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The Barlow Clowes Affair

The Barlow Clowes Affair is the name given to one of the most notable financial scandals of the 1980s.

In 1988 Peter Clowes was convicted on 18 out of 19 counts of Fraud, Theft & Conspiracy and sentenced to 10 years in prison and was disqualified from acting as a company Director for 15 years, both the maximum sentences available to the Courts. Throughout Clowes protested his innocence, however, due to the fact that at no point was any investor ever refused his/her money back.

Barlow Clowes & Partners Limited was established in 1973 and its nature of business was that of an insurance broker. Peter Clowes became interested in gilts, or Government Bonds, shortly afterwards, however, and by the mid 1970s was acting as a manager of investor’s money profiting using a method called ‘anomaly switching’. This involved switching between similar gilts in order to take advantage of price discrepancies and is very similar to arbitrage in modern markets. However, this could not yield the results that Clowes had promised his investors and by the late 1970s Clowes was buying long-dated gilts and selling short-dated gilts to pay for them, trading many times a day in an attempt to turn a swift profit. This principle was extended offshore by setting up a Jersey Account for expatriates who, because of non-residence, would be able to avoid paying tax on their investments in the UK. The two accounts for the UK and Jersey investors were not kept separate and it was very easy for Clowes to make up any shortfall in the UK investors funds by using money from the client accounts in Jersey. This principle of Teaming and Lading is the practice employed by banks every day and would have been an attractive option to Clowes due to the fact that his promises of returns of 14 percent or more on investments was largly unobtainable in gilts at the time. As Clowes was unable to achieve the promised returns, he increasingly used new investor’s money to pay older investors and devote money to increasingly high-risk investments.

The misappropriation of investor’s funds continued through the early part of the 1980s and the corporate transactions using investor’s funds were both extensive and complex. On a commercial basis the client’s monies were invested in third party companies, such as a jewellery company and a computer company, as guarantee deposits in banks for back-to-back loan facilities to various UK companies, and also directly to operating companies as share capital, cash funding or loan agreements. Client monies were also paid to brokers for the purchase of various securities other than gilts on behalf of the investors. The money from investors was also used to fund a lavish lifestyle for Clowes and his fellow directors. Funds were paid directly to individuals and there were occasional cash withdrawals. A yacht, various houses in the UK and abroad, including renovations, private aircraft charters and other benefits in cash and kind were paid to Clowes, his principal directors, and were all funded by the client accounts.

This continued until 1988 when Clowes was arrested and put to trial. In all, around £200m from over 15,000 investors passed through the hands of Peter Clowes. Almost all of it was invested or spent on assets and securities other than gilts.

This case and others similar to it raised many questions about the regulation of companies involved in fund management and their audits. When Barlow Clowes was established the amount of money that was being managed on behalf of private individuals was relatively small. As the market expanded through the 1970s and 1980s the amount of money under management grew considerably and there were, incidentally, a number of other high profile financial scandals around this time, including the Ploy Peck, BCCI, and Robert Maxwell affairs. More recently incidences of alleged fraud have become apparent with the collapse of Enron, WorldCom and Parmalat. In all these cases the regulatory system has come under attack. The Government and Midland Bank were attacked over the Barlow Clowes affair and recently Arthur Anderson has been fined and placed on probation for five years because of the Enron scandal.

Most notably, the affair prompted a huge Government investigation at the time with an unprecedented payout to the investors of some £150m from taxpayers funds. The Department of Trade and Industry, as it was called at the time, was attacked for allegedly failing to regulate Barlow Clowes properly. At the time the Conservative Government was in power and the opposition spokesman for the DTI was Tony Blair, who became Prime Minister in 1997.