Fraudsters and Charlatans (33 page)

In 1897 Wright formed the new London and Globe to absorb all his previous holdings, with a capital of £2,000,000, and filled the board with the names of men who would inspire confidence. Many shareholders in the company were later to state that they invested ‘secure in the easy conviction that all must go well in a concern with which so distinguished and honoured a name as that of Lord Dufferin was connected'.
⁹
Lord Dufferin's biographer commented that it was strange that the personnel of a board of directors was more material to investors than the inherent soundness of the enterprise, but that ‘the easy process of glancing at the names of the directorate, and making
that
the main criterion, seems to exercise the greater fascination'.
¹⁰
Before accepting the chairmanship, Dufferin had taken the precaution of making enquiries about the duties of such a role and was reassured that the financial interests of the company would continue to remain in the hands of the managing director. To show his confidence in the company, he bought 5,000 shares at 30
s
each.

In December 1897 Wright formed the British America Company (Brit-Am) with the same directors as Globe, which acquired mining properties in British Columbia, and in 1898 he formed the Standard Exploration Company (Standard) with share capital of £1,500,000, whose directors were Lord Donoughmore, a former member of the Council of the Royal Geographic Society, the Australian-born solicitor Howard Spensley, and a Cape Town merchant, Sinclair Macleay. This company acquired Wright's earlier unsuccessful ventures in return for a million £1 shares. A further 213,848 £1 shares were purchased by Globe, and, when the rest were offered on the stock market, another £286,152 poured into the company coffers. No doubt the public believed that the £500,000 in cash now in Standard's bank would be expended on developing its impressive-looking list of assets, but this was not the case. In the years since the youthful Whitaker Wright had prospected in the Wild West he had lost interest in the development of mines. The properties on Standard's balance sheet were in a state of neglect, and there were no plans to spend any more on them than was strictly necessary. Wright's object was to utilise the companies as window-dressing, to enhance the image of Standard and to bring in investors' money for the occupation that was by now his passion – speculation on the Stock Exchange.

Globe, Standard and Brit-Am all had their offices at the same address, Whitaker Wright's large new premises at 43 Lothbury, and were managed by the same team of clerks. Wright kept a careful watch on the markets and in particular dealings in shares in his companies. When Globe made an issue of shares in a mine called Le Roi No. 2, it was initially unsuccessful. Out of 600,000 shares only 50,000 were sold, and Globe and Brit-Am bought up the rest. Wright – and as later became apparent, all activities of this nature were carried out by Wright with little or no input from the other directors – now indulged in what he later described as a ‘usual policy . . .of . . . “supporting the market”',
¹¹
and bought up every share in Le Roi No. 2 that was offered for sale. The poor initial take-up of the shares had created a ‘bear' market – speculators were entering into contracts to sell shares they did not yet own, anticipating a drop in price before they needed to buy to fulfil their commitments, so that when the settling date came round they could pocket the difference. Wright made use of this situation by contracting to purchase more shares than actually existed. When the accounting date arrived, he had cornered the market and the bears discovered that they were unable to deliver what they had agreed to sell. They were obliged to bid among themselves for shares to deliver, and when the price of the £1 shares rocketed to £25, Globe sold part of its holdings, realising a profit of £124,000. Wright made a personal profit of £50,000.

Wright, now lauded as a Midas among men, established a private life to match. He bought an elegantly furnished home in Park Lane and two yachts, the
Sybarita
and
White Wings
. In 1896 he purchased Lea Park near Godalming, together with an adjoining farm. The 2,000-acre estate, now called Witley Park, cost £250,000, but over the next three years he spent more than £1 million creating a palatial retreat. The natural beauty of the landscape did not appeal to him, and so he drafted in hundreds of workmen to bend nature to his design. Hills were removed and new ones created; artificial lakes were stocked with trout; terraces, rare trees, fountains, pagodas and costly marble statues – which were his especial passion – abounded. On the largest lake a boat would take visitors into a grotto resembling something out of an Eastern fairy tale, with rich and exotic decoration. Underneath the lake was a conservatory with a glass roof, where the owner could cool his great bulk in the heat of summer. The house was naturally fitted with every modern comfort and also boasted a ballroom, a private theatre, an observatory and elegant oriental furniture. Even the stables, large enough for fifty horses, were adorned with decorative mouldings depicting hunting scenes. Wright, who lavishly entertained both aristocracy and royalty, must have believed it was only a matter of time before he added a title to his name.

By the autumn of 1899 Wright was looking for another coup. The manager of the Lake View mine had reported a handsome monthly output of 30,000 ounces of gold, which he thought could be kept up indefinitely, and Wright decided to acquire all the shares he could. Unfortunately, most of Globe's available cash had been spent on railway development. Wright took a gamble, borrowing money from Standard to buy Lake Views, but the output rapidly dropped to 10,000 ounces a month and the value of the shares fell. Whitaker Wright had learned nothing from his American business failure. His companies were launched on a tide of optimism, leaving no room for recession. They were asset-rich, but those assets were shares in other speculative ventures. When he got into difficulties, there was no legitimate way to ride out hard times. Globe was obliged to sell at a loss just to stay in business. Globe and Standard lost over £1 million between them.

This disaster could not have happened at a worse time. Settling day on the Stock Exchange was 29 September, and the very next day was Globe's accounting date. There was no time for the ailing company to recoup its losses before it needed to report to the shareholders. Wright dared not reveal the truth and decided to delude the shareholders into thinking that the company was prospering, to give him enough time to stage a recovery. He desperately needed to boost Globe's bank balance to a level that would pay a dividend and in such a way that the money appeared to have come from trading profits. The man who had remoulded nature on his estate now fashioned a new financial reality. In just a few days, £359,000 was milked from Standard in a series of transactions that went largely unrecorded in its books and were reversed soon after the balance-sheet date. Loans of £84,000 were repaid to Globe, and Standard provided another £275,000 in share deals, the largest of which was its purchase of 6,888 Lake View shares. The market value of Lake View was then £8 a share, but Standard bought them at £23. Not that Globe had 6,888 shares to sell. It was obliged to borrow almost 3,000 from Whitaker Wright to make up the amount. This was only part of the fraud. Standard, as Wright well knew, did not have £359,000 to pay to Globe. It was forced to borrow £113,000 from Brit-Am, £140,000 from brokers and £40,000 from Wright to make up the total.

In October 1899 Globe presented its accounts for the year ended 30 September. Lord Dufferin, who as usual was reading a speech written by Whitaker Wright, told the shareholders that ‘the corporation was never in a sounder condition than it is at present'.
¹²
The accounts showed profits for the year of £483,000 and £534,455 in cash at the bank, ‘one of the best witnesses we can point to in support of the success of our operations'.
¹³
On this basis, said Dufferin, it would have been possible to declare a dividend of 25 per cent, but the company's financial policy dictated a more prudent 10 per cent. Wright assured the shareholders that the Lake View mine ‘is just as good as ever it was', adding ‘you hold shares in a corporation about which you can feel perfectly easy in your minds'.
¹⁴
Everyone went away well satisfied, and many shareholders, on the strength of the report, went straight to their brokers and increased their holdings.

Lord Dufferin was beginning to find his chairmanship of London and Globe more arduous than expected. The strain and anxiety brought about by the realisation that he was bound to a company whose scale and complexity he could not begin to understand, coupled with his gradually failing health, meant that by 1899 he was hoping to be relieved of his post. He had stayed on only because of the resignation from the board of the ailing Lord Loch, aware that the departure of two directors at once could have been misinterpreted. He had asked his solicitor, Mr Leman, to sit in on board meetings to advise him, and Leman became a director on Loch's retirement, but Leman shared the confidence of his fellow directors in Whitaker Wright.

In November 1899 Wright was told by his accountant that he must lend the corporation £400,000 of his own money or close it down. He provided the funds, later claiming it was money he was about to settle on his children. It was now necessary for Wright to shore up Brit-Am, which was preparing its accounts up to 28 November and was in danger of showing a loss. Options valued at £250,000, Brit-Am's share of a joint venture with Globe, had been retained on the Globe balance sheet. They were returned to Brit-Am in time for them to appear on its balance sheet. The reversal of other transactions completed the restoration of Brit-Am's accounts to an outwardly healthy appearance, and the company was able to pay a dividend. On 27 February 1900, at the Brit-Am shareholders' meeting, Wright declared that the securities owned by Brit-Am were being quoted at 100 to 150 per cent over their balance-sheet value, a statement that Leman later described as ‘a mistake'.
¹⁵

Wright's hoped-for revival did not come. The magic was gone. In November 1900, in an article entitled ‘Why Westralians are Weak', the
Financial Times
stated that ‘share rigging has been the bane of the Westralian market',
¹⁶
also citing poor management and insufficient expenditure on development. Wright had been guilty of all three. Early in October 1900 Mr Worters, the then company accountant, brought a balance sheet to Whitaker Wright. In the previous twelve months the company had made a loss of £1,645,748, mostly in Stock Exchange speculations, and was insolvent. The correct thing for Whitaker Wright to have done was to present the bad news to the investors and wind up the company, but he was too used to a luxurious life, elegant social circles, the adulation of the City and the admiration of the public. He was not about to let this go, and so he planned instead to reverse Globe's fortunes by a massive financial coup beside which Le Roi No. 2 was insignificant. Even if he was to be successful, however, he would need time, and time was not on his side. The company accounts had by law to be presented before a shareholders' meeting within three months of the accounting date. To buy time he put off the balance-sheet date to 5 December and manipulated the figures to make it look as if the company was solvent.

Among Globe's many investments was a block of 200,000 shares in West Le Roi Company and another of 150,000 in Columbia Kootenay, two of Wright's Canadian companies. These companies had sold almost all their property to another company but had made no distribution out of the proceeds. Wright introduced a non-existent distribution, crediting Globe with the receipt of £213,000 from West Le Roi and £103,000 from Columbia Kootenay, making the necessary adjustments in the accounts of all three companies. He then sold the now worthless shares to Brit-Am for £350,000. Globe owed Brit-Am £250,000: Wright ensured this debt did not appear on the balance sheet by surrendering it to Brit-Am on 16 November. He then returned it to Globe on 13 December. Globe also had 75,000 £1 shares on its books in the virtually dormant Victorian Gold Estates, while Brit-Am had another 125,000. Wright quickly floated some new companies, which bought the Victorian Gold Estates properties at a hugely inflated price, and Brit-Am passed its shares, now valued at £500,000, to Globe at par. On 22 November an agreement was signed to sell some mining shares to Brit-Am ‘ex div', which meant that Globe retained the right to the next dividend. Wright later claimed that this was an error and they should have been sold ‘cum div' (with the dividend rights). Whatever the reason, the ‘error' increased the amount of Globe's assets by £250,000. Other liabilities for share purchases of £150,000 were simply omitted from the balance sheet. With these and a host of other manipulations, the balance sheet was in the black and the accounts now showed an adjusted loss on the year's operations of only £36,327. A sweep of the pen amalgamated this with a £500,000 depreciation reserve, creating an apparent profit of £463,673. The main element lacking on the Globe balance sheet was cash. Early in December £75,000 was transferred from Victorian Gold Estates and a further £25,000 was hired from a broker for two days at a cost of £500. By now, Wright's efforts to make a killing in Lake View shares was in full swing, with agreements in place to purchase 105,000 shares at a cost of over £1,400,000, and large numbers of other speculative transactions were open. Naturally, he did not want these desperate gambles to appear on the balance sheet, and on 29 November a directors' meeting attended only by Wright and Macleay passed a resolution transferring the bulk of the speculations to Brit-Am and Standard without informing any of the brokers involved.

The auditor, Mr Ford, had only a few days to provide accounts in time for the meeting, and at 2 a.m. on Sunday 15 December he was hard at work in the Globe offices. Henry Malcolm, who had succeeded Worters as company accountant, urged him to sign the balance sheet, but Ford refused to do so, as he had not been shown the brokers' written consents for the transfer of the open speculations. Malcolm assured him that he had all the consents and would supply them in the morning, and eventually, on that verbal assurance, Ford was persuaded to sign. Later that day he enquired after Malcolm and found that he had left London. He did not see Malcolm again until after the meeting of 16 December, when he discovered that the consents had neither been obtained nor requested. None of the massive speculations appeared in Globe's balance sheet at 5 December, and the transfers were reversed a few days later.