My wonderful grandfather, William B. “Pop” Thompson (1908-1984), who ran the construction accounting division of Merritt-Chapman & Scott, could tell something was wrong. He would work late into the evening with his trusty 13-column green notepad and Dixon Ticonderoga pencils to prepare bids for public works projects. But the company rarely pulled the trigger to bid on work that he estimated highly profitable.
Finally, he approached company executives, including Louis Wolfson, who had taken over the company in a proxy battle in 1951, to ask what was up. The fateful meeting occurred in 1960.
“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 anymore.” The executives reportedly said, “‘Well, as a matter of fact, you can resign.’ They weren’t interested in taking on new work; they just wanted to milk the company dry.”
Pop decided to do just that. As it turned out, he left Merritt-Chapman at the right time. Several years later, Wolfson, one of the first corporate raiders in the United States, and his fellow officers were indicted for stock fraud and perjury. But before we get to that story, we need to answer a question: How did Pop Thompson, who was as honest as the day is long, a man of lived his entire life by the Golden Rule, get involved with these guys?
After serving in the merchant marines in WWII, Thompson established a New York City investment advisory firm, Thompson & Rittmaster, with his friend Alexander Rittmaster. Thompson had previously worked as a statistician at Bache & Co. and, before that, as a partner with Filor, Bullard, and Smyth. Rittmaster had worked as a broker at Hirsh & Co. 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 took positions in the companies; other times, they just consulted. Their work with Kalamazoo ended in a bitter proxy dispute. One of the firm’s “special cases” in 1949 was the Merritt-Chapman & Scott Corporation, 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, ending with Wolfson and his brothers acquiring complete control. Wolfson was named chairman in 1951, and Thompson was elected director. Rittmaster became a director two years later, managing all the company’s divisions.
Starting in 1953, Wolfson worked with Rittmaster to acquire other companies, mostly with stock, doubling Merritt-Chapman’s outstanding shares by 1959. Wolfson used Merritt-Chapman as a base to acquire 17 corporations worth $240 million. The acquisitions dealt in a wide swath of businesses — steel manufacturing, lending, chemicals, paints — some far afield of the company’s core salvage and construction business. Wolfson is credited with having created the first modern conglomerate, and the company reached as high as 210 on the Fortune 500 list.
Predictably, some acquisitions didn’t pan out. For instance, Wolfson’s purchase of the money-losing New York Shipbuilding Corporation substantially cut into profits and dividends. Wolfson started selling off assets to stem the red ink — 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 a while, whittle expenses to the core, and then sell them at high multiples.
During the early 1950s, when my grandfather was running the salvage and inland salvage division, Merritt also took on some massive construction projects — dams, power plants, and sections of the Mackinac and Throgs Neck bridges. The company’s stock price was hammered due to the liability; it was forced to borrow from lenders. Loan covenants prevented the proceeds from being used to buy stock to prop up pricing.
My grandfather moved over to the construction division in 1956 to try to fix the mess. His first move was to separate the parent holding company from construction, derrick, and salvage activities, which accounted for nearly all of the parent company’s direct actions. He took the title of Construction Treasurer and imposed imposing financial controls.
The strategy wasn’t wholly effective. By 1961, Merritt’s stock was still suffering. Wolfson 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. According to the indictment, participants in the scheme, including Merritt-Chapman officials, shared $4 million in profit.
According to news reports, the indictment contended 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 fraud on the company’s outside stockholders. Rittmaster, who had left the company two years before the indictment, was named a defendant, along with President Marshall G. Staub, Director Elkin B. Gerbert, Kosow, and Wolfson. Pop was long gone by then.
Interestingly, the federal indictment didn’t directly charge the directors with a stock scam. Instead, it accused them of lying during a Securities and Commission inquiry and destroying documents. The executives were accused of conspiracy to violate securities law, perjury, and obstruction of justice.
The case got 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. Government prosecutors later said his testimony ensured a conviction in what otherwise was 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 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 trifling sum considering that his 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 charges against the executives constituted a “material alteration” of the indictment handed down by the grand jury. The government tried Wolson twice, but juries couldn’t reach a verdict in either case. When the government threatened a third trial, Wilson pleaded nolo contendere to a felony and was fined but not sent to jail. Defending himself against the government had cost him $10 million, though.
The 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 implicated 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 the 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.
Meanwhile, Thompson went on to become the CEO of the Vinnell Corporation, which built public works projects worldwide, including in Vietnam and Saudi Arabia. Today it’s a subsidiary of Northrup Grumman Corporation, specializing in military training and support. That’s the subject of a separate blog, to be sure.