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.
What was the scam?
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.
What happened next?
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
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.
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radiosProfiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoaxProfiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empireProfiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt bingeProfiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scamProfiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debtsProfiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
