Monday, August 15, 2011

The Man Who Blew the Whistle on Charles Ponzi

From Fraud Magazine: 
The Man Who Time (Almost) Forgot
William H. McMasters Finally Gets His Due for Exposing Ponzi

mcmasters-portraitFor the first time ever, the ACFE presented its annual Cliff Robertson Sentinel Award posthumously. Who was the person who earned such an honor, 43 years after his death? William H. McMasters, the man who exposed Charles Ponzi as a fraud in 1920.

He was Ponzi's publicist for just a short time before he realized his client was a fraudster. McMasters then wrote a scathing exposé for The Boston Post that led to Ponzi's ultimate downfall. The newspaper received the 1921 Pulitzer Prize for its Ponzi coverage. McMasters never even saw the medal and, during his lifetime, he never received public recognition for his role. It is past time to give him his due. 

Possibly the most remarkable part of the story is that McMasters wrote the exposé on Ponzi only 10 days after Ponzi hired him. Compare that to the years of reporters' and investigators' questions before Bernie Madoff's scheme finally came crashing down.

On July 23, 1920, Boston Municipal Court judge Frank Leveroni and William S. McNary, treasurer of the Hanover Trust Company, called McMasters - by then a well-known publicity agent - into Leveroni's office to meet Ponzi. They wanted to know if McMasters would consider working for Ponzi, who had become a major Hanover Trust stockholder.

Ponzi was dashing - he wore an expensive suit and was incredibly charming and confident. He outlined his plan for a massive financial empire. He purportedly sent money overseas to be exchanged for local currency, and then his contacts bought postal coupons and mailed them to Ponzi, who exchanged them for stamps, which businesses bought in bulk for a reduced price. (See sidebar: "Who was Charles Ponzi, and what was his scheme?" below.) The bottom line was he was raking in hundreds of thousands of dollars a month from investors with the promise of a 50-percent return rate on their money within 90 days.

McMasters' suspicions began as early as the very first meeting because the rate of return seemed a little too fantastic, but he was honest about his prospects. "I was not averse to having a millionaire for a client, especially one who evidently wanted to spend money lavishly," McMasters wrote in a 1949 accounting of the story.

As his newly hired publicist, McMasters scored Ponzi an interview with The Boston Post (which then had the largest circulation in New England) shortly after his first meeting with Ponzi. The front-page story the next day drew investors like flies to honey. A line formed at Ponzi's office at 6 a.m., and he collected more than $3 million (US $34 million in today's dollars) in just one day. McMasters recalled Ponzi swaggering among the crowd, reassuring them that his staff would help them all.

The story spread like wildfire to "the front page of practically every newspaper in the United States," wrote McMasters. People could not get their money to Ponzi fast enough.

But Ponzi's numbers bothered McMasters. How could it possibly be true for Ponzi to give the returns he was promising? The answer, of course, was that he couldn't....MORE 
HT: The Big Picture

Coincidentally, although Madoff was as Wall Street as they come, the guy who saw through him, Harry Markopolos was, like McMasters, based in Boston.