For a few brief months during 1920, Charles Ponzi dazzled investors in Boston with an investment scheme that promised unheard-of returns. No one, of course, realized that all he was doing was simply paying old investors money derived from new investors. Instead of actually putting the cash to work, investors were unwittingly getting their own money returned to them.
Yet Ponzi neither invented this type of fraud—which has been described as robbing Peter to pay Paul—nor was he its most successful purveyor.
There was, for example, Leo Koretz, a lawyer in Chicago who, during a span from 1908 to 1923, ran a Ponzi scheme that robbed as much as $20 million from investors. As Dean Jobb remarks in Empire of Deception: From Chicago to Nova Scotia—The Incredible Story of a Master Swindler Who Seduced a City and Captivated the Nation, “Leo, the Bernie Madoff of the Roaring Twenties, operated his swindle for far longer and with more panache” than Ponzi. Moreover, Koretz’s victims were more sophisticated, too—invariably plucked from Chicago’s professional classes.
The story of Koretz, an obscure figure among swindlers of the 20th century, is interesting in as much as the durability of Ponzi schemes shows no signs of abating. When the 2007–09 credit crisis struck, triggering the most severe economic cataclysm since the Great Depression, one impact was to expose numerous Ponzi schemes that had been purring along smoothly—most notably those run by Madoff and Allen Stanford in the United States, and Earl Jones, Tzvi Erez and Weizhen Tang here in Canada.
What is less well appreciated is how Ponzi-like structures are embedded within the financial industry right now. Three years ago I was investigating TV celebrity (of “Dragons’ Den” fame) Kevin O’Leary and his investment fund for The Globe and Mail and discovered that O’Leary was often paying investors a dividend drawn from their very own money. It is called “grinding your own capital” and it is perfectly legal—although it resembles a Ponzi practice. The asset-backed commercial paper disaster that blew up on Bay Street in 2007, freezing $32 billion worth of investors’ money overnight, happened because ABCP also had Ponzi-like characteristics.
Moreover, Jobb’s book is a sobering reminder that parting investors from their money with promises of vast riches seemed no less difficult to accomplish during Koretz’s era than it is today.
Born in 1879 in Bohemia, a western province of Austria-Hungary, Leo Koretz emigrated with his family to America a few years later, most likely fleeing anti-Semitism. Stout and prematurely balding, as a young man Koretz landed a job as an office boy at a prominent Chicago law firm, where he was later encouraged to earn his law degree at night school. In 1903, he set up his own practice.
But Koretz was more interested in getting rich than practising law. In 1907, he was convinced by an acquaintance to invest in timber holdings in Panama, only to discover the forests did not exist. Having been swindled so easily, he realized he could do the same thing to others. Koretz set up the Bayano Syndicate and attracted investors by claiming he controlled five million acres of Panama’s forest. He acquired the trappings of success by buying a famous Arts and Crafts mansion in the posh suburb of Evanston, opening swanky offices and throwing expensive parties for investors. Charming, quick witted, fluent in German with a suave voice that enchanted listeners, Koretz became a fixture in Chicago’s German-Jewish community.
Chicago was an exciting city during this epoch: flush with new immigrants, money, culture and jobs. It was an era of dance crazes and bathtub gin and bob-haired flappers—as well as gangsters, brothels, gambling dens and bootleggers.
In this milieu, Koretz managed to sustain his web of lies for years, and when his fraud involving the fictitious timber holdings began to wane, he re-energized it by claiming that a vast reserve of oil had been discovered under the very same forests.
In 1923, however, things began to unravel and Koretz fled first to New York, before making his way to the small town of Liverpool, Nova Scotia. He left behind his wife and family, as well as shattered investors and newspapers baying for his blood. A national manhunt was launched.
Meanwhile, in placid Nova Scotia, disguised and with a new name, Koretz bought a lodge, and began the life of a boulevardier until, a few months later, a sharp-eyed tailor in Halifax noticed a label in one of his suits with Koretz’s real name on it. The swindler was arrested and eventually returned to Chicago where he promptly confessed all, was sent to prison and died in early 1925 after an apparent suicide.
Jobb, a former reporter and editor at Halifax’s The Chronicle Herald, and now a professor of journalism at the University of King’s College, does a marvellous job of laying out the story with as much colour and historical detail as possible, painting a vivid account of the era that gave rise to Koretz. As a yarn, Empire of Deception is expertly told.
But there are weaknesses with the story—due to no fault of Jobb’s. And that is largely because after Koretz’s Ponzi operation was uncovered, what happened next was rather anti-climatic and not terribly riveting. Once he arrived in Canada, with the exception of some womanizing, he did little of interest here. Koretz pretended to be a writer and critic, bought and renovated a big house, and told fibs about being the man who discovered the western novel writer Zane Grey. Yet the locals soon tired of him. In fact, it was the result of his own stupidity and carelessness that he was caught so quickly. And once apprehended Koretz did not fight the charges or claim innocence and meekly went to prison before his swift demise.
Jobb tries to create tension by introducing the character of Robert Crowe, the son of Irish immigrants who worked in the same law firm with Koretz in Chicago when both were young attorneys. Ambitious and well connected, Crowe rose quickly to become a prominent lawyer, judge and state attorney. And years later, he oversaw the investigation into Koretz’s scam and sentencing once he was caught. Still, in the end, the lives of Koretz and Crowe never intertwine to any great extent.
Despite this flaw, Empire of Deception is well written and a worthy addition to any library devoted to the depressingly repetitive history of white-collar crime in Canada and the United States.