Owen Philipps was born in Warminster in 1863 and was apprenticed to a Newcastle shipping firm at the age of 17. In 1888 he set up his own shipping firm with his elder brother John. Three years later the brothers started acquiring shares in the Royal Mail Steam Packet Company (RMSPC). Owen went on to be appointed chairman and, over the next 25 years, RMSPC would become the parent of a sprawling group of shipping-related companies that would control around 13% of all large British ships, as well as shipbuilder Harland and Wolff. In 1923 Philipps was granted a peerage, becoming Lord Kylsant.
What was the scam?
RMSPC made a lot of money during World War I, mainly from transporting troops. This money was hidden away in the reserves, which was used to enable RMSPC to keep paying dividends during the second half of the 1920s, despite consistently losing money. At the same time, Kylsant manipulated the accounts, juggling losses between individual companies, to give the impression that the group was still profitable. This deception enabled RMSPC to borrow large amounts of money, including issuing £2m worth of debentures (long term debt) to investors in 1928 (£118m in today's money).
What happened next?
By October 1929 over-expansion had exhausted RMSPC's reserves and it was struggling to repay loans. In desperation, Kylsant tried to defer payment of a loan. This prompted a government audit that discovered the widespread manipulation, as well as the fact that the company was effectively bankrupt. Because of the strategic importance of the various companies, the RMSPC, and the wider group of companies, were put into trusteeship. Kylsant was tried for fraud, convicted of misleading debenture investors and spent ten months in jail.
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Lessons for investors
The government takeover resulted in a painful restructuring that involved moving RMSPC's ships into a new company, Royal Mail Lines, which was largely owned by creditors. RMSPC shareholders would eventually end up with nothing; the creditors of the individual subsidiaries recovered varying amounts. One red flag was the fact that the debenture prospectus didn't break down profitability by individual year. Generally, a company being vague or opaque about financial matters is a sign that it is trying to hide something.
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