Business & Finance: Babes & Wolves

Franklin Roosevelt and Senator Burton K. Wheeler are on record as believing that most intermediate holding companies should be eliminated; Governor George Earle of Pennsylvania likes to assert that the long fingers of J. P. Morgan reach into too many crannies for the public good; SEC Chairman William Orville Douglas argues that major financing programs should always be subject to competitive bidding. Last week all three of these themes ran through the complicated story of a battle for control of rich Chesapeake & Ohio Railway.

C. & O., which made $34,500,000 in 1937, is not only one of the few U. S. railroads in the black but is the only profitable woof left in the $3,000,000,000 Van Sweringen railroad and real-estate empire’s tangled warp. C. & O. is controlled by Chesapeake Corp., a holding company which owns 35% of its common stock. Chesapeake Corp. in turn is controlled by Alleghany Corp., another holding company which owns 71% of its stock. Last year, after the Vans had died, the chief backer of their declining years, Glass Tycoon George A. Ball, sold 46% of Alleghany Corp.’s common stock along with some real estate to a trio of virtual unknowns for $6,375,000 ($4,000,000 in cash, rest in notes). This trio consisted of two Wall Streeters. Robert Ralph Young and Frank Frederick Kolbe, and Allan Price Kirby, son of one of the F. W. Woolworth Co. founders. Admitting that they were “babes in the woods,” the new bosses of the Van Sweringen empire set put to simplify Allegheny’s elaborate holding company substructure, have been lost in the woods ever since. Last fall’s market crash forced Mr. Kolbe to liquidate his Alleghany holdings; the other two survived only to face a bitter attack by Wall Street wolves.

First skirmish occurred even before the “babes” bought control of Alleghany. In planning this purchase, there was originally a syndicate including General Motors Executives Donaldson Brown and John Thomas Smith, the former having large holdings of Alleghany preferred stock.

But Burton Wheeler, the Senate’s railroad finance policeman, advised them not to participate in the proposed deal and they have since, according to Mr. Young, steadfastly opposed his policies. Another pair who presently lined up against Mr. Young were two oldtime Van Sweringen officers, Charles L. Bradley and John P. Murphy, president and secretary respectively of both Alleghany and Chesapeake Corp. Last summer, when Robert Young proposed to eliminate Chesapeake Corp. entirely as an unnecessary corporate entity, these four opposed him. In December, when C. & O. President William Johnson Harahan died, they also opposed Robert Young’s decision to elevate longtime General Manager George Doswell Brooke to the presidency. Instead they proposed that President Charles Eugene Denney of Erie R. R. be given the job.

Last January Robert Young forced Messrs. Bradley and Murphy out of their Alleghany jobs. But he failed to get them out of Chesapeake. When he tried, Messrs. Bradley and Murphy simply refused to attend the directors meeting, thus preventing a quorum and any action. Then, in his capacity as president, Mr. Bradley called a special meeting of Chesapeake Corp. stockholders with the avowed purpose of shuffling the directorate contrary to Owner Young’s wishes, who feared losing his control thereby.

This action is only possible because Manhattan’s vast Guaranty Trust Co. happens at the moment to have the balance of power in the situation. For years it has held all of Allegheny’s 71% interest in Chesapeake Corp. as collateral for three bond issues. By the highly unusual terms of the indenture, Guaranty may exercise voting rights on this stock whenever the market value of the collateral falls below 150% of the bonds’ value as determined by quarterly appraisals, unless Chesapeake’s owners restore the collateral to the 150% figure within 30 days. When the Vans were Chesapeake’s owners, Guaranty never exercised this power, always gave its proxies to the Vans on request. Now Robert Young & friends own Chesapeake, the collateral is once more below the 150% level, and Guaranty has changed its policy.

Month ago, when Robert Young asked for the proxies to prepare himself for the Chesapeake meeting, Guaranty refused to give them. Instead it announced that it planned to appoint three “impartial” directors to the Chesapeake board to break the deadlock between Young & Kirby and

Bradley & Murphy. Month ago desperate Robert Young went to Judge Coxe’s district court in Manhattan, got a temporary stay restraining Guaranty from exercising voting rights on Chesapeake Corp. stock on the ground that before the end of the 30-day period of grace after the Feb. 1 appraisal the collateral back of one bond issue momentarily went above the 150% figure and also on the ground that Guaranty was acting in bad faith. Judge Coxe later refused a permanent injunction, so resourceful Robert Young appealed to Judge Manton of the Circuit Court of Appeals, got another temporary stay. Last week Judge Manton asked and got a stipulation from both sides that there would be no Chesapeake meeting until the court has made up its mind on the whole question.

Young’s Case. According to this bitterly angry financier, the whole shebang is a result of “the interests” ganging up on him. Robert Young asserts that when the Vans ran C. & 0., its fat banking account was always handled by J. P. Morgan & Co. or by Guaranty, on whose directorate sit two Morgan partners. Morgan’s, claims Mr. Young, also handled all C. & O. financing, which was never offered to competitive bidding from other investment houses. This business would now fall to Morgan Stanley & Co., Morgan’s underwriting offshoot since the New Deal divorced deposit banking and underwriting in 1933. Last summer in an exuberant moment Robert Young, who likes to think of himself as a financial liberal, told Senator Wheeler’s Senate Committee investigating railroad finance that he planned to open all C. & O. financing and banking to competitive bidding such as the New Deal recommends. He maintains that Morgan’s has been after his hide ever since and that this explains Guaranty’s actions. He also claims that Guaranty is yielding to Messrs. Brown & Smith since General Motors also banks at Guaranty.

To explain the opposition of Messrs. Brown & Smith, he claims that they have been against him because he outsmarted them in the original syndicate to purchase Alleghany. To explain the opposition of

Bradley & Murphy, Robert Young points to Cleveland rumors that they are minions of J. P. Morgan & Co. because Morgan’s lent them sufficient money last summer to buy Cleveland’s Higbee department store. To prove that “Guaranty Trust Co. has utilized, subverted and abused its fiduciary position as trustee,” he claims C. & O.’s present management has shown its worth by its success, that his simplification plans would benefit Alleghany bondholders, that Guaranty’s claim to impartiality was exploded when it rejected as possible “impartial” directors for Chesapeake such bigwigs proposed by Young as Pan American Airways’ Juan Trippe, U. S. Steel’s Edward R. Stettiaius Jr., Manufacturers Trust’s Harvey Dow Gibson.

Guaranty’s Case, With the aplomb of a man at the head of the third largest U. S. bank, Guaranty Chairman William Chapman Potter’s affidavit retorts: “I resent these allegations in the complaint and in Mr. Young’s affidavit and brand them as utterly false. The Guaranty Trust Co. has repeatedly told Mr. Young and his representatives that … the only desire of the Guaranty Trust Co. was to protect the interests of the bondholders of Alleghany Corp., for whom it is trustee.” Reason Guaranty is acting now, though it never did so while the Vans were in power, says Mr. Potter, is because for the first time there is a deadlock in the Chesapeake board, continuance of which might damage C. & O. Also, says Mr. Potter, more than a million in cash dividends of Chesapeake Corp. has piled in the Guaranty’s vaults and it wants to release the money.

Mr. Potter will shortly have another arrow in his quiver—a report soon to be released by the impartial SEC on Mr. Young’s proposed simplification of the Alleghany empire. SEC records show that this plan, formulated by a group preponderantly interested in the common stock of Alleghany, would benefit the common stock at the expense of other Alleghany and Chesapeake securities, notably the Series A Alleghany preferred. The owners of the 667,539 shares of this issue (among them Donaldson Brown and Mr. & Mrs. Young) were asked to surrender the right to accumulated dividends of $33 per share in exchange for a new type of preferred and a common stock warrant.