The Outfit (28 page)

However, by the midthirties, after three decades of sharing its bookie-derived profits with its shareholders, AT&T felt sufficient pressure from the FCC to abandon the race wire. By this time, Western Union was in such dire financial straits that it was more than willing to jump back into the game. With its transmission lines in great disrepair since their construction six decades earlier, and with the advent of air mail, Western Union was in a financial free fall, and desperate for a cash influx. But another factor appeared to sound the death knell for the company. According to a 1939 FCC report, “the financial condition of Western Union is definitely unfavorable . . . Probably the most important factor contributing to these conditions is the development of competing forms of communication.” In other words, the telephone.

Alexander Graham Bell’s invention had by now so proliferated that fewer Americans than ever were reliant on the telegraph for fast communication. To make matters worse, in 1937 the Department of Justice had filed charges against Western Union, alleging violations of the Sherman Anti-Trust Act. Stockholders feared the utility was about to come under increased federal supervision as a result of its monopolistic practices. A Senate report on the telegraph industry in 1939 summed up the situation, pointing out that Western Union profits in 1938 were down $38,529,000, or 31.1 percent, since 1926. Thus, when the race-wire gangsters came calling, Western Union gratefully accepted the deal. Years later, a congressional committee chaired by Senator Ernest McFarland uncovered an internal Western Union memorandum from the company’s vice president urging his board “to pursue expeditious handling” of the race-wire business, noting that the corporation could expect to earn over $30,000 per month in much needed profits.

Like AT&T before it, Western Union could not be bothered to cooperate with government investigators. In one of its few swipes at corporate white-collar crime, the Senate’s 1951 Kefauver Committee described the company’s hubris:

The backbone of the wire service which provides gambling information to bookmakers is the leased lines of the Western Union Telegraph Company. This company, in many parts of the country, has not been fully cooperative with law-enforcement officials who have been trying to suppress organized criminal rackets which make use of telegraph facilities. By permitting its facilities to be used by bookmakers, Western Union has given aid and comfort to those engaged in violation of gambling laws. In some cases, Western Union officials and employees actually participated in bookmaking conspiracies by accepting bets and transmitting them to bookmakers.

Appearing before McFarland’s committee, the heads of both AT&T and Western Union played dumb, attempting to convince the probers that they had no inkling of who leased their lines or for what purpose. An exchange between the committee and Western Union’s Assistant Vice President Walter Semingsen was typical and revealing. McFarland’s interrogation of Semingsen is worth reprinting at length, so revelatory it is about the upperworld’s attitude toward, and involvement in, the propagation of organized crime. The ludicrous back-and-forth comprises dozens of pages of testimony, with exchanges that presaged both the self-serving responses of the jukebox manufacturers, and the end-of-century strained testimony by tobacco-company executives professing that nicotine is not addictive. At one point in the hearings, Senators Tobey and McFarland expressed disbelief when the company VP claimed to have no interest in what was being transmitted over the company’s wires:

Semingsen: “We have no way of knowing about illegal use of these facilities until the law-enforcement authorities so inform us.”

Tobey: “What do you think goes on? . . . The point is that these [wire] messages are their means of doing business and carry information on which the bets are based. Is that not correct?”

Semingsen: “I do not know.”

Tobey: “What do you think they are used for?”

Semingsen: “I have never been in any of the establishments, and I could not tell you personally.”

Senator McFarland then ticked off the names of dozens of “racing information” parlors in different states that leased the wires, asking, one by one, what Semingsen believed they did with the information. To each query Semingsen’s responses were similar: “I have not the slightest idea,” “I have no way of knowing,” “I have not the slightest idea how they make use of the information.” Tobey then began to lose his temper.

Tobey: “Do you know what the trouble is in this country? Nobody accepts responsibility . . . We know that these lines are being used for disseminating race track information. We know it is so; you know it is so. A child six years old knows that.”

Semingsen: “I disagree with you. We do not know it is so.”

Tobey: “Do you mean to stand there and say, under oath, that in your judgment you do not know that these leases are being used for disseminating race track information? . . . When you carry the information into the state where bookmaking is illegal, you become an accessory after the fact, do you not?”

Semingsen: “You are assuming that all these persons to whom we are leasing facilities are bookmakers.”

Tobey: “No; I do not assume that at all. I assume some of them are, and so do you . . . The moral law - the law of society - does not interest you a bit, as long as you get the revenue; is that right? . . . Western Union is a necessary cog when the Western Union is used to accept money from the bettor and transmit it to the bettee, through their offices, by accepting the money and paying out at the other end on the facts circumscribed in the telegram; is that right?”

Semingsen: “That is correct.”

Tobey: “I should think - and I say this without prejudice - that certainly makes Western Union a party to the illegal transaction of business, because in some states those things are illegal.”

Semingsen: “ . . . I do not know what the laws are.”

In the end, not one director or employee of Western Union or AT&T was ever charged with collusion in the bookmaking racket. The huge profits they reaped from illegal betting were somehow deemed beyond the law, whereas countless underworld bookies in the Outfit and other crime consortiums regularly faced the prospect of hard time.

In contrast to the free ride given to the white-collar criminals, Moe Annenberg felt the full weight of the government’s muscle. In 1935, the combative, omnipresent Elmer Irey focused his attention on Annenberg’s operation. Instead of investigating “the backbone of the wire service,” Western Union, its stockholders, or board of directors (such as Vincent Astor, Percy Rockefeller, Paul Warburg, William Truesdale, Donald Geddes, William Vanderbilt, W. A. Harriman, and Jay Cooke), Irey’s IRS chose to persecute the most recent immigrants, such as Annenberg, to have become millionaires. After all, Western Union’s founder, Ezra Cornell, had long ago legitimized his company when he endowed Cornell University. For Annenberg and the gangsters, this lack of prestige-purchasing turned out to be a key oversight.

After studying Annenberg’s books for a full five years, Irey’s men garnered enough evidence to indict Moe for
$5.5
million in tax evasion. Also named was Annenberg’s son Walter, who had initially pleaded with Moe not to get into the wire business, but had eventually helped run the company. However, when Moe agreed to take the fall and pay an $8million fine (the largest personal tax fine to date), he negotiated his boy’s removal from the charge. Due to the diagnosis of a terminal brain tumor, Annenberg was released from prison after having served two years of a three-year sentence. He died at home on June 11, 1942. Since few large corporations could survive five years of such scrutiny, the question was begged, why did Irey target Annenberg in the first place? The answer appears to be twofold. First, Annenberg attained his wealth too quickly, and with the cooperation of Capone and the Outfit, infuriating old-money types, who promulgated the charade that they themselves would never engage in illegal activities. The nouveau riche have always been snubbed. After years of frustration in trying to prove that the wire operators knew about the hoods at the other end of their transmissions, the feds fell back on the dogs of the IRS.

In his decision, the presiding judge in Annenberg’s case delivered closing remarks that weakly attempted to explain why he could not vacate a jail sentence altogether. To do so, the judge said, would be to say to all businessmen, “you may organize your affairs in a network of corporations and avoid the payment of your just taxes, and when called to account by the Government for what you really owe, nothing worse will happen to you than to be compelled to pay what you would have paid long ago.” That sort of privilege, after all, was reserved for Western Union, AT&T, the Morgans, Rockefellers, Du Ponts, and assorted other robber barons.

Second, Annenberg had drawn the ire of the notoriously thin-skinned President Franklin Roosevelt. For months Annenberg had used the bully pulpit of his influential
Philadelphia Inquirer
to editorialize against what he perceived to be the shortcomings of FDR’s New Deal. Annenberg was not alone in concluding that, while FDR deserved praise for his success in jump-starting a flagging economy, many New Deal entitlement policies were destroying initiative and encouraging strikers to demand more concessions from the business world. Furthermore, Annenberg supported the Republican slate in Pennsylvania and rubbed FDR’s nose in it when the Republicans triumphed. PENNSYLVANIA HAS REPUDIATED THE NEW DEAL screamed the
Inquirer’s
headline.

In a paranoid style that would have impressed Richard Nixon three decades later, Roosevelt tasked his treasury secretary and attorney general with investigating the tax status of his enemies in the press. After attempting to instigate legislation that would label policy dissenters as criminals (Moe promptly called the move Hitler-like), Roosevelt’s senior aides stepped up their attack. Soon, Roosevelt met with Attorney General Homer Cummings to discuss tax delinquents, singling out Annenberg and demanding, “I want him in jail.” When Treasury Secretary Henry Morgenthau met Roosevelt for lunch, he asked the president if he could do anything for him. “Yes,” a seething Roosevelt replied. “I want Moe Annenberg for dinner.” To which Morgenthau replied, “You’re going to have him for breakfast - fried.”

Eventually, Roosevelt prevailed, thanks to Irey’s IRS. In discussing presidential abuse of the tax code, David Burnham, author of
A Law Unto Itself: Power, Politics and the IRS,
wrote, “President Franklin Delano Roosevelt may have been the champion abuser.” Under pressure from the feds, Nationwide was forced to cancel its contract with AT&T, which was itself attempting to escape prosecution from the previously noted FCC probe. In its desire to escape the FCC’s clutches, AT&T got out of the race-wire business altogether. Moe’s son Walter quickly struck up a deal with the struggling Western Union.

Democrats themselves quietly admitted that Annenberg’s prosecution was nothing short of a White House-directed vendetta. They knew that had Moe’s anti-New Deal editorials appeared in the
Lubbock Avalanche,
Roosevelt could have ignored them. But his adversary could not be granted a forum as visible as the
Inquirer.
As discovered by Annenberg’s biographer Christopher Ogden, even the IRS accountant who dissected Annenberg’s books knew the case was a sham. The accountant, William Hopewell, wrote to Walter Annenberg in 1981, “The tremendous injustice done to him has been on my mind - on and off - for years. I am sure your father was not guilty as charged.” Moe Annenberg concluded the obvious in an
Inquirer
editorial: He had been indicted because “it was important to the Democratic Party that I be destroyed prior to the 1940 elections.”

After his indictment on August 11, 1939, Moe Annenberg walked away from the Nationwide wire business in exchange for the government’s sparing of his son Walter. A mere five days after Nationwide ceased operations, Continental Press was established, allegedly after the new owner, Mickey McBride, paid Annenberg for his infrastructure. In short time, McBride sold Continental to James Ragen, who finessed the legalities of the wire business by selling his race information to distributors, not directly to illegal bookies. “Selling information is legal, [and] what the distributors did with it is none of my concern,” Ragen said, sounding remarkably like his upperworld counterparts at Western Union. When Congress investigated Continental in 1951, it was likewise not fooled by Ragen’s insouciance. It determined that Continental received wildly varying weekly fees from its distributors (from $500 to $10,000 per week), depending on how much “business” they did with the information. One congressional probe, the McFarland Committee, concluded: “The facts support the thesis that Continental today has a near monopoly in the transmission of racing news which ultimately reaches the bookmakers in the country. Continental does choose its distributors, assigns them exclusive territories, and charges them on the basis of size and amount of business done in such territory.”

A second federal inquiry added: “[Continental’s distributors] are nearly all dummies, set up to insulate the Continental Press Service against the charge that it deals directly with persons engaged in illegal operations.”

This then was the atmosphere when, in 1946, the Outfit got serious about its desire to control the underworld sector of the wire business. For years, Ragen, owner of Continental Press, had rebuffed Outfit attempts to work their way into his operation. Ragen later testified that he had once been approached by Frank Nitti, who told him, “If you come along with us, we will kill [owner] Annenberg in twenty-four hours.” Ragen refused, and Annenberg mollified the gang by paying them $1 million a year in protection fees. For years under Annenberg, Nationwide had coexisted in a delicate standoff with the Outfit, but now Nationwide’s descendant, Ragen’s Continental, began to view the Outfit as its enemy.