Great frauds in history: Prescott Jernegan’s gold hoax

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.

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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.