FTX’s collapse echoes British scandal
Both frauds came with little advance warning
Enron. Bernie Madoff. FTX. In modern capitalism, it seems as if stories of companies and managers who engage in fraud and swindle their investors occur like the changing of the seasons.
In fact, these scandals can be traced back to the origins of publicly traded companies, when the first stockbrokers bought and sold company shares and government securities in the coffeehouses of London’s Exchange Alley during the 1700s.
There are many similarities between what’s known as the Charitable Corporation Scandal and the recent collapse of FTX.
The Charitable Corporation was established in London in 1707 with the noble mission of providing “relief of the industrious poor by assisting them with small sums at legal interest.”
Essentially, it sought to provide lowinterest loans to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30% interest. The corporation made loans available at the rate of 5% in return for a pledge of property for security.
Under its original mission, it was like an 18th-century version of today’s socially responsible investing, or “sustainable investment funds.”
In 1725, the Charitable Corporation diverted from its original mission when a new board of directors took over.
These men turned the corporation into their own piggy bank, taking money from it to buy shares and prop up their other companies. At the same time, the company’s employees began to engage in fraud: Safety checks ceased, books were kept irregularly and pledges went unrecorded.
Investigators would ultimately find that 400,000 pounds or more in capital was missing – roughly $108 million in today’s U.S. dollars.
In the autumn of 1731, rumors began to circulate about the solvency of the Charitable Corporation. The warehouse keeper at the time, John Thomson, who was in charge of all loans and pledges but also in league with the five fraudulent directors, hid the company’s books and fled the country.
At the shareholders’ quarterly meeting, they found that money, pledges and accounts had all gone missing. At this point, the proprietors of the Charitable Corporation stock appealed to the British Parliament for redress.
The parliamentary investigation led to various charges being leveled against both managers and employees of the Charitable Corporation. Many of them were forced to appear before Parliament and were arrested if they did not. The managers and employees deemed most responsible for the 1732 fraud, such as William Burroughs, had their assets seized and inventoried in order to help pay back the shareholder losses.
In the end, the shareholders received a partial government bailout – Parliament authorized a lottery that reimbursed only 40% of what the corporation’s creditors had lost.
There are several key characteristics that stand out in the collapses of both the Charitable Corporation and FTX. Both companies were offering something new or venturing into a new sector. In the former’s case, it was microloans. In FTX’s case, it was cryptocurrency.