Great frauds in history: the Butcher brothers' corrupt banking empire
Jacob and CH Butcher plundered their $3bn banking empire, leaving investors short of almost $400m.
Jacob Franklin Butcher was born in Maynardville, Tennessee, in 1936. He worked in his father’s store, which operated as an informal local bank, before graduating from the University of Tennessee and serving in the US Marines. In 1968 Jacob and his brother, C.H. Butcher Jnr, bought a small bank in Lake City. Over the next 15 years they would build a banking empire. By 1982 the brothers controlled a consumer finance company, as well as 27 banks, though a combination of equity stakes and management contracts, with total reported assets of $3bn ($7.95bn in today’s money).
What was the scam?
To finance the buying spree, they would loan money from one of the banks to another, which was then used to purchase shares in a third institution, leaving the banks with high levels of debt. They also began to embezzle money to support their lifestyle, holding lavish parties with Jimmy Carter and Imelda Marcos and making a large number of reckless loans, including one to pay for a 60-foot yacht for Jacob. To hide the fact that their banks were insolvent, the brothers started to use fake loans to shuffle money between them, taking advantage of the fact they were audited on different dates.
What happened next?
By 1982 federal agents and state regulators working on individual cases started to realise that large amounts of money were being transferred around the various parts of the brothers’ empire. As a result, they raided all institutions simultaneously in November 1982. This revealed the true extent of the fraud, leading to the collapse of 11 of the banks, including the United American Bank, which was the main part of the group, as well as the Southern Industrial Banking Corp, run by C.H. Butcher Jnr. Both brothers were convicted of fraud and spent time in jail.
Lessons for investors
Federal insurance ensured bank depositors got their money back, with US taxpayers picking up the estimated $382.6m in losses. The 7,000 depositors in the uninsured Southern Industrial Banking Corp would have to wait up to a decade to get only two-thirds of their money back. Jacob Butcher told a reporter in 1976 that borrowing large amounts was like “going barefooted in the spring” – “for the first few days, the gravel really hurts. But then your feet toughen up and you don’t notice it”. Investors would be wiser to remain aware of what they’re treading in.