THE CASE OF DAVID D. COLTON
Meeting the Associates
During the seventies the associates took a new partner. This was David
D. Colton, one-time sheriff of Siskiyou County, brigadier-general of
militia, second to Broderick in the famous Terry-Broderick duel, and
still later colonel of United States Volunteers. In spite of these
various military titles, Colton seems never to have seen service.
But he had been active in California politics as a delegate of the
Union Democratic party in 1861, and as chairman of the state central
committee of that organization, and was widely known throughout the
state. He was a man of fine physique, and endowed with a quick if not a
profound intelligence.
Colton first made the acquaintance of Charles Crocker in 1867, when
the latter was on his way to inspect the work of construction of
the Central Pacific beyond Elko. Three years later Crocker invited
Colton to accompany him to Evanston, California, where he intended to
look over, and perhaps to purchase, certain coal mining properties.
According to Crocker, Colton said that he also would like to have an
interest in the mines in question. Crocker, who had in the meantime
completed negotiations for the purchase, replied with an offer to make
Colton president and manager of the coal company if he would buy a
thousand shares of its stock, which Colton immediately did.[217]
The relations thus begun rapidly became more intimate. As early as
1868, Mr. and Mrs. Colton had invitations from Mr. Crocker and passes
to travel on the Central Pacific. In 1869 or 1870 the two families
visited the Yosemite together, and in 1871-72, when the Crockers went
to Europe and the two Crocker boys were left behind at a military
academy in Oakland, the Coltons looked after the children generally,
and had them at the Colton house for week-ends.[218]
It was through his acquaintance with the Crockers that Mr. Colton met
the other members of the Stanford group. Mr. Huntington was favorably
impressed with him; Stanford and Hopkins less so. Huntington was
becoming dissatisfied about this time with the amount of work done
by his associates, and the suggestion soon made that Colton join the
other members of the group and share the burden of managing the Central
Pacific enterprise with them, met his approval. “I was worked,” he said
later, “up to my full capacity, whatever that might be. Mr. Crocker was
in the habit of going to Europe and having a good time and the Governor
owned ranches, and his horses took a great deal of his time; in fact,
the Governor never could confine himself right to the office; that is,
I don’t consider that he could, to close, hard work, and we wanted
somebody there to do that work; and Mr. Colton convinced me that he, of
all men, was just the man that we wanted.” And again, speaking of his
partners and of Colton, Huntington said: “He knew I was not satisfied
with some things that my associate co-directors were doing there. The
way they used to go to Europe and go away from business, while I was
working every day in the year almost, and about fourteen hours a day;
he knew I was not quite satisfied with the hours they put in.”[219] The
fact that Mr. Hopkins’ health was not strong was an additional reason
for taking in a new partner.
Agreement Signed
The result of these preliminary discussions was the conclusion of an
agreement, dated October 5, 1874, whereby Colton received 20,000 shares
of Central Pacific Railroad stock and 20,000 shares of Southern Pacific
stock in return for his promissory note for $1,000,000, maturing in
five years.[220] At the same time it was mutually understood that
Colton should share in all the responsibilities and liabilities of
the associates for five years in proportion to his stockholdings, and
should stand in their shoes, as it were, holding the same positions and
relations which they had to the Central Pacific Railroad, and to the
Contract and Finance Company. The contract called for no cash payment,
for obvious reasons.
Mr. Huntington says he felt in 1874 that Colton was receiving something
very handsome, and the opinion was not without some justification.
Certainly, in the long run the opportunity to share in the profits
of the associates was valuable. Colton was not a man of large means
to begin with, yet after two years and three months with the Central
Pacific, he inventoried his assets at $961,506.18,[221] and at the
time of his death his rent roll alone amounted to $2,500 to $3,000 a
month.[222]
This was a very substantial compensation, even for very valuable
service. But on the other hand, it is evident that Mr. Colton put
himself entirely in the hands of the associates when he signed the
agreement and the promissory note which have been described. He
not only pledged his services for five years, but he assumed an
unconditional liability to pay $1,000,000 at the end of this period, in
return for which he obtained only 40,000 shares of unsalable securities
and a right to participate in the management of the associates’
property which was revocable at the pleasure of Huntington and his
friends at any time within two years. This was a dangerously exposed
position. It was not a wise thing even for the Huntington-Stanford
group to put Colton in such a predicament, and much subsequent
difficulty resulted therefrom.
In 1876 the associates served notice on Mr. Colton, dissevering his
connection with them. Mr. Crocker relates that Colton was very much
affected. He said, according to Crocker, “It is generally known that I
am here with you, and there is no one knows these relations are only
temporary, and it will be next to ruin to me to have them dissevered
now.” In fact, he wept. Crocker later testified that he liked the
general very much, and was touched by his distress. Colton wished him
to go and see the others, and Crocker did so. The result was that the
notice was reconsidered and a second contract made.[223] After this,
Colton bought one-ninth of the capital stock of the Western Development
Company, and commenced to deposit money with that organization in the
same manner as did the other members of the group.
“Financial Director”
During substantially the whole period from 1874 to 1878, Colton took
active charge of the financial affairs of the Huntington group at the
San Francisco end. His office and title beginning August 31, 1875, was
that of “financial director.” Formally he acted under the direction of
the treasurer of the company, Mr. Hopkins. Practically he reported to
Mr. Huntington and perhaps to Mr. Crocker, more than to Mr. Hopkins,
but exercised a good deal of independent initiative.[224] With the
operation of neither the Central Pacific nor the Southern Pacific had
he anything to do. On the other hand, it was either Colton in San
Francisco, or Huntington in New York, as we shall presently see,
who attended to the negotiation of short-time loans, often necessary
to take care of interest on the railroad properties. It was also
Colton who had particular charge of the many affairs of the Western
Development Company;[225] it was Colton who was responsible head of the
Rocky Mountain Coal and Iron Company’s mine at Ione; and it was Colton
who took particular interest in finding a market for the output of this
corporation.[226]
From the tone of Mr. Huntington’s letters to Colton, it seems as though
the former was reasonably well satisfied with the way the business in
the West was conducted after 1874. On his part, Colton cultivated the
idea that the interests of the five associates, himself included, were
inextricably bound together. “I have learned one thing,” he wrote in
1878, “we have got _no true friends_ outside of _us_ five.... People
will profess friendship to one of us, just to either try to find out
something, or when the time comes, lie about the rest of us. We cannot
depend on a human soul outside of ourselves, and hence we must all be
good-natured, stick together, and keep our own counsels.”[227]
Yet, in spite of his assumption of the permanency of his relations
with the Huntington group, Mr. Colton certainly understood that his
position had no legal security whatever. Of this the episode of 1876
must have been a disagreeable reminder. In particular, as has been
observed, there was a reasonable likelihood that he would be called
upon to pay his note for $1,000,000 in 1879, before the Central Pacific
and Southern Pacific shares, which secured it, had become salable. It
is evident that these matters were in Mr. Colton’s mind constantly, and
gave him great concern. No other reason can be offered for his efforts
to secure title to property with such feverish rapidity. How should
he protect himself against the automatic presentation of a note which
might require the sacrifice of all his accumulations to pay? How should
he put himself in a position where his income was not wholly dependent
on the forbearance of four men, with only one of whom he had ties of
personal friendship? If Mr. Colton’s moral fiber weakened somewhat
under the strain of the situation, the fact need occasion no great
surprise.
Western Development Dividend
Some time after 1874 Colton suggested to Crocker that the salaries
of the associates be raised. They were all drawing $10,000 a year,
and were giving all their time for that salary. Colton said it was an
insignificant sum. Men such as the associates ought to have $25,000 a
year, at least. But Crocker replied prudently that a salary of $10,000
could always be justified, while one of $25,000 might not be. He
preferred to let the matter stay as it was.[228]
Three years later, when the period of his contract was drawing to
a close, Colton took more drastic action by causing the Western
Development Company to distribute a substantial part of its assets in
the form of a dividend. This provided him with property, upon which as
security he might have borrowed considerable sums of money. A dividend
was declared on September 4, 1877, which consisted of $13,500,000 in
Central Pacific stock, $6,300,000 in Southern Pacific Railroad bonds,
and $1,562,500 in other securities, amounting to between one-half and
one-third of the holdings of the Western Development Company. Colton’s
personal share was one-ninth.[229]
Ostensibly the Western Development Company’s dividend was a
distribution of surplus profits. In reality it was a division of
capital. Nobody knew, in 1877, how great the profits of the Western
Development Company had been, nor even whether the assets of the
company equaled its liabilities, for the reason that the value of these
assets was speculative and uncertain, and if realized on all at once,
would have amounted to scarcely anything at all. It was known, of
course, that the creditors of the company were also its stockholders,
so that the distribution was not quite so reckless as it otherwise
might have appeared; but yet the various stockholders were not holders
of stock in the same proportions as they were creditors, and the
heavier creditors, such as Huntington, might well have felt that their
interests were not being sufficiently protected.
[Illustration: David D. Colton]
Nothing was said about the Western Development dividend to any of the
associates at the time it was declared. Charles Crocker was in San
Francisco, but knew nothing of it.[230] The fact came out, however,
in August of the following year, when Huntington was in the West.
Stanford, Huntington, and Crocker were all together in one of the
Southern Pacific offices when Colton came in, accompanied by a couple
of subordinates with their hands full of bonds, and said, “Gentlemen,
here are your dividends.” Both Huntington and Crocker became at once
very angry, and hot words seem to have passed. Huntington said that
there was no sense in the dividend—it was wrong, the company ought
to pay its debts before it paid a dividend—the stocks and bonds
were of no particular value, but their distribution would leave the
Western Development Company shorn of its resources, and they must be
returned. Crocker agreed with Huntington. Colton begged the others not
to injure him in the eyes of the employees of the company by compelling
a return of the securities, and pledged his honor that he would not
part with his shares, and would return them if needed. Stanford thought
the matter might be passed with this understanding, and it was so
agreed, not, however, without a good deal of resentment on the part of
Huntington and Crocker.[231]
Misappropriation of Funds
The Western Development dividend and Colton’s request for a higher
salary were, in a measure at least, open and above board. The same
cannot be said of a number of other operations—in general, it is
true, of minor importance—which took place between 1874 and 1878,
and which became known only after Colton’s death. How far Colton was
guilty of positive dishonesty during these years has been a matter of
bitter dispute. There is no question, however, that he drew or credited
himself with considerable amounts of money without the knowledge of
the other partners, and that no vouchers were ever made out which
sufficiently explained these transactions. Charges of embezzlement were
even later made and not disproved. Three of four illustrations of such
incidents may be given.
1. Salary drawn from the Rocky Mountain Coal and Iron Company. Mr.
Colton was made president of this company in 1871 at a salary of $100
a month. In 1874 the associates agreed that Colton should receive a
salary of $10,000 a year, as partner. No separate mention was made of
the Rocky Mountain Coal and Iron Company in 1874, but it is reasonable
to suppose that the new salary of $10,000 covered Colton’s work in
supervising the coal property, as well as his share in the general
administration of the railroad, especially as the coal business took
comparatively little of his time. As a matter of fact, however, Colton
restricted himself to $100 a month only during 1871. In 1872 he drew
$400 a month, except during the month of March, when he took $366.50.
In 1873 he took $23,500, of which a considerable amount was for back
salary. In 1874 Colton drew $12,000, and in 1875, 1876, and 1877,
$6,000 annually. According to the testimony of expert accountants
who later went over the company’s books, Colton took $54,966.50 in
salary during the years 1871-77 in excess of what he should have taken
according to his agreement with Mr. Crocker, and beyond the amounts
which the other associates intended he should have.[232]
2. Interest on Rocky Mountain Company balances. It is admitted that
Mr. Colton deposited the balances of the Rocky Mountain Coal and Iron
Company, running all the way from $30,000 to $90,000, in his own
private bank account, and used them in his own private transactions.
3. Receipts from sale of coal. It appears that the Rocky Mountain
Coal and Iron Company sold coal to the Central Pacific. For some time
this coal was paid for at the rate of $2 and $2.65 per ton. In July,
1874, the Central Pacific made an extra payment of $11,622 to Mr.
Colton for the purpose of increasing the price paid during the months
from January to May, 1874, to $2.85 per ton, and arranged to pay this
increased amount thereafter. In his instructions to the superintendent
of the mine, Mr. Colton made no mention of the retroactive payment, and
apparently pocketed the $11,622.
4. Appropriation of interest coupons. In 1876 Mr. Tevis wished to
exchange some Southern Pacific bonds which he held, for certain
lands owned by the Railroad Company. Colton agreed to facilitate
the transaction by taking the bonds and giving his individual check
for $140,700. Tevis delivered the check and $10.13 in cash to the
Southern Pacific land agent, and got his deed. Colton eventually
redeemed his check by delivery of the bonds to the treasurer of the
Southern Pacific, but when the bonds came in, two interest coupons
were missing. A similar transaction between the same parties, but for
a lesser amount, took place later the same year, and again interest
coupons were clipped from the bonds before Colton turned them in.[233]
In each case Mr. Smith, the treasurer of the Southern Pacific, was
compelled to hold Colton’s check for a considerable period before it
was redeemed, and during this time Colton had, of course, the use of
the money.
In addition to matters such as those here partially enumerated, there
were a multitude of instances in which Colton charged relatively small
sums to various accounts without supplying any evidence that the
charges were legitimate. Doubtless the other associates did the same,
but Colton’s position in the group was peculiar, and he could not
afford to allow himself equal freedom with Huntington and Stanford. It
would serve no useful purpose to discuss these instances in detail.
The aggregate of all the sums which Colton thus gathered into his
control was considerable. The Western Development dividend alone
supplied him with 700 Southern Pacific bonds that might have been used
as collateral security for a loan, as well as with other securities,
mostly of still uncertain value. Items of excess salary, interest
on balances, and miscellaneous unaccounted-for expenses totaled
$130,831.13. Had Colton succeeded in increasing his salary as financial
director to $25,000, he would have added from $75,000 to $100,000 to
his resources. Substantial progress was evidently being made toward
meeting the million dollar note.
Colton’s Death and Mrs. Colton
Upon all the activities which have been described, Colton’s death in
October, 1878, in the prime of life, fell with crushing force. In the
first place, Colton’s manipulations were such as to be unforgivable
by his business friends. Devious as Huntington’s ethical code was
at times, he had no hesitation in pronouncing Mr. Colton guilty of
robbery; that he himself was partly responsible was not likely to occur
to him. In the second place, Colton’s assets at the time of his death
were such as to render immediate liquidation impossible, and yet this
was precisely the thing most likely to be demanded. Mrs. Colton, the
sole heir, was a woman of unusual ability, clear-headed, definite in
speech, and, although inexperienced in business, apparently quickly
able to understand business problems. She had, moreover, a good adviser
in the person of a San Francisco lawyer named S. M. Wilson. Her
position was, nevertheless, one of disadvantage, which was intensified
by her wish to shield her husband’s reputation.
It does not appear that the associates were aware of the true state
of affairs during the weeks immediately following Mr. Colton’s death.
Mr. Huntington wrote cordial though not altogether sincere letters
to Mrs. Colton, expressing willingness to serve her in those matters
in which General Colton was interested with the associates,[234] and
Crocker called at Mrs. Colton’s house and wept there while speaking of
the death of Mr. Colton. This attitude soon changed, however, and Mr.
Crocker became less friendly in his intercourse with Mrs. Colton, and
at last ceased to visit her altogether.[235] In fact, all pretense of
sympathy with Mrs. Colton was presently abandoned, and negotiations
between her and the associates were continued upon a cold business
basis.
The attitude of the Stanford-Huntington crowd was officially that they
were willing to have Mrs. Colton pay her obligations and continue with
them. This meant a settlement of claims arising out of the improper
withdrawal of moneys by Mr. Colton, but also more particularly the
payment of the $1,000,000 note. It involved, also, for the future
continued investment of funds in the Western Development Company, and
the payment of assessments which might be levied upon Southern Pacific
stock. It was insisted, however, that the matter be settled quickly,
partly because Mr. Huntington was about to leave the city, and partly
because the period for filing claims against the Colton estate would
soon expire.[236]
In the event that Mrs. Colton should not desire to continue with them,
the associates demanded an accounting in which the liabilities of
Mr. Colton on account of the $1,000,000 note, his share of the net
indebtedness of the Western Development Company, and the sum of the
alleged embezzlements, should be set against the estimated value of the
stock and bonds of which Colton died possessed. In estimating the value
of Mr. Colton’s securities, moreover, the associates declared that the
question was not as to the amount which could be realized eventually
and after the underlying property had had a chance to prove itself, but
the market value at the time of negotiations.
Mr. Crocker’s testimony on this point expresses very fully the attitude
of the associates. He said:
Mr. Wilson and I had frequent conversations, and he sometimes asserted
we could do so and so with these bonds, that we could realize 80 or
90 cents on them. I said in reply, “Possibly we can; I don’t know; it
is a matter of speculation; it depends on the future of the roads.”
Sometimes he would claim they would bring 80 or 85 cents; and then I
would say, “Very likely they may,” but it would require time to do
it, and a great deal of management necessarily to bring that out, and
if Mrs. Colton desired to realize the full value of these securities
after this lengthy handling of them, all she had to do was to pay the
amount of the note and continue in the company and we would manage
them for her, as well as we would for ourselves, of course, and she
should receive the full benefit of our knowledge and experience in
handling these securities, and we would get every dollar out of
them we could, and she should have her share to the last cent. Then
he would reply: “Well, that can’t be. We are determined to go out of
this.” “Well,” I says, “then it is a matter of speculation.”[237]
Unquestionably these were hard terms, for it was out of the question
for Mrs. Colton to continue with the associates in 1879, a fact of
which these gentlemen must have been well aware. She did not have
the necessary money, she could not afford in any case to risk her
livelihood in so speculative an undertaking as building railroads in
southern California, and the relations between her and the Huntington
group did not savor of trust and confidence. The expressions of
willingness to continue to treat Mrs. Colton as one of themselves cost
the associates nothing, and were worth as much. Nor was the standard
of valuation of the Colton assets offered by the associates, easily to
be defended on ethical grounds. Mr. Colton had not played fair, it is
true, but on his part he had been led into an improvement agreement and
caused to sign a $1,000,000 note, in at least partial reliance upon the
value of the stock of railroads under the associates’ control, which
was given him in exchange. It was hardly appropriate for the Huntington
group now to insist that the collateral security had no value.
Settlement with Mrs. Colton
Hard as the terms were, Mrs. Colton finally acceded to them. By
agreement dated August 27, 1879, she turned over 408 shares of the
capital stock of the Rocky Mountain Coal and Iron Company, all of
the shares which she held of the Occidental and Oriental Steamship
Company, all claims to the 40,000 shares of Central Pacific Railroad
and Southern Pacific Railroad stock, pledged as collateral for the
$1,000,000 note, all of the capital stock of the Western Development
Company standing to Colton’s credit, and some $587,500 in par value of
bonds of the Central Pacific-Southern Pacific system, of which $500,000
was in first mortgage bonds of the Southern Pacific Railroad itself. In
return for all this, the associates agreed to cancel Colton’s note for
$1,000,000, and to release Mrs. Colton from any claims on the part of
themselves, the Western Development Company, the Central Pacific, and
its allied companies.[238]
This settlement left Mrs. Colton with property reasonably valued
at half a million dollars, and with an income of perhaps $28,000 a
year. That she withdrew with so much to her credit was due to the
interposition of Mr. Tevis on her behalf at the last moment, in
consideration of a contingent fee,[239] and to the fact that the
associates were on the point of floating large amounts of Central and
Southern Pacific securities in New York. Mrs. Colton felt, however,
that she had been robbed, and in May, 1882, commenced suit to reopen
the whole transaction, and to annul the compromise agreement. It has
been estimated that this famous suit cost the parties $100,000 apiece.
Mrs. Colton alleged fraud and the withholding of essential facts which
the associates should have disclosed by reason of the trust relations
which had existed between Colton and his partners. In particular she
insisted that the statements given her in 1879 with reference to the
affairs of the Western Development Company had been misleading and
untrue. She now offered to pay Colton’s $1,000,000 note, and other
liabilities, and asked for the return of the securities which she had
previously surrendered.
The more important facts developed in this litigation have been dwelt
upon in the preceding discussion, and need not be repeated here. The
case went to the Supreme Court of the state, where Mrs. Colton was
finally defeated. A careful reading of the evidence leads to the
conviction that the court was right. Mrs. Colton had done the best she
could under the circumstances and was properly held to an agreement she
had made with her eyes open, some three years before. Yet the fault of
the whole unsavory affair was not hers, nor altogether Mr. Colton’s,
and the reputation of the associates thereby properly suffered in the
public mind.