Whisky investment déjà vu

A number of warnings about whisky investment firms have appeared in the press, and on this blog, in the past year. But, as Dr. Nick Morgan explains, dodgy schemes promising big returns are nothing new. And many of them ended in tears. Here is whisky investment déjà vu.

These are the sorts of things that clog up social media feeds of the whisky curious: “15 – 30% capital growth per annum”; “in four years your matured whisky may double in value”; “malt whisky investment shows an average profit of 50% at maturity.” Outlandish claims from firms that sprout up from nowhere like new leaves on a springtime tree, and they might well be from 2020, but these particular claims date from the late 1960s and early 1970s, when investors, principally in the United Kingdom and the United States were lured into whisky investment schemes by promises of returns beyond the dreams of avarice.

The last whisky boom

Between 1950 and 1970 production of malt whisky had increased over fourfold in Scotland, (and grain whisky more than fivefold), as distillers struggled both to replenish inventories depleted during the second world war, and satisfy an apparently unquenchable thirst for blended Scotch all over the world. However, stocks of maturing whisky ate away at the capital of both producers and brokers, many of whom began to look to cash-rich post-war economies as a way of financing their inventories. Potential buyers were lured into schemes unaware of what they were buying, often ill-informed about the volatility of prices for grain whiskies on the open market, or of the fluctuations in the pricing of malts as demand from blenders shifted.

Along with advertisements from numerous investment companies (‘Brigadoon Scotch Investors’ being, perhaps, the most appropriately named) articles appeared in American newspapers with headlines such as “Aye, the clans smile on such investments” commending the “opportunities for investors of more limited means to participate with a simplified type of transaction”, selling parcels of Scotch for as little as $1000. In reality, what these companies (some of whom did, and some of whom didn’t have access to stocks of maturing Scotch through partners in the UK) were selling were not casks of whisky, but rather warehouse receipts, giving title to either real or imagined inventory. These practices soon attracted the attention of both State authorities as well as the Securities and Exchange Commission (SEC), which took the view that these warehouse receipts represented unlicensed investment contracts under American legislation, and were thus in breach of the law.

Whisky investment déjà vu

It soon became apparent from a series of investigations by the SEC that this technical breach of regulations was not the only thing wrong with these get-rich schemes.  

Michael Lundy & Associates, and its partner company Scotch Whisky Limited, were among the first to be investigated, partly because Lundy was also being pursued for the sale of fraudulent property investments in Florida, which along with his sale of warehouse receipts would see him eventually jailed for six years. Lundy was also found to have misled whisky investors by claiming that aged whisky would automatically increase in value (rather than being priced according to the law of supply and demand), by making it appear that the investment was insured against all risks by Lloyds of London, and that it would be straightforward for investors to take physical possession of the casks for which they held receipts should they want to.

A self-styled publicity-seeking maverick

Also feeling the long arm of the SEC in London was war hero, former wine merchant, and whisky entrepreneur John Haffenden. A self-styled publicity-seeking maverick he charmed drinks and business writers (but less so the PR agencies whose bills he struggled to pay) with his very public contempt for the authorities, be they the American courts, the whisky establishment of the Distillers Company, or the Scotch Whisky Association (“bootleggers who’ve turned respectable”). “Thanks to disastrous public relations,” he wrote in one of his regular acerbic newsletters, “the Distillers Company which has in the past wielded almost feudal power over the rest of the trade in Scotland, is losing its grip”. 

Haffenden’s business was whisky broking and blending. He declared his ‘Highland Silk’ blend to be a “rare blend’ of half malt and half grains, matured for at least four years, with at least twenty percent Glenlivet’s”, “S.M.O.O.T.H”, and “popular with both sexes”. In a gushing interview with Haffenden for the Illustrated London News in 1970, Peta Fordham wrote “writers have a soft spot for any David who successfully challenges the Goliaths in a world in which the individual finds it increasingly difficult to survive”.  

Blend your own whisky

This particular David caught the imagination of the press in both the UK and the USA with a series of quirky headline-capturing innovations. His ‘Master Blenders kit’, launched in 1969, was a do-it-yourself blending pack containing four single malts and one-grain whisky. “A three-year-old child standing on his head could use it to produce a whisky better than most proprietary brands” observed Haffenden in an interview with an American newspaper; “you can blend whisky in five minutes,” he told another. 

Haffenden claimed that hundreds of thousands of the kits had been sold all over the world. Harrods, he said, described it as their “best selling thing for years”. A much-trumpeted launch event for 400 MPs in the ‘long bar’ of the House of Commons ended in an acrimonious fiasco, but unbowed Haffenden nominated himself for a Queen’s Award for Exports on the basis of the alleged success of his kits. Two other eye-catching projects were ‘Haffy’s whisky sour’, the first in a promised range of pre-mixed Scotch cocktails, and ‘the Nightender’, an automatic dispensing machine, that promised hotel guests all-night drinking “at bar prices”.

Haffenden claimed to have pioneered the selling of casks as investments in the United States in the early 1950s and had been active in the UK since at least 1965.  He suggested in advertising that the value of cask investments could triple over three or four years, advertising his firm’s services in the United Kingdom as “the leading whisky brokers”, claiming maturing stocks of between eight and twelve million gallons, and offering potential punters a free illustrated booklet on ‘Scotch Whisky Investment’. In the USA he partnered with the Rimar Corporation, which promised returns of between 20% and 25% to investors “disgusted with the stock market.”

High-pressure sales techniques

Like Lundy, the Rimar representatives deployed high-pressure sales techniques which wilfully misrepresented the nature of the investment (investors were never told what whiskies they were buying), the likely returns, the risks involved, the nature of the insurance that was on offer, and the difficulties associated with transferring casks from Scotland to the USA. The whisky was sold to investors with a mark-up of between 36 and 70 percent on its market value, partly to fund the hefty commissions paid to salesmen. Haffenden Rimar was banned from trading in the United States in 1973. A long list of other traders who followed in its wake were also banned, including some names still familiar in the Scotch whisky industry today,

Until this point the British financial press had been woefully uncritical of such schemes: “a minimum investment of £500 could be troubled or trebled in three or four years’ time if the whisky cult spreads to new countries abroad” said The Sunday Times enthusiastically in 1965.  Sentiments began to change with leading figures in the industry such as the Glenlivet Distiller’s Ivan Straker speaking out against them “‘the poor investor is being hoodwinked by glowing literature”) and even the normally beige Scotch Whisky Association expressing reservations. The FBI, Interpol, and fraud squads in Glasgow and from Scotland Yard were on the case.

Haffenden disingenuously recast himself as the saviour of the poor investors led astray by ‘cowboys’, but his various business interests were crumbling and in 1974 his brokerage company received a winding-up order. A subsequent business, Haffenden International Marketing, was short-lived and equally unsuccessful.

Keith St John Foster

Enter at this point Keith St John Foster, a former Daily Telegraph junior financial journalist, with a business promising to deliver greater transparency to hapless investors, and “introduce some order into an essentially chaotic market”.  Brokers, said St John Foster, “benefit from the virtual conspiracy of silence within the legitimate trade to feather their own nests at the expense of the private investor”. With “considerable trade backing” and thus access to insider information St John Foster’s company claimed a unique position “to place funds in stocks of high return and high security”. The American press reported that his firm would “in time evolve into a major commodity market”.

Fate determined otherwise. The new company faced legal challenges to its advertising and by the end of 1975 was heavily in the red, with St John Foster being declared bankrupt in 1977. In the same year St John Foster, then described as a ‘commodity broker’, was accused (and acquitted) of being involved with four other men in the murder of a drug dealer on the Isle of Wight. Then only months later he was convicted of the attempted murder of his estranged wife and jailed for eight years. He later reinvented himself as Aphelion, an international ‘parfumeur’ who apparently made custom scents for Princess Diana and Ivana Trump among others. Such is the tangled webs of the lives and careers of whisky investment experts.

Glen Garioch, Glenrothes

Arthur G Schuffman’s whisky expertise was somewhat questionable when he set up Perthshire Scotch Whisky in New York in 1973 and began selling warehouse receipts for casks of White Abbey blended Scotch whisky to investors, guaranteeing fantastical returns of over 55% after a two-year maturation period. The six-year-old whisky was sold to investors for $6.80 a gallon, although investigators subsequently put its worth at $1.50 to $2 a gallon.   

In a textbook boiler room operation, Schuffman and his partners targeted “unsophisticated investors” with glossy mailshots which were followed up by high-pressure telephone calls, making “numerous misrepresentations about the value of Scotch whisky as an investment”. Perthshire Scotch Whisky would, it was promised, either buy the whisky back or assist them in selling it to third parties. “Like a masterpiece of art”, claimed the company’s advertisements, “White Abbey appreciates in value as it ages”. Neither Schuffman nor his partners waited to see if their claims were true. After luring twenty-seven or more investors to part with over $60,000, they closed down their smart Park Avenue South office, leaving no forwarding address. As it turned out, jail was their eventual destination.

We’ve been here before

There is no doubt that with the right advice there is money to be made from speculating in cask purchases; there always have been. There can be a great deal of pleasure in simply buying a reasonably priced cask from a new distillery, either as an individual or with a group of friends, for bottling and enjoying at some later date. But those tempted by the seductive promises of many whisky investment firms today, keen to “find out why investors are going crazy over whisky” might do well to reflect on the experiences of the late 1960s and 1970s when incalculable losses were experienced by investors in both the United States, the United Kingdom, and elsewhere as a result of illegal and fraudulent practices. 

Then as now, tempted by glossy brochures, seductive (and mostly misleading) promises of huge returns, investors placed trust in companies whose resources and expertise in whisky was minimal, whilst their salesmanship was weaponised. The deluge of new firms over the past three to five years with little or no proven background in Scotch whisky, desperately trying to steal a share of the profits of the whisky investment bubble, exactly mirrors the experiences of the past. And we know how that ended.

Perhaps then we should consider not the catchy and almost hysterical advertising claims of the 1970s, but rather the news headlines that followed in their wake such as: “Con man sentenced in liquor swindle”; “amateur suckers for Scotch whisky investments”; and “Scotch whisky racket bad news.” It has to be hoped it’s not a lesson too late for the learning.’