Great Frauds in History: Robert Schuyler’s illicit share issue
Robert Schuyler was known as “America’s first railroad king” issued millions of dollars' worth of fraudulent shares in his company, and kept the money, fleeing to France when his scam was exposed.
Robert Schuyler was born in Rhinebeck, New York in 1798, the grandson of American general Phillip Schuyler and nephew of the treasury secretary, Alexander Hamilton. After graduating from Harvard he moved into steamboats, becoming president of the New York and Boston Transportation Company in 1838. In 1846 he founded R. & G. L. Schuyler, which invested in railroads. His career progressed rapidly and he soon became a major figure in the American rail industry: he was president of several railroads and involved with many others. As a result he became known as “America’s first railroad king”.
How did the scam work?
In 1848 he was appointed president of the New York and New Haven Railroad, as well at its sole transfer agent, which meant that he was in charge of keeping the shareholders’ register up to date to reflect share transactions. He took advantage of this to issue 19,540 shares in the group without informing shareholders or the directors. Schuyler then diverted the $2m ($56.9m today) raised in this way from the company’s treasury, instead using it as collateral for loans intended to shore up other parts of his business empire. He then falsified the accounts to conceal his activities.
What happened next?
In 1853 one of the New York and New Haven railroad’s trains crashed into Norwalk Harbour, killing 50 people. Complaints that Schuyler had spread himself too thinly meant that he had to resign several of his presidencies. However, it was not until the summer of 1854 that a sudden plunge in the value of New York and New Haven’s shares finally prompted the board to investigate, prompting Schuyler to flee, eventually to France, and confess his guilt. Schuyler would die in November 1855 from the combined effects of illness and guilt about his own behaviour.
Lessons for investors
After a long legal battle, the US Supreme Court ruled that the company had to honour the shares, costing the company around $1.8m. The wider impact of the scandal resulted in the bankruptcy of several small brokerages, as well as a fall in the share price of other railroads Schuyler had been involved with. These days most major stock exchanges require share transfers to take place through a centralised system, making sales of unauthorised shares practically impossible, although the practice can still occur with shares in small private companies.