Great frauds in history: Philip Arnold’s big diamond hoax

Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.

Philip Arnold was born in Elizabethtown, Kentucky in 1829. After serving as a soldier in the Mexican-American War (which saw the US take over California), he became a gold prospector and was successful enough to return to Kentucky and buy a farm. By 1870 he was back in California and working as a prospector when he claimed to have discovered, along with his cousin John Slack, a large deposit of diamonds. This attracted the attention of several wealthy investors, including the founder of the Bank of California.

What was the scam?

Arnold and Slack’s “discovery” was the result of their buying diamonds and mixing them in with their samples. On this basis they attracted money from investors and used it to buy additional diamonds, which they then claimed were part of the original discovery. Having hooked the investors, Arnold and Slack then led them to their “mine” in Colorado, taking care to seed the ground with diamonds beforehand. Arnold and Slack then sold the mine, bringing the total amount they had received to $660,000 ($14.3m in today’s money).

What happened next?

The new owners set up the San Francisco and New York Mining and Commercial Company in 1872, raising $850,000 ($18.4m) from investors for 20% of the company, valuing it at $4.25m ($86.4m) and setting off a mini-boom in mining shares. However, US government geologist Clarence King, who had been surveying the area and was worried that his team had missed such a massive deposit, investigated and quickly concluded that it had been salted. By November 1872 the find was publicly revealed to be a fraud, though not before hundreds of prospectors had set off to Colorado.

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Lessons for investors

Arnold agreed to return $150,000 ($3.2m) in return for all charges being dropped, but managed to retire with the rest of his ill-gotten gains. Shareholders were left with shares in a worthless mine, though some received partial compensation. Later, one of the original investors admitted that if they had spent just an extra hour exploring the area, they would have spotted the scam – a lesson on the need for proper due diligence.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri