Great frauds in history: Prescott Jernegan’s gold hoax

Prescott Jernegan claimed to be able to extract gold from seawater. He couldn't, of course. But he persuaded an awful lot of people that he could

Prescott Jernegan was born in December 1866 and as a toddler spent a few years on his father's whaling ship before his family settled in Edgartown, Massachusetts. Jernegan later graduated from Brown University and briefly worked as a schoolteacher before attending Newton Theological Seminary and becoming a Baptist preacher. His preaching proved controversial and he struggled to earn enough money.

One day, while recovering from typhoid fever, he had a dream about seawater turning into gold. Hooking up with childhood friend Charles Fisher, he later claimed to have found a way to extract gold from seawater at a reasonable cost. (Seawater does in fact contain gold, but in such low concentrations that extraction is uneconomic.)

The pair set up the Electrolytic Marine Salts Company in 1897 and raised $900,000 ($28m in today's money) to set up a "gold extraction factory' in Lubec, Maine.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues 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

Sign up

What was the scam?

As Jernegan would later admit, the company's scientific apparatus was an elaborate sham intended to give the impression that something was going on, rather than producing any actual gold. In order to give the impression that gold was being extracted from the seawater, gold flakes were covertly added to the early samples produced by the machine. Later, to keep the deception going, the duo would spend $2,000 a week on gold, which was sent to the Boston offices of their company, to be mixed in with the material produced from the Lubec factory.

What happened next?

The scheme came to a messy end when William Phelan, a private detective who had been involved in setting up the original scam, attempted to blackmail the duo. When they refused to pay him, he revealed in The New York Herald how they had gone about deceiving investors, causing Fisher and Jernegan to flee to France. Initially Jernegan pretended that he was searching for Fisher, who was needed to operate the machinery. He then vanished, though not before returning $150,000 that he had taken from the company before his disappearance.

Lessons for investors

Thanks to Jernegan's fit of conscience and the sale of land and equipment, thousands of investors managed to recover around a third of their original investment. Those who bought shares in the company at the peak of the market would lose much more. The scam was fuelled by the publicity generated by the Alaskan Gold Rush of 1896-1899) a lesson that bubbles and booms provide fertile ground for scams and deception.

Dr Matthew Partridge

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