1903-11-02-New York Times-Smith Says Shipyard Trust Was A Swindle

New York Times

2 November 1903, page 1

SMITH SAYS SHIPYARD TRUST WAS A SWINDLE

Declares Directors Made Gift of $55,000,000 of Securities. SCORES BETHLEHEM DEAL Recommends Receiver for Steel Plant and Suit to Recover Bonuses from Vendors and Promoters.

Upon Charles M. Schwab a large part of the blame for wrecking the United States Shipbuilding Company is placed by ex-Senator James Smith, whose report as receiver of the trust will be filed this morning in the United States District Court, presided over by Judge Andrew Kirkpatrick in Newark, N.J. The contents of the report, a document of more than 30,000 words, were made public yesterday afternoon at the New York office of the receiver, 43 Cedar Street.

According to the report, the organizers of the shipyard trust made false reports both as to the earnings and properties of the shipbuilding concerns and the Bethlehem Steel Company. John W. Young, the promoter, he describes as simply a medium for the transactions of the "instigators." Mr. Schwab, he says, admittedly received some of the "plunder" of the "artistic swindle." The purchase of the Bethlehem works, engineered by Mr. Schwab, is declared to have had much to do with the trust's ruin. That transaction, the receiver states emphatically, was accompanied by fraud.

In the voluminous report no one connected with the organization, financing, or demise of the combination escapes some measure of blame either applied directly or indirectly. No doubt as to the receiver's views is possible after reading what he has to say, and he goes so far as to say that all the stock bonuses given away to vendors and promoters are recoverable by the combination under the law, and that those who received them are responsible for having taken what they had no right to take.

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WORK OF DUMMY OFFICIALS.

After stating that he has made faithful appraisals of all the shipyard and constituent properties, (except the Bath and Hyde Companies, of which inventories are being made at present.) the receiver recalls the original meetings of the dummy Directors and the election of the dummy President, Mr. Newman, on June 24, 1902. Then these dummy Directors received from John W. Young the offer to turn over to them the shipyard properties, including the Bethlehem Steel Works. The letter of Mr. Young to the Directors is quoted in full. It gives in all details the terms of each vendor. The plants to be incorporated were those of the Union Iron Works of San Francisco, Harlan & Hollingsworth of Wilmington, Canda Manufacturing Company of Cartaret, Samuel L. Moore & Sons Company of Elizabethport, Bath Iron Works and Hyde Windlass Company of Maine, Crescent Shipyard Company of Elizabethport, and the Bethlehem Steel Company of Bethlehem.

In the letter were included the statements giving the alleged financial statuses of the concerns--earnings, working capital, &c. To use the words of the receiver: "Upon the receipt of this offer the Directors above named, holding no stock whatever in the company, but at most a mere subscriptive right, by assignment, to one share each, adopted a resolution accepting the offer at the price named, $70,997,000, and then further resolved:

That for the purpose of enabling this company to accept the foregoing offer, it shall as soon as practicable take the steps required by law for the increase of its authorized capital stock from thirty shares of $100 each, fifteen shares of which are preferred stock and fifteen shares of which are common stock to 450,000 shares of $100 each, 200,000 shares of which shall be preferred stock, and 250,000 shares of which shall be common stock, making a total authorized capital stock of $45,000,000, of which $20,000,000 par value shall be preferred stock, and $25,000,000 par value shall be common stock;

Further resolved, That the officers of this company be and they hereby are authorized and directed to make, execute, and deliver to the Mercantile Trust Company as Trustee, a mortgage or deed of trust upon the properties purchased pursuant to the offer of said John W. Young, (exclusive of the shares of stock of the Bethlehem Steel Company, to secure the payment of $16,000,000 par value of first mortgage 5 per cent, thirty-year sinking-fund gold bonds, Series A, of this company, payable in 1932, with coupons for interest thereon, payable semi-annually, and that said officers be and they hereby are authorized to make and duly execute and deliver $16,000,000 in par value of said bonds;

THE MORTGAGE ARRANGEMENTS.

Further resolved, That the proper officers of this company be, and they hereby are authorized and directed to make, execute, and deliver a mortgage or deed of trust to the New York Security and Trust Company, as trustee, of the shares of the capital stock of the Bethlehem Steel Company so purchased under the aforesaid offer of John W. Young to secure the payment of $10,000,000 par value of the 5 per cent, twenty-year gold bonds of this company, which mortgage shall contain the provisions required under the terms of said offer, and (subject to the priority of the said $16,000,000, and that said officers be, adn they hereby are authorized to make and duly execute and deliver $10,000,000 in par value of 5 per cent, twenty-year gold bonds to be secured by said $10,000,000 mortgage, payable in 1922, with coupons for interest thereon, payable semi-annually.

Further resolved, That the officers of this company by, and they are hereby authorized to execute, issue and deliver to the said Young or his nominee, upon the receipt of suitable instruments of transfer, conveying, selling, assigning, transferring andsettling over to this company the property described in said offer, the first mortgage 5 per cent, sinking fund gold bonds of this company, Series A, of the aggregate par value of $16,000,000, and twenty-year 5 per cent, gold bonds of the aggregate par value of $10,000,000, and (when the capital stock of this company shall have been increased as provided in the foregoing resolution) a certificate or certificates for 199,985 shares of the preferred capital stock of this company of the par value of $100 each, and for 249,985 shares of the common capital stock of this company of the par value of $100 each, all of said shares of stock to be issued as full paid non-assessable stock, in payment, together with said bonds, for the property so sold, conveyed, assigned, transferred, and set over to this company.

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BELIEVES RECORDS FALSE.

It was stated by the dummy Directors, continues the report, that the purchase was based upon financial reports made by W. T. Simpson and the firm of Riddle & Common, expert accountants, except regarding the Bethlehem Works. The report as to the latter came from Jones, Caesar & Co., accountants. As a matter of fact, says the receiver, the reports did not indicate such figures as were given out by the so-called Directors. Of this he says:

A comparison of the figures alleged to have been relied upon by the Board of Directors in accepting the offer of John W. Young, with the true figures ascertained from an examination of the subsidiary companies subsequent to the purchase of said plants, disclose so great a variance as to impel the belief that the figures contained in the minutes were wilfully misstated. It is extremely doubtful whether any report was submitted by any accountants made as of that time, as the minutes recite.

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"Who participated in this wholesale plunder?" he continues, "The testimony now being taken… will doubtless disclose the names of all the participants; but as such testimony will be submitted to this court for action, your receiver does not deem it proper to comment upon it here. Certain it is that much of this vast amount of stock and bonds was taken by persons and corporations who parted with little or no considerations in exchange therefor. Blocks of the stock went to the vendors of the constituent plants and to the purchasers of bonds, as bonus, absolutely without benefit to the company; $20,000,000 of it admittedly went ot Mr. Charles M. Schwab in addition to the agreed price for Bethlehem. Some of it went to the promoters of this artistic swindle; and when all had been provided for, what was left of the bonds, amounting to $1,500,000 was handed back to the company, ostensibly to supply it with 'working capital.' "

The prices paid for the plants were in all cases excessive, says the report, and the total amount of preferred stock and bonds that went to promoters and vendors without their returning value therefor was $24,500,000 in bonds and $44,997,000 in preferred stock. In reality, he concludes, the bonds were the full payment for the properties, and the stocks may be recovered under the law from those who received them.

The debts of the individual concerns were the "culpability of the United States Shipbuilding Company's Directors and others." The dummies were but figureheads. John W. Young wias the medium for presenting the combination proposition to them. The purchase of the various concerns was "absolutely without intelligent and independent representation." There were no independent appraisements. No steps were taken to protect the United States Shipbuilding Company, its creditors, and others interested in it, besides the instigators of the deal.

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