The writer’s latest book, co-written with Keely Winstone, is ‘Agent Twister’, a biography of John Stonehouse
An unlikely hit has been entertaining television viewers in Britain this week: the madcap adventures of John Stonehouse, a Labour MP who faked his own death in 1974, dramatised for maximum comic effect. The only serving minister believed to have spied for an enemy power, Stonehouse hoped to start a new life in Australia, escaping from his family, his Soviet bloc handlers and a rapidly unravelling financial fraud.
The fraud was the root cause of Stonehouse’s downfall yet is the least retold aspect of this extraordinary tale. It centred on a bank that the former cabinet minister started in 1972. By then his front bench career was over — savvy Labour leader Harold Wilson decided that his former protégé was “corruptible”. Stonehouse needed money to fund an extravagant lifestyle. A property boom was in full swing and developers piled in, borrowing from fringe banks. Making money seemed easy and Stonehouse set up his own financial institution, eventually called London Capital Group (LCG).
He popped in to see the governor of the Bank of England who was friendly enough and passed him on to a senior official who appeared at Stonehouse’s promotional dinners, warning him only not to use the term “bank” until LCG had a banking licence. It was a green-enough light for the MP to raise money in the hope eventually of getting a stock market listing. But while Stonehouse was on his roadshow, The Sunday Times alleged that he was already promising the new venture would be a bank. Stonehouse denied it and the Bank believed him.
But investors were scared off. The night before the issue closed in late 1972 Stonehouse needed another £3mn in today’s money to get it over the line. With his contacts book exhausted, Stonehouse created an elaborate chain of loans to enable his directors and other connected parties to fill the gap. This was against company law and LCG’s articles of association, but the board, consisting entirely of Stonehouse appointees, meekly agreed.
The plan was for the company to trade its way out of trouble. But by 1973 the property market was cooling. Only one substantial loan was made and an audit was due in July. The loans to the directors and their illegal purpose needed to be covered up so Stonehouse began inserting various friends and family members into the chain. The auditors were suspicious but their senior partner, a City big-hitter who was chair of five companies, deputy chair of another two and director of eight more, had introduced Stonehouse to the firm. He trusted his friend and signed off the accounts — this was enough for the Department of Trade and Industry and the Bank of England to grant the company a banking licence.
“If ever you found out a chap in a lie, he was finished forever. You assumed that nobody would be so stupid,” the BoE later explained.
In 1974 the property bubble burst and fringe banks had to be bailed out. Another audit loomed. Stonehouse owed his brokers more than £1mn in today’s money. Threatened with disgrace, he executed a bizarre plan to escape by creating a new persona. Leaving a pile of his clothes beachside in Miami, he reappeared in Australia using the stolen identity of a deceased constituent. He was soon arrested and, back in the UK, sentenced to seven years, mainly for life insurance fraud. He died in 1988 and was never charged with more serious corporate fraud offences.
The financial world is much changed since Stonehouse’s day. Technology and corporate crime are more sophisticated and the prizes much greater. But whatever corporate scandals emerge during 2023 it’s a safe bet that the eternal triangle of weak governance, complacent regulation and sloppy auditing will be involved, just as they were 50 years ago. Happy new year.
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