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.

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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.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri