TRADE: Drug Mystery

Frank Donald Coster graduated from Heidelberg with an M.D. and a Ph.D., practiced medicine in New York City from 1912 to 1914. He quit practice to become president of Girard & Co., a small drug manufacturer owned by his mother’s family. In 1926 he bought control of McKesson & Robbins, old and honored New York drug house, and made it the nucleus of a nationwide manufacturing and distributing business.

To McKesson & Robbins, Inc., whose 1928 expansion was underwritten by Goldman, Sachs and Bond & Goodwin, Dr. Coster transferred a private enterprise of his own, the business of trading in crude drugs from far places—China wood oil, camphor from Japan, Javanese quinine. McKesson & Robbins’ crude drug department was very much the private concern of President F. Donald Coster.

Last week Dr. Coster and his crude drugs became the X and Y of a mystery-story equation. Other factors were forged Dun & Bradstreet reports, dummy trading companies, phantom warehouses, vanished inventories and missing assets of $18,000,000.

Chapter 1. Before Judge Edwin Stark Thomas in the U. S. District Court at Hartford, Conn, last week appeared Vincent W. Dennis, a McKesson & Robbins’ stockholder and corporation counsel of Hartford. Representing that at least $10,000,000 in nonexistent assets had been fraudulently written up on the company’s books, Stockholder Dennis asked for a temporary equity receivership and got it.

Chapter 2. In Manhattan that evening Lawyer Wilbur Love Cummings, a McKesson & Robbins director, was called on the telephone by the company’s treasurer, Julian F. Thompson, and told about the receivership. Mr. Cummings thereupon turned amateur detective. He tipped off another director. Partner Sidney J. Weinberg of Goldman, Sachs, who is a governor of the New York Stock Exchange, and the Exchange suspended trading in McKesson & Robbins next morning.*

Chapter 3. Two days later Mr. Cummings, who had gone to Bridgeport to pick up the scent, appeared before the Exchange’s Stock List Committee to report. With him was Treasurer Thompson, no mean detectivehimself. Said Mr. Cummings : “The facts are really comparatively simple, but they’re so darn fantastic that we still can’t believe them.” The fantastic facts:

All the mystery was in the crude drug department, which Dr. Coster ran with the help of Assistant Treasurer George E. Dietrich. Each year the department reported a nice inventory profit from its operations abroad and this profit was added to the inventories and accounts receivable on the books. Accountants Price, Waterhouse & Co. certified that the inventories had been “certified … by responsible officials” without certifying the inventories themselves.

Last month, while checking up on inventory insurance, Treasurer Thompson found that the insurance did not cover crude drug inventories. Dr. Coster told him the insurance was handled by W. W. Smith & Co., the company’s Montreal agent. Mr. Thompson found several Dun & Bradstreet reports in the company files showing W. W. Smith to be a worldwide trading company with assets of between $6,000,000 and $7,000,000. Suspicious Mr. Thompson went to Dun & Bradstreet and was told the reports were forgeries. Next Mr. Thompson began checking up on W. W. Smith and on another Montreal firm, Manning & Co., which seemed to be “a sort of fiscal agent, a sort of a fiscal agent in the English sense, a sort of a banking firm.” Manning’s Montreal staff consisted of a female secretary.

W. W. Smith had moved its New York office to Brooklyn, where Mr. Thompson interviewed a “funny looking customer” named Vernard who remarked: “I hear you’re doing a lot of alcohol business these days.” Mr. Thompson found that the crude drug department warehouses were nothing but addresses—one a stenographer’s, another a mimeograph operator’s. While he was wondering what to do next, the receivership was granted.

Chapter 4. Messrs. Cummings and Thompson didn’t like the Hartford receivership. They suspected that Dr. Coster was somewhere behind it. Only a few days before, Mr. Thompson had refused to sign the papers for a $3,000,000 bond issue Dr. Coster wanted to sell. Assistant Treasurer Dietrich was reported by one of the receivers to have “shouldered the entire blame.” So Messrs. Cummings, Thompson and others went to New York, got trustees appointed for reorganization of the company under the Chandler (bankruptcy) Act.

Chapter 5. By the fourth day of the case possible missing assets had grown to $18,000,000—$10,000,000 in inventories and $8,000,000 in accounts receivable. Five investigations began—by the SEC, Department of Justice, U. S. Treasury, New York State Attorney General John J. Bennett Jr., and New York County District Attorney Thomas E. Dewey. Mr. Bennett got started first, sent a man to Canada to try to find some warehouses.

Chapter 6. At week’s end Mr. Bennett got a court order tying up a $100,000 brokerage account of Dr. Coster’s wife, Carol, on the ground that “she is in all probability in possession of funds which . . . may be … derived from . . . fraudulent practices.” That seemed to point to a possible answer to one question in the mystery: what happened to the money? Other questions remained unanswered. What the crude drug department’s real business was, nobody knew. Whether there were any real warehouses where drugs or liquor might be cached, nobody knew. How long the crude drug department had been making false inventory reports, or whether it had ever traded in legitimate drugs, nobody knew. Unless Dr. Coster would talk, it might take six months to answer these questions. McKesson & Robbins directors, without waiting for the answers, invited Dr. Coster to resign.

* In over-the-counter trading the company’s bonds broke from 103 to 56.75, its common stock from $7.50 to $1.25.