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Penny Dreadful
In his celebrated portrayal of fraudulent sales practices in “The Wolf of Wall Street,” Martin Scorsese did not show the victims who bought the penny stocks that fueled the profits of Jordan Belfort and the brokers at Stratton Oakmont. One would think that a blockbuster movie might teach investors a lesson about trusting such brokers, but fraud in the market for penny stocks continues unabated, as two criminal cases filed last week show.
On Tuesday, federal prosecutors in Brooklyn unsealed an indictment charging six people and six companies with conspiracy, tax fraud and money laundering involving up to $500 million in assets funneled through offshore shell companies created in Belize and Nevis that allowed clients to manipulate stock prices and hide their profits. It is a sure sign that the market for penny stock fraud is
growing when an industry is developing to help the scam artists avoid paying taxes.
The Wall Street Journal reported that two of the defendants in the case are linked to investigations by the Securities and Exchange Commission and Justice Department into manipulation of the Cynk Technology Corporation, which is based in Belize. A financial report filed by the company last year showed it had no assets or revenue, yet its stock jumped in just a couple weeks from about $2 a share to an intraday high of $21.95 in early July. The S.E.C. stepped in on July 11 to halt trading, after which the stock collapsed; a recent price quote was for 20 cents a share.
Last Thursday, the Manhattan district attorney, Cyrus R. Vance Jr., announced charges against eight defendants in a stock manipulation scheme that resulted in losses to investors of about $290 million. They are accused of using penny stock websites, including OxofWallStreet.com, PennyPic.com and MonsterStox.com, to promote companies they controlled to drive up the price before selling their shares to investors.
This type of scheme, called a pump-and-dump, is fairly simple. The scam artists gain control of a corporation, often by merging a private company into a corporate shell that is listed on one of the microcap stock exchanges, and issue a large block of shares to nominees acting on their behalf. Information hyping the company, usually about some new technology, is then disseminated through websites, newsletters and social media. Promoters trumpet the company’s prospects by telling investors to get in early before the rest of the market dives in — the pump. Shares are often bought and sold between nominees to give the appearance of active trading, further heightening interest as brokers contact clients to buy stock. Once the price starts rising, the control block can be dumped on the market, leaving investors with shares in a nearly worthless entity.
An investor alert issued by the S.E.C. on microcap fraud points out that more than 10,000 companies are traded on two interdealer quotation systems, the OTC Bulletin Board and OTC Markets Group, which used to be known as the “pink sheets” because the listings were printed each day on pink paper. Companies are not required to meet minimum financial standards to have their shares listed, unlike those on the New York Stock Exchange and Nasdaq. Most listings are for operating companies, but even if only a small percentage are shells ready to be used for a pump-and-dump scheme, that is a big pool for potential fraud.
Caesars’ Debt: Dealer’s Choice
The house always wins. That’s worth remembering when you’re in a casino. It also seems to be true for some people who hold Caesars Entertainment debt.
That’s the message of a tangled tale involving a dispute between Caesars and a group of debt holders. And the spat has troubling implications for corporate-bond investors everywhere.
The story begins in 2008 when Caesars, whose empire includes resorts in Las Vegas, New Orleans and Atlantic City, became the target of a $30 billion, highly leveraged buyout. Apollo Global Management and TPG Capital, two big private equity firms, acquired the company, then known as Harrah’s Entertainment. They continue to control the company.
A Caesars subsidiary — the Caesars Entertainment Operating Company — incurred most of the $23 billion in debt that financed the deal. That company has since exchanged some of the old debt for new; its current debt load of $19 billion is governed by different terms and rules, and some are tilted in the favor of the parent company.
A poker table at Caesars Palace in Las Vegas. In August, the resort’s parent company, Caesars Entertainment, offered some of its debt holders an attractive deal — and other holders are angry about its possible effects. Credit Julie Jacobson/Associated Press
At the heart of the dispute is a chunk of debt issued before the buyout: $1.5 billion of senior unsecured notes due in 2015 and 2016. Principal and interest payments were guaranteed by the parent company.
Caesars took a beating in the 2008 economic downturn. It is struggling now, and management has begun restructuring talks. Debt issues of Caesars are trading at well below their original value.
In mid-August, Caesars did something remarkable. It quietly offered a delectable deal to a few select investors holding the senior notes of 2015 and 2016. It paid par — 100 cents on the dollar — for $155 million of notes held by the chosen, as-yet-unnamed investors, more than double the prevailing market price for the debt.
Caesars got something, too. As part of the deal, the parent company’s guarantee of principal and interest payments for all the remaining notes held by other investors was removed from the senior notes’ governing documents. Under those documents, called indentures, changes can be made to the note terms if holders owning at least 51 percent agree. Caesars offered the premium to just enough holders to meet that threshold.
If this tactic is allowed to stand, deals that disenfranchise some bondholders in favor of others could become common.
Not long after the transaction, a group of holders who were excluded from it sued Caesars in Federal District Court in New York. One plaintiff is MeehanCombs L.P. of Stamford, Conn., whose president, Eli Combs, said: “The bond market needs to know whether or not we have gone back to the 1930s, when valuable rights could be stripped away from individual and smaller investors through backroom deals between issuers and a favored few. That’s what we think this case will determine.”
They argue changes to the indenture can’t override another of its provisions: that all holders’ rights to principal and interest cannot be impaired.
Caesars has not yet responded to the lawsuit, which argues that the “backroom deal” violates the Trust Indenture Act of 1939, a Depression-era law written to ensure that debt holders were treated fairly.
Richard Sylla, a professor at New York University, said that before the law, “Trustees often worked in cahoots with issuers and investment banks to draw up trust indentures that were not really in favor of the people buying the bonds.”
The dispute over the senior notes affects other Caesars debt: Removing the parent’s guarantee on the senior notes means that the guarantee can be stripped from $11.6 billion of other Caesars debt. That’s clear in the governing documents.
Taking a belt-and-suspenders approach to the guarantee on the notes, Caesars sold $135 million of stock this year, a transaction that it says also had the effect of stripping the parent company guarantee from the senior notes. The stock sale meant that the operating company was no longer wholly owned, thus releasing the parent from obligations on billions in debt.
That move has also spurred litigation.
Stephen Cohen, a Caesars spokesman, said the lawsuits were victimizing the company. “We have worked collaboratively and constructively with debt holders in an effort to improve the operating company’s financial condition while investing in the business and taking steps to enhance operating performance,” he said in a statement. “Despite the efforts of some speculators to impede our ability to improve the company’s financial situation, we are continuing to work with responsible creditors.”
Since the Caesars moves, the price of its debt has fallen. Second-lien notes due in 2018 and yielding 10 percent are trading at just over 25 cents on the dollar.
One reason may be that over the past two years, the company has sold valuable assets owned by the subsidiary to affiliates that are not liable for its debt, according to the note holders’ lawsuit.
Last March, the operating company sold four properties to Caesars Growth Properties Holdings — a Caesars Entertainment affiliate. They are the Cromwell, the Quad and Bally’s in Las Vegas and Harrah’s in New Orleans. The $2 billion paid gave the operating company breathing room, but that cash flow is no longer paying off its debt. Mr. Cohen said the asset sales were fair and in the operating company’s interests.
Caesars and its private equity owners may be playing hardball, increasing their leverage with bondholders as they try to restructure the debt. Spokesmen for Apollo and TPG declined to comment. So did a spokesman for the Law Debenture Trust Company of New York, the trustee on the notes that are part of the suit.
But the lawsuits over Caesars’ actions raise questions for pension funds that own stakes in Caesars through private equity investments with Apollo and TPG. Because of those deals, they are silent partners in what Caesars’ note holders say is unfair treatment of certain debt holders.
Some institutions are in the awkward position of holding stakes in Caesars’ battered equity as well as its troubled debt.
The most recent portfolio of the California State Teachers’ Retirement System, an investor in the Apollo fund that bought Caesars, shows that it also holds five Caesars debt issues that stand to lose their guarantees. A spokesman for the pension fund declined to comment.
In the long run, it’s hard to win in a casino. And it’s becoming hard to win as an investor in them. What’s troubling is that if the deal is found acceptable by the courts, the house advantage could spread to other companies, too.
Pedigree Counts
In August 1941, Richard Whitney, the former financier and New York Stock Exchange president, emerged from prison at Sing Sing, on parole after serving three years of a five- to 10-year sentence for grand larceny.
Whitney had stolen from the New York Yacht Club and from Harvard (where, as a member of the class of 1911, he had rowed for the crew team); from his wife’s family estate; as well as from the widows and children who depended on the Stock Exchange Gratuity Fund, of which he was trustee.
Dick Whitney had once been hailed as a “Great White Knight” of Wall Street. At the start of the terrifying market plunge of October 1929, he had bravely helped shore up the market by parading around the exchange floor, placing bids for shares of U.S. Steel, as well as other blue-chip holdings.
In the early 1930s, the top-hatted Whitney had a reputation as a “perfect snob,” quietly blocking Jewish aspirants from reaching important positions in his exchange. With a thoroughbred-horse-and-cattle farm in Far Hills, N.J. — he was also president of the Essex Fox Hounds — and a five-story, red brick townhouse at 115 East 73rd Street, his lifestyle required a formidable cash flow. And soon he found himself in severe debt.
Evidently intrigued that his Harvard schoolmate Joseph P. Kennedy, who had followed him by a year, had made millions selling Gordon’s Dry Gin and Haig & Haig Scotch, Whitney tried to achieve a similar trick — while Prohibition was winking out in 1933 — with Jersey Lightning applejack and Canadian rye. But these and other more fly-by-night gambits failed, and Whitney started his secret life of crime.
Both Whitney and President Franklin D. Roosevelt, who was six years his senior, were born into the old American, Northeastern, Protestant, moneyed patriciate; both had attended Groton School and Harvard. This shared inheritance, however, didn’t keep Whitney from leading a fierce campaign, summoning his full throw-weight as chief of the New York Stock Exchange, to attack Roosevelt’s proposed Wall Street regulations.
At the White House, Whitney warned the president that such drastic change could ravage the American financial system, with the result that “grass will grow in Wall Street.” Defending his organization, Whitney told United States senators and their staff members: “You gentlemen are making a huge mistake. The exchange is a perfect institution.” But Congress approved Roosevelt’s reforms, which were enforced by Joseph P. Kennedy, then the chairman of the new Securities and Exchange Commission.
On Halloween 1936, three days before his landslide re-election, Roosevelt signaled his intention to crank up more pressure against Wall Street. At a huge, raucous rally at Madison Square Garden, the defiant president declared that “government by organized money is just as dangerous as government by organized mob.” Using language that sounds almost contemporary in 2014, he said the “forces of selfishness,” of “reckless banking” and “class antagonism” were “unanimous in their hate for me, and I welcome their hatred.”
With the crowd shrieking, Roosevelt went on to exclaim, “I should like to have it said of my second administration that, in it, these forces met their master!”
Then, 16 months later, the president was informed of Whitney’s indictment for grand larceny, and details of the embezzlement. The president’s strategist-speechwriter Thomas Corcoran — whom Roosevelt called Tommy the Cork — recalled to me decades later that, in response to the news, the shocked Roosevelt lowered his head and murmured: “Poor Groton. Poor Harvard. Poor Dick.”
As in recent times, an American president had to make a decision about how personal he should get about the transgressions of Wall Street titans. The revelations about Whitney seemed to hand Roosevelt a powerful foil. Some of his advisers encouraged him to exploit and dramatize the Whitney scandal, making the financier a national avatar of Wall Street misbehavior.
But to their surprise and dismay, Roosevelt, in public, never cited Whitney, his offenses or his downfall. Although so often derided by many of his social peers as a “traitor to his class,” Roosevelt refused to exploit Whitney’s troubles; he did not instruct his staff and political allies to ask friendly journalists and legislators to help them make the fallen financier into a demonic household name. This is one reason that Whitney’s name is so little known today.
Corcoran, who died in 1981, told me that he believed that the president had pulled his punches largely out of deference to his and Whitney’s similar bloodlines. Corcoran said that Joseph Kennedy — an Irish-American, like himself — emphatically agreed with this theory. Corcoran and Kennedy may have been at least partly right, but by his sixth year in office, Roosevelt, deadlocked by a hostile Congress, was already turning from domestic affairs to the dangers posed by Hitler and the imperial Japanese.
In April 1938, after pleading guilty to grand larceny, Whitney was handcuffed between two other freshly minted convicts (for rape and extortion) and hauled off to Sing Sing, where he enjoyed a few vestiges of privilege. Some inmates politely removed their caps when Whitney arrived, and even contrived for him to get a hit on the prison baseball diamond. (Whitney had played first base at Groton.)
But the Sing Sing psychiatrist was startled that Prisoner No. 94835 displayed no self-reproach. In “The Embezzler,” his 1966 novel, Louis Auchincloss wrote of his title character, Guy Prime, based on Whitney, that he “had not believed that he had done anything really wrong.”
After parole, Whitney lived for decades in New Jersey with his wife (whom he outlived), serving as treasurer for a friend’s dairy and dabbling in other small ventures before his death in 1974 at the age of 86. In his book “Impeccable Connections,” Malcolm MacKay wrote of being told by Whitney’s daughter Appy that her mother had commanded her “never to speak to anyone” about her father’s “troubles.” After Whitney died, a few of his relatives responded to critical obituaries by pointing out that his well-publicized debts had been long ago repaid by his brother George, who had risen to become a top executive at J.P. Morgan.
Whitney’s scandalous demise left a lasting impression on a later American president. In March 1962, John F. Kennedy privately demonstrated that he shared his father’s opinion that when it came to ethics, there was sometimes an ethnic double standard. The Boston Globe had just revealed that as a Harvard freshman, Kennedy’s brother Ted had persuaded a friend to take a Spanish test in his name.
Referring to The Globe’s report about Ted — who was seeking his old Senate seat — the president sarcastically told his journalist friend Ben Bradlee: “It won’t go over with the WASPs. They take a very dim view of looking over your shoulder at someone else’s exam paper. They go in more for stealing from stockholders and banks.”
Michael Beschloss, a presidential historian, is the author of nine books
In his celebrated portrayal of fraudulent sales practices in “The Wolf of Wall Street,” Martin Scorsese did not show the victims who bought the penny stocks that fueled the profits of Jordan Belfort and the brokers at Stratton Oakmont. One would think that a blockbuster movie might teach investors a lesson about trusting such brokers, but fraud in the market for penny stocks continues unabated, as two criminal cases filed last week show.
On Tuesday, federal prosecutors in Brooklyn unsealed an indictment charging six people and six companies with conspiracy, tax fraud and money laundering involving up to $500 million in assets funneled through offshore shell companies created in Belize and Nevis that allowed clients to manipulate stock prices and hide their profits. It is a sure sign that the market for penny stock fraud is
growing when an industry is developing to help the scam artists avoid paying taxes.
The Wall Street Journal reported that two of the defendants in the case are linked to investigations by the Securities and Exchange Commission and Justice Department into manipulation of the Cynk Technology Corporation, which is based in Belize. A financial report filed by the company last year showed it had no assets or revenue, yet its stock jumped in just a couple weeks from about $2 a share to an intraday high of $21.95 in early July. The S.E.C. stepped in on July 11 to halt trading, after which the stock collapsed; a recent price quote was for 20 cents a share.
Last Thursday, the Manhattan district attorney, Cyrus R. Vance Jr., announced charges against eight defendants in a stock manipulation scheme that resulted in losses to investors of about $290 million. They are accused of using penny stock websites, including OxofWallStreet.com, PennyPic.com and MonsterStox.com, to promote companies they controlled to drive up the price before selling their shares to investors.
This type of scheme, called a pump-and-dump, is fairly simple. The scam artists gain control of a corporation, often by merging a private company into a corporate shell that is listed on one of the microcap stock exchanges, and issue a large block of shares to nominees acting on their behalf. Information hyping the company, usually about some new technology, is then disseminated through websites, newsletters and social media. Promoters trumpet the company’s prospects by telling investors to get in early before the rest of the market dives in — the pump. Shares are often bought and sold between nominees to give the appearance of active trading, further heightening interest as brokers contact clients to buy stock. Once the price starts rising, the control block can be dumped on the market, leaving investors with shares in a nearly worthless entity.
An investor alert issued by the S.E.C. on microcap fraud points out that more than 10,000 companies are traded on two interdealer quotation systems, the OTC Bulletin Board and OTC Markets Group, which used to be known as the “pink sheets” because the listings were printed each day on pink paper. Companies are not required to meet minimum financial standards to have their shares listed, unlike those on the New York Stock Exchange and Nasdaq. Most listings are for operating companies, but even if only a small percentage are shells ready to be used for a pump-and-dump scheme, that is a big pool for potential fraud.
Caesars’ Debt: Dealer’s Choice
The house always wins. That’s worth remembering when you’re in a casino. It also seems to be true for some people who hold Caesars Entertainment debt.
That’s the message of a tangled tale involving a dispute between Caesars and a group of debt holders. And the spat has troubling implications for corporate-bond investors everywhere.
The story begins in 2008 when Caesars, whose empire includes resorts in Las Vegas, New Orleans and Atlantic City, became the target of a $30 billion, highly leveraged buyout. Apollo Global Management and TPG Capital, two big private equity firms, acquired the company, then known as Harrah’s Entertainment. They continue to control the company.
A Caesars subsidiary — the Caesars Entertainment Operating Company — incurred most of the $23 billion in debt that financed the deal. That company has since exchanged some of the old debt for new; its current debt load of $19 billion is governed by different terms and rules, and some are tilted in the favor of the parent company.
A poker table at Caesars Palace in Las Vegas. In August, the resort’s parent company, Caesars Entertainment, offered some of its debt holders an attractive deal — and other holders are angry about its possible effects. Credit Julie Jacobson/Associated Press
At the heart of the dispute is a chunk of debt issued before the buyout: $1.5 billion of senior unsecured notes due in 2015 and 2016. Principal and interest payments were guaranteed by the parent company.
Caesars took a beating in the 2008 economic downturn. It is struggling now, and management has begun restructuring talks. Debt issues of Caesars are trading at well below their original value.
In mid-August, Caesars did something remarkable. It quietly offered a delectable deal to a few select investors holding the senior notes of 2015 and 2016. It paid par — 100 cents on the dollar — for $155 million of notes held by the chosen, as-yet-unnamed investors, more than double the prevailing market price for the debt.
Caesars got something, too. As part of the deal, the parent company’s guarantee of principal and interest payments for all the remaining notes held by other investors was removed from the senior notes’ governing documents. Under those documents, called indentures, changes can be made to the note terms if holders owning at least 51 percent agree. Caesars offered the premium to just enough holders to meet that threshold.
If this tactic is allowed to stand, deals that disenfranchise some bondholders in favor of others could become common.
Not long after the transaction, a group of holders who were excluded from it sued Caesars in Federal District Court in New York. One plaintiff is MeehanCombs L.P. of Stamford, Conn., whose president, Eli Combs, said: “The bond market needs to know whether or not we have gone back to the 1930s, when valuable rights could be stripped away from individual and smaller investors through backroom deals between issuers and a favored few. That’s what we think this case will determine.”
They argue changes to the indenture can’t override another of its provisions: that all holders’ rights to principal and interest cannot be impaired.
Caesars has not yet responded to the lawsuit, which argues that the “backroom deal” violates the Trust Indenture Act of 1939, a Depression-era law written to ensure that debt holders were treated fairly.
Richard Sylla, a professor at New York University, said that before the law, “Trustees often worked in cahoots with issuers and investment banks to draw up trust indentures that were not really in favor of the people buying the bonds.”
The dispute over the senior notes affects other Caesars debt: Removing the parent’s guarantee on the senior notes means that the guarantee can be stripped from $11.6 billion of other Caesars debt. That’s clear in the governing documents.
Taking a belt-and-suspenders approach to the guarantee on the notes, Caesars sold $135 million of stock this year, a transaction that it says also had the effect of stripping the parent company guarantee from the senior notes. The stock sale meant that the operating company was no longer wholly owned, thus releasing the parent from obligations on billions in debt.
That move has also spurred litigation.
Stephen Cohen, a Caesars spokesman, said the lawsuits were victimizing the company. “We have worked collaboratively and constructively with debt holders in an effort to improve the operating company’s financial condition while investing in the business and taking steps to enhance operating performance,” he said in a statement. “Despite the efforts of some speculators to impede our ability to improve the company’s financial situation, we are continuing to work with responsible creditors.”
Since the Caesars moves, the price of its debt has fallen. Second-lien notes due in 2018 and yielding 10 percent are trading at just over 25 cents on the dollar.
One reason may be that over the past two years, the company has sold valuable assets owned by the subsidiary to affiliates that are not liable for its debt, according to the note holders’ lawsuit.
Last March, the operating company sold four properties to Caesars Growth Properties Holdings — a Caesars Entertainment affiliate. They are the Cromwell, the Quad and Bally’s in Las Vegas and Harrah’s in New Orleans. The $2 billion paid gave the operating company breathing room, but that cash flow is no longer paying off its debt. Mr. Cohen said the asset sales were fair and in the operating company’s interests.
Caesars and its private equity owners may be playing hardball, increasing their leverage with bondholders as they try to restructure the debt. Spokesmen for Apollo and TPG declined to comment. So did a spokesman for the Law Debenture Trust Company of New York, the trustee on the notes that are part of the suit.
But the lawsuits over Caesars’ actions raise questions for pension funds that own stakes in Caesars through private equity investments with Apollo and TPG. Because of those deals, they are silent partners in what Caesars’ note holders say is unfair treatment of certain debt holders.
Some institutions are in the awkward position of holding stakes in Caesars’ battered equity as well as its troubled debt.
The most recent portfolio of the California State Teachers’ Retirement System, an investor in the Apollo fund that bought Caesars, shows that it also holds five Caesars debt issues that stand to lose their guarantees. A spokesman for the pension fund declined to comment.
In the long run, it’s hard to win in a casino. And it’s becoming hard to win as an investor in them. What’s troubling is that if the deal is found acceptable by the courts, the house advantage could spread to other companies, too.
Pedigree Counts
In August 1941, Richard Whitney, the former financier and New York Stock Exchange president, emerged from prison at Sing Sing, on parole after serving three years of a five- to 10-year sentence for grand larceny.
Whitney had stolen from the New York Yacht Club and from Harvard (where, as a member of the class of 1911, he had rowed for the crew team); from his wife’s family estate; as well as from the widows and children who depended on the Stock Exchange Gratuity Fund, of which he was trustee.
Dick Whitney had once been hailed as a “Great White Knight” of Wall Street. At the start of the terrifying market plunge of October 1929, he had bravely helped shore up the market by parading around the exchange floor, placing bids for shares of U.S. Steel, as well as other blue-chip holdings.
In the early 1930s, the top-hatted Whitney had a reputation as a “perfect snob,” quietly blocking Jewish aspirants from reaching important positions in his exchange. With a thoroughbred-horse-and-cattle farm in Far Hills, N.J. — he was also president of the Essex Fox Hounds — and a five-story, red brick townhouse at 115 East 73rd Street, his lifestyle required a formidable cash flow. And soon he found himself in severe debt.
Evidently intrigued that his Harvard schoolmate Joseph P. Kennedy, who had followed him by a year, had made millions selling Gordon’s Dry Gin and Haig & Haig Scotch, Whitney tried to achieve a similar trick — while Prohibition was winking out in 1933 — with Jersey Lightning applejack and Canadian rye. But these and other more fly-by-night gambits failed, and Whitney started his secret life of crime.
Both Whitney and President Franklin D. Roosevelt, who was six years his senior, were born into the old American, Northeastern, Protestant, moneyed patriciate; both had attended Groton School and Harvard. This shared inheritance, however, didn’t keep Whitney from leading a fierce campaign, summoning his full throw-weight as chief of the New York Stock Exchange, to attack Roosevelt’s proposed Wall Street regulations.
At the White House, Whitney warned the president that such drastic change could ravage the American financial system, with the result that “grass will grow in Wall Street.” Defending his organization, Whitney told United States senators and their staff members: “You gentlemen are making a huge mistake. The exchange is a perfect institution.” But Congress approved Roosevelt’s reforms, which were enforced by Joseph P. Kennedy, then the chairman of the new Securities and Exchange Commission.
On Halloween 1936, three days before his landslide re-election, Roosevelt signaled his intention to crank up more pressure against Wall Street. At a huge, raucous rally at Madison Square Garden, the defiant president declared that “government by organized money is just as dangerous as government by organized mob.” Using language that sounds almost contemporary in 2014, he said the “forces of selfishness,” of “reckless banking” and “class antagonism” were “unanimous in their hate for me, and I welcome their hatred.”
With the crowd shrieking, Roosevelt went on to exclaim, “I should like to have it said of my second administration that, in it, these forces met their master!”
Then, 16 months later, the president was informed of Whitney’s indictment for grand larceny, and details of the embezzlement. The president’s strategist-speechwriter Thomas Corcoran — whom Roosevelt called Tommy the Cork — recalled to me decades later that, in response to the news, the shocked Roosevelt lowered his head and murmured: “Poor Groton. Poor Harvard. Poor Dick.”
As in recent times, an American president had to make a decision about how personal he should get about the transgressions of Wall Street titans. The revelations about Whitney seemed to hand Roosevelt a powerful foil. Some of his advisers encouraged him to exploit and dramatize the Whitney scandal, making the financier a national avatar of Wall Street misbehavior.
But to their surprise and dismay, Roosevelt, in public, never cited Whitney, his offenses or his downfall. Although so often derided by many of his social peers as a “traitor to his class,” Roosevelt refused to exploit Whitney’s troubles; he did not instruct his staff and political allies to ask friendly journalists and legislators to help them make the fallen financier into a demonic household name. This is one reason that Whitney’s name is so little known today.
Corcoran, who died in 1981, told me that he believed that the president had pulled his punches largely out of deference to his and Whitney’s similar bloodlines. Corcoran said that Joseph Kennedy — an Irish-American, like himself — emphatically agreed with this theory. Corcoran and Kennedy may have been at least partly right, but by his sixth year in office, Roosevelt, deadlocked by a hostile Congress, was already turning from domestic affairs to the dangers posed by Hitler and the imperial Japanese.
In April 1938, after pleading guilty to grand larceny, Whitney was handcuffed between two other freshly minted convicts (for rape and extortion) and hauled off to Sing Sing, where he enjoyed a few vestiges of privilege. Some inmates politely removed their caps when Whitney arrived, and even contrived for him to get a hit on the prison baseball diamond. (Whitney had played first base at Groton.)
But the Sing Sing psychiatrist was startled that Prisoner No. 94835 displayed no self-reproach. In “The Embezzler,” his 1966 novel, Louis Auchincloss wrote of his title character, Guy Prime, based on Whitney, that he “had not believed that he had done anything really wrong.”
After parole, Whitney lived for decades in New Jersey with his wife (whom he outlived), serving as treasurer for a friend’s dairy and dabbling in other small ventures before his death in 1974 at the age of 86. In his book “Impeccable Connections,” Malcolm MacKay wrote of being told by Whitney’s daughter Appy that her mother had commanded her “never to speak to anyone” about her father’s “troubles.” After Whitney died, a few of his relatives responded to critical obituaries by pointing out that his well-publicized debts had been long ago repaid by his brother George, who had risen to become a top executive at J.P. Morgan.
Whitney’s scandalous demise left a lasting impression on a later American president. In March 1962, John F. Kennedy privately demonstrated that he shared his father’s opinion that when it came to ethics, there was sometimes an ethnic double standard. The Boston Globe had just revealed that as a Harvard freshman, Kennedy’s brother Ted had persuaded a friend to take a Spanish test in his name.
Referring to The Globe’s report about Ted — who was seeking his old Senate seat — the president sarcastically told his journalist friend Ben Bradlee: “It won’t go over with the WASPs. They take a very dim view of looking over your shoulder at someone else’s exam paper. They go in more for stealing from stockholders and banks.”
Michael Beschloss, a presidential historian, is the author of nine books
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