Great frauds in history: Richard Whitney and the White Knight’s pensions raid

Richard Whitney was born in Massachusetts in 1888 and graduated from Harvard before founding his own brokerage in 1910 in New York, purchasing a seat on the New York Stock Exchange two years later. His role as J. P. Morgan's main broker helped him get elected to the NYSE's board of governors in 1919 and he eventually served four terms as the exchange's president, retiring in 1935. He played a role as the head of a pool of financiers that tried to halt the Wall Street Crash by buying large numbers of blue-chip stocks. The attempt proved unsuccessful, but it brought him widespread fame as the "White Knight" of Wall Street.

What was the scam?

Although a successful broker, Whitney was an awful speculator. His worst investment was in the Distilled Liquor Corporation, which manufactured applejack in the hope that the drink would benefit from the repeal of prohibition. It proved unpopular and shares in the company plummeted. Convinced that they would rebound, Whitney borrowed money in order to prop up the share price. As the price tumbled further and Whitney's credit line was exhausted, he turned to embezzlement, stealing money from various pension funds that he managed. Overall, he stole $1m ($17.8.m in today's money) from his clients, to add to the $27.4m ($488m) he had borrowed.

What happened next?

By 1938 rumours spread that Whitney's brokerage, Richard Whitney & Co, was insolvent. Eventually, the complaints grew so vociferous that the New York Stock Exchange demanded to inspect his books, a power it had that Whitney had unsurprisingly opposed while he was president. As a result, his company was suspended from the stock exchange and Whitney was quickly exposed as an embezzler. He attempted to use his status to get the charges discreetly dropped, but he was arrested, convicted and eventually sentenced to between five and ten years in jail. He was out in less than four.

Lessons for investors

Whitney's brother, George, stepped in and repaid all the lost money. But this took some time, so Richard's victims would have seen the value of their cash eroded by inflation. The lessons are obvious: first, steer clear of brokers or managers who aren't always prepared to be 100% transparent on their holdings; and second, think very carefully before putting more money into investments that have already turned out to be losers.