Corporations: The Great Conspiracy

In a tense and packed Philadelphia courtroom last week, a drama took place that U.S. business will long remember—to its shame. The cases before him, said Federal District Judge J. Cullen Ganey, were “a shocking indictment of a vast section of our economy.” They were more than that. They showed clearly that the executives of a mighty industry, publicly devoted to the concept of competition, had privately conspired to rig prices to the detriment of their customers on a scale so vast that it embraced everything from the Tennessee Valley Authority to the private utilities that supply the nation’s light and power.

Up for sentencing were 29 electrical-equipment companies, headed by the industry’s two “competitive” giants, General Electric and Westinghouse, and 44 of their executives. Long ago, faced with incontrovertible evidence gathered by the Eisenhower Administration’s relentless trustbusters, the companies and individuals had pleaded guilty or nolo contendere (no contest) to charges that they conspired over the past seven years to fix prices and rig bids in the sale of some $7 billion worth of heavy electrical equipment (TIME, Feb. 29, 1960, et seq.). Now the moment of reckoning had come. First before the court came the lawyer for John H. Chiles Jr., 57, a vice president of Westinghouse, to plead for mercy. His client, said the lawyer, while Chiles bowed his head, was a vestryman of St. John’s Episcopal Church in Sharon, Pa. and a benefactor of charities for crippled children and cancer victims. “These men,” the lawyer pleaded, “are not grasping, greedy, cutthroat competitors.”

In antitrust cases, executives may be fined but are rarely jailed. Judge Ganey sentenced Chiles to 30 days in jail. Chiles began automatically to return to his seat, but was startled to be seized by two armed deputy U.S. marshals and hustled off to the marshal’s office to be fingerprinted.

Behind the Door. One by one, as the sentencing went on, lawyers rose to describe their clients as pillars of the community. William S. Ginn, 45, vice president of General Electric, was the director of a boys’ club in Schenectady, N.Y. and the chairman of a campaign to build a new Jesuit seminary in Lenox, Mass. His lawyer pleaded that Ginn not be put “behind bars with common criminals who have been convicted of embezzlement and other serious crimes.” Judge Ganey thought the company appropriate, gave Ginn 30 days in jail. The lawyer for Charles I. Mauntel, Westinghouse division sales manager and a man prominent in charitable and community affairs in Drexel Hill, Pa., asked: “What difference does it make if the Government recommends 30 days or 60 days or more? What matters is crossing the prison door at all.” Judge Ganey recommended 30 days behind the door.

Despite other pleas attesting to the public usefulness and position of the defendants, the federal judge handed out the greatest number of jail terms ever in an antitrust proceeding. He gave 30-day sentences to George E. Burens, 55, G.E. vice president and division manager, Lewis J. Burger, 49, G.E. division manager—both demoted from those positions since the indictment—Edwin R. Jung, 58, vice president of Clark Controller Co., and John M. Cook, 56, vice president of Cutler-Hammer Inc. He fined the 29 electrical companies a total of $1,787,000, levied fines ranging from $1,000 to $12,500 on the individuals, and gave 21 other executives suspended 30-day jail sentences—advising some that they would also have gone to jail except for reasons of age and health.

Balmed Conscience. Judge Ganey confined jail sentences to those he felt had “ultimate responsibility for corporate conduct”—but he made it clear that he did not think that all the guilty parties were in court. Though the Government could not get enough evidence against them, he said, the “highest echelons” of each company “bear a grave responsibility.” Most of the defendants, said the judge, “were torn between conscience and an approved corporate policy, with the rewarding objectives of promotion, comfortable security and large salaries—in short, the organization or company man, the conformist.” Even to those whom he did not send to jail, the judge gave no verbal mercy. When the lawyer for M. A. deFerranti, a former G.E. manager, tried to defend his client, Judge Ganey snapped: “But here again is the classical company man. He balmed his conscience for a salary of $60,000 a year.”

What aroused Judge Ganey’s indignation was not only the conspiracy but also the efforts of almost everyone involved to justify his misdeeds as part of a prevailing business morality. “What is really at stake here,” said the judge, “is the survival of the kind of economy under which America has grown to greatness, the free-enterprise system.” Many of the executives pleaded through their lawyers that they were victims of corporate policy and morality. G.E., declaring that sympathy for the arrested was misplaced, denied that it had any “business policy or alleged conformity” that would lead its executives into violations of the law; it then called the defendants “nonconformists” who deliberately broke G.E.’s “Directive Policy 20.5” insisting on strict obedience to the antitrust laws. Judge Ganey said that it would be “naive” not to believe that top company officials knew what was going on in such vast and prolonged shenanigans, noted that G.E.’s rule “was honored in its breach rather than in its observance.”

Identical Bids. The Government said that the conspiracy had been going on for nearly 25 years. The companies involved might have got away with it even longer had not TVA—which bought from the companies such equipment as the $16.1 million, 500,000-kw. turbogenerator for its Widows Creek steam plant in Alabama—become aroused over a succession of almost identical bids. It tipped off the Justice Department, which began digging into the conspiracy in 1959 under the direction of Republican Trustbuster Robert Bicks (who recently entered private law practice). Often the Government has a hard time gathering evidence in antitrust cases, but this time it got a break. In October 1959, four Ohio businessmen were sentenced to jail for antitrust violations, the first in history to go to jail after pleading nolo contendere in an antitrust case. (One of them committed suicide on the way to jail.) This news sent a chill through the electrical-equipment executives under investigation, and some agreed to testify about their colleagues under the security of immunity. With the evidence gathered from them (most are still with their companies), the Government sewed up its case.

The threads wove a fantastic pattern. Top electrical-equipment executives, gathering together at conventions or in hotels, homes and resorts, worked out common prices, split up markets as if they were personal property, and devised ingenious systems for rigging bids on contracts, such as the “phase of the moon” system in which each firm knew when to bid low or high, taking its turn in rotation at the low bid. With most of the industry represented, the conspiracy directly or indirectly affected almost every dam built, every power generator installed and every electrical distribution system set up in the U.S., even reached into the new and vital field of atomic energy.

Many of the executives complained that they had to go along with the conspiracy if they hoped to keep their jobs or have a chance for promotion. Some, even after indictment, openly defended what they had done. F. F. Loock, president and general sales manager of Milwaukee’s Allen-Bradley Co., who was slapped with a $7,500 fine and whose company was fined $40,000, maintained that “no one attending the gatherings was so stupid he didn’t know they were in violation of the law.” Then he added, in a surprising non sequitur: “But it is the only way a business can be run. It is free enterprise.”

Handcuffs & Guards. G.E. has already demoted, shifted or cut the pay of 48 employees involved in the antitrust violations, including 16 who were indicted. Several of the G.E. men indicted who drew fat salaries ranging from $60,000 to $125,000 have had their salaries cut as much as $50,000. But G.E. made no move at all to discipline its most important figure in the trial: Vice President Ginn, head of G.E.’s important turbine-generator department at a salary of $125,000 a year. G.E.’s lame reason: Ginn’s illegal activities in the transformer field were outside the company’s own three-year statute of limitations for antitrust violations. Westinghouse demoted none of its executives, noted that its employees’ punishment “already is harsh,” and announced that “no further penalties would serve any useful purpose.”

At week’s end Westinghouse’s Chiles and Mauntel were led off in handcuffs to begin their sentences in a county jail in Norristown, Pa. The others, except for one who got permission to remain free another week to attend his daughter’s engagement party, were to begin their sentences this week.

More Trouble. The companies’ troubles will not end with the paying of fines, the completion of jail sentences, or the issuance of public relations disclaimers. The antitrust law gives defrauded customers the right to sue for as much as treble damages—and many customers are spoiling to get at the conspirators. More than a dozen cities, including New York and Chicago, are considering suits, and the National Institute of Municipal Law Officers may seek treble damages for many of the 171 cities who bought price-fixed and bid-rigged equipment. The Justice Department announced that it will bring suit within two months for damages on behalf of some 20 federal agencies that could amount to more than $250 million in claims.

All told, the suits against the companies involved in the conspiracies could total as much as $1.7 billion. To collect, their customers must first prove that they were charged more than they would have been without the conspiracy. But the Government charges that the manufacturers raised prices by mutual agreement, and the records show that the companies started cutting their bids as soon as the Government began investigating. TVA had paid $34 per kilowatt for its Widows Creek turbogenerator; because of foreign competition and other factors, the price for similar generators has since dropped to about $14 per kilowatt. So worried are the companies about their chances that some have already agreed to negotiate claims out of court: G.E. has offered to negotiate privately with anyone who feels that he was cheated.

The expectation of further trouble for the companies last week forced down G.E. and Westinghouse stock on the New York Stock Exchange. On one day, so many sell orders accumulated for G.E. stock that it took four hours before the price could be set and the stock opened. In turbulent trading during the day, 238,500 shares changed hands. By week’s end G.E. stock had fallen more than $7 to about $62 and Westinghouse stock about $5 to $42.50.