Great frauds in history: Ronnie Ewton’s ruinous punt on rates

Ronnie Ewton was born in May 1942 in Nashville, Tennessee, and went on to attend Castle Heights Military Academy and Georgetown College (Kentucky). After graduating he went on to sell life insurance before becoming a salesman for various brokerages, including at least two that later collapsed in dubious circumstances. He then founded ESM Government Securities in 1976, with former pool hustler Bob Seneca and George Mead. ESM was nominally a specialist in buying American government bonds and then reselling them to cities and financial institutions. Seneca persuaded his partners to let the firm place large trades in the bond market.

What was the scam?

ESM placed large bets that interest rates would fall. When they instead started to rise, ESM bled money, including $2.3m on one trade alone, wiping out invested capital and accumulated earnings. Ewton and Mead forced Seneca to resign, but instead of then declaring bankruptcy decided to continue making trades, using customers’ bonds as collateral. In order to disguise the mounting losses, the owners set up a shell company, ESMFG, which supposedly owed it $300m ($721m in today’s money), bribing with cheap loans one of the partners of its auditors to sign off on the accounts.

What happened next?

In November 1984, Alan Novick, ESM’s financial adviser and the architect of the financial manipulation, died unexpectedly of a heart attack. Lacking the ability to continue the deception, Ewton resigned a few months later, though not before paying himself a final $710,000 ($1.7m) bonus. Mead then immediately brought in an accountant, who discovered the $300m hole in ESM’s accounts by comparing its official profits with its tax returns (which consistently showed large losses). As a result, ESM was quickly shut down by the Securities and Exchange Commission, the US financial regulator. Ewton, Mead and various others connected with the fraud later received criminal sentences.

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Who lost out?

Those institutions that had placed their securities with ESM found that they were unable to get them back as they were seized as part of the bankruptcy process. This led to an immediate run on Home State Savings Bank, which had lost $145m ($348m) worth of securities in this way, causing it to collapse. Home State’s depositors would normally have been protected by a federal guarantee, but Home State had opted out of protection in favour of a poorly capitalised local scheme. It got back just two-thirds of its money.