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Wall Street History
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06/21/2002
Richard Whitney
Over the past few months we have taken a look at some of the
true scumbags of the 1920s. But while I have featured leaders
from the era like Albert Wiggin and Charles Mitchell, CEO’s of
Chase and National City Banks, respectively, who were
eventually indicted, only one big time figure from the era
actually served jail time Richard Whitney.
If ever there was a poster boy for the Twenties and the great Bull
Market that ended in the Crash, it was Whitney. Captain of his
baseball team at Groton, a leading prep school in the northeast,
and a member of the crew at Harvard, Whitney’s Brahmin
background was typical of many of the movers and shakers back
then.
He started out dealing mostly in bonds at his own firm, Richard
Whitney & Company. A member of the New York Stock
Exchange since 1912, by the time 1929 rolled around, he was
vice president and, when the president, E.H.H. Simmons, went
on an extended honeymoon in Hawaii that fall (timing is
everything), Whitney became acting president of the NYSE.
Whitney’s claim to fame during this time was the fact that he
was J.P. Morgan & Co.’s broker, as his brother George was a big
partner at Morgan. Richard lived large, with homes on the East
Side and an estate in Far Hills, N.J. (horse country, for those of
you not too familiar with the area). He was known to spend
some $5,000 a month, at a time when an annual salary of $2,500
was considered middle class.
The problem was that even though he was Morgan’s broker, they
really didn’t give him much business and so Whitney, an
inveterate gambler on penny stocks, as well as on more
established companies, took to borrowing money; from his
brother, friends, associates, you name it he hit them all up to
cover his investment losses.
Well, as noted in earlier pieces from the era, along comes Black
Thursday, October 24, 1929. You’ll recall the Dow Jones topped
out at 381 on the prior September 3rd, but by Wednesday,
October 23, the Dow had slipped to 305 and there was growing
concern that the bubble was about to burst.
As the market opened on Thursday, all hell broke loose. Within
an hour the brokerage firms were overwhelmed with sell orders
and the Dow had tumbled to 272 on record volume. The tape
would end up being over 4 hours late that day and as the Federal
Reserve Board was meeting in Washington to decide whether or
not there was anything they could do (they ended up sitting on
their hands), the leading bankers on Wall Street (including
Mitchell and Wiggin) gathered at Morgan’s offices to form a
“pool,” raising $130 million to be spent on selected blue chips in
the hope that this would stop the panic and bring some level of
confidence back into the market.
Richard Whitney was chosen as the pool’s agent and went to the
Exchange around 1:30 PM to walk the floor. Stopping at the post
for U.S. Steel, he announced in a loud voice, “I bid 205 for
10,000 Steel.” A huge cry went up and Whitney made similar
purchases of AT&T, Anaconda Copper and General Electric,
among others.
The moves had their desired effect and the Dow Jones roared
back, closing Black Thursday at 299, off just six points from the
prior day. The Dow then finished at 301 and 298 on Friday and
Saturday (yes, they schlepped into work on Saturdays in those
days) and all seemed to be back to normal.
But the panic set in again on Monday, the 28th, with the Dow
closing at 260, and then the climax was reached on Black
Tuesday, October 29, with the key barometer finishing at 230.
Wall Street was inundated with paper and the brokerage firms
couldn’t keep up with the volume, so Whitney (remember, his
boss is still having a blast in Hawaii) decided that after opening
late on Thursday, the market would close for two days to allow
everyone to settle down a bit. [The Dow ended the week with a
rally back to 271.]
Whitney was a hero to many and seen as the savior of the market
(which was greatly overblown since he was only acting for
others, and with their money to boot). Early in 1930 it was then
decided that he should formally become the president of the New
York Stock Exchange (I never did see if Simmons came back)
and Whitney took it upon himself to travel around, giving
speeches stressing the personal integrity of the Wall Street
brokerage community.
All along, though, no one seemed to realize that Richard
Whitney & Co., his firm, was going under, thanks to Whitney’s
incredibly poor investing. He would lose a $million, borrow
from his brother or friends, and then double down, thereby
compounding his problems. As historian John Steele Gordon
notes, by 1931 Whitney was at least $2 million in debt, but he
kept up his lifestyle. How was he able to do this? If he couldn’t
borrow, he stole.
The New York Times would later report that Whitney “stole
from his customers and looted an exchange fund to aid widows
and orphans,” all as he kept trying to recoup losses going back to
the Crash.
But during the time while Whitney was still president of the Big
Board, FDR and Congress were beginning to look into the causes
of the Crash. In 1933 Whitney was the first witness called by
Ferdinand Pecora, chief congressional counsel to the hearings
which would bear his name. Whitney claimed that the Exchange
was a “perfect institution,” but that it bore no responsibility for
any of the information (as in prospectuses) associated with its
offerings, the Street merely being a market place for the sale of
stocks and bonds.
But as the Securities Act of 1933 and the Securities and Exchange
Commission (1934) were being legislated into existence, Whitney
had to backpedal and accept some regulation of the NYSE, though
he tried to act before the government forced him to and the
Exchange finally abolished the practices of investment pools, as
well as forbidding specialists from giving inside information to
family and friends.
[This era is, of course, very much in the news these days, as
many of the miscreants have violated rules going back to 1933-
34.]
Whitney was able to prevent one item from being outlawed,
short-selling, as the Securities and Exchange Act merely
prohibited “manipulation.” [Selling short only on an uptick, for
example.] Nonetheless, by 1935 the board members at the
NYSE forced Whitney to give up the president’s title and he
went back to simply running his firm, which wasn’t a good thing
either.
As he struggled with his debts, still managing to keep much of it
secret, Whitney was stealing from everyone, all of it reaching a
climax in 1937 when he embezzled up to $1 million from the
Exchange’s Gratuity Fund, which had been established to pay
out $20,000 to the estate of every member upon his death.
Whitney was a trustee, so he looted it.
Eventually, this last action was discovered in an audit, as the
Exchange kept asking Whitney, first, where the money was, and,
second, to replace it. Needless to say his borrowing days were
over at this point, but the scandal was kept quiet in order to avoid
embarrassing the whole Street. Finally on March 8, 1938, 5
minutes after opening, the gong was sounded, announcing a halt
in trading as from the rostrum the following statement was read:
“In the course of an examination of the affairs of Richard
Whitney & Company, the Committee on Business Conduct
discovered on March 1, 1938, evidence of conduct apparently
contrary to just and equitable principles of trade, and on Monday,
March 7, 1938, at 1:30 PM presented to a special meeting of the
Governing Committee charges and specifications. Hearing on
the charges was set for March 17 This morning the firm of
Richard Whitney & Company advised the Exchange that it was
unable to meet its obligations and its suspension for insolvency
was announced from the rostrum of the Exchange shortly after
10:00 AM.”
Events then proceeded quickly, as Whitney was indicted on
March 10 by a rather ambitious District Attorney, one Thomas
Dewey (shades of today?), on March 15 he was arrested, again,
while on the 17th he was expelled from the Exchange and on
March 25 filed for personal bankruptcy.
Pleading guilty to two charges of embezzling $109,000 from the
New York Yacht Club and $105,000 from his father-in-law (he
also looted his own wife’s trust fund, let alone the Gratuity
scam), Whitney was sentenced on April 11 to 5-10 years in
prison and led away to Sing-Sing, eventually gaining parole in
1941.
The presiding judge addressed Whitney at the sentencing.
“To cover up your thefts and your insolvency, you resorted to
larcenies, frauds, misrepresentations and falsifications of books
and financial statements causing losses of several millions of
dollars.”
As a result of the Whitney scandal, however, the SEC mandated
more frequent audits of member firms, as well as restrictions on
the amount of debt they could hold. Customer accounts were also
finally segregated from the firm’s assets.
Lastly, in doing the research for this piece, there was this item on
the front page of the New York World, Friday, October 25, in
describing the action of Black Thursday.
“In a society built largely on confidence, with real wealth
expressed more or less inaccurately by pieces of paper, the entire
fabric of economic stability threatened to come toppling down.”
Sounds like an advertisement for gold!
Wall Street History will return next week. I’m running out of
1920s dirtballs to write about, but I’ll find one for you.
Sources:
“The Great Game,” John Steele Gordon
“The New York Times Century of Business,” Floyd Norris and
Christine Bockelmann
“Rainbow’s End,” Maury Klein
“Wall Street: A History,” Charles Geisst
“Eyewitness to Wall Street,” David Colbert
“Money, Greed, and Risk,” Charles R. Morris
Brian Trumbore
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