Wall Street - The Whitney Scandal
( Originally Published 1939 )
THE rumblings were at first low and indistinct, but as hours and days passed, the rumblings grew into a volcanic roar. The great Monarch of Wall Street was in trouble. The high speed grapevine ticker was loaded down. Rumors flew fast and furiously. And then came the announcement! The firm of Richard S. Whitney and Company, members of the New York Stock Exchange were suspended. They were unable to meet their obligations.
This announcement alone was not responsible for the consternation caused among the brokers of the narrow canyon. Many men in years gone by who have used Wall Street `poker chips' which added up to five, six or even seven figures, have found themselves broke after throwing their all into the jackpot.
But with Whitney it was different. For five consecutive times he had been president of the Stock Exchange and was known as a stickler in financial discipline. Nothing off color must come under his notice. He would stand for no shady practices, no turning of a sharp corner. And now! The shrewd, conservative dictator of other brokers business morals had been dethroned.
It was rumored he was short a million, five million, ten million! Nobody knew. Attorney General, John J. Bennett, immediately started an investigation and hard upon his heels was the newly elected District Attorney, Thomas Dewey. The Security Exchange Commission also went into action as did the Stock Exchange itself.
Although Attorney General Bennett started an investigation immediately upon Whitneys suspension, District Attorney Dewey moved in the middle of the investigation and secured an indictment against Whitney charging him with mis-appropriating $105,000 from the estate of his late Father-in-law, George R. Sheldon. Whitney was executor and co-trustee of this estate.
Such an indictment seemed inconsistent, inasmuch as the two main benefactors were Whitney's wife and her sister, Mrs. Mary Murphy, nevertheless, Dewey seemed armed with facts. He appeared before Judge William Allen, in General Sessions, and charged that Whitney had used the securities of the trust fund for three loans. One was for $100,000 in 1932, another for $100,000 in 1937, and a third for $100,000 in January 1938.
Whitney was bound over and taken to the Elizabeth Street Station, where Lieutenant Breen, reached over and extended his hand.
"I'm sorry to see you in this trouble, Mr. Whitney," he said. A moment later adding: "The Whitneys' have always had a good name around here and I wish you the very best of luck."
With that Whitney was hustled into a side-room with a dozen vagrants from the Bowery and taken down stairs to be finger printed and photographed. He was then carried to the home of Judge Allen who approved his bond.
The following day, Attorney General Bennett, stated he would seek Whitney's indictment on another charge of misappropriating securities. This time it was $103,000 belonging to the New York Yacht Club. In the meantime, both the president and former president of the Exchange were being questioned as well as other members of Whitney's firm.
Whitney, however, insisted at the hearing in the Attorney General's office, that he ruled the affairs of his firm with an iron hand and that his partners knew nothing of his irregularities.
At a later hearing on March 15, 1938, Whitney admitted pledging the securities of the trust fund of which he was executor and read a 750 word statement to the Court, in which he outlined five cases of irregularities which existed in his handling of his clients finances. After reading the statement, Whitney said:
"I fully realize the gravity of what has been done and that a penalty must be paid. I also fully realize the nature and consequence of the statement which I make, but nevertheless, I am determined to make it."
Three days later, on March 18, President Charles R. Gay, mounted to the rostrum of the Stock Exchange and solemnly announced to the floor traders that Richard Whitney had been expelled from transactions on the Stock Exchange for life.
Whitney was brought to trial on the indictments secured by Attorney General Bennett and Prosecutor Dewey. He entered a plea of guilty and Judge Allen, after a bitter denunciation, sentenced him from five to ten years in Sing Sing. Thus did the energetic and aggressive graduate of Groton and Harvard, who was five times president of the New York Stock Exchange, end, what started out to be and was, while it lasted, a meteoric financial career.
Whitney had many friends and many enemies in Wall Street. He was prone to assume a "holier than thou" attitude and when it became known he had been engaged in his illegal practices as far back as 1932, his enemies were bitter in their comment.
One thing, however, can be said to his credit. He was not a cheap crook. He did not filch securities or pass worthless stocks and bonds to widows and orphans. He took only from his own kind.
It was brought out that he borrowed over one million dollars in November 1937 from his brother, who is a partner in the firm of J. P. Morgan and Company. He borrowed from his fiends, two hundred thousand, a hundred thousand, fifty thousand, or as much as they would lend. However, the inevitable had to happen. As I stated elsewhere in this book no manipulator can buck facts. He must either get in harmony or get out of business. Unfortunately Whitney attempted to corner the stock of the Distilled Liquors Corporation and in his efforts to support the price, he lost millions in a falling market.
Whitney was tried, sentenced, convicted and incarcerated in Sing Sing within four weeks after his defalcations were made public in the earlier part of March, 1938. Despite what he had done, he earned the admiration of many by his manly attitude He did not whine or whimper. As one reporter wrote, "When the. time came to pay off, he paid like a man, taking it squarely on the chin."
It may be stated here that the Security Exchange Commission had nothing to do with the prosecution or conviction of Whitney. He was prosecuted by the Attorney General of the State of New York and the District Attorney of New York County. This ex-planation is made in view of the erroneous impression held by many, that men high in the councils of Wall Street finance are exempt from prosecution and conviction.
Richard Whitney and Company were brokers for the firm of J. P. Morgan and Company. Whitney's brother, George, is a member of the Morgan firm. Despite all of this, however, nothing could save him.
The conviction of Whitney may serve as an object lesson for others whose vaulting ambitions may tempt them to betray the confidences which other people vest with them. However, if it can be regarded as having any virtue, I reiterate that Whitney stole only from his own kind, and not from those who could ill afford to lose.
Shortly after the proud scion of a great family had been sent to Sing Sing another scandal broke in the Street. The truth of the charges must still be proved in Court, but according to reports, Whitney was only a novice at real manipulation.
Can you take a five dollar bill and run it into ten million dollars? It was done, according to District Attorney Dewey. Furthermore it was done by out-of-towners who came down to the narrow canyon and taught the smart boys some real lessons about high finance.
On June 1, 1938, District Attorney Dewey secured six indictments against persons he claimed were a ring of Investment Trust looters and had drained seven Investment Trusts of $10,000,000 of their assets within a years time.
According to Assistant District Attorney Ten Eyck, the looters invested only five dollars to build up control of four investment trusts, namely; First Income Trading Corporation, Continental Securities Corporation, Administered Fund Second Corporation and the Reynolds Investing Company. These four trusts had assets of approximately $13,500,000.. The alleged looters also acquired three other Trusts known as the Burco Corporation, Bond and Share Trading Corporation and Insuranshare Corporation of Delaware. These three trusts were said to have assets of $2,500,000.
Just what part the five dollar bill played in these transactions the writer has not been able to ascertain, but it seems the alleged looters had devised a scheme, whereby the Investment Trusts were made to pay for their own acquisition and stripping.
The modus operandi as I understand it was somewhat as follows; First; They borrowed the money to buy control of one Investment Trust. After they secured control they substituted worthless securities for marketable securities. They then sold the marketable securities to repay the loan and had some margin left over. This operation was repeated over and over again until they controlled seven Investment Trusts and according to the District Attorney had looted them of $10,000,000. It seems their scheme had all of the ear marks of perpetual motion in high finance.
With Richard Whitney, in addition to his defalcations, borrowing hundreds of thousands and even a million on his open note, with several smart boys from up Boston way, coming in and taking ten million dollars from under the very nose of the watch-dogs of finance, it should not appear too facetious to suggest the creation of another bureau or commission. That is, a commission of some kind to protect the Napoleons of finance as well as the investors, for the Napoleons lost fifteen millions through Whitney and the Investment Trust looters in less than fifteen months.