This, then, was the man, Drew’s hedonistic, garish, tempestuous ally, who joined the somber, puritanical Gould on the Erie board during the autumn of 1867. If Fisk was “blue fire,” Gould was anything but. Fuller, who knew both men well, wrote that the “contrast between Jim and Gould was complete. Jim was florid and fond of the table, a weakness that was beginning to show in his figure. Gould was abstemious. Jim was loud and self-confident; Gould was silent and seemed diffident. Jim was bold; Gould was cautious. Jim said what he thought; Gould kept his mouth shut. Jim liked to spend his money; Gould kept his. Jim was generous and open-handed; Gould wasn’t. But both men had inexhaustible capacity for work and both were unusually intelligent. They made a formidable combination when they joined forces.”12
Chapter 15
THE ABUSED MACHINERY OF THE LAW
GOULD AND FISK came to the Erie board at a time of conflicting interests and diverse, often Byzantine, agendas. Just as the new board assembled, the Erie’s major western connection, the Atlantic & Great Western Railway (A&GW) went into receivership. The Erie itself, two years after the death of its erstwhile savior Nathaniel Marsh, remained an unmitigated mess. Already carrying a dangerously high floating debt of $6 million, the mismanaged and physically broken railroad was about to confront, for the first time, competition from Vanderbilt’s newly consolidated, fiscally and physically sound trunk line extending from the Atlantic Ocean at New York to the Great Lakes at Buffalo. Adding even more uncertainty to all of this was Vanderbilt’s presumed dominance on the Erie board. For anyone with eyes to see, Vanderbilt’s agenda was clear: to eventually, on his own leisurely schedule, gain complete control of the Erie and in that way come to dominate most of the main lines entering New York State from the West. Meanwhile Erie president John Eldridge had only one focus and interest: the Boston, Hartford & Erie (BH&E)–of which, coincidentally, Fisk’s old friend Eben Jordan was a backer. As for old man Drew, he could only be counted on to do whatever, at any given moment, would put the most greenbacks in his pocket. Drew remained, according to the Herald, “a wild card.”1
The notion of Vanderbilt as the Erie’s driving force was slow to be challenged, since Vanderbilt’s nephew Work acquiesced that October when the Eldridge recruits on the board proposed and passed a measure guaranteeing interest for $4 million of the BH&E’s bonds. To Eldridge’s pleasure, if not surprise, the offer from the Erie came without most of the caveats that had been attached to the Scarlet Woman’s previous guarantee proposal. All the BH&E had to do was meet a January 1870 deadline for rails and rolling stock capable of carrying 300,000 tons of coal annually. Thereafter the BH&E would also be required to set aside for the bondholders’ trustees enough revenue from coal profits to pay the interest on the guaranteed notes. At about the same time that this transaction occurred, Work joined the party when several board members (including Drew, Gould, and Fisk) together with a few outsiders (among them Fisk’s partner Belden, Gould’s brokerage partners, Smith and Martin, and the Commodore himself ) formed a pool designed to bull up the price of Erie stock, this pool to be run by the undisputed master of stock manipulation: Drew.
The first intimations that Vanderbilt and Work were not in undisputed control of Erie’s helm came in November, when the Erie board rejected an offer from Vanderbilt to participate in another kind of pool. Vanderbilt proposed that the Erie join together with the New York Central and the Pennsylvania Railroad in evenly dividing the earnings of the three trunk lines into southeast New York, thus avoiding the type of ruinous rate war for which Vanderbilt had become justly famous. By the time he approached the Erie, Vanderbilt already had the Pennsylvania Railroad committed to the plan, and he expected the Erie to come over willingly. (In fact, some writers have speculated that the New York Central–Pennsylvania–Erie pool may have been a key part of whatever backdoor deal making had gone into seating the new Erie board that October.) But when the measure came up before the Erie’s board, only Frank Work voted in favor, the other members insisting that Erie’s share of the proposed pie was not large enough. One month later–in yet another blow to Vanderbilt–the Erie board overrode a protest from Work and entered into direct negotiations with the Michigan Southern & Northern Indiana to gain the Erie a line to Chicago with which it could compete head to head with the New York Central–Michigan Southern interchange.
While this maneuvering went on, the pool masterminded by Drew slogged along but did not yield instant results. Erie stock moved up slowly, achieving a high of $79 per share by late January 1868, only to collapse back down to $71 in one day’s trading on 4 February. Vanderbilt and the others who had authorized Drew to orchestrate heavy purchases using pool funds were baffled, unaware that Drew had privately resorted to his old game of converting bonds, dumping stocks, and shorting–a classic bear raid. As a reporter for the Herald was to note, on the day of the collapse “the emissaries of the speculative director exerted themselves . . . to create a panic, and told more falsehoods than usual about stocks in general and Erie in particular.”2 Broker William Fowler, who continued trading the stock that evening long after the Exchange and the Open Board had closed, recalled that the “whole strength of Wall Street seemed to have poured into the halls of the Fifth Avenue Hotel. Daniel Drew, with his face pushed into an expression more than usually somber and solicitous, stood near the grand stairway, watching the writhings of his victims, the late exultant bulls.”3 In the end, Drew made considerable profits for the pool, not by building up the stock but by shorting.
Ironically–and perhaps to Drew’s delight–one of the victims who sweated late into the evening on the 4th was none other than Frank Work, who had gone so far as to borrow pool funds from Drew in order to do some speculating on his own and thus benefit from what he believed would be the steady rise in Erie shares. Work was subsequently outraged to find that the shares he’d bought had come from the pool’s own brokers. Henry and Charles Francis Adams eventually chronicled Work’s dilemma in their book Chapters of Erie, but they did so without giving away the embarrassed man’s identity. The Adamses wrote that the unscrupulous Drew had actually loaned “the money of the pool to one of the members of the pool to enable him to buy up the stock of the pool; and having thus quietly saddled him with it, the controller proceeded to divide the profits, and calmly returned to the victim a portion of his own money as his share of the proceeds.”4
Afterward, Vanderbilt–who came away unhappy even though he’d personally racked up substantial gains through this round of Drew’s unauthorized machinations–realized his mistake in allowing the uncontrollable speculative director to return to the Erie board. Vanderbilt likewise realized that the board contained few members besides Work on whom he could rely. Therefore the Commodore resolved, at long last, to finish up the lethargic process he’d begun years before and do whatever it took to gain a controlling interest in the Erie sooner rather than later. Ordering his agents to begin buying up all the shares of the Erie that they could find, Vanderbilt simultaneously had Work obtain from New York Supreme Court Justice George G. Barnard–an easily bribed Tammany Democrat operating in Manhattan–injunctions prohibiting Drew and the Erie directors from issuing bonds, converting bonds, selling Erie stock, or guaranteeing the bonds of any other railroad. These injunctions, issued first on 17 February and then extended on 3 March, were supposed to remain in effect pending the outcome of a suit to remove Drew as the Erie treasurer and force his return of the 58,000 shares (28,000 units of stock plus $3 million in bonds convertible to 30,000 units of stock) given him as collateral in 1866. Through this mechanism Vanderbilt sought to protect himself–and those buying Erie shares on his behalf–from Drew’s usual tricks. By manipulating the convertible shares alone, Drew–if left free to do so–would have been able to expand or contract the number of outstanding Erie securities by more than 20 percent, according to his whim. From his treasurer’s throne, Drew could also–if left free to do so–manufacture as many more convertible bonds as he saw fit by getting a majority
vote of the board.
At the time there was some $17.5 million in Erie common stock outstanding, and some $8.5 million in preferred stock. Vanderbilt calculated it would take something in excess of $10 million combined with what he owned already to gain absolute control of the Erie. This sum represented a fraction of the Commodore’s net worth. But it also represented far more than he had liquid, since the bulk of his capital was tied up in the stock of the New York Central. Still, Vanderbilt remained easily the most bankable buccaneer on Wall Street, and with Drew and his clique of directors apparently neutralized, he set out to corner Erie shares. As well, he arranged for wealthy friends such as Leonard Jerome to invest along with him.
Vanderbilt’s errors were two.
For starters, in sculpting the injunctions that he handed to Judge Barnard for pronouncement, Work had neglected a key nuance of language. Barnard’s order enjoined both Treasurer Drew and the Erie board from “selling, transferring, delivering, disposing of or parting with” Erie bonds and stocks.5 But as Gould, that avid reader of fine print, readily surmised, Barnard’s order contained no words limiting the actions of the Erie’s executive committee, the latter being empowered by the corporation’s charter to act for the Erie in between regularly scheduled board meetings. So in closed session on 4 March, the executive committee–dominated by Drew, Eldridge, Gould, and Fisk–fired a volley against Vanderbilt’s takeover of the road. The committee approved $5 million in bonds and voted their sale to Drew’s broker, William Heath. Within hours those same bonds were converted into 50,000 shares. Heath combined these with another 10,000 shares Drew had on hand and dumped the lot onto the market that same evening. (Prior to this, some 251,050 shares had been outstanding.) Vanderbilt’s representatives eagerly devoured the newly minted Erie shares, buoying the price. Drew, meanwhile, personally shorted Erie on every board in town, to the eventual chagrin of Vanderbilt, who did not yet realize the true number of Erie shares outstanding or the relative inflation of Erie’s per-share price above fair value.
On another front, Vanderbilt had either ignored or not realized one painfully obvious fact. The same highly corrupt court system that he had leveraged to bring injunctions against Drew and the Erie board could be exploited just as easily by others.
Despite its name, New York’s “Supreme” Court is actually one of the lowest courts in the state, a court of first rather than last resort. The Supreme Court’s judges (four to each of the eight judicial districts at the time of our story, except for Manhattan, which had five) were elected every fourteen years, with the combined judges of a district sitting en banc to constitute that district’s first-tier appellate court. In this highly incestuous atmosphere, the justices of the Supreme Court–all of them creatures of their party, most often the Democratic Party–were routinely called upon to review decisions made by their local political allies and brothers on the bench: men who, on the morrow, would wield similar appellate authority over them.
The program of elective judgeships had arisen out of the populist fervor that inspired the new state constitution of 1846–a deep Jacksonian faith in the ultimate wisdom of the common man. In practice, however, as the aristocratic Adams brothers eagerly pointed out in Chapters of Erie, the electoral approach filled the benches with political hacks. “The system of electing judges by the popular vote,” they wrote, “. . . brought forth bitter fruit, and men had been elevated to the bench who should have ornamented the dock.”6
In adjudicating commercial disputes, New York judges were bound by a Code of Civil Procedure authored by Manhattan attorney David Dudley Field and approved by the New York State Legislature not long after adoption of the 1846 constitution. Eventually the essence of the “Field Codes” would become law at the federal level, in twenty-six states, and in Great Britain. Although generally a model of excellence, the Field Codes nevertheless included certain particulars that tended to complicate matters, at least in corrupt New York. According to these Codes, Supreme Court judges, although elected by voters only in the district where they sat, enjoyed authority that extended throughout the state. Furthermore, they were not barred from entering into cases already under adjudication by another Supreme Court justice in a different district. Additionally, the judges possessed vast, unrestrained powers to issue injunctions and appoint receivers in ex parte proceedings where–by definition–only one side of a case was heard. These idiosyncrasies of the Field Codes, the New York Supreme Court’s odd appellate structure, and the cronyism of the justices would play major roles in the coming battle for the Erie.
The best of New York’s attorneys had long mourned the shortcomings of the Supreme Court. Writing in his diary, Manhattan attorney George Templeton Strong complained that “law does not protect property. The abused machinery of law is a terror to property owners. No banker or merchant is sure that some person calling himself a ‘receiver,’ appointed ex parte as the first step in some frivolous suit he never heard of, may not march into his counting room at any moment, demand possession of all his assets and the ruinous suspension of his whole business, and when the order for a receiver is vacated a week afterwards, claim $100,000 or so as ‘an allowance’ for his services, by virtue of another order, to be enforced by attachment. No city can long continue rich and prosperous that tolerates abuses like these. Capital will flee to safe quarters.”7
Thus Vanderbilt should not have been surprised, on 5 March, when Gould, on behalf of the anti-Vanderbilt clique, found a judge of his own. Operating out of the Erie County town of Cortland, Judge Ransom Balcom willingly issued an injunction against any further Erie proceedings in Barnard’s Manhattan court pending a hearing in Erie County on 7 April. For good measure, Balcom also suspended Frank Work from the Erie board. On the heels of Balcom’s order effectively closing Barnard’s court to all matters relating to the Erie, Vanderbilt ally Richard Schell (lately a member of the Erie pool who had joined Work in his unhappy speculations) prompted Supreme Court Judge Daniel P. Ingraham (of Manhattan) to issue an order on the 6th forbidding the Erie board from transacting any business without Frank Work in attendance.
The air of uncertainty around the company did not go unnoticed. The New York Herald commented: “The Street is afraid to hold Erie, and the clique supporting it [Vanderbilt and his cohorts, who together, on the morning of 10 March, held some 100,000 shares] has to bear its full weight. . . . There are rumors afloat that the amount of common stock is far larger than is generally supposed, owing to the conversion of old bonds into stock and the issue of new convertible bonds to an extent which is at present difficult to estimate.”8
Because of the rumors, as reported in the Herald and every other paper in town, the price for the stock began to plummet. When several banks hesitated to advance Vanderbilt money on which questionable Erie shares were to be pledged as collateral, Vanderbilt had to force their hand. He threatened to reduce the value of New York Central stock–in which most New York banks held major positions–down from its current market price of $68 to $50 per share and to ruin several institutions in the process, unless the banks immediately advanced him half a million on the Erie at $50. Surrendering instantly, the banks gave Vanderbilt his money, which he immediately ploughed into Erie shares, buoying the value once more.
Vanderbilt evidently believed that since no rival judge had as yet explicitly vacated Barnard’s original order, Drew’s stock-manufacturing machinery was still shut down. But even as Vanderbilt’s soldiers bought up the latest printing of Erie shares, the Erie’s executive committee created a second $5 million in bonds, converted them, and tossed the results at the market, while also setting up a $500,000 legal defense fund. At the same hour of the morning on the 10th that the executive committee did its work, Fisk’s brokerage partner, Belden, appeared before a Judge Gilbert in Brooklyn. Represented by the demonstrably upright Thomas G. Shearman, superintendent of the Sunday school in Henry Ward Beecher’s Brooklyn church, Belden orchestrated an order enjoining “all parties to all previous suits from furthe
r proceedings.” Gilbert also ordered that every Erie director, save Frank Work, continue to discharge his duty and continue to convert bonds into stock as necessary.9 The same morning, Judge Barnard voided all injunctions except his own.
Gould and friends reveled in the stalemate. “One magistrate had forbidden them to move,” wrote Henry and Charles Francis Adams, “and another magistrate had ordered them not to sit still. If the Erie board held meetings and transacted business, it violated one injunction; if it abstained from doing so, it violated another.”10 Edmund Clarence Stedman–a broker, banker, and minor poet who watched this first Erie War from a front-row seat–pointed out the convenience of the dilemma faced by Gould, Drew, and Fisk: “Since they were forbidden by Barnard to convert bonds into stock, and forbidden by Gilbert to refuse to do so, who but the most captious could blame them for doing as they pleased?”11
The broker William Fowler stood by the Open Board on the morning of the 10th, watching as Vanderbilt’s buyers soaked up Erie stock. “The whole market hung on one word–Erie. The strident voice of George Henriques, the Vice president of the Open Board, was heard calling off in quick succession, government bonds, state bonds, Pacific Mail, New York Central, then a pause, a shadow rippled across his face and a shiver ran through the hall as he ejaculated in a tone still more strident–Erie! For ten minutes bedlam seemed to have broken loose. Every operator and broker was on his feet in an instant, screaming and gesticulating. The different Vanderbilt brokers stood each in the center of a circle, wheeling as on a pivot from right to left, brandishing their arms and snatching at all the stock offered them. As the presiding officer’s hammer fell and his hoarse voice thundered out ‘That will do, gentlemen. I shall fine any other offer,’ Erie stood at 80. The crowd, leaving the other stocks not yet called, poured into the street, where nothing was heard but Erie. Vanderbilt’s brokers had orders to buy every share offered, and under their enormous purchases the price rose, by twelve o’clock, to 83.”
Dark Genius of Wall Street Page 14