Great frauds in history: the oil well that gushed fake shares

In 1922 Canadian oil man and real-estate speculator Courtney Chauncey (“C.C.”) Julian arrived in Santa Fe Springs in southern California and began raising money to drill for oil. He set up syndicates that gave investors the right to the profits from any oil wells created. He exploited the publicity generated by the apparent success of the first five syndicates, combined with aggressive advertisements in the press, to create Julian Petroleum Company, which floated on the Los Angeles Stock Exchange in 1923, raising $5m ($73.6m in today’s money). When state regulators started to ask questions about his claims, he claimed to be the victim of a government conspiracy and relinquished control to Texas oil man S.C. Lewis.

What was the scam?

Lewis and his henchman Jacob Berman set out to fleece investors in two ways. Firstly, they got Julian Petroleum to issue large quantities of unauthorised shares, without informing the existing shareholders. They set up a big investment pool (nicknamed the “million-dollar pool”) that aimed to keep the price of Julian Petroleum’s shares rising, stepping in to buy them whenever it looked like they were about to fall. The pool was financially supported by many of Los Angeles’ most prominent citizens, including Hollywood mogul Louis B. Mayer.

What happened next?

Initially, the scam worked well and the members of the pool made up to 75% on their investment. However, as rumours started to surface of an overissue, Lewis tried to prolong the scam by merging Julian Petroleum with the California-Eastern Oil Company. An investigation by California-Eastern’s board confirmed the illegal issuance of shares, causing the merger to collapse. By May 1927 Julian’s shares were formally suspended. Lewis, Berman and stockbroker Ed Rosenberg were subsequently acquitted of fraud, but Lewis and Berman were later convicted of bribing the prosecution. Julian himself fled to China after an unrelated scam and died in 1934.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Lessons for investors

Counting the unauthorised shares, Julian Petroleum was worth $150m ($2.2bn today) at its peak; shareholders ended up with nothing. Generally, it is a good idea to avoid investments that make wild claims about possible returns, or are run by someone who responds to accusations of fraud by claiming to be the target of a government conspiracy. The original advertisements were, at least, correct in their claim: “Widows and Orphans, This is No Investment for You!”