February 1913. France.
The Paris daily Le Matin accuses Rufus Isaacs (Attorney General and Godfrey’s brother) and Herbert Samuel (Postmaster General, and so in charge of telecommunications) of abusing their positions to profit from Marconi’s share price. The paper makes a fatal mistake: it claims the ministers held shares in the English Marconi company. That inaccuracy earns it a libel suit, which it loses, and it has to publish a formal apology. All the more so since Samuel, personally, never held any. But the damage is done.
At the same time, Cecil Chesterton of The New Witness in England publishes similar claims and attacks Godfrey Isaacs by name. The executive sues that paper for libel too. Chesterton’s brother is promptly sacked from the Daily News in retaliation.
Did this whole little crowd know that the Titanic had sunk, that wireless could have prevented the disaster, and that Herbert Samuel was going to name Marconi in public? Well… it seems not. Even though, in fact, this is where the manipulation would look most obvious.
But the facts are far subtler than the papers claimed. The central players in the affair were all senior members of Herbert H. Asquith’s Liberal government:
It all starts in the spring of 1912, when the British government is preparing the ambitious Imperial Wireless Chain, the wireless network described earlier. Except that this confidential information reaches quite a few ears…
On 17 April 1912, a few days after the Titanic went down, Rufus Isaacs buys 10,000 shares in the Marconi Wireless Telegraph Co. of America, through his brother Godfrey, at a preferential price of around £2 a share. He immediately sells some of them on to Lloyd George (2,000 shares) and Alexander Murray (1,000 shares). Murray also buys 2,500 more on behalf of the Liberal Party, as an investment of its funds. Herbert Samuel, aware that he is the one negotiating the contract, refrains from investing personally.
At this precise moment, the ministers already know a very large government contract with Marconi is imminent, confidential information negotiated in secret for several weeks. They also know the Titanic has sunk, but in Britain the details of the crucial role wireless played in the rescue are still patchy and confused. So that does not seem to be what drove the little gang.
The trick lies in one small sleight of hand: the ministers do not buy shares in the British company the state is about to contract with (an obvious conflict of interest), but in its American subsidiary. That legal distinction will later let them argue there was no direct conflict of interest, while still riding the general rise in Marconi shares after the government contract was announced.
The timing is especially handy. The day after Samuel’s statement, the shares take off at the IPO. Rufus Isaacs sells all of his at around £3.5 (+80%). David Lloyd George sells half of his at roughly the same price the next day, 20 April.
In the end, Herbert Samuel’s (apparently uncoordinated) statement is a double windfall:
Because in reality, the government contract would only be announced several months later, in July 1912, sending the shares soaring once again. And letting everyone still holding shares close out their positions.
Today, this sequence (a private purchase at a preferential price, a favourable public statement by a minister, then a stock market listing, with PEPs7 involved, as we now say) would without hesitation be called blatant market manipulation. But in 1912, neither insider trading nor price manipulation was clearly defined in British law.
Lloyd George, Isaacs, Samuel and Murray were publicly accused for a long time, then in court. Several bankers and brokers were also harshly criticised for their conduct in a parliamentary report that spoke of grave moral impropriety, but none was ever formally convicted, for lack of a law explicitly banning such conduct.
Lloyd George became Prime Minister in 1916, three years after the scandal. Rufus Isaacs became Lord Chief Justice, but his reputation took a lasting hit. Herbert Samuel later became Home Secretary in 1916, then an influential Liberal leader, despite a tarnished image.
Alexander Murray (Lord Elibank) was the only one forced to resign shortly after the scandal, in 1913… but was made a peer the following month.
In the courts, Marconi’s managing director, Godfrey Isaacs, brought a criminal libel case against Cecil Chesterton over the accusations published in The New Witness. The trial in June 1913 ended with Chesterton’s conviction and a token fine of £100. The verdict did not clear the ministers in the eyes of the public. Even after his conviction, Chesterton repeated his accusations in public, and no minister dared sue him again, a sign that any new case risked exposing their dealings even further.
The affair also stirred up a latent antisemitism in the rhetoric of some critics, who denounced a financial clique pulling the strings. Hilaire Belloc and Chesterton did not hesitate to play that card, casting a shadow over Jewish figures in public life, since Rufus Isaacs and Herbert Samuel were both Jewish, even though there was no evidence of any conspiracy.
The Marconi scandal went down in history as one of the first great modern controversies mixing politics, high finance and public ethics. While it did not change the law straight away, it made the public and those in power aware that stricter rules against conflicts of interest were needed.
The Titanic tragedy reshaped maritime regulation. From 1913-1914, new international rules made a permanent, round-the-clock radio watch (24 hours a day) compulsory on ships, along with frequencies reserved for emergencies at sea. SOS was formally established as the universal distress call, replacing for good the various codes used by private companies.
The disaster triggered a worldwide awareness of how much telecommunications matter for safety at sea, leading to the creation of SOLAS8 in 1914. The lessons drawn from the tragedy exposed the system’s gaping flaws: no continuous watch, networks clogged with non-urgent messages, no priority for safety warnings.
Ironically, the same tragedy boosted Marconi’s public image, while exposing the limits of a system in which commercial traffic still too often came before safety at sea.
The story of the Marconi Company itself takes a decisive turn after the First World War. In 1919, in the United States, RCA is created, with the backing of the US Navy, to buy the assets of the American Marconi subsidiary. This strategic, military decision ends Marconi Wireless Telegraph Co. of America as a separate entity. The US government wanted to make sure strategic radio infrastructure would no longer be under foreign control.
In Britain, the parent Marconi company moves into new fields. In 1922, it helps found the BBC9, a consortium of transmitter and radio set makers set up under government auspices.
The company keeps expanding its technology, launching Marconiphone, a brand of home radios, and developing shortwave transmitters for international communications between the wars. In the 1930s, Marconi researches electronic television together with EMI. The Marconi-EMI system is chosen by the BBC for the world’s first public television service in 1936. In France, the company launches Pathé-Marconi, a joint venture with the oldest film studio in the world, which still exists.
After the Second World War, in 1946, the Marconi Company is bought by the English Electric conglomerate, which wants to expand into electronics. The company is restructured into four divisions: communications, broadcasting, aeronautics and radar. Its absorption into ever larger groups continues with GEC in 1968, then BAE Systems, within which Marconi Electronic Systems survives until 1999, a symbolic date that truly marks the end of the Marconi era, almost a century after the first wireless transmissions that had revolutionised the world of communications.
But the Titanic-Marconi affair also revolutionised the world of finance. Timid attempts at regulation appear over the decades. The Companies Act of 1929 requires certain share dealings by directors to be disclosed, then in 1939 legislation penalises civil servants who misuse confidential information. But these texts, with no real teeth, remain woefully inadequate.
It takes seven decades for a real legal arsenal. Only in 1980 does the UK pass the Companies Act, the first law making insider trading (insider dealing, in British legal terms) a criminal offence. It is later strengthened by the Criminal Justice Act of 1993, then by European regulation. A staggering gap between the Marconi scandal and modern investor protection.
Other countries moved faster: the United States as early as 1933-34 with the Securities Act and the Securities Exchange Act, laying the foundations of the rules against market abuse. France adopted clear legislation with the law creating the COB10 in 1987, the forerunner of the AMF, France’s financial markets regulator. But the UK, despite the shock of the Marconi scandal, dragged its feet for almost a century.
As for the United States, recent news has shown, as recently as this spring (in French), that the matter is far from settled.
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