Great frauds in history: Farrow’s Bank

Thomas Farrow set up his eponymous bank in 1901, offering high interest rates to small savers. After falsifying the accounts and collapsing the bank, he was convicted of fraud in 1921.

Thomas Farrow was born in Catton, near Norwich, in 1862. He left school at the age of 13 to take up an apprenticeship to a solicitor. Although he passed all the necessary exams, he decided in 1881 to go to London to work as personal secretary to W.H. Smith, the leader of the House of Commons. He later took a similar position with Robert Yerburgh, the president of the Agricultural Banks Association. After writing a book in 1895 that criticised bankers for offering poor value, he set up the Mutual Credit and Deposit Bank in 1901, followed by Farrow’s Bank in 1904.

What was the scam?

Farrow’s Bank deliberately focused on the smaller savers and borrowers supposedly neglected by the large institutions. It offered higher interest rates on small deposits and more generous terms on small loans than its competitors. As a result, its deposits increased from £166,304 in 1908 (£17.4m today) to £4m (£161m) by 1920, while still reporting large profits. However, in reality this profitability was a mirage generated by Farrow falsifying the balance sheet by writing up the value of the bank’s assets (such as agricultural land), to hide the fact that the bank was in fact losing large sums of money.

What happened next?

Desperate for more money to pay depositors, Farrow agreed in 1920 to sell a controlling interest in his bank to the American investment bank Norton, Read & Company. However, when the prospective buyers examined Farrow’s books, they discovered the bank was not only unprofitable, but also insolvent, leading to its immediate collapse. Farrow claimed that all the deception was intended to save the bank’s future, rather than for his personal enrichment, but he was convicted of fraud in 1921, along with the bank’s deputy chairman and chief accountant, and was sentenced to four years in prison. He died in 1934.

Lessons for Investors

Farrow’s emphasis on small depositors would spur the main banks to pay much more attention to this segment of the market. However, this was small comfort for Farrow’s shareholders, who were wiped out, and the depositors, who received just over a quarter of their money back. One of the red flags was that the bank was registered as a “credit bank” rather than a “clearing bank”, which reduced the level of regulation. For example, the accounts were never checked by an external auditor and were overseen only by the chief accountant and later by his unqualified son.

Recommended

How to invest in blockchain without buying cryptocurrencies
Bitcoin & crypto

How to invest in blockchain without buying cryptocurrencies

Many investors have been searching for a way to invest in bitcoin in their Sipp or Isa via a regular broker account. This fund fits the bill nicely, s…
27 Jan 2022
The Federal Reserve has turned inflation-fighter – how do you invest now?
US Economy

The Federal Reserve has turned inflation-fighter – how do you invest now?

The US Federal Reserve has become much more hawkish on inflation and less concerned with the markets' reaction to rising interest rates. John Stepek e…
27 Jan 2022
Whether it’s cryptocurrencies or investment trusts, make sure you know what you’re investing in
Investment strategy

Whether it’s cryptocurrencies or investment trusts, make sure you know what you’re investing in

Many people scoff at cryptocurrency speculators pouring money into an asset they may barely understand. But the same could be said of investors in man…
26 Jan 2022
How to invest in energy and metals as tech stocks crash
Commodities

How to invest in energy and metals as tech stocks crash

It’s been a terrible week for stockmarkets. But not everything is crashing – “real” assets such as metals and energy are holding up well and should ha…
26 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022