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Great frauds in history: Jabez Spencer Balfour

Jabez Spencer Balfour built the largest building society in the land and swindled its depositors out of millions.

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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.

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.

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