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.
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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.
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