Abstract
Using a wide range of primary sources, this chapter provides an in-depth historical overview of some of the most notorious securities and company promotion frauds that took place in the City of London in the years between 1919 and 1939. Contained within this discussion are the underhand exploits of a wide variety of infamous financiers, including: Gerard Lee Bevan, Clarence Hatry, and Martin Coles Harman. Also discussed is the structure of the British securities at this time and the extent to which this helped to create an environment conducive to these sorts of large-scale securities frauds.
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Notes
For more on the links between political instability and economic volatility, see Alesina and Perotti (1996).
To give one example, although all newly formed joint-stock companies had to submit Articles of Association to the Committee of the Stock Exchange before they could be listed on the London Stock Exchange, no pre-quotation checks or investigations were ever made by the Committee to see whether the numbers quoted in these documents were fictitious or not (Robb, 2002: 82–83).
On top of these measures, steps were also taken by the leading London merchant banks and finance houses to exclude unscrupulous financiers from the business of underwriting bills of exchange and foreign bond issues, with the end result being the establishment of the Accepting Houses Committee (AHC) in 1914 (Kynaston, 2000: 3).
The Manchester Guardian (30 June 1927), p. 13.
Ibid. (13 October 1927), p. 19.
Prior to this, the British cotton industry had been largely reliant upon private financing from local merchants and manufacturers.
In total, he purchased over 20 separate cotton mills in the space of less than a year, with his largest investment being the £5.25 million he paid for the historic firm of Horrocks, Crewdson and Co. in November 1919. See The Manchester Guardian (30 June 1927), p. 13.
There were also allegations that White, in collaboration with a number of stockbrokers, had organised pools to artificially drive-up the share price of his various business concerns (Vallance, 1955: 88–89).
G.K.’s (9 July 1929), p. 485.
Between 1895 and 1897, Hooley promoted 26 different companies with a total capital of over £18 million (Clapham, 1938: 238).
The Manchester Guardian (10 April 1922), p. 3.
The Observer (9 April 1922), p. 15.
The Manchester Guardian (19 January 1923), p. 10.
In total, Ellis & Co. purchased 100,000 £1 preference shares (4s paid at 12s a share) and 25,000 £1 ordinary shares (4s paid at 2s a share) in the Company. See ‘Official Receiver’s Report to the Court of Bankrupts’ (1923), PRO, B 9/940, p. 15.
‘Statement by Peter Haig Thomas’ (22 February 1922), PRO, DPP 1/68.
‘Report from Sixth Annual Meeting’ (1915), PRO BT 31/32007/100728.
The Manchester Guardian (29 September 1922), p. 3.
Some indication of this change in direction can be gaged by the fact that, in 1916, 22 per-cent of the company’s assets was cash in hand and at the bank, whereas, by 1921, this figure had dropped to less than 5 per-cent. See The Times (2 September 1922), p. 6.
‘Memorandum of Work Done by the Special Managers’ (December 1922), PRO J 107/206, p. 4.
By February 1921, it was estimated that the City Equitable had loaned over £911,000 to Ellis & Co. to assist them in their corporate dealings. See ‘Official Receiver’s Report to the Court of Bankrupts’ (1923), PRO, B 9/940, p. 4.
‘Deposition of Frederick Van de Linde’ (1922), PRO, HO 45/11083/429568, pp. 3–5.
‘Preliminary Examination of the Affairs of Ellis & Co.’ (14 August 1922), PRO, DPP 1/68, pp. 3–6.
Of course, by directly financing these share purchases with money obtained through loans, Ellis & Co. were actually making a loss owing to the interest they had to pay on the original loans (Manley, 1973: 108).
‘Official Receiver’s Report to the Court of Bankrupts’
Ibid., p. 17.
The Times (25 July 1921), p. 16.
These securities were then promptly sold on, with the funds generated being used by the City Equitable to pay off its own outstanding debt. See ‘Deposition of Sir Archibald Bodkin’ (14 August 1922), PRO, DPP 1/68, p. 8.
The funds from this sale was mainly used to pay off some of the debts on Ellis & Co.’s books, with £6,000 going to Barclays and £25,000 to Kleinwort, Sons & Co. (Weyer, 2011: 157).
Investors were offered 250,000 8 per-cent participating preference shares of £1 each, payable in four instalments over a six-month period.
The Times (25 July 1921), p. 16.
Ibid. (2 September 1922), p. 6.
In addition, the prospectus for the City Equitable Associated was also highly irregular in that it only disclosed the (supposed) ‘cash, investments, and other interest-bearing assets’ of the four insurance companies, with no mention of the liabilities that each of the companies faced. See ‘Deposition of Sir Archibald Bodkin’ (14 August 1922), PRO, DPP 1/68, p. 6.
The Manchester Guardian (21 November 1922), p. 7.
The Times (2 September 1922), p. 6.
These window-dressing tactics largely ceased after 1946 as a result of an unofficial agreement between the ‘Big Five’ London clearing-house banks (Billings and Capie, 2009: 42).
Indeed, as Manley (1973: 111) rightly notes, it is doubtful that either the City Equitable or Ellis & Co. could have survived past 1919 had it not been for Bevan’s various financial malefactions.
The Times (6 December 1922), p. 7.
In a similar sense, the way in which Bevan sought to conceal his huge debts by shuffling money and assets between the various companies in which he was involved can be seen to resonate closely with more recent cases of corporate mismanagement, such as those involving Robert Maxwell and the Enron Corporation, in which a variety of shell companies and special purpose entities have been deployed to conceal reckless spending and other financial irregularities (McLean and Elkind, 2013; Sarna, 2010: 152–153).
The Independent (4 March 1995), p. 25.
The Daily Telegraph (27 February 1995), p. 24.
The Argus (17 November 1933), p. 9.
Alpheus Hyatt Verrill, Secret Treasure: Hidden Riches of the British Isles (London: D. Appleton & Co., 1931), pp. 63–65.
Lundy Field Society, Eight Annual Report (Lundy: Lundy Field Society, 1954), p. 5. Available online at: http://www.lundy.org.uk/publications (accessed: 30 September 2013).
The New York Times (7 December 1954), p. 24.
Auckland Star (8 November 1933), p. 7.
‘Bankruptcy Proceedings’ (1 ?? 932), PRO, B 9/1202; ‘Summary of Finances’ (January 1931), PRO, DPP B 9/1178.
The Economist (18 November 1933), p. 970.
Auckland Star (8 November 1933), p. 7.
The Economist (18 November 1933), p. 970.
The Accountant (27 January 1934), p. 136.
The Spectator (27 September 1929), p. 2.
The Commercial Bank of London also played a prominent role in the various issues that Bevan was bringing to the market at this time, acting as the sponsoring bank in almost all of his flotations. See ‘Statement by Peter Haig Thomas’ (22 February 1922), PRO, DPP 1/68.
In a pamphlet later published by his son, it was stated that Hatry had provided over £1.5 million from his own personal funds to support his ailing business empire. See ‘The Hatry Case: Eight Current Misconceptions’ (1937), PRO, HO 144/21218, p. 4.
‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, pp. 54–55.
‘Particulars from File No. 221937’ (1929), PRO, DPP 1/191.
‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, pp. 57–60.
On top of this, he was also instrumental in reorganising and merging together the various bus companies operating in London at this time – again, making a substantial profit for himself by selling his amalgamated creation on to the London General Omnibus Company (Kynaston, 2000: 141).
The Banker (March 1930), pp. 367–368.
Note that all this took place despite the fact that, as the auditor who subsequently looked into the company’s books noted, ‘no transactions of any kind [were] carried out by this company from its inception to the present time’. See ‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, pp. 30–33.
‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, p. 52.
Hatry also later claimed that one of the reasons why he was unable to obtain credit was because he ‘had made powerful enemies in the City by having wrested from influential and powerful interests the virtual monopoly of Corporation Loan business’. See ‘The Hatry Case: Eight Current Misconceptions’ (1937), p. 38, PRO, HO 144/21218.
‘Exhibits 216–218: Summary of Positions as to Issue of Regular Stock’ (1929), PRO, DPP 1/191.
‘Testimony of James Somerville Knott’ (October 1929), PRO, DPP 1/191.
From its inception, the standard procedure for these underwriting deals was for Corporation and General Securities to purchase (at a discount) the respective local authority’s debt, with payment being delivered as and when the stock was sold (Vallance, 1955: 141–142).
‘Testimony of Alfred Ernest Dean’ (October 1929), PRO, DPP 1/191.
Furthermore, at the time of the collapse of the Pinners’ Hall group, it was discovered that in the offices of the Austin Friars Trust there were freshly printed allotment certificates for 250,000 preference shares in the Steel Industries company that had, in fact, already been allotted out. See ‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, pp. 34 and 53.
‘Proof of Evidence by Sir Gilbert Garnsey’ (9 December 1929), PRO, DPP 1/191, p. 34.
Illustrated London News (28 September 1929), p. 533.
The Economist (1 February 1930), p. 223.
Quoted in Lang (1935: 288).
‘The Hatry Case: Eight Current Misconceptions’ (1937), p. 38, PRO, HO 144/21218.
Quoted in Lang (1935: 289).
For instance, it was rumoured that one firm of stockbrokers had had to write £350,000 off its books following the Hatry collapse. See The Economist (28 September 1929), p. 577.
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© 2015 Matthew Hollow
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Hollow, M. (2015). From Speculation to Devastation: Securities Fraud and Company Promotion Fraud in Interwar Britain. In: Rogue Banking: A History of Financial Fraud in Interwar Britain. Palgrave Pivot, London. https://doi.org/10.1057/9781137360540_3
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DOI: https://doi.org/10.1057/9781137360540_3
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