Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme

The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true –  thousands of policyholders who had handed over large sums were left with nothing.

Thomas Knowles was born in 1782 in Hythe, Kent, and went on to work as a servant in London. He was declared insolvent in 1819 and 1825, before finally being admitted to debtors’ prison for several months in 1829. William Hole, who was also born in Hythe, in 1793, worked as an apprentice before moving to London to set up his own shop. Like Knowles, he also faced personal financial problems and was declared bankrupt in 1827. In 1836 the pair teamed up with two other bankrupts to form the Independent West Middlesex Fire and Life Assurance Company (IWM).

How did the scam work?

IWM offered annuities and life insurance at rates that were far more generous than the competition, supposedly backed up by £1m in capital. They claimed the Duke of Wellington was a policy-holder and rented plush offices in the West End of London to give the impression of wealth. In reality, it was run as an early Ponzi scheme. The money coming in that was left over from interest payments, and the operating expenses, were embezzled by the directors and spent on maintaining an extravagant lifestyle of servants and carriages.

What happened next?

By 1839 doubts were being raised in the press. An article in a Glasgow newspaper led many investors to demand their money back. A libel suit issued by the company enabled it to keep taking in money from investors for a while, but by the end of 1840 its offices were shut down and its staff and directors disappeared. Hole, who had left the company in 1839, was pursued by creditors and was eventually declared bankrupt and died in poverty. Knowles managed to escape to the continent and was later spotted gambling in the German resort town of Baden-Baden.

Lessons for investors

One estimate puts losses from the scam at between £160,000 (£14.5m today) and £240,000 (£21.8m); another puts them at £300,000 (£27.3m). Either way, thousands of policyholders who had handed over large sums to purchase annuities were left with nothing. The investors in the scheme should perhaps have realised that the high spread between annuity and life insurance rates, allowing investors buying both sets of policies simultaneously to earn an effective rate of 6% a year, should have raised suspicions since rival companies’ spreads were just 1.5%. 

Recommended

Britain’s ten most-hated shares – w/e 1 July
Stocks and shares

Britain’s ten most-hated shares – w/e 1 July

Rupert Hargreaves looks at Britain's ten most-hated shares, and what short-sellers are looking at now.
4 Jul 2022
Britain’s most-bought shares w/e 1 July
Stocks and shares

Britain’s most-bought shares w/e 1 July

A look at Britain’s most-bought shares in the week ending 1 July, providing an insight into how investors are thinking and where opportunities may lie…
4 Jul 2022
M&G offers a solid 10.1% yield – but future growth is uncertain
Share tips

M&G offers a solid 10.1% yield – but future growth is uncertain

Financial services group M&G has one of the highest dividend yields in the FTSE 100. But it’s a complicated company, and a tough one to analyse, says …
4 Jul 2022
We’re doing well on pensions – but we still need to do better
Pensions

We’re doing well on pensions – but we still need to do better

Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn S…
4 Jul 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022