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

Expect more turbulence as the market calls central bankers’ bluff
Stockmarkets

Expect more turbulence as the market calls central bankers’ bluff

With bond yields climbing and stockmarkets sliding, markets are hoping central bankers will step in again to repress interest rates – but that won’t …
26 Feb 2021
The MoneyWeek Podcast: strategic metals, the commodities supercycle and the electrified future
Commodities

The MoneyWeek Podcast: strategic metals, the commodities supercycle and the electrified future

John Stepek talks to Dr Paul Jourdan, CEO of Amati Global Investors, about investing in the metals needed for the post-oil electrified world, the impo…
26 Feb 2021
Our trade of the decade came good – what’s next?
Investment strategy

Our trade of the decade came good – what’s next?

Back in 2010 we said you should invest in unloved and undervalued Japanese stocks. If you had done that, you’d have made a nice return. So what should…
25 Feb 2021
Great frauds in history: Helmut Kiener, Germany’s mini-Madoff
People

Great frauds in history: Helmut Kiener, Germany’s mini-Madoff

The performance of Helmut Kiener’s fund of funds, which invested money from institutions and private investors into hedge funds, seemed too good to be…
25 Feb 2021

Most Popular

The days when you could get 7% from your bank are long gone – so what do you do?
Bitcoin

The days when you could get 7% from your bank are long gone – so what do you do?

With interest rates at rock bottom for so long, we’ve been forced to move from saving to speculating to earn any sort of return. Dominic Frisby asks w…
24 Feb 2021
Why you should still put money into a cash Isa
Cash ISAs

Why you should still put money into a cash Isa

Interest rates may be lousy, but tax-free saving into a cash Isa is still a good idea.
23 Feb 2021
Are we heading for another bond market tantrum?
Government bonds

Are we heading for another bond market tantrum?

The last time the US central bank tried tightening the purse strings, the bond markets threw a tantrum. With yields now rising, could we be about to s…
25 Feb 2021