Wednesday 20 July 2016

A Victorian Scandal: The Failure of the City of Glasgow Bank - Ann Swinfen

The near total collapse of the UK banking system in 2008 had repercussions which are still very much with us today.  But in case we should delude ourselves into thinking that it was a unique near disaster, spare a thought for the shareholders of the City of Glasgow Bank in 1878.  When their Bank collapsed, no-one was there to bail them out with government money.  Apparently unprotected by limited liability legislation, the great majority of them faced bankruptcy and destitution. True – the directors and officers faced trial on charges of fraud, but the remarkably lenient sentences handed down can have been poor compensation for the real victims of the affair.

The failure of the City of Glasgow Bank with estimated debts of £10 million, announced in the press on 2nd October, 1878, seems to have caught almost everyone by surprise. According to the Irish Freeman’s Journal, ‘The failure of the Glasgow City Bank for ten millions is a disaster as unequalled in magnitude as it was wholly unexpected.’ The Journal went on to point out that according to the previous week’s edition of the Investor’s Monthly Manual, all the signs were that the bank was in a healthy state.  Its stock was given as £1 million, the share price stood at £237 per £100, and it paid dividends of 12%.  But now that the disastrous news had broken, there was general concern to avoid a widespread panic.  While the other Scottish banks were unwilling to come to the Bank’s assistance, they did announce they would accept its notes in current circulation.  The Scotsman hastened to assure its readers that ‘the circumstances of the suspended bank were entirely exceptional, and that its status was not comparable with that of the other Scotch banks’. How the unhealthy state of its affairs had been kept secret until now was difficult to explain, but the paper assumed that it ‘was not before the minds of the shareholders, and can hardly have been known to the directors’.

The City of Glasgow Bank had been established in 1839, with 779 subscribers and a capital of £656,250. It was its regular practice to publish the annual balance sheet for shareholders in June each year, and the accounts for 1878 showed healthy deposits of £8,000,000 and the existence of 133 branches around the country.  Capital, reserves, and undistributed profits totalled £1,600,000, and a dividend of 12% would be paid to shareholders.  The announcement less than four months later that the directors had decided to close the bank naturally sent shock waves throughout not just the city of Glasgow, but across Scotland and beyond.  It is estimated that hundreds of businesses were brought down by the bank failure, and the 1200 shareholders and their families were made destitute. At a meeting of the liquidators held at the beginning of January, 1879, it was decided to pay a dividend of a mere five shillings (later raised to 6/8d) in the pound. At the same time all six of the Bank’s directors were served with indictments, and the trial date set for the 20th January.

Before the trial could take place, sympathisers with the shareholders met to discuss ways of providing some financial relief for those affected. These schemes included a controversial plan for a lottery, designed to raise a total of £6 million, of which £3 million would go to the shareholders. They and their supporters saw this as the only way to solve their problems. At a meeting of ‘influential men’ in Glasgow, Sir James Watson referred to the bank failure as ‘a national calamity, so ruinous to its innocent shareholders and their families, and so disastrous in its effects on the community at large, that it demands and justifies exceptional modes of relief’.  Others saw it differently, and the plan was roundly condemned in the pulpits and the press of the day.  ‘Many people, we are sure,’ asserted an editorial in the Leeds Mercury, ‘must have been inclined to regard the first announcement of the proposed lottery in aid of the shareholders in the Glasgow City Bank as an ill-timed hoax.  The suggestion of such a scheme was, indeed, so outrageous that it is astonishing that anyone could be found to discuss it seriously.  Yet we now know that the proposal has been received with extraordinary favour in Scotland.’ The writer was reassured, however, by the intervention of the Law Officers, from whom the promoters had received a discreet hint that what they were planning might well fall foul of the relevant legislation, and it is a fact that the scheme was shortly to be abandoned.

In the meantime the directors and manager of the City Bank had been removed from where they were lodged in Glasgow Prison, and conveyed with elaborate secrecy to Edinburgh, and the Calton Jail. The succeeding trial was to last for eleven days, in the course of which the incompetence or worse of the manager, Stronach, and his fellow directors was shown in high relief.

The trial was presided over by the Lord Justice Clerk, Lord Moncreiff, but his contribution to the eventual outcome was greater than that of a mere chairman of the proceedings.  The issue of whether the directors, or some of them, were guilty of an actual crime, or merely of professional incompetence, lay at the heart of the affair.  There was also a question as to whether they might in fact succeed in getting off scot-free on a technicality.  Two days before the trial was due to open, the Graphic advised its readers of a rumour ‘unfounded we hope, that the directors of the Glasgow City Bank are likely to be acquitted in consequence of a flaw in the indictment’.

Indeed before the trial proper, one entire session was taken up by legal argument challenging the ‘relevancy and non-specification’ of the charges in the indictment.  The following day, to a Court which ‘was again crowded, but not inconveniently’, Moncreiff returned to give his and his colleagues’ decision on the issues raised by counsel for the defence.  He explained to the court that the question they had had to decide was whether the indictment contained facts sufficiently relevant to go to proof before a jury. While many of the questions raised by counsel for the defence involved ‘considerations of very great weight’, these should most properly be dealt with when they came to investigate the facts of the case.

The real issue, however, was that of criminality, in particular in relation to the first charge in the indictment. This charge – of issuing false statements and balance sheets – had been withdrawn by the Lord Advocate, and it was now argued that the charge of misrepresentation of the assets and liabilities was in a similar position, and ought to be deleted.  The Court held, however, that ‘the charges respecting the assets and liabilities were matters of proof, and not of relevancy, but there was no doubt that it would be necessary when the facts of the case came to be proved, to add to the illegality of the accounts charged, some element of bad faith, or guilty knowledge, or of some fraudulent intent. This was an elementary principle, and was essential to establish the crime itself.

It would not have been enough to base the charge simply on the obligation of directors not to allow overdrafts without security – ‘unless there had appeared in the charge something alleging breach of faith’. Evidently the indictment itself was less than explicit on this matter of bad faith or criminal intent, and Moncreiff remarked that ‘he could have wished that the charge had been more specifically expressed…..but on further consideration he found words in the indictment which might be taken to override all the facts alleged, and to raise the elements of bad faith throughout the whole of these transactions…..the charge was clear that the prisoners had made use of their character as directors to obtain advances in regard to moneys entrusted to them’, and this was sufficient to justify an investigation by a jury’. Without this conclusion, the case against the directors would almost certainly have collapsed before it came to trial.

And so the case got under way, the prosecution being conducted by the Lord Advocate and the Solicitor-General for Scotland, with 14 ‘legal gentlemen’ appearing for the defence.  The defendants faced a total of 17 charges, including misrepresentation of assets and liabilities, overdrawing private accounts, and purloining of funds belonging to depositors. The directors had all made declarations before the Sheriff of Lanarkshire denying the charges, though the terms of their statements cannot have impressed their customers with their attention to the affairs of the bank.

Mr Potter, who was to be sentenced to eighteen months imprisonment, claimed to have been deceived by the manager, Stronach. Robert Salmond claimed to have been absent when the last balance sheet was prepared, but signed it in the belief that it was a true representation of the position of the bank.  Robert Taylor denied all misrepresentation or concealment.  He attended all weekly meetings of the directors, and ‘considered that by doing so he discharged his duty without himself examining the books’. Henry Inglis had been absent from board meetings through illness, but had complete faith in the bank officials. John Innes Wright, whose firm had received very large advances from the Bank, alleged that although he was a member of the board, he did not take an active part in the management but relied on the experience of his fellow directors. Robert Stronach, the manager, wisely declined to make any statement with regard to the charge of theft.

Upwards of 150 witnesses were to be called, but of these the most damning from the point of view of the defence were Dr Macgregor, an independent accountant called in by the directors to advise on the preparation of the balance sheet shortly before the stoppage, and one William Morrison, formerly a clerk at the bank, but since 1871 its chief accountant. It was one of Morrison’s responsibilities to prepare the draft annual balance sheet for submission to the manager.  In his evidence he claimed that for the June 1878 document, he had prepared the draft in accordance with the books of the bank, but then altered it under instructions from Stronach and Mr Potter. As a result, the amount of deposits declared in the public balance sheet of 1878 was given as £8,102,000, misrepresented to the tune of £740,000.  The bank notes in circulation were incorrectly stated to the amount of £89,000. The outstanding drafts were falsely stated to the extent of £410,000.

‘These understatements were made by the direction of Mr Stronach, the manager, and were marked on the abstract by red ink.’  And so it went on. The credit accounts were falsely stated to the amount of £3 million; the cash in hand overstated by £200,000.  False balance sheets had been prepared not only for 1878, but also for the two previous years of 1876 and ’77. The only small glimmer of light relief was afforded by Morrison’s near namesake, William Morris, whose monthly task it was to prepare statements of credits given to one of the bank’s largest customers, Smith, Fleming and Co. Sometimes these statements were accompanied by securities, sometimes not. In one case the security of an advance to the company had been six live elephants in Rangoon!

Dr Macgregor, as an outside consultant, had no need for concealment. He spoke of his meeting with the directors, at which the general affairs of the bank were discussed – a discussion in which Stronach took very little part, seeming to be ‘entirely overcome’. Having carried out his investigation Macgregor concluded that several of the directors and some of the firms with whom they did business had largely overdrawn their accounts.  In his opinion the bank was now hopelessly insolvent – the deficit according to his calculations being of the order of six and a half million.

And so the trial ground its way on for several more days.  The Court heard from shareholders and depositors, from the prosecution and the defence. For his part the Lord Advocate announced on the 27th that he had withdrawn the charges of theft and embezzlement. On January 30th, the Dean of the Faculty rose to speak on behalf of the defence – a speech of great power, and one which had a greater effect on the jury than any other. According to the Glasgow Herald, the speech was ‘courageous and skilful, and had the verdict been given immediately on the conclusion of his speech, the impression was that every one of the panels [defendants] would have been set free.’ The Dean was able to exploit weaknesses in William Morrison’s evidence, upon which the prosecution had largely relied. ‘As the case stands’, the paper concluded, ‘a great deal depends on the summing up of the Judge.  It is freely said that a powerful charge made either in one direction or another would, as matters stand at present, take the jury along with it to a verdict either of “all guilty” or of all “not guilty”, or at least “not proven”.’

Moncreiff’s address to the jury received widespread praise from the press. The Sheffield and Rotherham Independent described it as ‘an able and exhaustive summing up of the whole case’. The address lasted for four hours, and began with an admonition to the jury to put out of their minds the ‘excited comments out of doors’ occasioned by the fact that the failure of the bank had reduced hundreds of shareholders from affluence to poverty, and concentrate wholly on the facts given in evidence. Despite the length of the address, it succeeded in reducing the complexity of the case to a few simple propositions. According to him, the only charge now preferred against the prisoners was that they had falsified the balance sheets of the bank from 1876 to 1878, and that they had done so with a fraudulent intent to deceive the shareholders.

For the jury to come to a decision on this issue, he put to them three simple questions – first, whether the balance sheets were false; second, whether the prisoners, or any of them, knew that they were false; and third, whether the circulation and publication of the balance sheets had been done with fraudulent intent. He further reduced the burden on the jury by suggesting that they concentrate on just two of the amounts in the balance sheets which were alleged to be false. He made some criticism of Morrison’s evidence, which had sometimes been confused and contradictory, but if his evidence was to be believed, then the accounts had been altered with intent to deceive.  Evidently the summing up succeeded in enabling the jury to come to a speedy decision. After retiring for just two hours, they returned with a verdict. ‘We unanimously find Lewis Potter and Robert Summers Stronach guilty of all the charges as libelled; and John Stewart, Robert Salmond, John Innes Wright, Henry Inglis, and William Taylor guilty of using and uttering false balance-sheets or statements of the state of the City of Glasgow Bank.’

Potter and Stronach were each sentenced to eighteen months imprisonment.  The punishment would have been much more severe, if the jury had found that the crimes they had committed had been carried out for personal gain, rather than, as had been argued on their behalf, for the benefit of the bank. The remaining directors, who had been convicted of uttering false balance sheets, but not actually of fabricating them, each received eight months. Even to some contemporaries, these sentences seemed over lenient.  The Economist, for one, thought them to be inadequate, even taking into account the three months the directors had already served before the start of the trial. The Statist agreed. ‘So far as the sentence goes, it would appear to be a safer thing to make away with six or seven millions of money, and thereby to filch from thousands of affluent families everything they possess in the world, than to pick a pocket of a few pence.’ It would have been interesting to know what a Dundee mill girl, whom Moncreiff had sentenced to eight years in prison back in 1870 for stealing a silver watch and some clothing from her landlady, might have thought of this outcome.


For this and other Victorian legal scandals see:

Ann Swinfen


Leslie Wilson said...

What a fascinating post. I was immediately thinking of the failure of the bank in 'Cranford', and I did know that Victorian history was bedevilled with bank failures and ruined rentiers, but to have it all set out so very clearly, including the criminal behaviour of the bankers, is very informative. I do get the feeling that little has changed, though. BHS springs to mind.

Graham Clayton said...

Interesting to see how the various directors tried to blame the others for the collapse, while stating they had no knowledge of the real position of the bank.