Dummies & Monkeys

In Washington last week the Interstate Commerce Commission heard with apparent favor Chesapeake & Ohio Railway's plan to acquire direct control of the Erie and Nickel Plate to tighten two loose strands in the old Van Sweringen network. C. & O.'s past connections with another strand, Chicago & Eastern Illinois, meanwhile came under the pained scrutiny of Montana's Senator Wheeler and his committee investigating railroad finance. The evidence provided the Senator with his best illustration to date of how the late exceptional Brothers "Van" dummied their way through deal after deal to get what they wanted in spite of the vigilance of both ICC and RFC.

One thing the Vans particularly wanted in 1929 was the C. & E. I. to connect their termini at St. Louis and Chicago. In its 1929 plan for the coordination of U. S. railroads, however, ICC not only included that road in the Chicago & North Western system but specifically disapproved its linkage with C. & O. This, it appeared last week, was no deterrent to the Van Sweringens. In January 1930, Chesapeake & Ohio paid $5,000,000 to the Boston brokerage house of Paine, Webber & Co., for an "option" on controlling securities in C. & E. I. Paine, Webber & Co., which did not then own the stock, proceeded on the same day to buy it from Guaranty Co., which had just bought it from Guaranty Trust Co., which had in turn made the actual purchase from the estate of the late Thomas Fortune Ryan. Total price to C. & O. was $8,000,000, some $2,000,000 above the market value of the stock.

After Francis Ward Paine of Paine, Webber admitted that while his firm held title to the stock it acted "practically as a dummy" for the Van Sweringens, Senator Wheeler produced a letter written to O. P. & M. J. Van Sweringen in March 1930, by Joseph R. Swan, then president of Guaranty Co. Mr. Swan's letter, introduced to prove that C. & O. really acquired no option but immediate control of C. & E. I., was an interesting sidelight on the dummy deal. Wrote he: "I very much need some profit for the Guaranty Co. in this quarter, and on that account wondered whether or not it would be possible for you to arrange that we should receive the commission in connection with the purchase by you for, I think, the Chesapeake & Ohio, of the Chicago & Eastern Illinois shares. . . ."

To Senator Wheeler the "option" was a "slick scheme" by which the Vans avoided having to get ICC's approval of C. & E. I.'s purchase until it was too late for ICC to act. On the stand, C. & O.'s old Chairman Herbert Fitzpatrick could only reply that it had been "necessary to operate that way at the time." Snorted the incensed Senator: "If the Interstate Commerce Commission lets the railroads get away with this kind of deal, we ought to have some new commissioners down there."

Next day the Senate committee heard how C. & E. I. figured in a later Van Sweringen trick. In 1932 Reconstruction Finance Corporation made a $3,000,000 loan to C. & E. I. to enable it to pay certain pressing obligations, including $700,000 ostensibly owing to Cleveland's Midland Bank. Fact was that as soon as Midland had made this loan in 1931, Chesapeake & Ohio bought the note, transferred it to its wholly owned subsidiary Virginia Transportation Corp. and thus eliminated the legal requirement that it report on the purchase to ICC. RFC unwittingly lent C. & E. I. money to pay back a loan from its parent corporation. This particular dummy deal was known to ICC as early as Nov. 5, 1932, when Examiner Le Roy Sprice Jr. wrote a memorandum on it to Commissioner Charles Delahunt Mahaffie: "I doubt if any violation of the act is involved, but, of course it is obvious that we were made monkeys of. . . ."

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