Great frauds in history: Alexander Fordyce and shorting the East India Company

Alexander Fordyce was born in Aberdeen in 1729. He briefly worked in the hosiery trade before moving to London to take a position as a clerk to a banker. He eventually became a partner in a private bank, Neale, James, Fordyce, & Down. He soon acquired a reputation as a successful speculator – winning bets based on his gaining early intelligence of the Peace of Paris in 1763, and when East India Company stock soared in 1764-1765. With winnings from these and other trades he bought an estate in Roehampton, in southwest London, and spent £14,000 (£1.8m in today’s money) in an unsuccessful attempt to become the MP for Colchester. By 1770 he had risen high enough in society to marry the daughter of an earl.

What was the scam?

In 1771 Fordyce’s luck began to turn and he lost large sums of money on the market. Things really became bad when he shorted shares in the East India Company (that is, bet on the price falling). When the shares instead started to rise, he took money from his bank to cover losses, initially dipping into past profits, but later taking depositors’ money too. When his partners started to ask questions, he lied about the bank’s finances, temporarily borrowing £10,000 (£1.29m) in cash for a day to give the false impression that the bank had enough reserves.

What happened next?

By June 1772 the bank had run out of money. Fordyce went on a champagne binge and then left Britain for France with his wife, leaving his partners to pick up the pieces. Days later the bank shut its doors for good, which, combined with the subsequent collapse of the Ayr Bank, which was also badly run, caused a major financial panic that spread as far as Amsterdam, causing the implosion of at least 20 banks in Britain alone. The crisis was halted only by the intervention of the Bank of England and the Royal Bank of Scotland.

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Lessons for investors

Although Fordyce declared bankruptcy and had to sell his estate, he managed to retain enough money to run for parliament again. All other affected parties fared less well. The bank faced more than £450,000 (£57.9m) in claims, but its receivers only accepted £146,000 (£18.8m) as valid, and these ended up getting around three-quarters of their money back over a period of two decades as Fordyce’s partners’ estates were liquidated. Ironically, East India Company shares subsequently plunged, though too late for Fordyce. When it comes to short-selling, even the best predictions are useless without good timing.