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Looting ‘The Westchester’ 3: A Fortune Goes Missing

By Robert Scott

The New Haven’s hasty settlements with Thorne and Gottschall described last week did not end nagging questions about the Westchester’s financing. Some 35,000 shares of New York, Westchester & Boston stock not acquired by Thorne were unaccounted for.

New Haven president Charles Mellen concluded that these shares must be held by certain people "on 14th Street" who could make trouble for the company. [The headquarters of Tammany Hall, the Democratic Party’s powerful political machine, were on 14th Street, between 3rd Avenue and Irving Place; "14th Street" was a commonly used code word for Tammany Hall.]

Mellen's solution was to have the New Haven transfer to him 9,495 shares of New Haven stock, which had a market value of about $1,436,000 plus sizable cash advances. Mellen traded the stock certificates at the rate of one New Haven share for three Westchester shares. With New Haven stock trading around $150 a share, this gave an arbitrary value of $50 to a share of Westchester stock he had once characterized as being worth "about ten cents a pound."

Some of the New Haven shares he sold for about $150 in a series of unusual transactions. According to Mellen's 1914 testimony, from time to time mysterious messengers would appear bearing Westchester stock, and he would issue to them "due bills"—simple written acknowledgments of indebtedness showing the amount owed and his signature.

Later, other persons would accost him in hotel lobbies and present these same due bills, which he would redeem for cash and ask no questions. In this way, about $1.2 million changed hands. Mellen testified that he had created this unusual stock redemption scheme on the advice of former New York Police Department Inspector Thomas J. Byrnes, who he believed represented "the people on 14th Street."

Mellen added that he could not identify any of the holders of the due bills other than Inspector Byrnes, who had conveniently died in 1910. Mellen's explanation was highly suspicious. Byrnes was a Republican and not likely to have carried much weight at Tammany Hall. After his death, his modest estate was found to have a net worth of only $18,083.

An incredulous New York Times called Mellen's story "preposterous." Mellen offered no evidence that he had ever paid the $1.2 million under this weird arrangement. Incredibly, the ICC accepted Mellen's fanciful account without question.

The New Haven's association with Tammany Hall was widely known. When the railroad decided to widen the tracks in the Bronx on its Harlem River Division from four to six, the $10 million contract went to the New York Contracting & Trucking Company. Tammany boss Charles F. Murphy was its principal owner.

Despite lack of experience in heavy construction, Murphy's firm also secured the contract to excavate the huge site of Pennsylvania Station lying between 31st and 33rd streets and between Eighth and Ninth avenues. Although his Tammany job paid no salary, when Murphy died in 1924, his estate was estimated to be worth more than $2 million.

To be able to continue paying an unrealistic 8 percent dividend on the swollen number of New Haven shares issued, early in 1911 Charles Mellen instituted pay cuts, layoffs, curtailment of service and--most risky of all--drastic reduction in maintenance.

The cutbacks were followed by a series of New Haven train wrecks: four in 1911 and seven in 1912. Mellen blamed them on employee carelessness. On June 12, 1913, a steam locomotive plowed into the Boston Express waiting at Stamford for its electric locomotive to be coupled to it. Five passengers were killed and seven injured. The chickens were coming home to roost.

Charles Mellen resigned as president of the New Haven on July 17, 1913. His successor, Howard Elliott, took over on September 3rd, to be greeted by another Mellen legacy. Stopped at a signal outside of North Haven, the second-section of the all-sleeping car Bar Harbor Express was demolished by a speeding and behind-schedule White Mountain Express. The toll: 21 killed and 50 seriously injured.

Fatal accidents on the New Haven would continue into 1916. On February 22, the Connecticut River Special was wrecked, killing nine passengers and injuring 65. On April 17, The Gilt Edge, another New Haven express, was derailed at Bradford, R.I., killing five passengers.

Enter Louis D. Brandeis
Before the Panic of 1907, Mellen had cast a covetous eye on the Boston & Maine Railroad and bought 36 percent of the line. But Mellen had not reckoned with attorney Louis D. Brandeis. Self-styled "people's lawyer" and later a Supreme Court justice, Brandeis spearheaded the fight against New Haven's transportation monopoly in New England and in particular its purchase of the Boston & Maine. His probing was to throw a spotlight on the New Haven and its peculiar bookkeeping methods.

Born in Louisville, Kentucky, the son of immigrants from Eastern Europe, Brandeis was a graduate of Harvard Law School and already a wealthy lawyer when he took on the New Haven. Mellen responded with his usual dirty tricks, including planted editorials in captive magazines. A Boston magazine titled Truth, subsidized by the New Haven, suggested that Brandeis was an agent of banker Jacob Schiff, and the Brandeis campaign was part of the "age-long struggle between Jew and Gentile."

Brandeis became Mellen's worst nightmare and responded in kind. One writer described him as "orthodox neither in religion nor in law." He did not limit his legal battles to the courtroom. Instead, the New Haven was barraged with planted editorials in the sensational press, congressional investigations and antitrust indictments.

In May of 1912, a few days before the Westchester carried its first passengers, the Interstate Commerce Commission began a routine review of the New Haven's services and freight rates. ICC auditors found peculiar transactions between the New Haven and its 336 identified subsidiaries.

As auditors dug into the New Haven's books, the ICC review quickly became a full-scale investigation. Issued in 1914, the ICC's report showed that the New Haven was insolvent. It had lent money to its money-losing subsidiaries, which then returned it to the parent company as income. Even more damning, Mellen had regularly shuffled assets between subsidiaries to inflate profits.

A good example was the New Haven's coastal steamship business. In 1907, the ships were sold by a subsidiary, New England Navigation, to Consolidated Railways, another subsidiary that owned street railways in Massachusetts and Connecticut. Instead of cash, they were paid for in Consolidated Railways stock worth $20 million--the amount that Mellen said it was worth.

The ledgers showed a paper profit on the sale for New England Navigation. This was carried on its books as income and as an increase in the assets of Consolidated Railways by a like amount. With each transaction, the corporate books became harder and harder to unravel, as steamships were shuttled from subsidiary to subsidiary: Consolidated Railways to New England Steamship to New England Navigation and back again, pumping up the asset values in one or another set of books, depending on which subsidiary needed to be made more attractive to investors.

In the midst of this finagling, one question remained unanswered: Where had all the Westchester money gone?  $11,155,000 had been transferred by the New Haven to Thorne and Perry before the Panic of 1907. In exchange the New Haven acquired two paper railroad companies whose franchises were in default, and a few parcels of Bronx real estate. William C. Gottschall had been paid $1,550,125 for stock in the rival Portchester line.

Another $275,000 went to Thorne after the 1907 Panic, and some $1.4 million was paid in exchange for due bills and by other unspecified means. The legal fees of attorneys Francis Lynde Stetson and Lewis Cass Ledyard plus incidental expenses brought the total paid out on the Westchester to about $14.1 million. Paradoxically, the New Haven had spent these vast sums on a line that would compete with itself.

And not a foot of track had yet been laid! Contemporary newspaper editorial cartoonists had a field day. Indictments under the antitrust law were voted against 21 members of the New Haven's board of directors on November 2, 1914. Nearly 50 other persons were named as co-conspirators. Charles Mellen escaped prosecution by agreeing to testify against the other defendants.

Because the government did not have evidence that the Westchester had engaged in interstate commerce, it was ruled out of the conspiracy trial for violation of antitrust laws, and escaped public attention. To this day, the full story of the disappearance of millions from the Westchester remains buried in the dusty pages of history.