The Surprisingly Strange History of Securities Fraud

Investment and securities fraud seem like modern problems, but the fact is they have been around for a long time. In fact, they have probably been around since the first ever trade for goods transaction took place. These are some of the strangest and surprising accounts of investment and securities fraud throughout history.

Hegestratos and the Sinking Boat

The first recorded financial fraud occurred in 300 B.C. A Greek shipping merchant named Hegestratos took out a substantial insurance policy where he received a loan and agreed to pay it back with interest when his cargo shipment was delivered. The lender was entitled to take the boat and cargo if the loan was not paid back.

Hegestratos decided to keep the money, sell his cargo and sink his empty boat. Things didn’t quite work out as planned, however. His crew discovered his intentions and in an attempt to escape the angry men, Hegestratos drowned.

The Junk Bonds of the 1790s

American bonds were in their infancy in 1792. Bond values fluctuated rapidly and the only way to get ahead and stay ahead was with insider knowledge. Secretary of the Treasury Alexander Hamilton began a restructuring process to replace colony bonds with U.S. bank bonds. Assistant Secretary of the Treasury, William Duer, was in the right place at the right time. Tipping off his friends about Treasury actions and leaking information to the public to drive up prices, Duer sold bonds for easy profit. He kept it up after leaving office by keeping his inside contacts. He might have gotten away with it, but he didn’t know when to stop. As more money poured into chasing bonds, issuers rushed to cash in. Rather than taking a step back, Duer continued to believe he could make more because of his insider information. He made the mistake of borrowing heavily to pay for his doomed strategy. Sadly for Duer and his cronies, an unpredictable market correction left him with huge debts and worthless investments. Duer spent his last days in a debtor’s prison.

The History of Securities Fraud and the Law

The first laws governing securities appeared in the United States in the 1850s. Massachusetts became the first state to protect investors from railroad stock scams. Kansas and several other states soon followed. Most of the states required that securities and securities salesmen register with the state. A business challenge to the more restrictive laws made it to the Supreme Court in 1917, where justices upheld the state restrictions.

Stockbroker fraud gained nationwide attention with the crash of 1929 and during the Great Depression that followed. The Securities Act of 1933 protected investors and honest companies from fraudulent activities and imposed further restrictions to the securities industry. The Securities Exchange Act of 1934 created a commission to oversee the industry and enforce legislation called the Securities and Exchange Commission.