Great frauds in history: Jabez Spencer Balfour

published 26 June 2019

Jabez Spencer Balfour was born in London in 1843 and went on to found the Liberator Building Society in 1868. Thanks largely to Balfour's connections, through his family, with the Nonconformist community, its assets quickly ballooned. Within a decade it was the largest building society in the land. Balfour also set up a variety of property and development companies, making the most of the fame he had garnered through their apparent success to launch a modest political career.

The building society promised to invest its depositors' money in building affordable houses for working families. A large chunk was actually lent to speculative property schemes that Balfour was involved in, as well as to other parts of his empire. To sustain the illusion of profitability, Balfour overinflated the value of the assets his firms held. He also set up fictitious transactions between them so that he could claim they were growing at a fast rate and loot money from them for his own personal use.

The bad management and embezzlement meant that Balfour's companies had to resort to borrowing increasing sums, both from the building society and elsewhere, in order to pay dividends. Eventually, their debt grew so large that no one was willing to lend them any more money, even at interest rates of up to 20%. In 1892 a business run by his friend James Hobbs, who had borrowed £2m from another Balfour bank, imploded, bringing the bank down as well. The receivers quickly spotted that Balfour's empire was built on fraud, and he fled the country. He was extradited and convicted in 1895.

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Overall, the Balfour Group owed £7m (£747m in today's money) to creditors, a sum secured against a small amount of mostly worthless assets. Those who put their money into the building society lost almost everything. The trial of Balfour and his accomplices revealed shocking levels of corporate governance. The auditors were friends of Balfour and signed off on things they didn't understand. Watch out for firms that have friends of the CEO on the board it's a warning sign.

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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri