come out of other lenders' money.

By dead reckoning, the early payments did more than keep lenders calm. The opinion says the 45-day payouts “stimulated their avidity,” and Ponzi's secretary testified that from as early as April anyone unwilling to wait could take the money back at the amount lent. A doubtful lender could leave quietly, so private doubt did not have to become a public run.

The Court found “no evidence of any general attempt” by holders of unmatured notes to get paid before the run that began after the investigation. The opinion does not say what lenders believed before the run. The same question, why early doubt failed to stop a fake, runs through the entries on the Cardiff Giant and the Donation of Constantine.

What happened in the summer of 1920?

On July 26, 1920, Ponzi stopped selling notes “because of an investigation by public authority,” the opinion says, without naming the authority. He kept paying. Notes that had not yet run forty-five days were paid back at the amount lent, and notes that had were paid in full.

The report of the investigation set off a run on his Boston office. On Monday, August 2, the run became “a wild scramble,” when “a Boston newspaper, most widely circulated, declared Ponzi to be hopelessly insolvent,” with an account by one of his recent employees. The Court does not name the paper. Ponzi moved money from his other banks in Boston and New England into the Hanover Trust Company, his main bank.

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Download the table (CSV, charles-ponzi-court-findings.csv) (file notes: sources and license) Data: Cunningham v. Brown, 265 U.S. 1 (1924), opinion of the Court, U.S. Reports via govinfo.gov, retrieved 2026-11-01, public domain (U.S. court opinion)

Why did crowds fill the Hanover bank?

“The neighborhood of the Hanover Bank was crowded with people trying to get their money and for eight days they struggled,” the Court wrote. It gave the reason: “Because they feared that they would be left only with claims against the insolvent debtor.”

The bank figures show how fast the money moved. The balance in Ponzi's Hanover accounts was $334,000 at the opening of business on July 19 and $871,000 at the close on July 24. Withdrawals of $572,000 on July 26, $288,000 on July 27 and $905,000 on July 28 add up to $1,765,000, which the Court gives as “more than $1,765,000.”

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New deposits from other banks kept the account open until August 9, when it ended in an overdraft of $331,000. The petition in bankruptcy was then filed. Between July 19 and August 10, withdrawals totaled $6,692,000. At the end, the opinion says, there were five hundred people “to whom he gave checks in compliance with his promise” who were turned away “merely because there were no more funds.”

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The claims later filed against the bankrupt estate were for the money lent, not for the 150 percent he had promised, the opinion notes. By September 25, 1920, his name had become a verb in a Seattle bank's newspaper advertisement headed “Don't Be Ponzied,” which quoted a line it said the Literary Digest had picked up from another paper: “A Fool and His Money are soon Ponzied.”

What did the Supreme Court decide?

The case was about who keeps money paid out during a collapse. Ponzi's trustees in bankruptcy, the officers who gather a bankrupt's property for all the creditors, sued six lenders he had repaid within four months before the petition. Those six, by the opinion's list, had lent him $5,900 between July 20 and July 24, and one of them, Brown, had been a minor. By 1924 all the original trustees had died or resigned, and Cunningham, substituted for the last of them, was the sole trustee.

The District Court and the Court of Appeals saw the repayments as the lenders rescinding, or undoing, loans made through fraud and simply taking back their own money. Both courts dismissed the suits. The District Court also found that when these lenders were paid, on and after August 2, they had reason to believe Ponzi was insolvent.

The Supreme Court disagreed with the lower courts for two reasons. First, the lenders had not undone anything: they “merely took advantage of his agreement to pay his unmatured notes at par of the actual loan.” Second, a claim to their own money would fail anyway, because they could not trace it. All they had deposited had been withdrawn by the end of July 28, days before they were paid.

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The Court also held that an old English rule from Clayton's Case (1816) “has no application.” Under that rule, in a mixed fund owed to several defrauded people, the first money paid out counts against the first money paid in. Ponzi had drawn the July 26 to 28 money out before these lenders showed any sign of wanting it back, and at that point, the Court said, he could legally withdraw it.

To presume that Ponzi had kept these lenders' deposits apart from everyone else's would be, in the Court's phrase, “carrying the fiction to a fantastic conclusion.” After August 2, the Court said, his lenders “were all of one class,” all trying to save themselves from his insolvency. A payment that let one creditor recover a larger share of the debt than others in the same class was a preference, and when the creditor had reasonable cause to see that, the bankruptcy law let the trustee take it back.

“It is a case the circumstances of which call strongly for the principle that equality is equity,” Taft wrote. The minor stood in the same place as the others. The decrees were reversed. This is a reading of a 1924 decision, not legal advice about any present-day case.