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Business on trial: The tobacco securities trust and the 1935 pepper debacle

2007; Taylor & Francis; Volume: 49; Issue: 6 Linguagem: Inglês

10.1080/00076790701710316

1743-7938

Howard Cox,

Banking stability, regulation, efficiency

Abstract The prosecution and imprisonment of Lord Kylsant in 1931, following the collapse of the Royal Mail Shipping Group, has long been acknowledged as a landmark event in the history of financial accounting. Far less attention has been given to the equally high profile conviction and imprisonment of three businessmen four years later in the wake of the notorious pepper scandal. This article examines the background to the scandal, particularly the role played by an investment vehicle called the Tobacco Securities Trust, and compares the subsequent trial and conviction to that of the Royal Mail case. The findings of the article serve to endorse studies by accounting historians arguing that Britain's legal environment played a critical role in promoting improvements in the financial disclosure policies evidenced amongst leading British companies during the second quarter of the twentieth century. Keywords: Financial DisclosurePrimary CommoditiesTinShellacPepperCommodity Restriction SchemesCompany ProspectusOfficial ReceiverBankruptcyForeign InvestmentsRoyal Mail Case (1931)Boots Pure Drug Co. Acknowledgements I am grateful to Martin Farr, Simon Phillips, John Hillman, Edwin Green, Lucy Newton, Tony Corley, Tony Arnold, Trevor Boyns, Dick Edwards, Suzanne Fisher, Paolo di Martino and staff at the Archives Centre, Churchill College, University of Cambridge and the National Archives, Kew, for their advice and assistance in the preparation of this article. Notes Pre-decimal currency: £1 = 20s (shillings); 1s = 12d (old pence) = £0.05 (new pence). 1 On McKenna, see the biography by Martin Farr, Reginald McKenna: A Statesman among Financiers, 1916–1943. A brief biography is provided by Green, “McKenna, Reginald,” 33–37. 2 For a discussion of the reasons behind the limited sources of finance available to new businesses in Britain at this time see Scott and Newton, “Jealous Monopolists?”. 3 Eden et al., “TIC,” 17–18; Wellings, The History of Marley. 4 Around half of the £4 million ordinary shares were held as investments by BAT Co. or the Imperial Tobacco Co. See Cox, The Global Cigarette, 318–319. 5 Green and Moss, A Business of National Importance, especially 139–146. 6 Jones, True and Fair, 145–157. 7 Edwards, A History of Financial Accounting, 152. 8 Davies and Bourne, “Lord Kylsant and the Royal Mail,” 118–120. 9 Green and Moss, A Business of National Importance, 142. 10 Arnold and Matthews, “Corporate Financial Disclosures,” 13–14. 11 Havinden and Meredith, Colonialism and Development, 191. 12 van Helten and Jones, “British Business in Malaysia and Singapore since the 1870s,” 169. 13 Hillman, “Malaya and the International Tin Cartel,” 239–240. 14 Ibid., 242. 15 Hillman, “The Impact of the International Tin Restriction Scheme,” 73. 16 In the trial proceedings, it was stated that Howeson had first gone to India in about 1904, at the age of 20, to work for a firm of discount brokers and had remained there until 1923. The Times, 19 Feb. 1936. In fact, he went to work for his father's agency house which dealt in jute. Personal communication with John Hillman. 17 Cox, The Global Cigarette, 229. 18 Cunliffe-Owen succeeded to the chairmanship of BAT Co. when Duke formally resigned in 1923, but he had effectively assumed overall control when his main rival for the position, Joseph Hood, became an MP in 1919. Ibid., 242. 19 Oppenheim, Memoirs, 79. 20 For details of the share structure of Tobacco Investments and TST, see Cox, The Global Cigarette, 314–319. 21 Tobacco (London), 1 Nov. 1928, vi–vii. 22 Oppenheim, Memoirs, 79. Bradbury had earlier been joint permanent secretary to the Treasury between 1913 and 1919. 23 Eden et al., “TIC,” 17–18. 24 The operation of the tin pool, and its relationship with the ITC producer cartel, is explained in detail in Hillman, “Malaya,” 250–256. 25 Personal communication with John Hillman. 26 Hillman, “Australian Capital and South-East Asian Tin Mining,” 181. 27 Phillips, “Industrial Welfare”, 67; Whysall, “Interwar Retail Internationalization,” 160. 28 Merwin, Rise and Fight Againe, 232–233. 29 Greenwood, A Cap for Boots, 35–38. 30 Ibid., 42. 31 Chapman, Jesse Boot of Boots the Chemist, 157; Corley, “Hill, Philip Ernest (1873–1944),” 237. 32 Peden, The Treasury and British Public Policy, 258. 33 Ibid., 276–277. 34 Clay, Lord Norman, 447. 35 On 12 Jan. 1933 Basil Catterns, Deputy Governor of the Bank, wrote to A.P. Waterfield at the Treasury noting that ‘a memorandum of the interview shows quite clearly that the question of a public issue [of Boots shares] was definitely turned down’. Public Record Office (hereafter PRO), T160/530, File F13071/01, Letter from B. Catterns to A.P. Waterfield, 12 Jan. 1933. This correspondence had been prompted by Waterfield's own letter to Olaf Hambro three days earlier (see note 36). 36 PRO, T160/530, Letter from A.P. Waterfield to Olaf Hambro, Jan. 1933. 37 Greenwood's inside account of the negotiations suggests that an American merchant bank had used its influence with Norman to scupper the deal. Greenwood, A Cap for Boots, 47–48. 38 PRO, T160/530, Memorandum from R. Hopkins to N. Chamberlain, 12 Jan. 1933. 39 PRO, T160/530, Letter from Olaf Hambro to N. Chamberlain, 9 May 1933. 40 PRO, T160/530, Memorandum from R. Hopkins to N. Chamberlain, 9 May 1933. 41 Greenwood, A Cap for Boots, 51. 42 TST profits rose from £672,000 in 1932 to £802,000 in 1933. TST, Annual Report and Accounts, 1932 and 1933. 43 Time, 18 Feb. 1935; Jenkins, The Thirties, 159; Fallows, “The Pepper Paper,” 10–11. 44 PRO, BT31, 32285/155366. 45 Investors Review, 2 Feb. 1935. 46 Although by the 1930s growth in sales of gramophone records had been tempered by the impact of the depression and the increasing popularity and availability of radios, leading to a phase of industry consolidation. Jones, “The Gramophone Company,” 97–98. 47 Economist, 30 Nov. 1935. 48 Tobacco (London) 1 Jan. 1936. 49 Anon., Two Centuries of Lewis & Peat, 46. 50 Time, 2 March 1936. 51 Tobacco (London) 1 Jan. 1936. 52 Sayers, The Bank of England, 544. According to newspaper reports of the time, Eastern merchant banking houses, whose principals viewed with disfavour the entry of a speculative syndicate into what had previously been regarded as their private preserves, brought on to the market substantial hidden stocks of shellac, thus causing the price to drop sharply. Investors Review, 2 Feb. 1935. 53 The Times, 17 March 1936; Anon., Two Centuries of Lewis & Peat, 46. 54 Economist, 30 Nov. 1935. 55 Lyttelton, The Memoirs of Lord Chandos, 142–144. 56 Kynaston, The City of London, Vol. III, 425. 57 The Times, 15 Feb. 1936. 58 Fallows, “The Pepper Paper,” 11. 59 Holmes and Green, Midland, 195. 60 Economist, 30 Nov. 1935. 61 Sayers, Bank of England, 544. 62 Fallows, “The Pepper Paper,” 4. 63 McKenna Archive, Churchill College, University of Cambridge, MCKN 7/16, Report of the Official Receiver in the Matter of James & Shakspeare, Limited, 9 July 1935: 12, para. 24. 64 Kynaston, City, 426–427. 65 Ibid., 428. 66 Sayers, Bank of England, 545–546. Two other brokers who had purchased pepper on behalf of James & Shakspeare, Rolls and Sons and J.F. Adair, were also posted as defaulters and were bankrupted as a consequence of their inability to obtain the money required to pay for the pepper they had contracted to buy. News Chronicle, 15 Feb. 1935. 67 McKenna Archive, MCKN 7/16, Letter from E.T.A. Phillips to McKenna, 12 April 1935. 68 McKenna Archive, MCKN 7/16, Letter from E.T.A. Phillips to McKenna, 15 April 1935. 69 McKenna Archive, MCKN 7/16, Statement by McKenna to the Official Receiver, 8 July 1935. 70 The Times, 19 Feb. 1936. 71 McKenna Archive, MCKN 7/16, Statement by McKenna to the Official Receiver, 8 July 1935. 72 McKenna Archive, MCKN 7/16, James & Shakspeare Prospectus, 3 Sept. 1934. 73 McKenna Archive, MCKN 7/16, File note made by McKenna relating to the James & Shakspeare prospectus, 25 June 1935. 74 Marx had gained a reputation in the City for his financial creativity, and his method of devising the James & Shakspeare prospectus would seem to be a case in point. Kynaston, The City of London, 338. 75 In his report, the Senior Official Receiver noted that there was no foundation for the suggestion that McKenna was interested in pepper. McKenna Archive, MCKN 7/16, Report of the Senior Official Receiver in the Matter of James & Shakspeare, Limited, 9 July 1935: 8, para. 18. 76 Holmes and Green, Midland, 195. 77 Norman noted in his diary for 1 May 1935: ‘An hour protesting pain, surprise & innocence as to any knowledge of or dealings in pepper.’ Kynaston, The City of London, 429. 78 McKenna Archive, MCKN 7/16, Strictly private letter from McKenna to Lord Bradbury, 8 May 1935. 79 Tobacco (London) 1 Jan. 1936. 80 The Times, 13 March 1936. 81 In June 1935 Norman discussed with a visitor the reconstruction of TST, advising strongly against the appointment of Philip E. Hill as chairman to succeed McKenna. Kynaston, The City of London, 394. Norman personally chose a number of new company chairmen and directors to fill the places of those discredited by the pepper scandal. Roberts, “The Bank and the City,” 173. Lord Catto succeeded Norman as Governor of the Bank of England in 1944. 82 McKenna Archive, MCKN 7/16, Copy of correspondence between Hugo Cunliffe-Owen and Hermann Marx forwarded to McKenna by Cunliffe-Owen as enclosure with his letter dated 20 June 1935. Annual consumption of shellac in Britain at the time was estimated to be between 300,000 and 350,000 cases. The Times, 14 Feb. 1935. 83 Oppenheim, Memoirs, 80. 84 United Kingdom, Hansard Parliamentary Debates, Commons, 5th ser., vol. 298, 18 Feb. 1935: cols. 2194–2212. 85 Bywater, “McLintock, Sir William,” 73, 868. 86 McKenna Archive, MCKN 7/16, Report of the Official Receiver in the Matter of James & Shakspeare, 9 July 1935. 87 The validity of the prosecution's argument relating to the Royal Mail's use of secret reserve accounting practices has been questioned in more recent interpretations of the case. Cf. Arnold, “Secret Reserves or Special Credits?” 203–214. 88 A crucial point of law turned upon the interpretation of the phrase ‘false in a material particular’. In his summing up at the conclusion of the Royal Mail case, Mr Justice Wright had said that to confine section 84 of the Larceny Act to exclude from ‘falsity in any material particular’ that ‘type of fraud which may be found in a document, not fraudulent in the sense of what it states, but in the sense of what it conceals or omits’ was ‘to narrow unduly the words “in any material particular”’. This interpretation was subsequently supported in the Court of Appeal and thus provided the prosecution in the James & Shakspeare trial a prima facie case for deception based on omission. Brooks, The Royal Mail Case, xxxiii. 89 The Times, 17 March 1936. 90 The Times, 19 March 1936. 91 Davies, “Philipps, Owen Cosby: Lord Kylsant of Carmarthen,” 674. 92 Kynaston, The City of London, 428. Note that in this account Howeson's name is mistakenly translated into Harrison. Howeson's full name was John Henry Charles Ernest Howeson, his surname having earlier been changed from von Ernsthausen. Time, 2 March 1936. Howeson's father had emigrated from Prussia to Britain in 1849. John Hillman, private correspondence. 93 Edwards, “Plender, William (1861–1946),” 740. 94 Cf. Brooks, The Royal Mail Case, xxxviiii–xxxix. 95 Davenport-Hines, “Cunliffe-Owen, Sir Hugo Von Reitzenstein.” 96 For example see La Porta et al., “Law and Finance.” 97 Di Martino, “Approaching Disaster,” 26–27. 98 The issue of the ethical responsibility facing auditors following the outcome of the Royal Mail case was raised in particular by Lord Plender (cf. note 93 above, 739–740). 99 Edwards, History of Financial Accounting, 220–224. Edwards notes that the first concerted attempt to regulate the information contained in a prospectus was in the 1867 Companies Act. This led to the case of Oakes v. Turquand (1867), in which a prospectus issued by Overend Gurney & Co. was considered to be technically ‘true’ but not ‘fair’ in the impression it conveyed. 100 Defence Counsel for Bishirgian, Sir Patrick Hastings KC, had earlier defended Morland successfully in the Royal Mail case against the charge of false accounting. His view, concerning the subsequent conviction of Kylsant for issuing a false prospectus, was that he ‘was never completely satisfied of the justice of that conviction’. Hastings, “The Case of the Royal Mail,” 461. In his autobiography, however, he makes no reference to the James & Shakspeare case, (cf. Hastings, Cases in Court), although there is a brief reference to the case in his biography, Hyde, Sir Patrick Hastings, 307–312. 101 Time, 28 June 1937. 102 Arnold and Matthews, “Corporate Financial Disclosures,” 3–16. Additional informationNotes on contributorsHoward Cox Howard Cox is Professor of International Business History at Worcester Business School, University of Worcester, UK.