The Farrow's Bank Crash
Some time before the customary opening hour of 9 o'clock on December 20, 1920, there appeared at the head office of Farrow's Bank, Ltd., in Cheapside, London, the following brief notice: "Payment suspended." To the general public it was the first intimation that this well-known bank was in anything but a flourishing condition, but to outside banking interests the suspension did not come in the nature of a surprise.
The probability of suspension had also been known to the Government for some time, as the Chancellor of the Exchequer stated in the House of Commons the same day, when he declared that, while he deplored the widespread hardship which must be caused to small depositors, the Government could not usefully or prudently take any steps to support the bank.
The news was a tremendous shock to the majority of the depositors, and there were many pathetic scenes as inquirers, mainly of the poorer class, presented themselves at the Cheapside office. At one time they threatened to become demonstrative, but the police judiciously prevented any disorder.
A large number of particularly hard cases were reported during the day. There were small tradesmen who declared they would be unable to pay for the restocking of their shops for the Christmas trade; women whose sole means were deposited with the bank and who despairingly asked how they were to meet the bills now falling due; men about to marry whose prospects of furnishing or buying their houses had now, to say the least, become somewhat remote.
Thomas Farrow, the founder of the bank, was born at Catton, Norwich, in 1862, and he was educated at Carrow School, where he displayed more than average intelligence and a keen desire to learn. In later years he was successful in passing all the necessary examinations for admission as a solicitor, but he never actually practised. He had every intention of taking up a legal career, however, but his desire to do so left him when he succeeded in securing the private secretaryship to the Rt. Hon. W. H. Smith, an appointment which was followed by a similar one with Mr. Robert Yerburgh, M.P., president of the Agricultural Banks Association, on the death of the former.
As honorary secretary of the association it fell to him to investigate the subject of usury, as the outcome of which he wrote The Moneylender Unmasked. This was an endeavour to describe and expose the methods adopted by the majority of moneylenders of the period (the book was published in 1895) in the ordinary course of their business. In the same year he reprinted from the Parish Councillor a series of short articles under the title "In the Moneylender's Clutches," because, as he said in an introductory notice, the reviewers regretted that, on account of its cost, The Moneylender Unmasked would not be likely to reach the working-classes, who were mainly affected by the evils of the present system of usury.
The Moneylender Unmasked created something of a sensation in interested circles, and Thomas Farrow was gratified to learn that as a consequence of his exposure Parliament had come to the decision to set up a select committee to investigate his forthright charges. The direct result of the inquiry by the select committee was the passing of the Moneylenders' Act of 1900, in which, however, Farrow was greatly disappointed, and he expressed the personal opinion that the Act failed of its purpose.
Farrow aimed at something far more comprehensive than what was provided for by the Act. He wished not only that unsuspecting people in need of money to tide them over a period of temporary embarrassment should be protected against the usurious rates of interest demanded by moneylenders; he desired in addition that means be provided whereby thrift should be encouraged among the poorer classes.
It was with the latter purpose in view, and with the approval of a number of prominent people in the world of social reform, that Farrow's Bank was founded in May, 1904. It was established as a private undertaking, but after only three years of existence it was decided to register the bank as a public company, with a nominal capital of £100,000.
From year to year the business of the bank was shown by the accounts to have been progressively successful, and from time to time the capital of the concern was added to until by October, 1920, it had reached no less than £1,000,000.
An excellent and imposing building in Cheapside housed the chief offices, and up and down the country there were no fewer than seventy-two branches. The banking facilities appealed to many thousands of people throughout the United Kingdom, and its clients included representatives of many and varied stations in life - the poor and thrifty, the middle classes, and the well-to-do alike placing their confidence in the institution.
Farrow's Bank made most attractive offers and gave special terms to depositors, paying interest not only on deposit accounts, but also on current accounts, and the rate of interest was always higher than that offered by the big banks, as much as 5 per cent, being paid on deposits subject to six months' notice of withdrawal. In addition to the normal business of banking, Farrow's engaged in other associated operations, among which was the business of a land bank, which offered borrowing facilities to those in need of loans, and especially to small holders. Farrow's was also the first to introduce the commendable system of home safes for the promotion and encouragement of thrift, a practice which was later adopted by banks of a more stable character.
The arrest of Thomas Farrow, William Walter Crotch and Frederick Duncan Tabrum Hart followed almost immediately on the announcement of the failure of the bank, and following police court proceedings, first at the Mansion House and then at the Guildhall, they were committed for trial at the Central Criminal Court, where they made their first appearance on July 6, 1921.
The three defendants were indicted on charges of conspiring together and with others unknown to defraud such persons who might be induced to entrust money or valuable securities to Farrow's Bank, Limited, and to publish fraudulent statements as to its solvency.
As directors of the bank, Farrow and Crotch were separately charged also with circulating and publishing written statements or accounts knowing them to be false, and Hart with aiding them to commit these offences. Further, all three were charged with causing and procuring, by false pretences, William Albert Read and various other persons named to deliver certain shares, securities and money to Farrow's Bank, Limited, and William Albert Read to deliver a cheque for £5,000 to Thomas Farrow, in each case with intent to defraud.
The case was down for hearing by Mr. Justice Greer. The prosecution was in the very able hands of Sir Richard Muir, K.C., assisted by Mr. H. D. Roome and Mr. Giveen, while among the distinguished array of counsel appearing for the defence were Mr. Cecil Whiteley and Sir Robert Aske for Farrow, Mr. Curtis Bennett, Mr. Eustace Fulton and Mr. J. A. C. Reeves for Crotch, and Mr. G. Russell Vick for Hart. The director of public prosecutions, Sir Archibald Bodkin, was also in attendance.
The judge having taken his seat and the prisoners in turn having pleaded "Not Guilty," the attorney-general proceeded at once to open the case. He stated how the bank had been founded as a private trading business, how in 1907 it had been registered as a limited company, and how by December 20, 1920, when the doors of the bank were closed, its original nominal capital of £100,000 had grown to ten times that amount. The bank's deficiency, he declared at this point, was at least two millions sterling.
During its thirteen and a half years of business as a limited company Farrow had been chairman of the bank, an office for which he had drawn a very large salary; Crotch had been a leading director, receiving directorial fees; and both, in addition, had received dividends as shareholders, and, moreover, both owed the bank very large sums of money. Hart, who was not a shareholder, was, no doubt, remunerated for his services.
Sir Richard pointed out that no less than £9,000 was spent annually on advertising the business, and the advertisements appeared mainly in religious publications which were read chiefly by frugal and thrifty people. It was diligently and successfully represented that the bank was solvent and prospering, that it was, even in the war years, making very large profits, that it had a considerable and increasing reserve fund and was paying regular dividends yearly.
Sir Richard next proceeded to support his statement by producing statistics. In 1910 the company had paid a free-of-income-tax dividend of 7 per cent., and in 1920, despite the trade upheaval of the war period, a dividend of 6½ per cent, was received by the shareholders. The 1910 balance-sheet disclosed a profit of just over £14,000, and ten years later the profit was falsely declared at £45,768; while the 1910 reserves of £15,000 and assets of £636,305 had in the same decade increased according to the bank's figures to no less than £138,500 and £4,657,000 respectively.
As late as October, 1920, the bank had published pamphlets disclosing these remarkable results, and stating that "The bank's work since its inception has furnished abundant proof that the methods adopted are appreciated and supported by all sections of the community." Apart from the reserve fund of £138,500, which, it was stated, had been invested in Government securities, there was a reserve fund in the form of uncalled share capital of £336,757.
It was naturally not a matter of surprise that such a "remarkably flourishing and progressive business" should attract the attention of a prominent financial company; and on May 7, 1920, negotiations with a view to securing a financial interest in the bank were opened by Mr. Read, acting on behalf of Norton, Read and Co. of New York.
Seven days later Farrow was asked by Mr. Read whether the balance-sheet for 1919, of which he had received an analysis, represented a true statement of the bank's financial position. Mr. Read received Farrow's assurance on the point. On June 10, on the return of Crotch from America, a further interview was arranged with Mr. Read, at which Crotch "rather subtly suggested," as counsel declared, that if Norton, Read and Company acquired a controlling interest in the bank they should provide a reserve fund of £500,000, from which a sum of £100,000 should be drawn to compensate the directors, leaving the balance to be used as a reserve. At this interview Mr. Read was told by Crotch that there were "hidden reserves" in excess of £500,000 secured by the drastic writing down of assets each year on the insistence of the auditors.
The statement of the bank's position as given by Farrow and Crotch, both orally and in writing, convinced Mr. Read of its soundness, and he therefore gave a written undertaking of his intention to obtain £150,000 and take up the 300,000 unissued shares of the company at io/- each, and to pay £500,000, one-fifth of which was to be used as compensation for the directors and the balance to supplement the reserve.
On July 7 a letter of acceptance from Farrow was received by Mr. Read. The letter bore the date June 29, but, as prosecuting counsel pointed out, a close inspection of letter disclosed that the month typed originally was July, but this had been altered to June. This was a most important point, since the financial year of Farrow's Bank, Ltd., ended on June 30, and the company included the sum of £500,000 which was to be paid by Mr. Read in its 1920 balance-sheet as a debt owing at that time by the financial corporation represented by him.
At the annual general meeting on August 31, both Farrow and Crotch made glowing references to the continued expansion of the business and its prosperous position, and these were reproduced in Farrow's Bank Gazette. Farrow stated the year's net profit to be £53,450, and that the dividend had been raised to 6J per cent.
During a further discussion with Mr. Read concerning the agreement, Farrow stated that he required £25,000 and a salary of £4,000 as chairman. Eventually, however, he was persuaded to reduce his demand to £5,000 cash down, and that sum was actually paid over to him. Shortly afterwards, on October 18, Mr. Read was elected managing director of the bank, and he gave Mr. Riche, his partner, instructions to examine the books of the company.
As a result of the examination, Mr. Read, on November 4, declared his conviction that the bank, far from being in the prosperous position shown by the balance-sheet, and supported by the statements of Farrow and Crotch, was actually insolvent, and not in a position to pay more than §/- in the pound to its depositors; that it had consistently been making annual losses; and that the balance-sheet had been falsified.
Farrow was also taxed by Mr. Read with debiting his firm in the books for £500,000 on June 30, but both he and Crotch declared that they were unaware that such an entry had been made.
At the request of Mr. Read an expert inspection of the books was undertaken by Mr. Henry Morgan, a member of a prominent firm of accountants, and as a result of his examination Mr. Read was able definitely to declare that the bank was insolvent and the balance-sheet fraudulent. The fact was brought to the attention of Crotch, who calmly replied: "Well, the game is up. We have been sitting on this thing for years, hoping against hope until you turned up, and we thought our troubles were ended, instead of which they were really beginning."
In concluding his opening statement, the attorney-general mentioned that the question of responsibility of other persons who were connected with the bank would have to receive consideration. He ended by saying that if the evidence against the defendants was well founded, the jury would find that they had been guilty of persistent, elaborate and cruel fraud.
After evidence concerning the preparation of the balance-sheet of 1919 had been given by Walter Henry Jones, the manager of the bank, and he had been questioned on certain incidental points by Mr. Curtis Bennett, the first day's hearing came to an end.
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