Great frauds in history: John MacGregor’s dodgy loans

When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131

John MacGregor was born in Drynie in the Western Isles of Scotland in 1797 and emigrated to Canada with his family in 1803. After a brief involvement in local politics, he moved back to Liverpool in 1827, then briefly worked as a businessman before spending the next two decades in increasingly senior civil-service roles at the Board of Trade. He was elected to Parliament as a Liberal for Glasgow in 1847. He also helped found the Royal British Bank, with businessmen John Menzies and Edward Mullins, and would become its chairman after it was granted a royal charter in 1849.

What was the scam?

From the moment it was set up, the bank was brought low by a combination of bad business loans, including to a Welsh ironworks, and large personal loans to the directors and their friends. These included a £70,000 (£6.59m today) loan to Humphrey Brown, the MP for Tewkesbury, £30,000 (£2.82m) to the bank’s manager, £14,000 (£1.32m) to John Gwynne, £7,000 (£659,000) each to John MacGregor and Edward Mullins, and £2,000 (£188,300) to auditor Thomas Chandler. To hide the bank’s distressed state from its shareholders and depositors, the accounts were falsified and dividends were paid out of capital.

What happened next?

By 1856 rumours were flying around the City of London. The Joint Stock Companies Journal published a series of articles about the bank’s problems, although without mentioning it by name, leading to awkward questions at the half-yearly meeting in August. By early September the bank was forced to suspend business and the fraud was revealed a few weeks later. MacGregor died in France after fleeing the country. The eight surviving directors were convicted of fraud, though they served only nominal sentences.

Lessons for investors

By the time it collapsed, the bank’s liabilities were £539,131 (£50.75m) with only £288,644  (£27.1m) in assets. In the legal battle between shareholders and depositors, the courts ruled that the fraud did not diminish shareholders’ liability, despite the fact that around 40% of them were widows, spinsters, tradesmen or servants. The depositors had to settle for around three-quarters of the money they were owed. Unlimited liability has all but disappeared today, but it’s still worth checking if those making guarantees are in a position to stand by them. 

Recommended

The MoneyWeek Podcast: Jonathan Allum on why Japan is both different and the same
Japan stockmarkets

The MoneyWeek Podcast: Jonathan Allum on why Japan is both different and the same

Merryn talks to Japan expert Jonathan Allum who explains why many people's ideas of Japan are misguided, and why if you're looking to profit from a po…
27 Nov 2020
Too embarrassed to ask: what is value investing?
Too embarrassed to ask

Too embarrassed to ask: what is value investing?

When you start investing, one of the first concepts you’re likely to encounter is “value investing”. But what exactly is it?
24 Nov 2020
Once Covid-19 is over, we’re going to see an economic boom
Investment strategy

Once Covid-19 is over, we’re going to see an economic boom

After the dust from the pandemic has settled, we’re in for a consumer boom and a huge bout of government spending, says John Stepek. Here’s how to tak…
24 Nov 2020
What to buy as the pandemic’s pent-up demand is finally released
UK Economy

What to buy as the pandemic’s pent-up demand is finally released

As economies reopen, says Merryn Somerset Webb, people are going to start spending again. And when they do, here’s what you want to be holding.
23 Nov 2020

Most Popular

The next 20 years: five new technologies on the horizon
Global Economy

The next 20 years: five new technologies on the horizon

What will everyday life be like in two decades’ time? Matthew Partridge peers into his crystal ball.
12 Nov 2020
This week’s rally in value stocks is just the beginning
Value investing

This week’s rally in value stocks is just the beginning

The arrival of a vaccine this week saw huge gains in the markets and investors switching out of big-tech growth stocks and into “value” stocks in more…
13 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Nov 2020