Samuel Insull Trial: 1934
Samuel Insull Trial: 1934
Defendants: Samuel Insull, Samuel Insull, Jr., Harold L. Stuart, and 13 others
Crime Charged: Use of the mails to defraud
Chief Defense Lawyers: Frederick Burnham, James J. Condon, Harry S. Ditchburne, William H. Haight, John J. Healy, Charles E. Lounsbury, J. Fred Reeve, and Floyd E. Thompson
Chief Prosecutors: Dwight H. Green and Leslie Salter
Judge: James H. Wilkerson
Place: Chicago, Illinois
Dates of Trial: October 2-November 24, 1934
Verdict: Not guilty
SIGNIFICANCE: Many people consider the Samuel Insull case to be the father of the Federal Securities and Exchange Act. The revelations of the trial produced immediate legislation to regulate the issuance of securities, control stock exchanges, and protect the unwary from holding companies. The trial gives insight into a time when a stock manipulator could build a pyramid of commercial wealth, making as much as a million dollars a week, at the expense of thousands of small investors doomed innocently to ruin.
Samuel Insull was a 21-year-old Englishman in 1881 when inventor Thomas Alva Edison brought him to America as his private secretary. Eleven years later, Insull was Edison's most trusted adviser, with discretion to handle all the inventor's financial matters.
In Schenectady, N.Y., the Edison General Electric Company was losing money. Edison dispatched Insull upstate: "Whatever you do, Sammy, make either a brilliant success of it or a brilliant failure. Just do something." Within a few years after Insull took charge, the company had grown from 200 employees to 6,000. Soon it was the well-established General Electric Company, or GE.
In 1892, Insull became president of Chicago Edison Company. He borrowed $250,000 from Marshall Field and began buying the independent electricity-generating plants that were proliferating in Chicago. By 1907, his Commonwealth Edison Company served the entire city, and investors had put in hundreds of millions of dollars.
Inventor of the "Power Pool"
Meantime, Insull acquired small electric companies in surrounding counties. Eventually his Public Service Company of Northern Illinois served half the state—some 6,000 square miles. Insull built the world's largest generating plants, with long transmission lines, reducing production costs and consumer rates and increasing efficiency and profits. A reliable "power pool," as he called it (it was entirely his idea), supplied the network covering all Chicago and northern and central Illinois.
By the 1920s, Insull had reorganized the near-bankrupt People's Gas Light & Coke Company (its stock rose from $20 to $400 a share). He controlled Chicago's elevated rail lines and its commuter trolleys. His utilities companies operated in 39 of the 48 states. The man was worth more than $100 million. To trusting investors, his name was magic.
In 1907, when Chicago banks refused to handle the unknown Commonwealth Edison Company securities, Insull had found Halsey, Stuart & Company. Over the years, the firm, headed by Harold L. Stuart, had sold more than 2 billion dollars of Insull properties stock.
Threatened with loss of control when the 1926-29 bull market saw new investment trusts buying up shares in his companies, Insull organized Insull Utility Investments, Inc. He and Halsey, Stuart would hold enough securities of the operating companies to keep him in command. The investment company's common stock opened at $30 a share, boomed to $147, then settled at $100.
Next, in September 1929, Insull created another investment company, Corporation Securities Company of Chicago. An offering circular was mailed to potential investors. Despite the "Black Friday" stock-market crash five days later, faith in Insull was so strong that within a year the public had bought $100 million of the new securities.
But the Great Depression steadily overpowered the Insull empire. By 1932, his holding companies were petitioning for bankruptcy. The operating companies—Commonwealth Edison, Peoples Gas, and Public Service of Northern Illinois—survived, with Insull still in charge. In June, however, he resigned, citing ill health and advanced age (he was 73). He and his wife sailed for Europe.
Accountants announced findings: Investors in Middle West Utilities had lost more than $700 million. Those in Corporation Securities had lost $85 million. Collateral had been "cross loaned" between the Insull companies. Favored creditors had been given preference. Millions in questionable brokerage fees had been taken from assets. Padded payrolls had included Insull's relatives and friends. Immense secret profits had been paid to as many as 1,600 favorites. They had bought 250,000 shares of Insull Utility Investments common stock at $12 before it opened at $30 and zoomed to $147; selling at only the opening price would have produced $4,500,000 in profits.
Arrested in Istanbul
A Cook County grand jury indicted Insull and his brother Martin for embezzlement from the Middle West Utilities Company and Mississippi Valley Utilities Investment Company. A federal grand jury indicted Insull and 16 others, including Samuel, Jr., who had joined his father's business in the 1920s, and Harold L. Stuart, for using the mails to defraud.
Insull disappeared. Congress passed a special bill allowing U.S. authorities to arrest him in any country where it had extraterritorial rights. Found aboard a ship bound for Egypt, he was arrested in Istanbul and returned under heavy guard to America.
U.S. Attorney Dwight H. Green's opening at the trial on October 2, 1934, charged that the defendants, through Utility Securities Company, fraudulently schemed to induce investors nationwide to buy the common stock of Corporation Securities Company at inflated prices. He also charged that Insull-controlled companies had maintained a fictitious market for the common stock, thus misleading prospects as to its value. To carry out the scheme, the defendants had used the mails to send circulars to those they intended to defraud.
"The Jewels of the Insull Empire"
Eighty witnesses identified books and records. Another 50 had been solicited and bought stock. As countless company names became blurs in jurors' minds, the big picture grew clear: The government was out to prove that Insull's success had been gained—repeatedly—by having one Insull electric company sell properties to another Insull electric company at a splendid profit, with the second company then selling to a third. The holding companies—the securities of which were proclaimed by a Halsey, Stuart salesman as "the jewels of the Insull empire"—and the investment companies had been created to expand the bubble … until the Depression deflated everything.
The specific charge against Samuel Insull and his cronies was that the circular mailed by Halsey, Stuart & Company inviting subscribers to buy stock in Corporation Securities was false and deceptive: The company, it said, would open with $80 million in assets, whereas it actually had only a bank loan of $3.5 million and 304,000 shares of Insull Utility Investments for which it had paid $7 million. And the circular failed to state that most of the stock the company intended to buy was common stock paying only a stock dividend, not cash.
Chief defense lawyer Floyd E. Thompson, a highly respected former Illinois Supreme Court justice, skillfully brought out his client's English training in business, his success with Thomas Edison and GE, the vast saving in the cost of electricity his "power pool" had generated, and his accumulation of utility companies to assure their continuing control and hold off government ownership.
Insull further testified that divisions of stock were in line with prevailing corporate practice, that stock dividends (rather than cash) were common and represented earnings plowed back to increase equity value. As to the offending circular, Insull said its statement of assets was based on completion of financing, entirely in accordance with market practice.
Next, Insull testified on the "buoyant" optimism of the financial community in March 1930, after the crash, and on how the Corporation Securities Company's portfolio depreciated some $45 million in late 1930, then appreciated $86 million in early 1932, when people thought the Depression was over. He and his associates had done nothing unusual in "supporting the market," he said; even the United States did it for government bonds. He himself had borrowed $5 million to bolster Corporation Securities Company, then borrowed a million from GE to reduce the bank loan. But by April 1932 his holding companies had gone into receivership. To avoid bankruptcy, he had given his creditors everything he had. He now owned no property, had no income, and depended on his son for food and shelter.
"We are Trying that Age"
The gist of the Insull defense was that the government had to find someone to blame for the ills the Depression had caused. Samuel Insull, as the magic name in the era of million-dollar risks and losses, was the logical culprit. Thompson summarized:
Gentlemen, you have had a description here of an age in American history which we hope never will be repeated. We are trying that age. There is no proof here that anyone had any wrongful motive. There is proof that these men believed implicitly in the business venture in which they were engaged, and they poured their own fortunes and their own good names into it.
The jury agreed. It found all of the defendants not guilty.
Insull faced two more trials. In March 1935, a Cook County jury found him not guilty on the charge of embezzlement. In June in federal district court, he and his son and Harold Stuart were found not guilty of illegally transferring property with intent to prefer selected creditors and defeat the purpose of the Bankruptcy Act.
Insull returned to Paris, where he dropped dead on the street at 78. It was reported that his assets then were $1,000; his debts, $14 million.
—Bernard Ryan, Jr.
Suggestions for Further Reading
Busch, Francis X. Guilty or Not Guilty? New York: Bobbs-Merrill Co., 1952.
Davidson, Carla. "Chicago Transit," American Heritage (December 1985) 33-34.
Fleming, Thomas J. "Good-bye to Everything!" American Heritage (August 1965) 89.
Fuhrman, Peter. "Do it big, Sammy," Forbes (July 13, 1987) 278-280.
Michaels, James W. "History lesson," Forbes (December 24, 1990) 38-40.
Sifakis, Carl. The Encyclopedia of American Crime. New York: Facts On File, 1982.
Both before and after the stock market crash in 1929, Wall Street had no more potent symbol than Samuel Insull (November 11, 1859–July 16, 1938). He was the utilities magnate who either made fortunes or stole them. By the time of Insull's death on a Paris subway platform in 1938, most Americans had come to see him only as a thief.
Before October 1929, few American businessmen were more respected than Insull, who had a bit of Horatio Alger about him. Born in 1859 to a London family of modest means, Insull was twenty-one years old when he left England for a job in America. He came to work as Thomas Edison's personal secretary, a position that led him to a career in generating and selling electricity. In 1891, Edison's electrical holdings were folded into a new company, General Electric, with Insull named as a vice president. Soon dissatisfied with his position, Insull left the company to try his hand at running an electrical utility in Chicago. His efforts led to the creation of Commonwealth Edison, a model utility that quickly won over commercial and residential customers.
Insull preached what historian Harold Platt has called the "gospel of consumption," spreading the virtues of Commonwealth Edison through aggressive advertising and promotion. "Give Something Electrical," urged one Christmas ad campaign. Curious shoppers could visit a Commonwealth Edison "Electric Shop" to behold new appliances, or they could travel to the suburb of River Forest and see a model electric home. Samuel Insull had seen the future, and it was electric. Insull's ambition was to wire the entire United States. By late 1929, the companies he controlled generated one-eighth of all the electricity consumed nationwide. It was an activity that affected one million investors and forty-one million customers.
Insull raised money through the creation of holding companies. These were, in effect, corporate shells that allowed Insull to issue ever more stock. Investors bought the stock on Insull's reputation, and Insull used the proceeds to buy more utilities. The strategy worked until the great bear market of October 1929. Stock in four Insull holding companies declined $150 million in value by 1931. Small investors were especially hurt, and anyone who lost heavily in the crash was likely to hold Insull responsible for chasing the bull out of the market. The worsening Depression only furthered that view. Newspapers that had once viewed Insull as a genius now portrayed him as a pariah. During the 1932 presidential election, Democratic candidate Franklin Roosevelt lashed out at "the lone wolf, the unethical competitor, the reckless promoter, the Ishmael or Insull." In response, Insull fled the country, a move that only guaranteed more bad publicity. When he was extradited from Turkey two years later, Insull became a page-one story that simply would not go away.
The onetime protege of Edison was indicted for embezzlement, larceny, and mail fraud. Despite three separate trials Insull was never convicted, perhaps because Americans realized no one person could have caused such an economic calamity. Now stripped of one reputation and saddled with another, Insull retired to Paris, where he died in July 1938.
See Also: STOCK MARKET CRASH (1929).
Leuchtenburg, William E. Franklin D. Roosevelt and the New Deal: 1932–1940. 1963.
McDonald, Forrest. Insull. 1962.
Platt, Harold L. The Electric City: Energy and the Growth of the Chicago Area, 1880–1930. 1991.
Schlesinger, Arthur M., Jr. The Crisis of the Old Order, 1919–1933. 1957.
Samuel Insull (1859-1938), English-born American entrepreneur, organized a utilities empire in the 1920s valued at over $3 billion.
Samuel Insull was born on Nov. 11, 1859, in London. He attended school until the age of 14, when he became an apprentice clerk. After several jobs he was employed by the London manager for Thomas Edison. When he turned 21, Insull went to the United States, where he worked as Edison's secretary.
Edison liked Insull's stamina and audaciousness, and when the Edison General Electric Company was organized in 1899, Insull was made second vice president in charge of manufacturing and sales. Insull's biggest opportunity came when he took over the Chicago Edison Company, which had at least six competitors in the city. Slowly Insull combined the concerns into Commonwealth-Edison, using business methods which his critics called unfair. However, Insull's success was not due to manipulation alone; he also insisted on improved equipment such as the Curtis turbine, which allowed a wider distribution of electricity. Operating on his own, he expanded his interests into surface and elevated transit lines.
In 1912 Insull organized a conglomerate that became the symbol of "Insullism"—Middle West Utilities. With assets over $2 million, this maze of holding companies served at least 1,718,000 customers from 324 steam plants, 196 hydroelectric generating plants, and 328 ice plants.
During the 1920s Insull continued his pattern of using holding companies to control assets. By 1930 the empire consisted of five systems with assets over $2.5 billion that produced almost one-eighth of the total electric power in the United States.
Insull was recognized as one of the nation's important business leaders and received honorary degrees from several universities. The French government awarded him a knighthood in the Legion of Honor. In politics he supported both major parties as it suited his interests. His most notable philanthropic activities included support for the $20 million Chicago Civic Opera House and a donation of $160,000 to establish the London Temperance Hospital.
Insull's empire was in financial trouble in 1929, when the stock market crash and ensuing Depression sealed its doom. In June 1932 he was removed as executive officer of his companies and left for Paris virtually destitute. He was indicted on charges of fraud and embezzlement but fled to Greece, where he fought extradition. Finally returning to the United States for trial, he was acquitted. He fell into obscurity and died in Paris on July 16, 1938.
Only two books cover Insull's career: M. L. Ramsay is hostile to him in Pyramids of Power: The Story of Roosevelt, Insull and the Utility Wars (1937), and Forest McDonald shows sympathy in Insull (1962), which is the only full-length biography. □