Friday 28 February 2014

'OPERATION RICO' targets 'Boiler Room' fraud.

Around about 15 years ago, the name of one of golf's all-time greats, Gary Player, was used to perpetrate an extensive 'Boiler Room' fraud. This global crime was particularly targeted at prosperous, but gullible, Australians and New Zealanders.

The term, 'Boiler Room,' arrived during the 1970s inside American political parties to describe the practise of using a central office connected to multiple phone-lines (manned by party-activists) to seduce prospective voters across the nation. Supporters of (Republican) President Richard Nixon, are known to have employed the same practise in reverse - i.e. they cold-called thousands of known swing-voters in the middle of night in key states, and pretended to be aggressively canvassing for the Democrats. The term 'Boiler Room fraud,' is thought to have been coined in the 1980s, to describe members of the American 'Mafia' who adopted similar, industrial cold-calling tactics to contact as many potential victims as possible. 

'Boiler Room' gangs (so-called, because of the high-pressure techniques they use, and low-profile premises from which they habitually operate) pose as stock broking firms with hot-tips based on inside information, to deceive victims into buying valueless fake 'investments.'

 'Boiler Room' has even been used as the title for a Hollywood movie

During the past two years, 14 Boiler Room gangs have secretly been targeted by a British-led coalition of law enforcement agencies, in what has been widely-described as 'an unprecedented international crackdown on fraud.'
'Operation RICO' (presumably named after the US federal Racketeer Influenced and Corrupt Organizations Act, 1970), has so-far produced 110 arrests - mostly in Spain and the UK. Ironically, there is currently no RICO-style anti-racketeering legislation in the UK. However, to-date there are 850 confirmed 'Boiler Room' victims in the UK with combined losses of approximately £50 millions, but these figures do not accurately represent the full extent of the problem, because, classically, most fraud victims remain silent out of fear, shame and embarrassment.

Detectives have said that 'the aim of the two-year Operation RICO,' was to 'decimate' Boiler Room fraud in Europe.' Presumably, by 'decimate,' they meant 'destroy,' because 'decimate' is one of the most misused words in the English language. Originally, in the ancient Roman army, it meant to execute one in ten as a punishment when a Legion fought poorly or exhibited cowardice in the face of the enemy.

The UK National Economic Crime Co-ordinator, Commander Steve Head.

'It is our most important investigation ever, targeting people we believe are at the top of an organised crime network that has been facilitating Boiler Rooms across Europe and which is suspected of being responsible for millions of pounds of investment fraud.'

Wanted: Graham Hawrysh, 37, is suspected of helping to set up and manage a number of boiler rooms based in SpainSuspected: Jeffrey Gordon, 54, is believed to be involved in the set-up and management of various boiler rooms. He has links to Romania, and possibly Colombia or Ireland, and his aliases are Jeffrey Darren Goodman and Michael Goodman

Robert Douglas Lynch, 53, s believed to be involved in the set-up and management of various boiler rooms through alias namesTunch Kashif, 48, is believed to have been engaged in various investment frauds over a period of several years

Still Wanted 

Graham Hawrysh (top left), Jeffrey Gordon a.k.a. Jeffrey Goodman a.k.a. Michael Goodman (top right), Robert Lynch (bottom left), Tunch Kashif (bottom right).

'Operation RICO,' was led by City of London Police officers. Targets for investigation, were described as 'ten, tier-one criminals' suspected of being linked to organised crime and drug trafficking. Nine of them are British, one is a South African.

Britain's 'Operation RICO,' involved the Spanish police and various other international law enforcement agencies, including the US Secret Service.

An Aston Martin is towed away from alleged fraudster's home in Barcelona

This week, 84 arrests were made in Spain in raids by 300 officers including 40 officers from the UK. A further 20 persons were arrested in the UK, 2 in the USA and 4 in Serbia. A number of luxury vehicles and properties were seized.

Police have said that typical British 'Boiler Room' victims have lost from £2,000 to £500,000. However, the 'Financial Conduct Authority' has admitted that a least £200m is being taken from UK citizens in 'Boiler Room' frauds each year, and that the largest individual loss recorded by UK police, is a staggering £6 millions.

Those caught by 'Boiler Room' gangs are generally vulnerable, commercially-inexperienced individuals aged 40 and over, but many are in their 70s and 80s. Police admit that a significant number of destitute victims have already committed suicide.

The criminals cold-call their prey, using classic, coercive behaviour modification techniques - pretending affinity with potential victims - tricking them into parting with their money whilst giving them the illusion that they are always making free-choices. Victims are initially told of attractive returns of 10 to 20% per year. They are then pointed to fake commercial Websites and brochures and told that, if they hurry, they can still invest in secure bonds backed by famous legally-registered companies. Some victims have been paid 'dividends,' to lure them further into the trap.

Divorcee Joan Mayer, 78, from Hampshire was scammed out of a six-figure sum over a period of two-and-a-half years by a series of cold callers

One British woman, Joan Mayer (aged 78), courageously admits to being tricked (over a period of two and a half years) into handing over £23,000 in exchange for valueless fake carbon credits, and shares in anti-malaria products and rare earth metals. She was then coerced by another crook, posing as 'a salesman,' into borrowing £140,000 to buy valueless fake 'shares in a gold mine.'
'I wanted to start investing what I had very carefully, to build a pension for my daughter... that is what mothers do. When I had the first call about investing in carbon credits I thought that was the beginning.
...I was very interested in the idea so I agreed to invest and I was then sold some more carbon credits and the same seller, who by this time had become quite a pal, then suggested investing in rare earth metals.
... I had lots of brochures sent to me and he promised me that the rewards would be considerable.
...Over a period of many weeks I felt I got to know him quite well. He was very helpful and thoughtful and he kept in touch regularly.
 ...Over a period of days I agreed to see if I could get more equity out of my house – which I foolishly did.
...It was only when that ('gold mine') flotation mysteriously managed not to happen that I released that I was deep in it.'

According to the police, just as was depicted in the Hollywood movie (released in 2000), today's 'Boiler Room' gangs comprise a book-keeper, money launderer and lawyer, as well as a network of 'salespeople.' Classically, the cold-callers are trained to  sound friendly and respectable and to recite a '100% positive' closed-logic script . In general, they are young men (and sometimes women), who speak good English and who generally pretend to be older than their years. A significant number of recently-arrested 'Boiler Room' salesmen, are apparently naive, and/or greedy, unemployed university graduates from Scandinavian countries, who have responded to what they were led to believe were authentic advertisements for commission-related, 'job/income opportunities.'

The UK police acknowledge that they cannot eradicate 'Boiler Room' fraud, and that by forcing the gangs behind it, out of Spain, they are probably only shifting the centres of operations (that have been targeting UK citizens), to non-European countries like Thailand, Indonesia and the United Arab Emirates. The cultic aspect of 'Boiler Room' fraud also seems to have begun to register with the press and police, because they already accept that the cold-callers are both perpetrators and victims, and that they are not the main beneficiaries. 

The only journalist I have spoken to about boiler room fraud told me that the UK police estimate that the 14 gangs recently arrested, were 'cold-calling on average several thousands of UK homes per day, and that their salespeople worked  from morning till night, 7 days per week.' Apparently, these calls were were not aimed at random targets. The contact-details of potential victims, are known to have been harvested off the Internet using lawful and unlawful means. Sources of information have included electoral rolls and press announcements of deaths (these list details about the occupation of the deceased and their surviving relatives). Another source of information has been credit-rating agencies, banks and the stock market itself, because (for commercial purposes) information is held by financial institutions and stock-broking firms about buyers of shares. When public utilities were privatised back in the 1980s, millions of UK citizens bought a few shares. Apparently, with the right IT specialists and equipment, it is child's play to break into databases and compile lists of potential 'boiler room' fraud victims who have access to capital. The most-vulnerable profile seems to have been elderly or middle-aged, widowed, divorced or unmarried women without debts, and who have invested in a few safe shares in the past, and who are likely to trust psychologically-dominant men pretending affinity and presenting themselves as experienced stock brokers. 

In brief, due to its scale, 'boiler room' fraud is a form of industrialised psychological, and economic, warfare, and the generals directing it, have almost unlimited resources available to them.

The first questions I have for anyone cold-calling me, are:

Who are you? 

Where have you got my number from?

What inducements have you been offered to call me? 

Evidently, no one in the UK government has been clearly advising ordinary citizens to take the same common-sense approach.

David Brear (copyright 2014)

Wednesday 26 February 2014

'Bitcoin' - the 'South Sea Bubble' of the 21st century.

Charles 'Charlie' Shrem IV (born November 25, 1989) co-instigator and CEO of the 'Bitcoin startup company, BitInstant,' instigator of the 'Bitcoin Foundation' of which he was Vice Chairman until January 2014 when arrested for money laundering.

Once upon a time, a good fairy created 21 millions miraculous coins (out of thin air) - the coins constantly rose in value and, thus, only those people who were clever enough to believe in them, lived happily ever after.

At the present time, who has ultimately been gathering the lion's share of the cash out of peddling places in the non-existent 'Bitcoin' Utopia, remains a mystery. 

One thing is certain, however, the real beneficiaries of the 'Bitcoin' bubble, have bailed out prior to its most recent crash. They will, no doubt, soon be creating a new, and even more-exciting, chapter, in their never-ending 'financial' fairy story.

Protesters outside bitcoin exchange Mt Gox headquarters (picture: Reuters)

During 2013, I was asked for my opinion of :


Is it a Ponzi scheme or a speculation bubble?

In response, I quite openly-stated that 'Bitcoin' is, without a shadow of a doubt, soon to go down in history as being to the early 21st century: what the 'South Sea Company' was to the early 18th century. i.e. 'Bitcoin' has been the name over the entrance to an absurd swindle hiding in plain sight and, just like 'Bitcoin's' historical counterpart, it has already spawned copy-cats.


Ignoring all their bedazzling camouflage, the universal identifying characteristic of Ponzi schemes, pyramid frauds, money circulation games, chain-letter scams, etc., is that they have no significant, or sustainable, source of revenue other than their own participants. Thus, about 15 years ago, I coined the common-sense phrase: 'premeditated, or dissimulated, closed-market swindle,' in order to describe all Ponzi schemes, pyramid frauds, money circulation games, chain-letter scams, etc. 

However, although a few commentators have used my term (sometimes without attribution), a 'closed-market swindle' is not yet defined in law. That said, it is universally accepted that lying to, or withholding key-information from, people in order to take their money, is fraud which is a form of theft. Common-sense also reveals that, by 'passing any law, but failing to enforce it, has the effect of authorizing the very crime which you are trying to prohibit.' 

The lie which is fundamental to all 'closed-market swindles' is thapeople can earn financial reward by first contributing their own money to participate in an (alleged) 'profitable commercial opportunity' which is secretly an economically-unviable fake, due to the fact that the (alleged) 'profitable commercial opportunity' has been rigged so that it generates no significant, or sustainable, revenue other than that deriving from its own participants.

For more than 50 years, 'Multi-Level Marketing' racketeers have been allowed to hide in plain sight, dissimulating some of the most-extensive closed-market swindles of all time, by offering endless-chains of victims (arbitrarily, and falsely, defined as 'Distributors, Independent Business Owners,' etc.) various banal, but effectively-valueless commodities, and/or services, in exchange for unlawful losing-investment payments (based on the false-expectation of future reward), but laundered as 'sales' (based on value and demand to 'customers and end-users'). However, since no gang of 'MLM' racketeers has ever proved that 'MLM' wampum has actually been regularly re-sold to the general public for profit in significant quantities, tens of millions of 'MLM' participants have, in fact, been peddled infinite shares of their own finite money.

In recent years, there have been a significant number of 'MLM Income Opportunity' racketeers who have hidden their criminal activities behind claims to be selling valuable coins, and/or precious metals and/or stones, which will increase in re-sale value.

In the final analysis, other than their ephemeral external presentations, internally there is no real difference between all closed-market swindles; for any alleged 'opportunity to make money,' wherein (when challenged, and/or rigorously investigated) the promoters are unable to provide independent quantifiable evidence to prove that their alleged 'viable commercial activity' has had any significant, and sustainable, source of revenue other than its own participants, is self-evidently a dissimulated closed-market swindle.

Should anyone begin printing or minting pounds, dollars, Euros, Yen, etc. they would be committing the criminal offence of counterfeiting.

However, although it doesn't seem possible, the unoriginal economic alchemists behind the 'Bitcoin' phenomenon, have demonstrated that, currently, anyone can create, and peddle, an apparently revolutionary new means of exchange in the form of  an unguaranteed digital currency, provided enough uncomplaining persons continue to buy it using guaranteed currency, because, obviously, such individuals need to believe that their bitcoins have value and will increase in value.

Readers, might be interested to learn that a team of so-called 'financial experts' working for the European Central Bank, recently looked at 'Bitcoin' and concluded that:

 'Bitcoin' exhibits some, but not all, of the characteristics of a Ponzi scheme.

Consequently, even the European Central Bank was unable to inform the public as to whether the so-called 'Bitcoin system' was fundamentally fraudulent and dangerous. However, these demonstrable dunces with diplomas seem to have forgotten that a counterfeit banknote might be 99.9% perfect, but the bit that is not, makes all of it worthless. They also failed deduce that, despite its up-dated 'digital currency' camouflage, the 'Bitcoin' craze was neither original nor unique and, consequently, it could not be fully-understood in isolation  

My first advice to any regulators/law enforcement agents trying to fathom what 'Bitcoin' is/was, is stop using all of the bedazzling jargon which the instigators of this absurd financial fairy story keep constantly-repeating, and try to describe what has occurred using only accurate deconstructed terms. I would also encourage all regulators and law enforcement agents looking at 'Bitcoin', to ask the following question: 

What exactly is it that a greedy minority of crooks always keep trying to do, when corrupt, and/or na├»ve, political leaders fail to identify them as being dangerous to the majority, and allow them to steer nations' monetary policies in whatever profitable direction they want? 

The rather obvious answer to this important question has been known for three centuries; for, even before the Industrial Revolution (let alone the Digital Revolution), central banking systems and many of the other so-called essential structures, and instruments, of free-market capitalism (which have produced today’s failing global-economy) were already being installed in England, but without the slightest independent regulation.

In 1694, a ‘joint-stock’ company, the ‘Bank of England,’ was created. A Royal Charter granted its Governor the monopoly to act as the English Government’s banker. Until this time, the ancient concept of money had been based on the intrinsic value of the precious metal content of a sovereign State’s coinage, but the ‘Bank of England’ was also given the monopoly to issue paper money (guaranteeing bearers payment on demand, in gold). However, thriving merchant banks, insurance and securities markets, and a stock exchange (turning over millions of pounds of business annually on promissory notes) were expanding rapidly in London at the dawn of the ‘Age of Enlightenment.’ By 1707, the United Kingdom of Great Britain had been created by the union of Scotland with England.

In 1711, the incorporation of a ‘South Sea Company’ was proposed by two London merchant/ stockbrokers, George Caswall (of Turner Caswall & Co.) and John Blunt (of the ‘Hollow Sword Blade Company’). What they initially offered, seemed to be a perfectly viable investment scheme linked to profits generated by Britain’s growing overseas trade. As such, at first glance, the ‘South Sea Company’ prospectus closely-resembled that of the ‘East India Company’ which itself was based on a variation of the theory of insurance (i.e. the off-loading of financial liability held by the few, onto the many). 

In 1708, the directors of the ‘East India Company’, supported by their political allies, had, in exchange for lending the government approximately £3 millions, legally-acquired the hugely-profitable (temporary) monopoly of British trade with the ‘East Indies.’ The government's £3 millions debt to the East India Company (upon which annual interest was paid via tarifs imposed on goods imported into Britain by the East India Company), was then carved up and resold to private investors in the form of ‘East India Company’ stock (the value of which was subject to market forces). Dividends were only paid to share holders on the East India Company's actual net-trading profits. 

Completely contrary to what they initially claimed to be doing, the instigators of the ‘South Sea scheme’ progressively circumvented the ‘Bank of England’s’ juicy monopolies, by deliberating creating an insolvent corporate trading-front behind which lurked another profitable, but unlawful, national bank. Unlike the 'East India Company,' this mystifying, legally-registered corporate structure would first agree to pay dividends to share holders only on net-trading profits, but then make no significant net-profits from trade; instead, the 'South Sea Company' would hide in plain sight unlawfully paying dividends to its share holders derived from the government's annual interest payments whilst peddling more and more people an exclusive financial product derived from carving up more and more government debt. In simple terms, the so-called 'South Sea scheme' was a dissimulated closed-market swindle without any significant source of revenue other than its own participants. As such, it was based on the crack-pot economic theory that: never-ending recruitment + never-ending payments by the recruits = never ending profits for the recruits.

Edward Harley (1689-1741)
Robert Harley (1661-1724)

It is now generally accepted by historians that the entire 'South Sea scheme' had been largely-devised by Edward Harley, the younger brother of Robert Harley (Britain's new Chancellor of the Exchequer), and John Blunt. 

When the wider picture is examined, Robert Harley is revealed as being a classic target for swindlers. In simple terms, the politician who enthusiastically helped to drag the Trojan Horse  'South Sea Company' inside Britain, had such a high opinion of himself, that he was certain that he could not be deceived. Furthermore, self-righteous, Nonconformist Christian and leading member of the Whig party, Robert Harley came to office in August 1710, at a time when government debt was spiralling out of control due to previous mis-management of the nation's finances, combined with Britain's ongoing involvement in the vastly-expensive ‘War of Spanish Succession.’ Thus, desperate to find cash to keep paying the Duke of Marlborough's army fighting in Europe against Spain's allies the French, under the influence of his brother, Edward, and John Blunt, the new Chancellor's first move was to turn away from the Bank of England. 

John Blunt of the 'Hollow Sword Blade Company' (a bank), along with a private banking consortium including Edward Gibbon and George Caswell, were given the right to sell £100 tickets for a national lottery. This offered all players a minimum (net-loss) 'prize of £10,' but a few lucky players would get maximum prizes up to £20 000. However, the winners soon discovered that their prizes were not paid out as lump-sums. In this way, more than £1 million was raised within a few months. Blunt, Caswell and Gibbon (along with friends and relatives) pocketed huge commissions and 'expenses' for promoting the lottery and selling the tickets. It seems that these events further convinced Robert Harley that he was destined to go down in History as a great man.  

Whilst the Lottery was in full swing, Robert Harley headed a parliamentary committee (including his younger brother, Edward, his brother- in-law , Paul Foley, and John Aislabie who led a group of 200 members of parliament known as the 'October Club). The committee was appointed to investigate, and calculate, the national debt. In reality, the Chancellor already knew this to be approximately £9 millions.

Daniel Defoe

In the face of political opposition, what appeared to be Blunt and Caswell's prospectus for a ‘South Sea Company,' was supported by Robert Harley, who was so certain of its authenticity, that he personally organised a campaign of pamphlets and editorials in newspapers. Notable poet and collector of antiquarian manuscripts himself, Robert Harley employed his literary friends as propagandists. They were some of the most talented English prose writers of the day, including Daniel Foe (a.k.a. ‘Daniel Defoe’) and Jonathan Swift. As a reward for his efforts, Robert Harley was made Earl of Oxford and promoted to the post of 'Lord High Treasurer.' Secretly, members of the British government (including Robert Harley) were already in peace talks. Consequently, rumours were rife that the 'War on Spanish Succession' was about to end and that the 'South Sea Company' was going to make all its investors rich.

Behind all the pretty words and exciting images, the reality of the ‘South Sea Company’ was somewhat different. Although the instigators knew that their company was destined to be the front for an unlawful national bank (which would not make its real profits from trade), the 'scheme's' covering 'commercial' activity was intended to be the purchase of kidnapped humans in W. Africa to be transported and sold into slavery in the Americas. This horrific racket was a perfectly legal business at the time; it was falsely justified by the convenient, contemporary belief that negroes were subhumans and, therefore, no different to farm animals. After discharging their surviving human cargo, the 'South Sea Company' slave ships (which each would have a Christian Minister on board) were to be used to transport goods to Europe.

Share certificate of the South Sea Company.

In 1711, a joint-stock company (i.e. a corporate structure with a specified commercial purpose, initially financed by capital raised from the public sale of shares in its declared assets and projected trading profits) was legally- incorporated by Blunt and Caswall. In return for a future monopoly of British trade with South America, the ‘South Sea Company’ was permitted, by Act of Parliament, to assume liability for a portion of the British National debt. Private holders of a recent issue of government securities (with a guaranteed face-value), were obliged, by the same Act of Parliament, to exchange these for ‘South Sea Company’ stock (with a nominated value). The initial rate of exchange was determined by the government, but, thereafter, the value of the stock became subject to market forces. The company was permitted to raise extra working-capital by borrowing against the security of the future debt-repayment due from the government. The government agreed to pay the ‘South Sea Company’ 6 % annual interest (in perpetuity) on approximately £9 millions value of the national debt (fixed at the moment of exchange). However, stock-holders had no rights to a share of the approximately £568 000 annual interest and 'expenses' payments to the company. Officially, dividend payments had to depend solely on the company’s actual trading profits. Unfortunately, South American ports had been closed to British ships since the start of the war in 1703, but the government intended to fund its interest payments to the ‘South Sea Company’ from tariffs on the millions of pounds worth of goods which the company was (theoretically) going to be importing once the war was successfully concluded.

As predicted (by Robert Harley and his friends), the ‘War of Spanish Succession’ soon ended. However, as enormous international tensions remained, the Treaty of Utrecht (1713) granted Britain only limited trading rights with Spanish colonies. 

Just one solitary British ship, carrying not more than 500 tons of cargo, was allowed per year. A further clause in the Treaty of Utrecht, specified a maximum annual British quota of 4800 slaves. Consequently, an immediate boom could not occur. In fact, the ‘South Sea Company’ only conducted its first, allotted slave trading during 1717, and this represented a net-loss. As they had always intended, to increase income, the company’s officers took on a further £2 millions of national debt to be converted into stock, but they now unlawfully increased the market-value of their existing stock-issue by paying dividends to share-holders using capital which they’d legally borrowed against the security of the government’s future interest payments. During 1713, the market-value of (what should have been) the technically insolvent ‘South Sea Company’ was artificially-increased by 40%. Despite the fact that, to achieve this the company officers had wilfully breached the terms of an Act of Parliament, no private investor had cause for complaint, and independent financial regulators didn’t exist. Although relations between Britain and Spain were on the slide, supporters of the ‘South Sea Company’ steadfastly denied this bleak reality, insisting that long-term prospects for future earnings were excellent. 

George I

In 1718, another war with Spain broke out. South American ports were again completely closed to all British ships. Therefore, the South Sea Company’s’ specified commercial purpose disappeared overnight. Since the company’s officers were only authorized to pay dividends using actual trading profits, the shareholders had become the contributing participants in an unviable system of economic exchange without a sustainable source of external revenue. Whilst the war continued, the company couldn’t conduct any trade. Self-evidently, there could be no actual profits to divide. In reality, the pieces of paper printed as ‘South Sea Company shares’ had become fake securities, because they had long-since lost their guaranteed face-value. Therefore, any unqualified ‘commercial’ vocabulary used to describe the subsequent criminal activities of the officers of the ‘South Sea Company’ should be considered a misleading use of language. Obviously, it was now impossible for everyone involved to face reality. To maintain confidence, Robert Harley and his friends had encouraged King George I to become ‘Governor of the South Sea Company.’ For a period, Britain’s Head of State was the unwitting front-man for what was soon to become one of the most convincing, and extensive, closed-market swindles in history.

John Aislabie

By 1719, Robert Harley had fallen from royal favour and the new ‘Chancellor of the Exchequer,’ John Aislabie, was again facing a rising national debt. This time, it was already over £50 millions. John Blunt and his ‘company cashier,’ Robert Knight, again offered salvation. In the face of competition from the ‘Bank of England,’ they proposed what they arbitrarily defined as a ‘larger joint-stock, investment scheme’ where private holders of a new issue of approximately £31 millions of government securities (with a guaranteed face-value) could voluntarily convert these into ‘new South Sea Company shares’ (with a nominated face-value). Without a full explanation of the source of their finance, Blunt and Knight offered to pay the government an immediate £7.5 millions fee for the privilege. To sweeten the deal, the pair even promised that the government would only have to pay 5% annual interest on the new debt, and that this would be lowered to 4% after 8 years. Knight then corrupted approximately 50 members of parliament and numerous friends of the King. The (freshly-Knighted) Sir George Caswall had been elected to parliament, 2 years earlier. The bribes comprised valueless pieces of paper, elaborately printed as ‘new company shares,’ but which would acquire a market-value only if the proposed ‘South Sea stock-conversion’ was voted through parliament.

James Craggs the Elder
James Craggs the Younger
The Duchess of Kendal

Recipients of the bribes included: Charles Spencer (First Lord of the Treasury), Charles Stanhope (Secretary to the Treasury), James Craggs the Elder (Postmaster General), James Craggs the Younger (Southern Secretary) and the Duchess of Kendal (the King’s favourite mistress).

In the Spring of 1720, parliament duly passed another Act which agreed to Blunt and Knight’s so-called ‘investment scheme.’ In order to finance the new debt-acquisition, the ‘company’ was given official permission to increase its number of existing ‘shares.’ However, to pay the £7.5 millions fee, the government’s own securities needed to be exchanged for ‘new South Sea Company shares’ at a nominated rate already different to the securities’ guaranteed face-value. There were some common-sense objections at the time, but, incredibly, the South Sea Company directors’ were allowed to set their own rate of conversion. Obviously, the greater the nominated value of the new shares’ at the moment of exchange, the greater the profits were for the directors’ and for everyone whom they’d bribed. In the end, the exchange-value of the bribes alone totalled over £1.2 millions. In effect, the Parliamentary Act was a license to print, and launder, a form of counterfeit currency. Once the conversion was completed and the government was paid, the counterfeiters began to use various ruses to drive-up the market-value of their ‘new shares.’ Again, using pamphlets and newspaper editorials, exciting rumours were started about ‘secret, future trade agreements and the unlimited value of future trade with the Americas.’ When this ‘positive’ propaganda tactic worked, and share prices rose steeply, the counterfeiters then sold further issues of ‘new stock’ and started to lend cash (via their own Bank, the ‘Hollow Sword Blade Company’) against the artificially inflated market-value of their previous issues, but only to enable individuals to purchase the subsequent issues. There was a veritable mania to buy - a contagious mass-psychosis, akin to gambling fever, began to spread throughout the land. In the end, there were more than 30 000 reality-denying believers - all convinced that they couldn’t lose. 

In January 1720, ‘South Sea Company shares’ were trading at approximately £130, by the end of May 1720 they were over £500. Not surprisingly, dozens of copy-cat swindles began to appear. Frustrated members of the public who felt they’d missed the boat, and who now couldn’t afford ‘South Sea Company shares,’ fell over themselves to get in on the ground floor of any ‘new prospectus’ that sounded speculative. The most infamous of these was presented as:

‘A Company for carrying on an Undertaking of Great Advantage, but nobody to know what it is.’

One morning an enterprising young man circulated a ‘prospectus’ in London’s financial quarter for a joint-stock company’ that required £500 000 capital to be raised from 5000 shares to be sold at £100 each. Subscribers were to pay a £2 deposit per share which would entitle them to an annual dividend of £100 per share. The source of all the profits was to be kept an absolute secret at first. After one month, subscribers would have to pay the remaining £98 per share - only then would they be given the full explanation. An office was opened in Cornhill (opposite the Royal Exchange) at 9 o’clock the following morning. By 3 o’clock 1000 shares had been subscribed for, and the £2 deposits paid. The young man promptly closed the door of the office. He caught the first available mail-coach to Dover, and was never seen again.

The even less-sustainable ‘joint-stock’ swindles were popularly known as ‘Bubbles’. They led to a temporary weakening in public confidence in the entire London stock-market, and demands for independent regulation. In June of 1720, the ‘Royal Exchange and London Assurance Corporation Act’ (or ‘Bubble Act’) obliged all ‘joint-stock companies’ to have a Royal Charter compelling their officers only to engage in ‘authorised trading activities.’ This was not enforced for two months, but confidence returned temporarily. Predictably, the loudest supporters of the legislation had been the ‘directors’ of the ‘South Sea Company’ and their corrupt political allies. However, in order to pay-out some profits, and to maintain their own more-sustainable, but essentially identical swindle, the ‘South Sea Company directors’ needed to keep raising more capital and to keep the market-value of their ‘shares’ increasing. Since there were no external trading profits being generated, the public were merely buying infinite shares in a finite quantity of their own cash.

Apart from all the pseudo-economic mystification and ‘commercial’ shielding-terminology, the factors which fooled almost everyone, were that:

- the ‘South Sea Company’ was associated with the King and the government
- it had a Royal Charter
- its directors were now some of the most wealthy and famous Christian gentlemen in Britain
- all holders of the original share-issue had received annual dividends for 9 years

Some profits were taken when some private ‘share-holders’ re-entered reality and began to realise that it was all too good to true. When the ‘South Sea share’ price hit the psychological barrier of £1000 at the end of June 1720, public confidence finally began to crack. An increasing number of people, including the instigators themselves, then began to sell-out in a panic. The bubble started to deflate. By the second week of September, ‘South Sea stock’ had lost 33% and it was still in free-fall. Fearing that the British economy might collapse, the directors of the ‘Bank of England’ (who managed about 8% of the national debt) offered their silver reserves to underwrite and stabilise ‘South Sea shares' at £400. Many grabbed this offer, but the ‘stock’ continued to plunge. On the September 24th the ‘South Sea Company’s’ own bank stopped redeeming South Sea stock.’ The directors of the ‘Bank of England’ now withdrew their previous offer, creating even more panic. Many depositors became convinced that the government’s bankers didn’t possess sufficient reserves to meet their obligations. Tens of thousands queued to withdraw their savings, and/or convert their paper money into gold. By the end of September 1720, the market-price of ‘South Sea stock’ had collapsed to approximately £135. Several thousands people (including many aristocrats) were ruined, five banks had failed. There was some rioting in London streets, whilst an unknown number of bankrupt victims committed suicide. Parliament was recalled in December and the government was forced to form a committee to investigate and report.

In the Spring of 1721, the labyrinth of lies and corruption was only partially unveiled. Many of the guilty parties remained isolated from liability. Some, including Charles Spencer and Charles Stanhope, were impeached. James Craggs (the Younger) dropped dead before he could be held to account, whilst his father (probably) committed suicide. The Craggs’ vast profits and estates were confiscated from their heirs by the Crown. John Aislabie was imprisoned. Robert Knight, had already run away to the Continent with bundles of cash. John Blunt, was arrested and put on trial. His profits and estates, along with those of his fellow company officers,’ were also confiscated by the Crown. The new, First Lord of the Treasury, Robert Walpole, saw too it that these seized funds were used to relieve the victims. ‘South Sea Company’ stock was divided between the ‘Bank of England’ and the ‘East India Company’ and new directors were appointed. The restructured ‘South Sea Company’ continued to trade in times of peace until the 1760s, but its principal role remained the management of government debt. It was finally wound up in the 1850s.

To give some idea of how convincing the ‘South Sea Bubble’ was at the time, the ‘Master of the Royal Mint’ and Britain’s leading mathematician, physician and astronomer, Sir Isaac Newton(1642-1727), was asked for his mathematical opinion on the rapid rise of ‘South Sea Company’ stock. Newton apparently replied that he ‘could not calculate the madness of people.’ However (according to his niece), Newton lost £20 000 himself. Ironically, he also owned one of the world’s largest private collections of antiquarian books on the subject of ‘Alchemy.'

According to the ‘South Sea Company’s’ accounts, over a period of 25 years (1717-1742), 96 triangular trading voyages were undertaken and a total of 34 000 humans were purchased in W. Africa. At least 4000 (11%) did not survive the nightmare journey across the Atlantic.

David Brear (copyright 2014)