Cincinnati and Springfield Railroad

Submitted by scott on Thu, 08/17/2023 - 11:42

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THE CINCINNATI AND SPRINGFIELD RAILWAY COMPANY:

A CCC&I “Money Pump,” 1870-1875

By the late 1860s, the CCC&I’s St. Louis access plan had reluctantly been set—clearly an important, though expensive, solution for its ongoing survival. Soon, however, a further obstacle arose related to another key connection point: Cincinnati. The Pennsylvania Railroad had purchased a controlling interest in The Little Miami Railroad Company, a pivotal link in the CCC&I's chain of roads to reach Cincinnati. And its other option, a lease of the CH&D railroad, was seen as too costly. It was under these pretenses that the need for a new line to Cincinnati was essentially contrived. The C&S was thus organized on August 29, 1870 — with $5 million of capital stock authorized. And it would come as no surprise, as Pierson reported, that Townsend, Hurlbut, and other CCC&I board members purchased founders’ stock in this new road either directly or through agents and friends.

To assemble a complete link to Cincinnati, the C&S acquired track access leases from the Cincinnati, Sandusky and Cleveland Railroad Company—successor to The Sandusky, Dayton and Cincinnati Railroad Company—between Springfield and Dayton, and a one-third interest in a Cincinnati Depot on Plum Street. These investments were assigned to the CCC&I under a 999-year lease. The CCC&I also endorsed $1 million of a $2 million first mortgage bond issue and took $500,000 of second mortgage bonds in exchange for furnishing the C&S with rolling stock and other equipment. Subsequently, in conversation with a CCC&I board member, Pierson discovered that $300,000 of the $1.7 million raised from sale of the first mortgage bonds was unaccounted for and could not be traced to actual C&S expenditures. Others measured the vanishing proceeds at $500,000.

Most interestingly, Pierson reported, the CCC&I had sold some its own first mortgage bonds at 90 percent of par to pay for the equipment delivered to the C&S—accepting C&S second mortgage bonds at 100 percent of par value. Beyond this the CCC&I was to operate the new line and pay for all expenses, taxes, rentals, and interest from the receipts of the road—with any excess going to the C&S. If receipts were insufficient in any year, the CCC&I was to advance the shortfall and receive 7 percent interest on the amount loaned. It was, effectively, fronting the amount for its own accumulating interest payments, And this proved to be a substantial number. By 1878, the year Pierson published his “Retrospect,” the amount advanced to the C&S had exceeded $1.2 million.

Pierson also calculated that the C&S received 36 percent of receipts while paying only 32.8 percent of expenses, which meant the CCC&I was paying more than two-thirds of road expenses and receiving only 64 percent of receipts. And yet, in spite of assuming all risk and expenses of the C&S, the CCC&I held no ownership interest by which it could benefit if the stock price rose; nor could it vote on proposed C&S construction contracts or the like. However, in the CCC&I's 1875 annual report, the president remarked the company did own $559,800 of C&S stock. How and why it was acquired, and at what cost, was not explained—although the CCC&I treasurer acknowledged it was in his possession as “trustee.” Nonetheless, he could not account for its acquisition. Pierson noted this ownership interest did not appear in the CCC&I asset list for 1875 or subsequent years, leading him to raise this question: “In trying to fathom the muddy proceedings, it is [a] matter of query whether it has actually passed into possession of the company as an asset, or is simply held ‘in quod [‘in prison’], to be quietly grabbed by ‘the faithful’ and sold for their benefit whenever it comes to have a market value.”

With the benefit of hindsight, he would later paint an apt picture of the entire situation: “The C&S was a sort of pump rigged to pump the money out of the CCC&I treasury into the pockets of a ring, a portion of whom were officers and directors of the latter company.”

But how could this happen? After all, CCC&I stockholders had to approve the C&S contract and its various financial transactions, The explanation that Pierson proffered would also prove to be a central tenet of James McHenry’s manipulation of the A&GW’s European investors—soon to be discussed. Pierson put it this way:

The representation of large masses of stock held abroad, by agents holding but a small interest themselves, and, indeed, the whole system of voting by proxy, is liable to abuse. . . . Many large holders of railway stock and bonds are quite innocent of any great amount of practical knowledge regarding their properties, and are entirely in the hands of the immediate managers, at least so long as these are able to maintain confidence in any general way. . .. Plausible explanations and adroit representations from ‘the men who ought to know, you know” will sometimes bring about very astonishing results.'*°

Then, reflecting on the makeup of the CCCe&I board at that time, Pierson further rationalized:

When the power to act was once in the hands of our Board, a very few active men controlled matters. At this time several members were non-resident; others were small holders, retired from active pursuits, and not disposed to take much trouble in the matter; and of the balance, one portion used the Vice-President [Hurlbut] to further some scheme of their own, and the other hoped he might want to use them. In this, as in every affair of life, the active energy led the movement, and dragged the passive force to the support of its measures nolens volens [whether willing or unwilling].'”

It would not be the only scheme tapping into the lifeblood of the CCC&I.