by Vanda Krefft
The crowd roared with applause.
CHAPTER 44
Defeat
It is desirable that Mr. Fox be ousted of his control of Film and Theatres.
—ERPI/AT&T LEGAL MEMO, MARCH 14, 1930
Well, the old warhorse did it,” exclaimed a front-page article of the New York Morning Telegraph after the March 5, 1930, stockholders meeting. Fox was elated. “A new world had opened for me,” he said. “Oh, but that joy didn’t last long.”
Although Fox had publicly portrayed the Bancamerica-Blair group (which included Lehman Bros. and Dillon, Read) as the Fox companies’ heroic saviors, in fact the three Wall Street firms were interested only in money—preferably easy money and preferably lots of it. As he didn’t disclose at the stockholders meetings, Fox’s relationship with the Bancamerica-Blair group had always been tentative and tense.
They had already taken one big bite out of the Fox companies. In early March 1930, Fox’s $20 million deal to buy the three-hundred-house Gaumont theater chain in Britain nearly fell through because he didn’t have $6 million to make the final payment. At the last minute, the Bancamerica-Blair group agreed to lend Fox the money, but on onerous terms. The duration of the loan would be only forty-five days, from March 1 to April 15, 1930, and in addition to paying 6 percent interest, Fox would have to pay a 10 percent commission—$600,000—amounting to a total annual interest rate of 87 percent. If he needed to renew the loan, then for each subsequent forty-five-day period he would have to pay another $600,000 commission along with 6 percent interest. As security, the Bancamerica-Blair group took all $20 million worth of Gaumont stock and also a $40 million West Coast Theaters contract—collateral worth ten times the amount of the loan. Fox had no other choice, and the Bancamerica-Blair bankers knew it.
Moreover, under the Bancamerica-Blair refinancing plan, Fox would not remain in absolute control. Mirroring the structure of the December 1929 voting trusteeship with Otterson and Stuart, the Bancamerica-Blair plan proposed to set up a three-member trusteeship consisting of two bank presidents and independent financier Bernard Baruch, and also to replace the existing eight-seat boards of directors of Fox Film and Fox Theatres, currently claques of Fox relatives and executives, with twelve-seat boards. On each board, five members would be chosen by the Bancamerica-Blair group, five by the nonvoting shareholders, and only two by Fox himself. A new treasurer would replace Fox’s puppet, his brother Aaron. While Fox would still command the areas most important to him, movie production and technology development, he well knew from experience that the larger issues of corporate management determined the boundaries of creative activity.
As for the issue of cost, the Bancamerica-Blair plan was, as Otterson and Stuart had claimed, extraordinarily expensive. In bankers’ parlance, it was a “hit and run plan,” one that guaranteed a large profit to the financiers no matter the ultimate outcome for the companies or their stockholders. Even if the plan were abandoned before it was implemented, the Bancamerica-Blair group would be contractually guaranteed a fee from Fox of $975,000.
Fox’s only alternative to the Bancamerica-Blair refinancing plan was to sell his voting shares and lose control of Fox Film and Fox Theatres. As awful as that prospect appeared, he could not dismiss it. For the sake of the companies, it might be best. And so he listened as Greenfield began actively to urge him to sell and have done with the battle. He also postponed writing a letter to the Bancamerica Blair bankers confirming his verbal pledge not to sell his voting shares. The bankers required that document because they were not going to refinance the Fox companies only to find someone else running them.
In mid-March 1930, at the time of the usurious loan to save the Gaumont shares, Fox gave in. If the price were high enough, he told Greenfield, he might consider selling.
Greenfield said he still didn’t know the identity of the prospective buyer. His contact, Fox’s estranged real estate partner Alfred Blumenthal, would not disclose a name.
“You will find it is Harley Clarke,” Fox said. It had to be. Not too many people were shopping for huge corporations these days, especially not ones burdened with $93 million worth of debt. At the March 5, 1930, Fox Film stockholders meeting, the Chicago utilities magnate had announced that if Halsey, Stuart were to do the refinancing, he would buy out the entire $74 million securities offering.
Was it Harley Clarke? Greenfield asked Blumenthal.
Yes, Blumenthal admitted.
Greenfield told Fox it ought to make no difference to him. Fox simply needed someone with enough money to pay off his companies’ debts and to pay a price for his voting shares that he felt would fully compensate him for the loss.
But it did matter. Fox suspected that Clarke meant to make the prosperous Fox companies a party to a bad bargain. In the initial stock offering of his General Theatres Equipment company in July 1929, Clarke had watered the stock heavily, stating its value according to projected earnings rather than actual value. Now, in the wake of the stock market crash, he was going to have a very difficult time supporting his predictions. The healthy profits of the Fox companies could fill GTE’s financial void. On March 7, 1930, Fox Film issued a 1929 earnings statement, showing after-tax net profits of $11.8 million, a 40 percent increase over 1928 earnings. (The figure is consistent with Fox’s claim of $13.5 million, representing 1929 profits before taxes and other charges.) As for the future, so far in 1930 both Fox Film and Fox Theatres were earning substantially more than they had during 1929.
Fox knew it would take careful management to sustain that momentum. He could do it, he believed. He had been through economic panics before, notably the 1914–1915 financial paralysis and the steep 1920–1921 postwar recession, and he had always turned a profit. Could Harley Clarke, who had never made a feature film in his life, do as well?
No, Fox decided, he couldn’t sell out to Harley Clarke.
Fox’s equivocation about selling his voting shares reflected his increasing inability to think clearly. Unanswerable questions tormented him. Why wouldn’t any bankers help save his strong, profitable companies? Why had so many executives, to whom he had given such wonderful opportunities, deserted him?
Overwhelmed by emotion and lost amid a thicket of unprecedented economic conditions, Fox mishandled contract negotiations with MGM’s ruling powers, Louis B. Mayer, Irving Thalberg, and J. Robert Rubin. Worried about their fate if the Fox-Loew’s merger were to go through, the three executives asked Fox for a five-year extension on their existing contracts, which still had two years left to run. Fox hit the ceiling when he learned that as part of their compensation, Mayer, Thalberg, and Rubin shared 20 percent of Loew’s, Inc.’s net profits. “If these three men were entitled to any percentage of the profits at all . . . it could only be from the Metro-Goldwyn-Mayer Pictures Company,” Fox reasoned. In his view, the M-G-M triumvirate had no business sharing in a reward for the performance of the Loew’s theaters because they had nothing to do with theater management and because Loew’s theaters played movies not only from M-G-M but also from other studios.
In general, Fox didn’t believe in performance bonuses. If executives were not required to make up the losses of a company during bad years, “they are surely not entitled to reap the benefits of it during its good years.” No Fox executive, including Fox himself, had ever gotten a performance bonus.
Of course, Mayer, Thalberg, and Rubin’s position was based less on what was equitable or reasonable than on what they had become accustomed to receiving and what they believed they could demand elsewhere. Performance bonuses were the way of the world now. That was what Charles M. Schwab, head of Bethlehem Steel and a longtime Loew’s board member, tried to explain “in his usual fine soft voice” to Fox during an evening at Schwab’s 75-room, block-long Riverside Drive mansion. Fox didn’t listen. Mayer, Thalberg, and Rubin had nowhere near the worries and responsibilities he had and they were not going to get a substantially better deal than he was willing to give himself. Fox refused to go through with th
e contract extensions, stirring up enmity just when he needed as many friends as he could find.
Samuel Untermyer, head of Fox’s legal team, understood that he had an unstable client and tried to shield Fox as much as possible from the courtroom squabbling and procedural jousting. Since January 23, 1930, when Fox had dared Judge Coleman to approve a receivership for the Fox companies, Untermyer hadn’t allowed Fox to see or speak to Coleman. The effort took its toll on Untermyer. Having turned 72 on March 6, 1930, he had not been in the best of health to begin with and after about a month on the case, his strength had deteriorated.
Fox offered to hire additional counsel. He and Untermyer went down a list of prospects and everywhere found the same story. Every well-qualified lawyer was a director of either a bank or a telephone company and so could not take the case. Consequently, Untermyer soldiered on alone, with only his lawyer son Alvin as an aide-de-camp.
At least moral support came in from distant quarters. On March 14, 1930, David A. Brown, the former head of Fox Securities, wrote to Fox to say that at two recent large Jewish conferences in Chicago and Washington, DC, “you and your affairs were a general topic of discussion and . . . the prevalent opinion now is that Halsey, Stuart and the Telephone Company have tried to steal your organization and have been caught in the attempt. Public opinion is with you one hundred percent . . .” Brown still wanted to help: “Don’t forget, Will, that if at any time I can be of any service, no matter how minor, a word from you will be sufficient.”
Almost every day from mid- to late March 1930 brought new trouble.
Far from humbling Otterson and Stuart, their defeat at the March 5 stockholders meetings steeled a determination to win by any means. In a conference in his chambers two days later, federal judge Coleman ordered Otterson and Stuart to dissolve the December 3, 1929, voting trust, which represented the main roadblock to the Bancamerica-Blair refinancing plan. Otterson and Stuart refused, insisting the trusteeship was still valid and vowing to prove it in court.
On March 11, 1930, Fox filed suit in federal court to cancel the voting trust and have him declared the sole owner of the voting shares. Essentially, he was trying to transfer jurisdiction from the state court system, where he suspected Judge Levy’s hostile influence would reach up into the Appellate Division, to the federal court system, where the case would come before Judge Coleman, who seemed to lean in Fox’s favor. Otterson and Stuart easily blocked that move. On March 13, they got a temporary injunction in state court from Judge Levy that restrained Fox from proceeding with the lawsuit in federal court. One week later, they got a U.S. Appeals Court to prohibit Coleman from holding any further hearings on the receivership lawsuits until April 7, 1930.
These were grievous blows. Time was against Fox. On April 15, 1930, if not already completed, Bancamerica-Blair’s contract with him would expire. Also on that date, the annual meetings of the boards of directors of Fox Film and Fox Theatres boards would take place. Otterson and Stuart had already announced that, at the Fox board meetings, they intended to assert their authority as two-thirds of the disputed trusteeship and replace a majority of the companies’ directors. Unquestionably they would depose Fox as chairman, cancel the Bancamerica-Blair agreement, and push through the Halsey, Stuart refinancing plan.
It looked as if Otterson and Stuart merely had to drum their fingers on their desks and turn the pages of the calendar. In fact, time wasn’t on their side, either. A confrontation with Fox at the April 15 board meetings would inevitably be explosive, risking utter chaos for the companies’ reputation and operations—and given their failure to gain control of Fox’s voting shares at the stockholders meetings, Otterson and Stuart might not win. Then they would have to fall back on the receivership lawsuits they had instigated.
But a receivership for the Fox companies would be most imprudent. So advised Richard T. Greene, an outside lawyer hired by AT&T to evaluate the ERPI division’s relationship with Fox. Greene told his clients that a receivership would probably be worse for their side than for Fox. In a March 14, 1930, memo to ERPI’s in-house counsel George C. Pratt, Greene acknowledged that Fox “would prefer the wreck of the companies” to a continuation of the voting trust with Otterson and Stuart. Greene outlined two possible outcomes of a receivership. Either the receiver would remove Fox temporarily from control, reorganize the companies, and then restore Fox to power—no one was more qualified or more motivated to do the job—or else the receiver would sell off all the Fox companies’ assets, voiding all existing contracts, including those with ERPI. In either case, ERPI would be no further ahead than it was now, while Fox might well triumph. Greene concluded, “Any plan avoiding receivership . . . is preferable to any of the foregoing alternatives.”
And what was most preferable of all? First on his list of recommendations, Greene wrote, “It is desirable that Mr. Fox be ousted of his control of Film and Theatres.”
Years before he would learn about Greene’s letter, Fox believed that he had been targeted for removal by AT&T in order to eliminate the threat of his Tri-Ergon sound-on-film patents. Over and over he would be dismissed as a paranoid megalomaniac who vastly overestimated his capabilities and importance. Surely the phone company had better things to do than to plot against him. Yet, there it was—not only AT&T’s statement of intent to unseat him as head of the Fox companies, but also an acknowledgment that it had never meant to deal with him fairly. Greene’s letter described the December 3, 1929, voting trust as one that had secretly been designed to “virtually eliminate him [Fox].”
Pratt immediately forwarded Greene’s letter to Otterson. Evidently, Otterson’s marching orders were to get rid of Fox as the head of the Fox companies.
The prime candidate to supplant Fox—the only candidate, actually—was Harley Clarke. AT&T didn’t particularly like Clarke. When, in late November 1929, Clarke had tried to buy Fox’s voting shares, he had asked ERPI for a loan and was turned down. Now necessity cast Clarke in a different light. The phone company didn’t necessarily have to like him, only to believe that it could control him. Astutely, Clarke assured Otterson that if he gained control of Fox Film and Fox Theatres, he would grant ERPI more favorable sound-on-film contracts.*
Now, in late March 1930, ERPI agreed to give Clarke a $5 million one-year loan, to be secured by 133,500 shares of General Theatres Equipment stock. Although according to Fox’s calculation, that collateral had an inherent worth of only $133,500, its value would multiply greatly once the Fox companies were swept into the GTE fold.
All that remained was to turn the heat up so high that Fox would have no choice except to sell his voting shares to Harley Clarke.
On March 22, 1930, Winfield Sheehan sued Fox to restrain him from implementing the Bancamerica-Blair plan and to compel him to return to the voting trust. The following day, Sheehan held a press conference at the Savoy Plaza Hotel in New York. Distributing copies of the affidavit that formed the basis of his complaint, he explained, “I deeply regret the necessity of this action and I decided to institute it only after a lengthy consideration of the attitude of Mr. Fox.”
According to Sheehan, Fox had run Fox Film and Fox Theatres “as if these enterprises were his own private affair, to be regulated by his own whims, personal desires and caprices” and was now trying to “jam his selfish plans and interests through, at the expense of the stockholders.” Why did Fox prefer the Bancamerica-Blair plan to the Halsey, Stuart plan, which would allegedly save the Fox companies $13–$31 million? Sheehan claimed that Fox had made secret “side agreements”—kickback deals—with the Bancamerica-Blair bankers. Fox had been unreasonable, “obstructive,” isolated, unwilling to listen to the advice of his concerned executives, and indifferent to the welfare of his stockholders, employees, and creditors.
Lest that portrayal of his boss seem difficult to square with the Fox companies’ stellar financial performance, Sheehan had an explanation. He, not Fox, was the real genius of the operation. Since becoming Fox Film’s head of prod
uction in October 1925, Sheehan claimed in his affidavit, he personally had led the studio to its peak of creative and financial success.
“I was the responsible general manager and the chief executive of this company, and under my management and supervision, the company has prospered enormously,” Sheehan stated. “I have a more intimate knowledge of the general business details, production details, distribution details, and all other fields which are under my supervision, than any other official, executive or employee of the company.” The numbers proved it, Sheehan said. In 1925, when he took over as head of production, the studio’s gross income from motion pictures had been $21.3 million. For 1929, gross income from similar sources was $72 million. Fox, Sheehan implied, was a mere figurehead.
No, Sheehan was not being disloyal. Rather, as Fox Film’s true steward and protector, he felt an “earnest obligation and duty to set forth the facts as they occurred.”
A reporter who visited Sheehan in his suite at the Savoy-Plaza around this time glimpsed a spirit other than the selfless pursuit of truth. “A determined jaw clamped down hard on what was once a cigar. One finger pointed aggressively by way of emphasizing the import of what was to come: ‘I know I am right and I am determined to win.’ ”
Some of Sheehan’s claims were outright lies and others were gross distortions. Fox had no underhanded deal with the Bancamerica-Blair group. There would be no great savings with the Halsey, Stuart plan: either it wouldn’t happen or it would lead to plundering of the Fox companies. As for the connection between Sheehan’s installation as head of production and Fox Film’s greatly increased revenues, it was not a cause-and-effect relationship.
The most successful Fox movies of the second half of the 1920s (What Price Glory, 7th Heaven, Street Angel, Four Sons, Mother Machree, Lucky Star, The Cock-Eyed World) made money not only because they were skillful, crowd-pleasing entertainment, but also because Fox had bought enough of the right kind of theaters to show them in. In particular, Fox’s January 1928 acquisition of the remaining two-thirds of West Coast Theaters’ stock had guaranteed access to more than 450 high-class venues, so that Fox Film rentals from that chain increased from $127,000 in 1927 to more than $2 million in 1929. Additionally, because West Coast rented $7.5 million worth of movies annually from other studios with large theater chains, Fox Film was able to bargain to get its movies into their theaters. Furthermore, the advent of sound had significantly enlarged the motion picture audience overall, increasing the pool of money available to be had. Other major studios such as Warner Bros., M-G-M, and Paramount had also seen a tremendous rise in income beginning in 1928 following the introduction of talking pictures.