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

Ex life-insurance salesman Ronnie Ewton's bet on interest rates cost investors millions and led to the collapse of an American savings bank.

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.

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. 

Recommended

Just how green is nuclear power?
Energy

Just how green is nuclear power?

Nuclear power is certainly very clean in terms of carbon emissions, but what about the radioactive waste produced as a byproduct? It’s not as much of …
22 Jan 2022
Why GSK should turn down Unilever’s billions
UK stockmarkets

Why GSK should turn down Unilever’s billions

Unilever has offered GSK £50bn for its consumer division. But while the cash will be a temptation, the deal is not in the interests of shareholders or…
22 Jan 2022
The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Cryptocurrency roundup: authorities tighten the screw
Bitcoin & crypto

Cryptocurrency roundup: authorities tighten the screw

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
21 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 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
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022