by Vanda Krefft
Harry Stuart, the president of Halsey, Stuart, Fox’s main banking firm, was cut from similar cloth. Impeccably groomed, usually with a carnation in his buttonhole, Stuart had a warm, ingratiating manner that masked icy, amoral instincts. Based in Chicago, he had made his fortune as a chief adviser and close friend to Samuel Insull, the founder of a huge inverted pyramid of utilities companies that would soon buckle and collapse into a heap of financial disaster. Stuart ultimately marketed $2 billion in largely watered Insull securities, collecting at least $20 million in fees.* Some sympathizers of Insull, who was previously a respected inventor, believed Stuart led him astray.
Insull’s wasn’t the only crooked business that Stuart promoted. In 1928, Halsey, Stuart marketed $2.5 million in gold debentures for Wardman Realty and Construction, which owned hotels and office buildings in Washington, DC. In its promotional literature, Halsey, Stuart failed to mention that Wardman had $16 million in prior liens and had been threatened with foreclosure proceedings in 1927. For that oversight, Harry Stuart would later be charged with mail fraud.
Furthermore, on a weekly basis Halsey, Stuart tried to bamboozle the public with its nationwide radio show, The Old Counsellor. Every Thursday night, interspersed with “tuneful . . . high order” musical entertainment, the program featured an allegedly wise, allegedly well-seasoned financial expert who profiled business leaders and offered advice about promising stock market investments. In fact, the sixty-minute show was just a sneaky sales pitch. All the supposedly model executives worked at companies whose securities Halsey, Stuart was selling and the mellow-voiced “Old Counsellor” was no such thing: he was actually a middle-aged University of Chicago professor of public speaking, Bertram J. Nelson, who for fifty dollars a week read a script prepared for him at the Halsey, Stuart office.
At arm’s length from Fox was Albert H. Wiggin, chairman of the board of the Chase National Bank. Through his private investment company, the Shermar Corporation, Wiggin participated in the Hayden, Stone syndicate that sold Fox Film shares from January to mid-September 1928; on an investment of $375,000, Shermar received a profit of more than $65,000. During the same general time frame, Wiggin was conducting an extensive insider-trading operation in Chase Bank and Chase Securities stock that by 1932 would yield $10.4 million in cash profits to him personally. He also helped engineer one of the financial industry trends that positioned the U.S. economy for a precipitous fall: the rise of bank-affiliated securities companies. In 1917, he had started Chase Securities as an investment banking firm that would underwrite new stock offerings. So it operated until 1928, when the stock market boom began. Wiggin then plunged Chase Securities into speculative trading. Using Chase Bank deposits (then uninsured by the federal government), Chase Securities threw money onto the gambling tables of the late 1920s stock market. According to Columbia University economics professor H. Parker Willis, who helped draft the Federal Reserve Act and who served as the Federal Reserve Board’s first secretary from 1914 to 1918, securities affiliates such as Chase Securities violated “[p]ractically every maxim of sound banking formerly known” and were “a national disgrace.”
Fox didn’t like any of these overseers of high finance, but he became one of them. He thought he had to in order to control his future. In 1927 or 1928, he joined the board of Harriman Bank, serving for less than a year. Then, on May 8, 1928, he created Bankers Securities with his close friend, millionaire Philadelphia realtor Albert M. Greenfield. A deal maker more than a real estate enthusiast, the Russian-born Greenfield had taken over a small West Philadelphia bank in 1926 and built it up as the Bankers Trust Company. Fox was a shareholder in Bankers Trust and, following the trend led by Chase Securities, he and Greenfield decided to form Bankers Securities as a securities-trading affiliate. Greenfield became chairman of the board, and Fox, a director of the new company. Having started with $12 million raised through stock sales, Bankers Securities increased its assets to nearly $31.6 million in less than fourteen months.
Although Bankers Securities loaned Fox $10 million in early 1929 toward his purchase of the Loew’s shares, he hated the general idea of the company. Later, when Greenfield’s Bankers Trust had collapsed and he had nothing to lose by expressing his true opinion, Fox called bank-affiliated securities companies “the most damnable practice that the banking world of this country has ever known.”
Secret stock price manipulation, short selling his own company’s stock, starting a bank-related securities company that helped destabilize the nation’s financial foundation—these were the tactics Fox used to get a large part of the money that fueled the tremendous expansion of his film empire during the late 1920s. He had misgivings, surely. But he had taken tainted money before and had redeemed it. He had built two huge, wonderful companies that gave many people fulfilling, creative employment and that brightened the lives of countless audience members around the world. He would clean up the money this time, too. He had to. Fox Film and Fox Theatres were still his shining cities on a hill, worth whatever sacrifices he had to make for their welfare.
CHAPTER 37
Trouble
Two main pressures bore down on Fox during the spring and summer of 1929. First, he had to get antitrust clearance from the U.S. Justice Department for the planned Fox-Loew’s merger. Second, he had to arrange permanent financing for the $50 million he’d spent—most of it obtained in short-term loans—to buy the Loew family’s stock. The second event depended on the first. Without Justice Department approval, he would not be able to raise money through the sale of stock in a combined Fox-Loew’s organization because there would be no combined Fox-Loew’s organization. And if he couldn’t raise the money to pay off his debts, Fox Film and Fox Theatres would collapse financially.
He’d learned nothing about the new Hoover administration’s attitude toward big business from the Fox News crew he sent to Washington, DC, on March 3, 1929, to interview the incoming U.S. attorney general, William D. Mitchell. Looking stiff and ill at ease, sitting at a desk with papers and a telephone on it, Mitchell droned on in general about the purpose of the Department of Justice—“enforcing the law and conducting the legal business of the federal government, civil and criminal”—and stated his philosophy in terms so noncommittal as to be meaningless. He said nothing about corporate mergers.
Neither had Fox gotten any reassurance during several visits to Washington, DC—quite the contrary. Shortly after the disappointing Fox News interview, Fox called on Mitchell at the Department of Justice to tell him that the previous administration had already approved the proposed Fox-Loew’s merger. Mitchell rebuffed him, saying he knew nothing about any such arrangement and advising him that no decision would be made until Hoover had named a new assistant attorney general in charge of antitrust.
That took until the end of May 1929, and the result was alarming. John Lord O’Brian, a lawyer with a prestigious private practice in Buffalo, hadn’t wanted the antitrust job, but had been arm-twisted by Hoover into accepting it. Disgruntled by a sense of “considerable sacrifice,” he agreed to meet with Fox and lawyer Saul Rogers, but dismissed them brusquely. They were wrong, O’Brian told Fox and Rogers. The Department of Justice had never approved Fox’s purchase of the Loew’s shares. In fact, he snapped, “as I read this record, I find the opposite, we warned you against it.”
Astounded, Fox protested that there had to be a mistake. O’Brian didn’t want to hear about it. Also in the room was C. Stanley Thompson, who had spent a month at the beginning of 1929 reviewing the proposed acquisition with Rogers. Fox asked Thompson to clear up the matter. Thompson said he would answer only if O’Brian asked him. O’Brian didn’t. Then O’Brian stood up; the meeting was over.
Leaving, Fox had no idea what to do. He knew only that he was in extremely serious trouble. If the Justice Department truly meant to quash his purchase of the Loew’s shares, the eventual result would be either a divestiture order forcing him to sell the stock or a consent decree requiring him to hold it as an in
vestment that would be managed by court-appointed trustees. Either way, the consequences would be ruinous.
If ordered to sell the stock, Fox would never be able to get anywhere near the $125 share price he had paid in order to get such a large block all at once. The market rate was only about $60, and even that amount was unlikely. One could not dump 400,000 shares on the market without depressing the price. And if Fox couldn’t get approval to merge the Fox companies with Loew’s, no other studio would want the Loew’s shares—certainly not Warner Bros., which had been his chief rival for them. The Warners were now in merger talks with Paramount. Although a consent decree would allow Fox to keep the Loew’s shares and benefit from them as a dividend-bearing investment, the Fox companies wouldn’t be able to afford the shares under such conditions. They didn’t have $50 million in cash to pay back the debts incurred in buying the stock from the Loew family.
If Fox failed to meet the due dates in early 1930 of his $27 million in loans from AT&T and Halsey, Stuart, those creditors could file receivership lawsuits against Fox Film and Fox Theatres.* Then the companies would be put into the hands of a court-appointed receiver, who would probably chop them up into pieces to be sold off to raise the money to pay the debts.
Fox had taken the biggest risk of his life with no contingency plan, no way to absorb failure and move on. There had seemed so little chance that events would go against him.
The situation worsened. A few days after his meeting with O’Brian, “two dapper young men” from the Department of Justice arrived at Fox’s office to hammer him with questions about the “illegal acquisition” of the Loew’s shares. Exactly how many did Fox own, they asked. Was it 400,000 or was it more than 400,000 shares? And where had Fox gotten the money? Fox didn’t answer their questions, but the Justice Department agents didn’t go away. Instead, they remained in New York and began visiting stock brokerage firms where Fox had accounts.
Would they learn that, as of June 1, 1929, Fox had bought another 260,900 Loew’s shares in the open market, so that instead of a less-than-one-third ownership position, he now controlled nearly half of the total 1,334,453 outstanding Loew’s shares? He hadn’t told the government about the additional purchases. In fact, he had tried to disguise them by making them in the names of relatives, friends, and employees. Would the eager young Justice Department agents also uncover the sneaky transactions he’d conducted over the past few years to boost the Fox companies’ share prices?
Racked with worry, Fox became physically ill. He stayed in bed at Fox Hall for more than a week. It could be fixed, he told himself. Government, he believed, worked just the way business did. People in the middle might run scared, but the man at the top could do what he wanted. A word from the White House would set the matter right.
Fox believed the president was his friend. He had met Hoover during the presidential campaign through their mutual friend Albert M. Greenfield and, “desirous of working for his election,” had put the Fox Movietone News and its silent counterpart, Fox News, in service to the candidate. Week after week, at great expense to Fox and the Fox companies, flattering coverage went out to an audience of about ten million.
As thanks, Hoover sent Fox an autographed photo. The day after Hoover’s victory on November 6, 1928, Fox promised that the Fox newsreels would continue their propaganda. “I have issued instructions that your personal and official wishes are to be followed to the letter,” he wrote to Hoover. The Fox newsreels would show “to the world in the best possible light what you and our government stand for.” Hoover wrote back briefly, thanking Fox for his “fine assistance.”* Maybe that wasn’t exactly friendship. Nonetheless, accustomed to the horse-trading ethos of New York City politics, Fox believed that Hoover at least owed him. To strengthen his ties to the president, Fox now hired Pittsburgh lawyer James Francis Burke, the Republican National Committee’s general counsel, who had also been Hoover’s main presidential campaign adviser, and accepted an offer of free help from Republican National Committee chairman Col. Claudius H. Huston.
A lunch was arranged for Fox at the White House in early June 1929. He thought it went well. After a sociable meal, he and Hoover adjourned to the smoking room, where Hoover listened attentively and seemed “vitally interested” as Fox recounted his troubles. Merely a misunderstanding, Hoover assured Fox. All he had to do was send Saul Rogers back to Attorney General Mitchell’s office and, Hoover said, “I am sure they will understand that an error has been made here.”
Rogers promptly made the trip and, Fox said, “it got him nowhere.”
Fox felt betrayed by the Justice Department. In his mind, he had diligently sought and received official approval for the Loew’s purchase. Now the government was pulling back, threatening to leave him stuck with a white elephant. In fact, the issue was much more complicated.
For one thing, Fox had misread the new president. Hoover wasn’t so much a laissez-faire capitalist as a proponent of what he called “true liberalism” in economics, which meant roughly that competition should not be fettered by any factors, including overwhelming market influence. Hoover had let it be known that he considered the Coolidge administration to have been too cozy with big business. Had Fox been listening, he would have heard Hoover, during campaign speeches and in his inaugural address, promise to prioritize antitrust law enforcement.
Furthermore, contrary to Fox’s assumption, government didn’t operate like a commercial business. A new administration had no obligation to abide by any assurances or advice given by its predecessor. Also, Fox had never actually received official approval for the Loew’s deal. The then-assistant attorney general in charge of antitrust, William Donovan, had simply stated that if he were to become attorney general, then based on the information Fox had provided, he would not object. Yet the deal that Fox had outlined to Donovan was not the deal currently in place. The original 400,000-share purchase had put Fox in a position where he might, at least theoretically, be overruled by the other Loew’s stockholders. Now, with a near majority of the shares, he almost certainly would not be.
Most pointedly, Fox’s purpose in acquiring Loew’s violated the letter of the law. The Sherman Antitrust Act of 1890 outlawed attempts to monopolize an industry, and the 1914 Clayton Antitrust Act expanded the prohibitions to include mergers and acquisitions that would substantially reduce market competition. Although he never admitted it in such terms, Fox did intend to reduce competition in the motion picture industry. Of the $17 million in annual savings projected to come from the Fox-Loew’s merger, he expected that a substantial part would be achieved by eliminating cross bidding between Fox Film and MGM for stories, actors, and directors.
What had gone wrong? One evening in mid- or late June 1929, Fox had a long conversation at Fox Hall with Republican National Committee lawyer Burke and RNC chairman Huston, who casually suggested that he talk to Louis B. Mayer. “While no one had told me that he [Mayer] had anything to do with my difficulties with the Attorney General, I surmised he had,” Fox said. The idea made sense. M-G-M’s president was a longtime close friend of Hoover and had worked aggressively on his presidential campaign. In appreciation, Hoover had invited Mayer and his family to attend the March 4 inauguration ceremonies and to stay at the White House as his first overnight guests. Mayer, Fox knew, was not happy about Fox’s purchase of the Loew’s stock.
Fox now realized he had made a serious tactical error by discounting Mayer and the other two executives who ran M-G-M, head of production Irving Thalberg and vice president and legal counsel J. Robert Rubin. Not only had he ignored them during the presale talks, but also after learning of Mayer’s pique, he had never apologized. To the contrary, he had insulted the M-G-M triumvirate again during a meeting held in late February 1929 to discuss the just-concluded deal.
Mayer, Thalberg, and Rubin had been fighting mad. Why, they wanted to know, hadn’t they received any of Fox’s $50 million payment, given that they had built M-G-M up into a success and had bolstered the revenues of
the Loew’s theaters by giving them such good movies to show? The fact that none of the three owned any Loew’s stock was, to them, beside the point. According to Fox, “What they would have liked to have done was to have bought some of these shares on the market, when they heard 400,000 shares were to be sold for $50 million, and [to have] sold them for more than twice as much as they bought them for.” Fox was unmoved. “I told them that they hadn’t expressed any faith in their company . . . by the mere fact that they had not seen fit to invest any of their money in the stock of that company.”
Such bluntness, Fox conceded, “didn’t make friends for me.” At the time of the conversation, he didn’t care. He considered Mayer, Thalberg, and Rubin valuable, yet replaceable. Well, not exactly, Loew’s president, Nicholas Schenck, told Fox. Irving Thalberg really did matter, but his loyalty could be bought. So Fox did buy it. On the day Thalberg returned to Los Angeles, Schenck handed him a check for $250,000.
Now, talking to Huston and Burke nearly four months after those events, aware that they and Mayer were “rather intimate friends,” Fox realized he had to make amends.
“I went to the telephone immediately and called up Louis B. Mayer. Whether he knew I was going to call him or not I do not know, but he was right on tap,” Fox said. “The call did not take long. I said, ‘Louis, the next time you get to New York, I would like to see you.’ He said, ‘I am taking the next train out.’ ”
Four days later, Mayer arrived at Fox’s home. “Louis went into a tirade and said he resented the amalgamation of these companies, that he would oppose it to the last drop and that he would resort to every legal means at his command.”
Go ahead, Fox replied. “I told him that was his right, that if what we were doing was illegal, of course he should resort to his legal rights in the matter. And I invited him to do it. I did not think that was what he was coming from California to tell me, but if that was what he came to tell me, it was all right with me.”