Texas' Frauds & Failures

Texas, which places a premium on superlatives, has the worst insurance laws in the nation. Because of poor enforcement, anybody in the state who can get a short-term loan for $10,000 can start an insurance company. There is nothing to prevent a promoter from writing up his assets far beyond actual value and, on this inflated base, selling stock and insurance. By such devices he can build a company up from nothing, sell out and take a capital gain. For these reasons Texas now has 1,884 insurance companies, more than all other states combined, and insurance is the state's second biggest business (after oil). Many of the promoters, for lack of a better corporate name, borrow a respected one from Britain: Lloyd's. In the last 16 months ten Texas insurance companies have gone broke; others are tottering. Last week, to nobody's great surprise, the Texas insurance mess was finally cracked wide open. District attorneys from four counties called for criminal prosecutions of get-rich-quick insurance promoters.

Storm No. 1. The storm first struck when the State Insurance Commission disclosed that Houston's big, two-year-old Lloyd's of North America was operating at a $427,000 deficit. After looking into Lloyd's books, the commission decided that the company had been "utterly and hopelessly insolvent from its inception." It found that Ralph W. Hammonds, an ex-Olympic wrestler (1928), had borrowed $20,000 to start Lloyd's, added $20,000 of his own, sold more than 50,000 policies his first year, and paid back his loan with part of the $1,700,000 he collected in premiums. The commission also charged that Hammonds had included $5,750 of real estate in his assets and written it up to $42,000.

Ex-Wrestler Hammonds, it turned out, paid John Van Cronkhite, Governor Allan Shivers' last campaign manager, $1,000 a month for advice on "public relations." Hammonds said he hired Van Cronkhite at the suggestion of Governor Shivers' executive assistant. Van Cronkhite was to "keep cordial relations with the State Insurance Commission," said Hammonds, and everything went along fine until Van Cronkhite wanted $2,000 a month. Denying that he had peddled influence, Van Cronkhite said: "I got sucked in ... As soon as I found out what the situation was ... I got out."

Storm No. 2. Hardly had the dust settled when a storm broke around another big company, the bankrupt Texas Mutual Co. Two appeals court justices accused Texas Mutual of "Ponzi-like manipulations" and called the State Insurance Commission guilty of "fraud if not criminal laxity" for not doing anything about it. Texas Mutual was organized in 1949 by Leslie Lowry, ex-mayor of Beaumont (ousted by recall), and his brother Paul. They started with $500 of their own cash and $19,500 borrowed. To expand their assets, said the court, the Lowry boys bought (with notes, no cash) a shabby, one-story building in Beaumont for $100,000, had three friends appraise it for $436,000.

The Lowrys then had State Senator William T. Moore, their attorney, who was also chairman of the senate insurance committee in the last legislature (which blocked reforms in Texas insurance laws), present the $436,000 appraisal to the insurance commission. Over a three-year period, Texas Mutual paid State Senator Moore $13,000. A state insurance examiner, said the court, performed "a specter of an audit" on Texas Mutual books but found nothing wrong, and the examiner later received $300 in cash from Paul Lowry. When Texas Mutual failed last year, it brought down three other Lowry insurance companies with it. Texas Mutual alone wrote 38,000 policies, and now it owes $1,200,000 on 1,600 claims.

Storm No. 3. The third storm broke around two El Paso firms, United Lloyd's and United World Life. At the companies' bankruptcy suit, it developed that ex-Texan Spencer L. Treharne (who is now living in New Mexico) got his license to start United Lloyd's on $55,000 borrowed from an El Paso bank and $5,000 of his own. The suit brought out that Treharne also took over a piece of real estate his father had just bought for $30,000 and wrote it up to $322,000. United Lloyd's wound up broke and about $450,000 in debt.

By week's end, State Senator Moore was scheduled to appear before a state bar committee to explain his Texas Mutual dealings. Governor Shivers investigated Van Cronkhite and announced that his ex-campaign manager had indeed been "sucked in" by Lloyd's of North America, would not be campaign manager this year.

Shivers then swiped at the Texas insurance industry and their manipulation of the legislature. Said the governor: "Too often the insurance companies in Texas have been too interested in using their legislative influence to run competitors out of business rather than to run abuses out of the business."

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