by Alice Echols
The more persistent obstacle in moving forward with dividend payments had to do with efforts to end the City’s receivership. Not long after the courts had named Fertig the receiver of the City, a group of association members and unnamed outside “investors” whom they brought onboard tried to engineer the dissolution of the court-ordered receivership. The people behind this effort were more financially comfortable than many depositors, and they hired Judge John Little of the Depositors’ Committee and the Taxpayers Association as their lawyer. They needed two-thirds of the City’s membership to support their effort before the district court judge would approve the creation of a liquidation corporation, as had happened much earlier with Sims’s association.
Advocates of liquidation maintained it would be a more “economical” and speedier way of terminating the business. There were some costs—property taxes, insurance, and upkeep—that a liquidation corporation could no more avoid than a receivership could. But the corporation planned to prioritize selling off all the City’s property as quickly as possible. While this would necessitate selling the association’s assets at a terrible loss, members would no longer be responsible for the taxes, insurance, and maintenance on these properties. On the other hand, if association-owned properties were rented, they were bringing in some revenue, and would do so until the receiver determined that the market had rebounded and the properties could be profitably sold.
Opponents of receivership argued that liquidation enabled members themselves to bear the brunt of the work, so association members would be spared the expense of paying receivers and their staff. It is true that these costs were considerable. During 1936 the cost of paying the City’s co-receivers and the office staff came to $5,400, and that was nearly four years into the receivership.34 Throughout the country people worried that those on the receivership’s payroll would use it for their own personal profit, and some did. The lawyer for California’s building and loan commissioner actually denounced “receivership racketeers.”35 The scandal in the Springs spawned no such “racketeers,” but the handling of Pueblo’s Railway crash was another story. There the judge actually appointed the association’s lawyer, a longtime Democratic politician and one of the embezzling trio, to act as the association’s receiver. After public outrage forced the judge to change course he appointed a wealthy businessman as its receiver, with a salary of $1,000 a month.36
Nonetheless, in contrast to a liquidating corporation, a receivership offered real transparency. Its records were a matter of public record, and there was court oversight. Moreover, if the receiver, lawyer, and staff were paid, it was because closing down these businesses required considerable work. By August 1934, the co-receivers of the City were working with twenty large boxes of depositors’ claims. Tellingly, as late as November 1937 members of the Assurance, who had opted for liquidation on the grounds that it would be speedier and less costly, had yet to see a penny.
As it happened, this group of wealthier depositors of the City failed three times to reorganize as a liquidating corporation. Despite their failed efforts, a new organization calling itself the Colorado Springs Liquidation Corporation (CSLC) stepped forward and announced its intention to liquidate the association. The men behind the CSLC repeated the usual arguments about the costliness of the receivership model. They promised more generous and quicker dividend payments than was possible with the receivers, whose process, they argued, was slow and cumbersome and made more so by the courts. They also bragged that they had the financial backing of a number of unidentified “rich men.”37
Many depositors and shareholders of the City were desperate. Those who were part of the Taxpayers Association were, as we have seen, suspicious of the state and its proxies—the court-appointed lawyers and real estate men who were serving as receivers and lawyers and allegedly draining the assets of their B&L. Originally there were reportedly 3,609 claimants of the City, with claims totaling $1,876,000.38 However, the CSLC peeled away so many of them that before long it controlled $1,263,000—or two-thirds—of the claims. Individual claims that were assigned ranged from $1.94 to $6,000, but the greatest number by far were between $200 and $2,500. In October 1934, knowing that the receivers were contemplating making their first dividend payment, officials of the CSLC filed in district court a notice that any dividend money to claimants should be paid instead to the corporation on the grounds that it held 70 percent of the claims against the City.
Having seen the success of the CSLC, other companies and individuals now got into the act. It became something of a cottage industry in the Springs, as businessmen who had obtained these consents and agreements sold them to others. And so it was throughout America as businessmen bought up passbooks on troubled banks and B&Ls. This was, of course, the tactic that Henry Potter had tried against George Bailey. In some places newspapers even printed the weekly rates for buying and selling these passbooks. However, it would seem that elsewhere in America actual money was sometimes exchanged for passbooks, although the sum could be as low as 25 cents on the dollar.39 Springs businessmen such as C.M. Marshall seem to have not even offered that much.
Among those who assigned their claims to Marshall was an elderly widow, Mrs. Newton Dotson, who lived in a North End bungalow. She was among the City’s middle-class depositors. We know what happened in this case because Mrs. Dotson’s daughter, who lived across the street from her mother, witnessed the sales pitch of one of Marshall’s smooth-talking salesmen. In exchange for Mrs. Dotson’s assignment the salesman promised to give her stock for the Colorado National Gold Company. He brushed off questions about the soundness of the company, assuring them that the company “shipped carloads of gold every day.” She could count on obtaining 50 percent of her claim, he said. Mrs. Dotson’s daughter believed he was running a scam, and she was sure that she had convinced her mother of this, too. She was so confident that her mother shared her view that she left her mother’s home before the salesman had. When she returned she discovered that her mother had turned over her claim in exchange for Marshall’s worthless stock. After Marshall had accumulated fifty-five of these assignments he sold them at between 10 and 15 percent of their face value of $39,565 to a man named I.J. Marker.
What brought Dotson’s case to court was that she, like other victims of this scam, had received zero compensation for her claim. Now word was spreading that the improbable was happening: the receivers were finally in a position to deliver on Fertig’s promise, and at a full sixteen percent. More and more people wanted out of these assignment agreements so they could take part in the dividend payment. And they were discovering that the CSLC had lied to them about being able to break off their agreements. Not only that, but all the talk about rich men being a part of the CSLC was a bunch of hooey. The corporation turned out to have no cash capital. Complicating matters further, many people were confused about what they had signed because they had never been given a copy of the agreement with the CSLC. Journalists who got hold of a copy of one of these agreements found that it promised the claimants nothing by way of remuneration. It wasn’t just vulnerable elderly people or those with little schooling who were taken advantage of. A clerk working for District Judge Cornforth on these cases had himself signed over his claim.
When these cases first began working their way through the court system in spring 1935, three years after Ed Sharer was first on trial, it must have felt like déjà vu. Once again the courtroom was packed, full of desperate people. These consents and assignments created problems for everyone, and not just the depositors who had assigned their claims and now found themselves stuck in a legal limbo. The delays and confusion they caused—with the lawyer for the CSLC asking for delay after delay and then appearing in court without the requested documents—meant that even those who had held on to their claims had to wait longer than they should have for those dividend payments. In the end, Judge Cornforth was scathing in his criticism of those such as Marshall and Marker who had tried to circumvent the court-ordered receivership.
Null and void was his judgment of the CSLC assignments, and many others, including I.J. Marker’s.40 He later said that in his sixteen years on the bench these assignment cases had proven the most troublesome cases of all.
Despite all the suffering they caused, for three long years the CSLC and its ilk were able to operate with virtually no interference. The one article in the local press warning depositors against assignment scams appeared in August 1932. In a front-page article, District Attorney John Meikle, at the urging of receiver Fertig, cautioned “B&L victims” that they should beware of “fly-by-night stocks and bonds salesmen,” eager to lure them into assigning their claims. However, no one else seems to have spoken up, or if they did, the press ignored them. As best as I can tell, the city manager, city council, mayor, newly elected district attorney Starrett, and, for that matter, the Depositors’ Committee were all silent.41
In California one finds much the same deplorable situation, as a very brisk trade in passbooks emerged there. However, in the Golden State the villains seem to have been associations in liquidation that still had considerable assets and had “pegged” the price of depositors’ passbooks at half or less of their actual value. Distraught depositors found themselves forced by their circumstances to trade in their passbooks for a fraction of their original worth. However, they also pushed politicians to do something about this, and progressive Democrats took the lead. In January 1935 the state legislature held hearings to investigate ongoing fraud in the building and loan business. Before a crowd of five hundred, one association member spoke of “aged and destitute people selling their passbooks at 48 cents on the dollar when the association had 100 cents on the dollar in property and other assets.”42 This speaker may have been exaggerating the health of his association, but the investigating committee of the state assembly called the traffic in passbooks one of the “worst scandals” in the state’s history. In May 1935 the Republican governor signed a bill designed to eliminate the trade in passbooks.43
What happened in California shows what could be done in a different political climate. Colorado boasted liberal Democrat Edward Costigan, who captured a Senate seat in 1930. Costigan promised voters a “new deal” in his Senate run, a full two years before FDR used the term.44 But while Colorado’s Republicans were in the doldrums between 1930 and 1938, the Democrats were deeply divided, with conservatives such as William (Billy) Adams and Edwin Johnson standing in the way of committed New Dealers like Costigan.45 Democrats were likely too divided to stop the fraud in consents and assignments. After all, politicians of both parties had a long history of looking the other way when it came to regulating this industry. Their history of inaction meant that the laws and regulations governing B&Ls were a muddle—badly written and therefore poorly understood. Complicating matters further was that certain details, such as whether particular claims took precedence over others, had not been legally established, at least not beyond contestation. Shortly after Walter’s suicide Colorado’s attorney general announced that he had appointed a committee mandated to develop a system of penalties for lax B&L commissioners. Whom did he choose to chair the committee? Bernard Seeman, the lawyer who had represented both Walter Davis and the unscrupulous Pueblo B&L operators. No effective regulation was pursued by the state legislature.46
Colorado’s failure to regulate the B&L industry in the first instance, along with its unwillingness to stop this business of consents and assignments, demonstrates something more fundamental than politicians’ refusal to strengthen the state’s regulatory machinery. In Colorado there was a determined opposition to regulation itself. How else can one explain the relative absence of public criticism of these consent and assignment schemes and the failure of successive district attorneys or anyone else to investigate them? Colorado Springs, like much of the West, was loath to erect or enact anything that might act as a roadblock to ingenuity and enterprise. For example, in May 1931, when the state legislature was debating changes in the laws governing B&Ls and the enactment of blue-sky laws to protect consumers against securities fraud, opponents characterized these bills as “destroyers and not builders.”47 It was a culture that encouraged ambitious men with entrepreneurial drive, and with predictable results when enterprise edged over into fraud, whether with the hustlers of the CSLC or with my grandfather and the rest of the local building and loan crew. Even the horror of dust storms was not at first enough to convince the farmers and ranchers of nearby Baca County, a hard-hit dust bowl county, to agree to a federal plan to control soil erosion. Farmers and ranchers there “preferred dealing with the problem individually.”48
As an open-shop town, the Springs had become a place that fostered individualistic solutions rather than one where the working classes pulled together as a group. There was a broad consensus, stretching from the Chamber of Commerce to its opponent Common Sense Weekly, that unions were “rackets.” When people did come together they usually did so in cross-class organizations such as the town’s voluntary associations, lodges and clubs, and groups such as the Depositors’ Committee and the EPCTA. In the end it was a culture invested in the idea of its own rugged individualism. Even the Depositors’ Committee fizzled out when the Pratts left town. They did so shortly after J. Herbert Pratt, running as a Republican, lost the election as county commissioner and a scheme to keep Common Sense Weekly afloat unraveled. The Pratts had devised a subscription drive to keep the paper alive: contestants with the most renewals or new subscriptions were promised a “magnificent array of prizes and commissions” totaling $3,000. Their “rustling ability,” readers were told, would determine their success. However, the drive came to an abrupt and mysterious end, reportedly because of a con man with extraordinary rustling ability.49
The El Paso County Taxpayers Association persisted, but not without internecine squabbling. By April 1934, a splinter group calling itself the Real Estate Owners Protective Association announced its intention to organize a special election, primarily to have the city entirely put on a “cash basis.”50 The Republican elite, too, was divided, but in the years ahead its members would pull together in an audacious effort to woo the U.S. military to the area. Among many other residents, however, the tradition of looking out for one’s own interest was firmly established, which is why two-thirds of the City’s members broke away from the receivership in order to cut their own deals. Over the decades it had become an individualistic culture whose valorization of free enterprise and rugged individualism inclined people to understand those in need as entirely responsibility for their own sad fate.
As the cases involving those consent agreements worked their way through the courts, the search for the missing money continued. In March 1935, after J. Edgar Hoover’s men proved unable to uncover Walter Davis’s hidden fortune, Scotland Yard was asked to scour the banks of London for it.51 Nearly three years later the authorities remained convinced that Walter had absconded with a vast fortune, possibly as much as a half million. Was it the report of him with scads of securities practically falling out of his pockets at a doctor’s office in Denver that persuaded them?52 Could it have been the chauffeur’s description of his boss cashing Liberty Bonds in banks as they traveled? Or was it his last letter to Lula, where he claimed he was saving all the money for when they could be together?
The mystery for me isn’t what happened to the half million dollars. For twelve years he had offered inflated rates of interest, which meant that he had paid out $450,000 more in interest to depositors than their money had actually earned. Moreover, for some time at the City withdrawals had outpaced deposits. Then there was the fact that his investments were in the failing real estate market.53 Seven years of extravagant living also made a dent, as did the insurance.54 That said, Walter made substantial withdrawals—$90,000 for himself and $35,000 for Lula—in the eight months leading up to the collapse of his business. The mystery is what happened to that money.
The authorities continued their search for the missing money, but they abandoned their plan to file c
harges against Lula for mail fraud or for anything else. She escaped prosecution, but had Lula knowingly aided and abetted her husband’s embezzlement? The woman who emerges in those telegrams and letters was certainly nobody’s fool. She had worked by Walter’s side when he was a loan shark, and her head was hardly buried in the sand when it came to his relationship with Eva. At the very least she knew her husband was capable of emotional dishonesty. And yet Lula seems to have never entertained the possibility that Walter was guilty. How else can one make sense of the fact that she pressed forward with the insurance claims and contested the ownership of properties belonging to Fleming and Company, all the while with the conviction that she was in the right?
Walter Davis believed in his own innocence and doubtless gave Lula persuasive explanations for his shortfall. Maybe he claimed that the inflated interest rates he paid depositors meant he now owed them nothing.55 Or maybe he stuck to legalistic defenses of his business practices. In the end, he was ambitious and hard-driving, and there was no law against that. No matter how sharply the money had been earned, Lula and Dorothy believed it was his and theirs. My mother only ever said of his failure, “I felt so damn sorry for him.”
Lula may not have been knowingly complicit, but her well-developed instinct for self-preservation sometimes did trump her truthfulness. There was the time in the summer of 1932 when she presented herself to the authorities as virtually penniless. Lula later revealed to her lawyer that she could have easily paid substantial insurance premiums to keep Walter’s policies in force.56 Thirteen years later, at the end of her life, Lula wrote daily letters from her hospital bed to Dorothy, who was then living in the East. In one such letter she voiced her apprehensions about having asked Jim Fleming, Walter’s former handyman, to find a crucial bit of paperwork in her desk at home: “Of course, everybody is going to know all our business and all our house if I keep on out here.” Yes, Lula had secrets.