Wednesday, September 21, 2011

1877: What Goes Around Again, Comes Around Again.

April 17, 1877, New York Times, THE EQUITABLE INVESTIGATION.

We now have the results of the investigation into the affairs of the Equitable Life Assurance Society, instituted three months ago by the managers, and intrusted by them to an influential committee with ex-Gov. MORGAN at its head. Although not altogether spontaneous, the action of the society was eminently politic

The Equitable shared with equally reputable institutions the business effects of the distrust excited and justified by recent revelations. The system was discredited. Doubt had been cast upon the accuracy of published statements. Policy-holders complained that their opportunities of verifying the representations made by officers were inadequate, and that their rights were ignored by the stockholders, whose interests were trifling in comparison with their own. The complaint was not unreasonable, and in the interest of the companies, not less than of the policy-holders and the public, this journal urged that all proper facilities should be afforded for independent scrutiny as essential to the restoration of confidence. The officers of the Equitable accepted the suggestion. They did not, indeed, invite the policy-holders to nominate investigators, but they invited the co-operation of gentlemen identified in one form or another with the welfare of the institution, and occupying positions which removed them from the suspicion of being unduly influenced in its behalf. The character of the chairman reflected the character of the committee, and gave satisfactory promise of the thoroughness of the work to be undertaken.

The promise thus made has been fulfilled. It is only necessary to glance at the report printed this morning to discover the resolute purpose with which Mr. MORGAN and his associates commenced their task. They had been asked to investigate the affairs of the society, not to exculpate its management, and having accepted the responsibility, they adopted the best possible methods of securing the objects in view. They called various forms of skill to their assistance. They retained a competent actuary, and accountants and valuators without stint. Nothing seems to have escaped them. They caused the calculations to be tested. They verified the books. They subjected the real estate owned by the society and the properties covered by the mortgages it holds to be appraised by trustworthy persons. They took possession of the other securities, and caused them to be valued at present market rates. Upon all these points the inquiry appears to have been complete, and uninfluenced by the officers of the society. It would have been better, we think, had the various reports acquired by the committee from these sources been printed entire, as appendices to its report. As the matter stands, the committee accepts the conclusions presented by those to whom it delegated special duties. The actuarial requirements are fully met by the figures of the balance-sheet. The appraisal of the property covered by mortgages, in this City and State, and also in New Jersey, is more satisfactory than many who are familiar with the depreciation in real property would have anticipated. Some of the properties are, of course, inadequate security for the amounts loaned, though in the judgment of the appraisers the difference is inconsiderable. With a caution characteristic of its members, however, the committee recommends that half a million dollars be taken from the surplus and set aside as a special fund to provide for any probable loss on this class of investments. This sum is about one-eleventh of the undivided surplus as estimated by the managers, or one-ninth of the surplus as computed by the Insurance Department. To meet possible losses on other securities---concerning which, by the way, information must be gleaned from sources unconnected with the report proper---the committee suggests that a further sum of three hundred thousand dollars be added to the special reserve thus created.

The examination carried on by the Insurance Department, irrespective of that directed by the committee, indicates somewhat differently the amount of losses already incurred in respect of property accepted as security for loans, and also in respect of property owned by the society. These amount, according to the department, to $365,475, and are, therefore, amply provided for by the half-million reserve recommended by the committee. It is satisfactory to observe that the Finance Committee of the society promptly responds to the twin propositions of the Investigating Committee by setting apart eight hundred thousand dollars, "to cover any possible loss arising from the value of real estate and other securities."

The labors of the investigators did not end here. They had tested the condition of the company and found it sound. Then came questions of management, and in regard to these the conclusions set forth by the committee will be seen to be in perfect accord with views again and again expressed in these columns as inseparable from life insurance reform. On the subject of expenditures in buildings for the accommodation of the company, here and in Boston, the committee deprecates the course that has been pursued. The structures would have been more judicious "if less elaborate, less expensive, and less ornamental." The fact that parts of the buildings are advantageously rented to others does not blind the committee to what should be the guiding rule in relation to corporate investments of this nature, namely, that "the actual requirements of the corporation itself should, at all times, be the main object in view in such considerations." The mistake into which the Equitable fell is so prevalent that it invites no special condemnation; but the dictum of the committee is the only safe one when the investment of corporate funds is involved. On another point, even more obviously improper, the committee is explicit. It does not look with favor upon the investment of any portion of the society's funds in the capital stock of the Mercantile Trust Company, or any business outside of its legitimate business of life insurance. Nor is there any attempt to break the force of feeling excited by recent testimony respecting the salaries paid to life insurance officials, of the sources of extra compensation. A special inquiry into this branch of the subject left the committee no alternative but to suggest that the compensation paid to the chief officers of the society "has been excessive and objectionable in principle," because in part derived from a percentage of the surplus. While recognizing the necessity of adapting the pay to the actual value of the services rendered, the committee insists that only fixed salaries should be paid, and that they should be reasonable in amount.

These incidental results of the committee's labors are, then, timely and important. They vindicate the sensitiveness evinced by the public upon the subject, and they will assuredly exercise a wholesome influence upon the management of kindred institutions. The committee, it is evident, has no sympathy with the prevailing laxity of opinion in reference to fiduciary responsibility, and none with extravagance in the administration of corporate funds. As for the Equitable Society, its managers should be more than satisfied with the committee's work. Any doubt that may have existed as to the society's condition is removed. And we venture to hope that the society, having had the courage to invite investigation, will use its influence for the furtherance of the reforms which are essential to the complete re-establishment of confidence in the life insurance system.

March 27, 1877, New York Times, SUIT AGAINST THE EQUITABLE LIFE.
In the Special Term of the Common Pleas, judge Robinson yesterday rendered decision in the case of Lyman Elmore and Jenny L. Elmore against the Equitable Life Assurance Society, etc., and Henry B. Hyde and others, respectively President and Directors of the society. The complaint charges that Hyde and the other Directors have obtained control of the stock of the company, and without authority of law have spent $5,000,000 in the erection and decoration of costly buildings in this City and Boston. These buildings, it is alleged, are not necessary for the transaction of the company's business, as the greater part of them are leased to other corporations. The plaintiffs claim that by this conduct, and by their positions, the Directors have drawn large sums over and above their salaries, and have shared profits derived, or said to have been derived by the contractors for the buildings. The plaintiffs desire to have an accounting of the sums alleged to have been overdrawn, and ask for the appointment of a Receiver. The case came up on a motion for the examination before trial of Henry B. Hyde. The answer of the defendants admits the expenditures but denies that they were unlawful or unnecessary or unprofitable to the company, and denies each and every one of the other allegations. This case was recently argued in the Common Pleas Court on a motion for the order to examine Henry B. Hyde before trial. The court holds it must be shown to be not a mere fishing investigation. The plaintiffs say the knowledge which they seek is peculiarly within the possession of the defendants, but the plaintiffs failed to disclose the facts in regard to which they desire to examine Hyde. On account of the failure to make such disclosure, Judge Robinson, without passing on the plaintiffs right to sue the Directors, denied the motion for the examination.

April 6, 1877, New York Times, LIFE INSURANCE AFFAIRS.;
ALBANY, April 5. The Insurance Committee resumed its investigation at 9:30 this morning. Previous to the resumption of the testimony the committee went into executive session, and it is understood that Mr. Floyd Jones made a motion to discontinue the investigation and make a report. What the result of the motion was is unknown
After the recess Theodore Weston testified that he was the architect of the Equitable Building; the work was commenced in May 1874, and was completed in July, 1876; the leases commenced in May, 1875; the original office of the Equitable was separated from the main building, and its completion was delayed; there is no restaurant in the building; Delmonico's adjoins it; the actual expense of putting up the main building was about $1,500,000, including the land; the additional building cost about $1,000,000; witness received a salary of $15,000 per year; the preliminary plans were drawn by Mr. Kendall; he had not completed the plans before the building was commenced; the internal arrangements were left entirely to the preliminary drawing; there was no percentage paid upon any of the material to my knowledge; blank ; furnished a statement of expenditures to the Building Committee of the Equitable at almost every meeting; Mr. Lambert was Chairman of this committee; they had meetings three times a week; the plans were submitted to them, and the contracts were made by witness; upon the larger contracts, bids were advertised for; all payments were made by approval of the committee; Silman & Cheney were the contractors for the stone; they bid $98,000, I think; it was the lowest bid of 17; it ran a little over $3 per cubic foot upon the granite actually furnished; the granite was measured by myself; no commission nor any consideration was paid on the contract; the contractor for the masonry work who cut the stone was T.T. Smith; his work was let in the same way at $18 per 1,000 foot of brick, and $9, or about that, for setting the granite; that included pay for everything; he was paid nothing more; no one else received any gratuity on account of the contract; he did the fire-proof wall in the interior and the plastering; for the first he received 40 or 50 cents, and for the last 42 cents, per square yard; Morton and Chesley did the carpenter work at about $65,000; no gratuity or commission was allowed anyone on any work; a number of contracts were made for the elevators, for the boilers, for the sub-cellar, for taking down the old building, and for other purposes; the entire work cost about $1,000,000, and upon it no bonus or commission was paid to any one; neither to officers, Directors, not any one else; the granite contractors furnished about $1,500 worth of work for Mr. Hyde's house on Long Island; Mr. Calvert Vaux was the architect of the house.

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