The publication of this book could not have been more apposite: It has been six years since the onset of the current recession, which was characterized by a series of bank failures, extreme financial fragility, and “imaginative” corporate accounting and reporting. This book examines the criminalization of company fraud—broadly defined to include the issue of false prospectuses, “puffing” of shares, the creation of “phantom” companies, and downright deception—in Victorian Britain. The book consists of three sections. The first, titled “Toleration.” re-examines the stock-market boom of the 1820s—which was, in all respects, a speculative bubble—and discusses how this event affected debates on bank reform. The second, “Criminalization,” explores the “railway mania” of the 1840s and the “premeditated and cynical deception” practised by bankers, actuaries, and other éminences grises in financial markets. Finally, “Enforcement” documents the growth of official prosecutions in cases involving fraud.
Boardroom Scandal contains an impressive array of supporting evidence, much of which has been obtained from litigation reported in the press. Unsurprisingly, there are the “usual suspects”—for example, George Hudson and the railway mania of the 1840s, the directors of Overend Gurney (1866), and the City of Glasgow Bank (1878). However, there are also stories of other rogues who have not, perhaps, received the attention they deserve, such as the failure of Straham, Paul & Bates (1855), a long-established private bank whose financial difficulties increased when it started financing Welsh coal mines. Instead of declaring insolvency, the directors of this bank tried—Nic Leeson-like—to recover their losses by investing in speculative Italian railway loans and, folly of follies, financing a plan to drain a French lake. Consider also the suicide of John Sadleir, MP, whose overdraft of £288,000 was a major reason for the closure of the Tipperary Joint Stock Bank. Press reports suggest that Sadleir’s total financial misdemeanors might have amounted to £1 million, making him the biggest individual fraudster of the time.
For this reader, the greatest strength of Boardroom Scandal is James Taylor’s explanation of how the law evolved to try corporate fraud, and the implications this has for our understanding of capitalism in the nineteenth century. For example, should disputes involving fraud be tried in the courts, or settled privately? Taylor’s analysis suggests that for much of the nineteenth century, the courts were more concerned with “freedom of contract” and caveat emptor than with deciding on what was best for society. If disputes were to be tried in court, should they be civil or criminal actions? The latter, of course, require a higher burden of proof, but they also carry more stringent penalties. Some, such as Justice John Byles, believed that false representations as to the value of a business might be “grossly fraudulent” but did not justify a criminal action.
Court action also generated moral and legal conflicts for presiding judges. For example, a prospectus might be morally false (by supressing material facts) without being legally false (knowingly making a false statement of fact). These conflicts were central to the decisions not to proceed with action against Lane and Childs (1869), who were directors of the Merchants’ Company and Lord Mayor James Lawrence’s refusal to commit other directors of this company in the same year. Similarly, in Reg v. Gurney (1869)—possibly the most famous British case of the nineteenth century involving financial misdemeanors—Chief Justice Cockburn ruled that the directors of Overend Gurney were guilty of sins of omission rather than commission. However, in the North Caradon Mining Company action (1870), the judge, Baron Anthony Cleasby, decided that one of the directors, Thomas Gibson, was guilty of enacting “a scheme of unparalleled audacity” and imposed the maximum sentence of five years of penal servitude.
Taylor successfully demonstrates that, from the 1870s onward, the courts adopted a sterner view of fraud. Part of the explanation for this change was that it was increasingly recognised that criminalization of fraud was a vital complement to economic individualism. Additionally, the growing market capitalization of major firms meant that the adverse consequences of fraud extended far beyond a company’s directors and shareholders. The upshot of these trends was that corporate fraud was viewed as a public rather than a private offense. Consequently, it became imperative that the state enact criminal prosecutions and thus, in 1880, the Director of Public Prosecutions (DPP) was established. This post was subsequently absorbed by the Treasury Solicitor.
Fundamentally, Boardroom Scandal is concerned with greed, one of the most powerful of human vices. In some cases, greed encouraged directors to deliberately lie, cheat, and swindle their way to substantial private fortunes, often at the expense of gullible and/or ignorant shareholders who were motivated by the same vice. In other cases, such as that of Overend Gurney, deliberate malfeasance was absent. Either way, shareholders were castigated for failing to insist on stronger corporate governance. By the later nineteenth century, the pendulum had swung definitively in favor of shareholders: Investment had replaced speculation in joint stock companies and shareholders deserved more, not less, protection. Even so, as Taylor fully acknowledges, even a battery of criminal legislation provided no deterrent to those determined to dupe the gullible. This observation, of course, resonates loudly today.
I found Taylor’s arguments totally convincing. This book is a welcome complement to recent work—for example, Brian Cheffin’s book Corporate Ownership and Control. Taylor sets corporate fraud in a broader perspective, which encompasses the evolution of the law, political economy, and contemporary perceptions of who was right and who was wrong. He deserves to be congratulated for this excellent piece of scholarship.
