Great frauds in history: George Hudson

Born in March 1800 in the Yorkshire village of Howsham, Hudson was forced to move to York after fathering a child out of wedlock. Apprenticed to a draper, he took over the shop after marrying his employer's daughter. An inheritance of £30,000 (£2.5m in today's money) from a great-uncle allowed him to help set up what would become the York and North Midland Railway as well as the York Union Banking Company. By 1848 "The Railway King" ran several railways accounting for a third of the rail network.

How did the scam work?

Hudson's frauds can be divided into two categories. Firstly, he embezzled an estimated £750,000 (£74m in 2018) from the companies that he was involved in. He pocketed money meant to repay landowners, sold land and raw materials to them at vastly inflated prices and persuaded the companies to buy shares from him at above-market prices. The second ploy was to falsify the accounts of his companies by classifying expenses as investment, omitting some spending entirely and generating fictitious revenue. In the case of the Eastern Counties Railway alone, profits were overstated by at least £353,000 (£34.8m).

What happened next?

The end of the railway bubble prompted shareholders to start asking questions. At a meeting of the York, Newcastle and Berwick railway in February 1849 Hudson was confronted with evidence of suspicious share transactions, prompting multiple inquiries, which revealed his fraudulent behaviour. Hudson resigned his directorships and was forced to sell his country estate and houses. However, this wasn't enough to cover his debts, and in 1859 he fled to the continent to avoid his creditors. He was eventually imprisoned for non-payment of his debt.

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Lessons for investors

Hudson's railways would eventually become part of British Rail a century later. However, investors who put money into them based on his promises of high dividends sustained by growing profits would lose out heavily, as these dividends were slashed or suspended. Even before Hudson resigned shares in the Eastern Counties railways were down more than half from their peak in 1846. When stocks offer high yields of 10%, check whether the dividends have a realistic chance of being paid.