My grandfather, William B. Thompson (1908-1984), who ran the construction accounting division of Merritt-Chapman & Scott, knew something was wrong. He would laboriously prepare bids for big public works projects, working late with his trusty 13-column green notepad and Dixon Ticonderoga pencils. Then the company wouldn’t pull the trigger to bid work that he estimated to be highly profitable.
In 1960, he went to company executives, including Louis Wolfson, who had taken over the company in a proxy battle in 1951, to ask what was up.
“I’ve designed bids for you for several very profitable jobs and you’ve turned them down,” Thompson said, according to his son Tony. “Quite frankly, I’m not sure that you need me to be working for you any more. And they said, Well, as a matter of fact you can resign. They weren’t interested in the jobs; they wanted to milk the company.”
Leaving Merritt-Chapman turned out to be a good thing because Wolfson, one of the first corporate raiders in the United States, and his fellow officers were indicted several years later for stock fraud and perjury. But before we get to that story, how did Pop Thompson, who was as honest as the day is long, living his entire life by the Golden Rule, get involved with these guys?
After WWII, Thompson and his friend Alexander Rittmaster established a New York City investment advisory firm, Thompson & Rittmaster. Thompson had been a statistician at Bache & Co and before that a partner with Filor, Bullard and Smyth. Rittmaster had worked at Hirsh & Co. as a broker and later as an accountant at David Goodkind & Co.
The partners quickly got involved in several high-profile investment ventures, including Colts Patent Fire Arms Manufacturing and the Kalamazoo Stove and Furnace Company. Sometimes the advisers just consulted. Other times their work ended in bitter proxy disputes, as was the case with Kalamazoo. By 1949, one of the firm’s “special cases” was the Merritt-Chapman & Scott Corporation, which had been established in 1860 to salvage wrecked sea vessels and later expanded into the derrick and construction business.
When a large block of Merritt stock became available, Rittmaster contacted Wolfson, who bought it. A proxy contest developed almost immediately. It ended with Wolfson and his brothers acquiring full control. Wolfson was named chairman in 1951. Thompson was elected as a director. Rittmaster became a director two years later, managing all the company’s divisions.
Under Wolfson, with a strong assist from Rittmaster, Merritt-Chapman in 1953 began acquiring other companies, mostly with stock, doubling its outstanding shares by 1959. Wolfson used Merritt-Chapman as a base to acquire 17 corporations worth $240 million. The acquisitions dealt in wide swath of businesses — steel manufacturing, lending, chemicals, paints — some far afield of the company’s core salvage and construction business. He is credited with creating the first modern conglomerate. The company reached as high as 210 on the Fortune 500 list.
Predictably, some acquisitions didn’t pan out. Wolfson’s purchase of the money-losing New York Shipbuilding Corporation, for instance, cut into profits and dividends. To stem the red ink, Wolfson started selling off assets — the paint company, a small steel mill, the company’s formerly profitable derrick division, and a small shipyard. Or maybe that was the strategy all along — hold the companies for a while, whittle expenses to the core, and then sell at a high multiple.
During the early 1950s, when my grandfather was running the salvage and inland salvage division, Merritt also took on some huge construction projects — dams, power plants, and sections of the Mackinac and Throgs Neck bridges. Its stock price was hammered as a result and the company was forced to borrow from lenders. Loan covenants prevented the proceeds from being used to buy stock.
My grandfather moved over to the construction division in 1956 to try to fix the mess. He separated the parent holding company from construction, derrick, and salvage activities, which accounted nearly all of the parent company’s direct activities. He took the title of Construction Treasurer, imposing financial controls.
But the company’s stock was still suffering by 1961. Wolfson and company devised a plan to buy back their stock, circumventing the requirements imposed by lenders. Joseph Kosow, a Boston financier who had sold Congress Management Corporation to Merritt-Chapman in 1962, and two conspirators bought 870,000 shares of Merritt-Chapman between December 1961 and June 1964 for roughly $10.5 million, or about $12 per share.
Kosow, the government alleged, had a “secret agreement” to sell the stock back to Merritt-Chapman for about 50 percent more. The group sold 650,000 shares to Merritt-Chapman for roughly $11 million (or about $17 per share) and the rest in the open market for approximately $3.5 million. Participants in the scheme, including Merritt-Chapman officials, shared $4 million in profit, according to the indictment.
The indictment, according to news reports, implicitly suggested that Merritt-Chapman’s money was used to make the initial purchases and that Wolfson had “personally” guaranteed “certain” of them. Wolfson’s family owned 30 percent of the stock in the company at the time.
A two-year federal investigation concluded that Wolfson and his fellow executives had committed a fraud on the company’s outside stock holders. Rittmaster, who had left the company two years before the indictment, was named as a defendant, along with President Marshall G. Staub, Director Elkin B. Gerbert, Kosow, and of course Wolfson.
Interestingly, the indictment didn’t charge the directors with a stock swindle. It accused them of lying during a Securities and Commission inquiry and destroying documents. The executive team were charged with conspiracy to violate securities law, perjury, and obstruction of justice.
The case got real interesting when Rittmaster, who had served as Wolfson’s chief investment advisor during the early 1960s, pleaded guilty two days before the trial began and served as a “star” witness for the government. His testimony, government prosecutors later said, all but ensured a conviction in what had been a shaky case. Rittmaster testified that the defendants conspired to destroy all the copies of the repurchase agreements and lie about it to the SEC. He also said that Wolfson had boasted to him that “if he had to, he would go as far as Capitol Hill to see that nothing happened, and that at most these people would receive only a slap on the wrist.”
A federal grand jury indicted Wolfson and his co-defendants in October 1966 on charges of conspiring to breach security law, perjury, and filing “false and misleading annual reports.” Rittmaster was only named in the conspiracy count.
Wolfson was sentenced to 18 months in federal prison and charged a $32,000 fine, a trifle sum considering that his personal fortune at the time was an estimated $100 million. Staub received a suspended one-year sentence and a $30,000 fine. Kosow got a year in prison and a $10,000 fine.
But the verdict was overturned by an appeals court on a technicality — that a change in the changes against the executives constituted a “material alteration” of the indictment handed down by the grand jury. The government tried Wolson two more times. Neither jury could reach a verdict. When the government threatened a third trial, Wolson plead nolo contendere to a felony and was fined, but not sent to jail. Defending himself against the government had cost him $10 million, though.
Merritt-Chapman company recorded a loss of $740,000 in 1966 and failed to pay a dividend. In 1967, the company audaciously added a $3.2 million “special charge” to the books to cover potential losses if it had to sell other assets.
The government didn’t pursue charges against Staub and Kosow. Rittmaster had died by June 1969. Wolfson did wind up spending nine months in prison, but for something else entirely — selling stock in an unregistered company, perjury, and obstruction of justice.
That case wound up catching in its jaws Supreme Court Justice Abe Fortas, who had received a $20,000 annual retainer for life from Wolfson’s foundation for unspecified consultation. Fortas ultimately resigned from the bench over resulting public outcry.
Wolfson got involved in thoroughbred horse racing in the 1960s, establishing Harbor View Farm near Ocala, Fla. One of his horses, Affirmed, won the triple crown in 1978. He also became a champion for prison reform.
Thompson, meanwhile, went on to become the CEO of the Vinnell Corporation, when it still built public works projects throughout the world, including Vietnam and Saudi Arabia. Today it’s a subsidiary of Northrup Grumman Corporation, specializing in military training and support.