“So, what is there for me to investigate?”
“The activities of the Netherlands-Sumatra Company undermine the stability of the currency markets and, as most of their trades involve sterling, we have addressed our concerns to them. This is a matter of particular moment as a French investor, Baron Claude Maupertuis, has made an offer for the shares of the Company at 70% of its current market value on the Bourse. That the shares of the Company should attract so low an offer from him is surprising, and my view is that the speculator thinks he has identified some flaw in the Company’s operations. We have agreed with the current management of the Netherlands-Sumatra Company that you will go to Lyon and investigate its affairs.”
“But there are firms who specialise in the scrutiny of company accounts who would be far more capable of undertaking such an exercise than I would.”
“I fear, Mr Holmes,” and at this point the gravest look came over Sir Joseph’s face, “that the word of our major auditing firms—Pitt & Waterman, Delatour & Foss, for example—is no longer considered a sufficient guarantor of a company’s propriety. It is not long since another major firm of auditors, Trant Gorton, stated publicly that it did not see protecting shareholders from fraud as part of its duties, while the auditors of the building company, Bell & Peal Ltd., were unable to decide whether that company was owed or owed a sum of no less than two million pounds. And yet they still felt sufficiently sure of the probity of the financial statements that they pronounced that they gave a true and fair view of the company.”
He paused and I waited to see what he would say next.
“In this matter,” he continued eventually, “as with so many others, the word of Mr Sherlock Holmes will carry far more weight with the public than that of any so-called expert, and so set the collective mind at rest.”
“And why does the British Treasury need to be involved in this at all? The fate of a French based currency speculator is surely not its concern.”
“Ah, Mr Holmes, you underestimate the internationalism of capital markets. Half the British aristocracy has its capital tied up in the Netherlands-Sumatra Company, and its failure would have disastrous consequences for many of the noblest names in the country. And the Netherlands-Sumatra Company’s tentacles extend to the City of London as well, so we must consider, based on your work, whether the regulatory control we exercise here is sufficiently rigorous.”
“So, what drives currency movements?” I asked.
“The value of a country’s currency goes up and down dependent on two main factors. If it is anticipated that there will be a demand for the country’s goods which will require purchasers to buy that country’s currency, then the country’s currency will tend to rise. And if the country’s interest rates are more attractive to foreign depositors than that of its neighbours, that will encourage those depositors to buy its currency which will also make its currency increase in value. Equally, if its interest rates are lower or are thought likely to become lower, foreign depositors will sell that country’s currency and deposit their money where they can get a higher return.”
“You make yourself very plain,” I replied. “So, in essence, economic buoyancy should be met by higher interest rates to counter irrational exuberance, while a decline in economic activity should be countered by a lower interest rate to encourage commerce.”
I paused for thought as this type of analysis was a new departure for me. Having satisfied myself as to the accuracy of my observation, I appended the remark, “And a change in the interest rate is thus almost an admission that the previous rate was wrong and is hence an indication of a failure in the government’s stewardship of the economy.”
“My dear Mr Holmes!” exclaimed Sir Joseph. “It has been said that all the economists in the world could be laid end to end without reaching a conclusion. But in spite of your preference for criminal investigation, you have expressed the key facts of macro-economic theory in a few words. Although,” he continued, “as with forecasting the weather, moving interest rates is as much a matter of convincing the public that a measure is being taken than that the measure being taken is right. Your pithy summary confirms the wisdom of my decision to appoint you to conduct this investigation.”
There were very few further discussions before I found myself on the train to Lyon, location of the marble-columned headquarters of the Netherlands-Sumatra Company, which stands at the confluence of the Rhône and Saôn rivers, next door to the city’s ancient amphitheatre. I was soon before its managing director, Monsieur Henri le Piège. The tall Frenchman was effusive in his welcome.
“Ah, Monsieur Holmes,” he said, “Bienvenu! We would welcome your seal of approval on our accounts at this time of our travail. We here have nothing to hide but if we did, the world knows that you, if anyone, would find it. You may go where you like within our building, speak to anyone you wish, and look at any document you request.”
“And what did you find?” I asked, agog at this further example of my friend’s investigative prowess.
“I examined the company’s financial records. I examined its correspondence. I looked at the details behind all the accounting entries. I was given full authority to correspond with third parties that traded with the Netherlands-Sumatra Company.”
My friend paused, and I was unsure what great discovery he might disclose.
“I found nothing,” he eventually said, his eye not meeting mine.
“The company’s activities,” he continued eventually, “consisted of very few transactions—although big ones. It made its profits entirely as Porter had described to me. That is to say, it invested in currencies that were about to rise, and took short positions on currencies that were about to fall. And extremely good it was at it. I saw from its library of newspapers from around the world that it kept a close watch on the latest developments in the world’s economy and was thus well-placed to make the most of speculative opportunities. At the same time, its system of internal control was impeccable, with a clear trail behind every document.”
Holmes gave a sigh and inhaled deeply from his pipe at the recollection.
“I tried everything to see a pattern in how they achieved their results: I performed an analytical review of their margins; I went through all their correspondence; I spoke to counter-parties; I had full co-operation from the company’s employees.”
Holmes pulled again on his pipe and a wan expression crossed his face.
“The hardest thing to deal with,” he continued, an unwontedly forlorn tone in his voice, “was my conflict of interest. I found everything in order. Yet my every instinct told me that something was afoot. And all the while I knew that finding nothing was the outcome that satisfied most people—including, uniquely in all my cases, the person who had given me the commission. But no one would make an offer for a company at 30% below its market value without some knowledge that all was not as it seemed. In no investigation I have conducted so far did my work encompass so great a timespan for such meagre findings. I considered drawing up a report which advocated further authorisational controls on process, but, in truth, I had found no official document that had not been counter-signed in triplicate. I reported as much to Sir Joseph when I returned to London.”
“And what was his response when you told him this?”
“He told me to take whatever time I needed to get complete assurance on my opinion. Accordingly, I returned to Lyon and spent another two months in a fever of labour. At one point, M. le Piège found me slumped at my writing-desk where I had expired through sheer inanition.”
“And what happened next?”
“I telegraphed Sir Joseph in London and told him that I still had no adverse findings on the company’s state of affairs. By return I received a telegram summoning me to an urgent meeting at the Treasury.” Holmes then continued his narrative.
I was still not sure what reaction to expect fr
om Sir Joseph. Had he wanted me to find some flaw in the activities of the Netherlands-Sumatra Company which, if I understood him correctly, would lead to the ruin of many British families, but which would reinforce his reputation as a politician of sound judgment? Or did he want me to confirm that the current level of regulation of companies was sufficient to protect investors and the market?
My doubts were resolved instantly for Sir Joseph’s face broke into smiles when I saw him and expressed my considered opinion.
“This is excellent news,” he said. “Your exhaustive researches have revealed nothing untoward. Mr Holmes, if there were an annual prize for auditor of the year, you would not be eligible to win as you would be the competition’s judge—and a good judge too. Whatever else may be said about the accounts of the Netherlands-Sumatra Company, they now have received the imprimatur of one of the minds of the age. The trustees of widows and orphans will be able to sleep easy at night. Could you perhaps, Mr Holmes, purely as a matter of form, sign this piece of paper?”
He passed me over a document. It said:
“I have examined the financial statements of the Netherlands-Sumatra Company. In my opinion, these statements present in all material respects a true and fair view of the financial position of the company.”
“But the specialist auditing firms,” I objected, “are much more equivocal in what they state about a company’s affairs than you are asking me to be here. Indeed, their reports on companies’ accounts grow longer each year, and each year the greater length is due to the auditors freighting their reports with more and more limitations on what their own responsibilities are.”
“But the specialist auditing firms, Mr Holmes,” soothed Sir Joseph, “are not endowed with the preternatural investigative abilities which you possess. They cannot claim as you, with justification, do, to know the whole chain of life from seeing a single link in that chain. Thus, it is hardly likely that they would wish to be unequivocal in their opinions. With your widely discussed forensic skills, I am sure your signature applied to this document will assure the markets that the Netherlands-Sumatra Company is an organisation whose business can be trusted. And the world will be in your debt because you have been able to come to this conclusion.”
I signed, and Sir Joseph face became even more wreathed in smiles.
“Your name, Mr Holmes,” he purred, “will be in the press this very day.”
I was soon on the pavement outside the Treasury. I was puzzled by the extreme pleasure Sir Joseph obviously took in my opinion that there was nothing awry with the Netherlands-Sumatra Company and was sure that I had been given some reason to be so disconcerted. I was still half-lost in thought when I saw on a newsstand across the road the headline, “Sherlock Holmes Signs Off Netherlands-Sumatra Accounts,” and realised that Porter had leaked my opinion to the press even before I had signed off on it. As I stood wondering what to do next, the newspaper vendor took delivery of the next edition of the newspaper. This bore the headline, “Major financier arrested”.
My curiosity piqued, I crossed the road and purchased a newspaper which contained an article under the by-line of “Our city correspondent”.
Holmes reached into his pocket and took out a newspaper cutting from which he read as follows. My older readers will probably recognise the contents of the below from their recollection of the Netherlands-Sumatra case, but I reproduce the full article for those less familiar with the matter.
“There was a bullish mood in the stock markets this morning as Mr Sherlock Holmes, in a fresh demonstration of his investigative skills, confirmed that the recent buoyant results of the Netherlands-Sumatra Company were a true reflection of the company’s state of affairs. The surge in the French Bourse that Mr Holmes’s pronouncement engendered was reflected in gains in the British stock market. The Treasury may need to consider raising interest rates to prevent the economy over-heating.
In an entirely separate development, share speculator Baron Maupertuis, who had been seeking to buy the Lyon-based Netherlands-Sumatra Company at a heavy discount to its market value, was today arrested on tax evasion charges in Paris. As he was led to a secure police carriage, he said to a bemused crowd of by-standers, ‘I am guilty of no more than the ability to tell the time.’”
“I remember the turn of events well,” I commented, drawing on my pipe. “There was indeed a surge of stock exchange euphoria, not to mention an avalanche of congratulatory mail for you, but you did not return to Baker Street, and the next I saw of you was at the Hotel Dulong. And Maupertuis’s remark caused much speculation in London as no one could work out what it meant.”
Holmes paused to recharge his own pipe and then continued:
I confess to a measure of anger at the anticipation of my verdict and likewise of curiosity at the arrest of the Baron, and I determined to re-enter the Treasury to make this clear to Sir Joseph.
A security guard made to block my path. “We are under instructions not to re-admit you, Mr Holmes,” I heard, but I was able to get past him, and was soon once more before Sir Joseph.
“Why did you anticipate my opinion on the account of the Netherlands-Sumatra Company? And why has Baron Maupertuis been arrested?” I asked.
“My dear Mr Holmes,” said he. “I knew that you had no adverse findings from your telegram from Lyon. I wanted to make sure I caught the first edition of the evening newspapers so that your opinion, which you have now confirmed on this piece of paper,” he held up the page I had just signed, “was in the news, thus enabling the markets to trade in full confidence of the probity of one of its most dynamic players. And the arrest of Baron Maupertuis is entirely a matter for the French authorities.”
“The two matters cannot be unconnected,” I objected.
“Mr Holmes, I am not aware there is anything further to discuss. I gave you a task, which you have completed to my complete satisfaction.”
“And to that of his sisters, cousins and aunts,” interjected a stout lady seated to his left.
“While tax evasion,” continued Sir Joseph, “is widely practised in France, and the French authorities are fully entitled to take any action they see fit to combat it. I wish you a good day. The weather is most clement, and I suggest you make the most of it.”
Rather than returning to Baker Street, I decided to go back to France to re-examine the records of the Netherlands-Sumatra Company. I was sure that there was some contrivance in its results, which Sir Joseph was at the least aware of, or—more probably—had instigated, and that he wanted me to certify the company’s results to prevent any further investigation of it.
By this time it was late and I had to get the night ferry from Dover. On the ship on the way to France, it struck me that any contrivance would require some sort of pre-arranged signal. As I had scrutinized all the company’s correspondence, that signal needed to be invisible to any outsider, obvious to any insider, and irregular in its frequency. The next day found me on the train from Paris to Lyon.
We passed through an unseasonal April squall which hurled a flurry of snow and hail against the window of my carriage and the conductor put his head into the compartment to say that our arrival in Lyon would be delayed by ten minutes due to the weather.”
Holmes paused, I think expecting an interjection from me, but I was lost for words. He resumed and, as he did so, the tobacco in the bulbous bowl of his pipe glowed red as he approached the moment critique in his chain of reasoning.
“When I got to Lyon, I went to the British Consulate and looked through its archive of British newspapers. What do you think I found?”
“I have no idea,” I responded, although I was sure I was missing something obvious.
“Baron Maupertuis had not been referring to the time at all when he said that he was guilty of no more than being able to tell it. In French, the word ‘temps’ means both time and weather, but the British press had
failed to understand what he had said and so had mis-reported it.”
I still could not follow the direction of my friend’s thought and said as much.
“When I conducted my research at the British Consulate,” explained Holmes, in a tone of quite unwonted patience, “I found that each time the day’s temperature recorded in The Times at London Docks was more than five degrees above what the Home Office had forecast on the previous day, interest rates were raised. And each time it was more than five degrees below what the Home Office had forecast on the previous day, interest rates were lowered.”
I still was not sure I had understood Holmes and he explained, “A forecast is published by the Home Office on Monday in respect of Tuesday. If the weather report in respect of Tuesday published in The Times on Wednesday shows a significant deviation from the forecast, interest rates would be raised or lowered. Use of weather patterns to fix interest rates met all the requirements of being clear, irregular, and incapable of manipulation.”
“So what was the purpose of the manipulation?” I asked, aghast at the thought that economic management might be being used for anything other than the greater good.
“I will come to the question of motive shortly,” replied my friend and resumed his narrative.
My next move on leaving the British Consulate was to head to the office of the Netherlands-Sumatra Company, as I wanted to challenge Monsieur le Piège. I was passing the amphitheatre next to the Company offices, when I saw a large group of ladies forming a queue to visit the site.
I made to hurry on until I noticed in their midst, Sir Joseph, and I realised that he too had been seeking to make his way to the premises of the Netherlands-Sumatra Company, but he had seen me and had sought concealment amongst his sisters, cousins and aunts.
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