Great frauds in history: Sarah Howe

Sarah Howe defrauded thousands of women through her "Ladies’ Deposit Company" in the late 19th century.

Sarah Howe was born around 1826 in Providence, Rhode Island, in the US, and worked most of her early life as a fortune-teller in Boston. In 1875 she was arrested several times for fraud, usually for taking out multiple loans secured by the same asset, and then refusing to repay them. In 1879 she opened the Ladies' Deposit Company. "Run by women for women," it accepted deposits from unmarried women, and quickly won a following in Boston, attracting $500,000 (around $13m in today's money) in deposits from 1,200 savers, who were attracted by the promise of getting 8% in interest each month.

What was Sarah Howe's scam?

Howe's bank, which she claimed was backed by a Quaker charity, operated as an early Ponzi-style scheme, taking money from depositors with promises of high interest payments, but paying that interest from later depositors rather than, as claimed, from stockmarket investment gains. Unlike Charles Ponzi's original scheme, however, Howe's scam cleverly placed a limit on withdrawals, allowing savers to draw only from accumulated interest payments, and not from their original capital. She justified this rule by saying that it would prevent members from frivolously wasting their money.

What happened next?

Thanks in part to the novelty of seeing a bank being run by a woman, the scheme attracted a lot of interest from the press. As a result, in September 1880 the Boston Advertiser ran a series of articles attacking the scheme, which caused the number of new depositors to dry up and existing savers to start besieging the bank demanding their money back. To begin with Howe starting repaying, handing out $80,000, but this failed to restore confidence. She then went on the run with $50,000 of the bank's money before being arrested and sentenced to three years in jail for fraud.

Lessons for investors

Amazingly, given the publicity surrounding the collapse of this scheme, Howe was able to launch another one shortly after her release. This also collapsed, though not before she absconded with $50,000. This time she got off because her victims were too embarrassed to help with the prosecution. Howe's appeal to women is a classic example of affinity fraud the use of social connections and/or shared identity to get victims to hand over cash without asking too many questions. It's never a good idea to invest in the scheme of someone you consider a friend or fellow traveller without doing proper due diligence.

Recommended

How to boost your income as dividends come back in fashion
Income investing

How to boost your income as dividends come back in fashion

Dividends are back in fashion. But how do you go about building an income-generating portfolio?
4 Jul 2022
The MoneyWeek Podcast: nuggets of positivity in an extended bear market
Investment strategy

The MoneyWeek Podcast: nuggets of positivity in an extended bear market

Merryn and John talk about he need for higher wages and lower house prices, and why the fact that this is the least dramatic bear market they’ve ever …
1 Jul 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022
Gold has been incredibly boring to own – but that’s no bad thing right now
Gold

Gold has been incredibly boring to own – but that’s no bad thing right now

Stocks, bonds and cryptocurrencies have all seen big falls this year. But gold remains at its one-year average. It may be dull, but it’s doing what it…
29 Jun 2022

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022