In 1775 the Gurney family of Norwich founded Gurney & Co, which grew to become one of the most successful banks in East Anglia. In 1807 the family bought London bill broker Richardson, Overend & Company – a business that bought and sold bills of discount (effectively short-term business debts). The merged firm became Overend, Gurney & Company. From around 1859 the bank, then the largest bill broker in England, expanded by making more general business loans to a variety of enterprises.
What went wrong?
Overend Gurney’s bill-brokerage business was profitable, but its forays into more general business loans proved disastrous, and it lost around £500,000 a year from 1860 onwards. By 1865 it was hopelessly insolvent. To protect the bank the partners decided to sell the business to a new limited company that was then listed on the stock exchange. As well as promising a “highly remunerative return”, the prospectus promised that any losses would be fully guaranteed by the sellers.
What happened next?
By the spring of 1866, people were speculating about the scale of potential loan losses and Overend Gurney’s directors realised that the company could not survive. After the Bank of England refused to give it an emergency loan, Overend Gurney ceased operation, causing a general financial panic that was only quelled when the Bank of England injected £4m (£385m in today’s money) into the system. In the ensuing bankruptcy it quickly became apparent that the losses on the loans far exceeded any guarantees, leaving shareholders liable for the rest. A private prosecution was launched against the directors. But although they had clearly made bad business decisions, the directors were acquitted of fraud in 1869.
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Lessons for investors
Overend’s creditors would be fully compensated; its 2,000 shareholders were less lucky. The shares, which were worth £25 at their peak in October 1865, were worthless by the end; shareholders also had to stump up an additional £25 a share based on the agreement at the initial public offering, landing them with a total bill of £2.5m, causing some of them to go bankrupt. The fact that the prospectus for the offering in 1865 was less than 300 words long, and didn’t contain a balance sheet or any accounts, should have raised some questions.
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