Great frauds in history: Carlton Cushnie’s befuddling Ponzi scheme

Carlton Cushnie set up a finance company which was valued at an estimated £230m, but made only one trade finance loan in its existence, which actually lost money.

Carlton Cushnie was born in Kingston, Jamaica, in 1950 and moved to London when he was 16. After studying maths at the University of London, Cushnie started up his own computer software business. His experience led him to start up Versailles Group in 1989, a finance company supposedly acting as middleman between lenders and small firms. By 1995 Versailles had floated on the junior Aim market, and within two years it had reached the main market, later breaking into the FTSE 250. Its share price rocketed from 7p to a peak of 251p in December 1999, giving Cushnie an estimated fortune of £230m (£390m in 2019).

What was the scam?

As Cushnie later admitted, the firm made only one trade finance loan in its existence, which lost money. Instead, it was run as a Ponzi scheme, with funds from banks and private investors funnelled into a range of shell companies, which then returned some of the money back to Versailles so it could pay interest on its debt, diverting the rest into the pockets of Cushnie and finance director Fred Clough. Clough would also use the phoney transactions to give a misleading impression to shareholders that Versailles was growing rapidly.

What happened next?

An anonymous tip-off in April 1999 alerted the Department of Trade and Industry, which then began an investigation. Unable to make sense of the accounts, it appointed accountants Baker Tilly to investigate further. In December Baker Tilly wrote to the stock exchange confirming that it was unable to verify the accounts, causing Versailles’ shares to be immediately suspended. Cushnie later claimed that Clough (who testified in court against his former business partner) was responsible for the day-to-day running of the company and had stolen from him, but both were convicted of fraud.

Lessons for investors

Versailles’ bankruptcy wiped out £625m of market value. Banks lost around £70m from bad loans that they made to the company. One of the big red flags was the complexity of the firm’s operations, which supposedly involved buying goods from one company, selling them to another, and then returning the profits, minus financing fees, to the first company. If you can’t understand how a business makes it money, don’t invest in it. As one journalist later said: “If the experts are befuddled, what chance, you wonder, do ordinary investors have?”

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