The Farrow's Bank Crash page 3

He admitted to knowing that in every year after 1908 the amount of expenses exceeded income, and with regard to the writing up of assets as a remedy for these losses, he declared that he imagined that the auditor, in whom he had implicit faith, knew what he was about.

Farrow was submitted to a searching cross-examination by Sir Gordon Hewart, at the conclusion of which the judge also put to him a number of pointed questions. It appeared that in the preparation of each yearly balance-sheet any loss in trading was balanced by the writing-up of the assets. He agreed that the bank had sustained trading losses, but these, he suggested, were more than compensated for by the profits from valuations.

When Farrow referred to the fact that an "inner reserve" existed from which trading losses could be met, he was asked by Sir Gordon what exactly he meant by this. "When there is a loss," counsel said, "you write up the assets; and when there is a further difficulty, you talk about an inner reserve. Is there anything else in the formulae?"

The explanation of this unusual method of accountancy was that when trading losses occurred, the assets were written up to cover the deficiency, first insuring that the value was there; then from the profits of those assets an inner reserve could probably be formed.

Farrow admitted that money utilised in paying the staff salaries and wages and the shareholders' dividends had come from the deposits of the unfortunate depositors, but in extenuation he declared that he did not know at the time that this was being done.

In reply to the judge, Farrow agreed that when preparing the annual balance-sheet the auditors would inform him that a certain sum was required, and that it would be referred to his co-directors; that the board were cognisant of the trading losses, and that they realised that the deficiency on the one side was made up by the accretions or profits from valuation on the other side. The total amount of the trading losses was, however, never reported to the board.

In a criminal case of this kind, which, Farrow said, ought never to have been taken, criminality is suggested in every line and every word, but he did not admit that he or his co-directors had done anything that was wrong.

Mr. George Hart, the father of the defendant Hart, stated that he had been accountant and auditor of the bank from 1908 to 1917, and that he was only responsible for the figures in the balance-sheets during that period. He agreed that he was responsible for the valuation of the properties, and was satisfied that they were fair.

He did not admit that the earnings of the bank from 1909 onwards were less than the expenses, and submitted that the company was entitled to regard the improvements in their properties as profits, and that the valuations were perfectly genuine. He denied that a trading loss was shown every year, but that, on the contrary, to the best of his belief, the accounts never showed a loss. He did not, he informed the judge, at any time, as far as he could recall, communicate to the directors the facts of the receipts and expenditure and inform them that there was a trading loss, and admitted that he was never anxious for them to know the result of the year's trading. Although he never actually told Farrow and Crotch the methods he employed in preparing the balance-sheets, he had no doubt that they fully appreciated what was being done.

When Crotch took his place in the witness-box, he stated that his acquaintance with Farrow started when he became a contributor to the Parish Councillor, of which the latter was editor. He later became parliamentary private secretary to Sir Henry Dalziel, and was instrumental in establishing the Dickens Fellowship.

When the idea for founding a people's bank was first suggested he travelled to Germany and other countries of the Continent where similar institutions had flourished for years, with a view of studying the methods thoroughly.

In the conduct of Farrow's Bank he took no active part, merely holding, like others, the position of a director. In answer to a question by Mr. Eustace Fulton, he replied that he was afraid that he had been careless enough never to inquire what the earnings and spendings of the bank had been, and therefore did not know that a loss was being made each year. And with regard to the 1920 balance-sheet, he said that he had signed it with "a foolhardiness I have cursed myself for ever since."

Replying to Sir Richard Muir, the defendant said that until the trial he never had a proper realisation of the situation of the bank. He added that since the opening of the trial it had been borne in on him with an ever-increasing sense of shame that he had been neglectful and careless of his duties in regard to the bank. He deeply regretted and apologised for having made the public suffer.

When it was pointed out to him that the balance-sheet for 1919 had never been certified by the auditors, although the published accounts bore the name "Hart and Company," Crotch said that he would indignantly deny any suggestion that he had forged the name of the auditors to any accounts.

With regard to the Dreadnought Cement Company, to which reference had been made earlier in the trial, Crotch agreed that this undertaking had been purchased early in 1914 for £5,500, that on June 30 of that year it had not been paid for, and that about that time a document had been prepared which named an amount in excess of £205,000; and also that the object of this proceeding was that the sum might be included in the balance-sheet. He agreed further, in reply to a question by the judge, that in 1915 the property had been valued at £645,847, and that the following year its, valuation was increased by an additional £145,000.

At the conclusion of Crotch's evidence, the defendant Hart was called. He had, he stated, succeeded his father, from whom he had acquired his knowledge of accountancy, as the auditor of Farrow's Bank in 1917, receiving an average salary of £1,750, from which, however, he had to meet clerical and other expenses, leaving him a net amount of about £6oo a year.

He informed the court that on June n, 1920, he wrote to the secretary of the bank regarding the very unsatisfactory condition of affairs at the close of the previous year, when the bank published accounts before the auditors' requirements were fulfilled, and in spite of the balance-sheet not having been signed.

He agreed that the balance-sheet included an item of £500,000 which it was anticipated would be received from Norton, Read and Company, and said that he included it on the strength of a letter, followed by the signed agreement, and because he saw the securities which had been lodged.

When arrested, Hart was found to be in possession of a copy of the Falsification of Accounts Act, and his explanation was that it had been mentioned to him that the opinion of Sir John Simon had been taken, and that he had said there had been fraud; 'he had turned up his reference books, in which he saw a reference to the Act, and that he had happened to buy a copy on the very morning that the bank failed.

On the conclusion of the evidence, Mr. Curtis Bennett addressed the jury on behalf of Crotch, and he was followed by Mr. Russell Vick, who spoke in the interests of Hart. For Farrow, Mr. Cecil Whiteley made a well-reasoned and forceful speech, declaring that the bank was justified in everything it had done with regard to the balance-sheets. He mentioned that, in the previous October, Farrow was considering the future association of his two sons with the bank. If Farrow had really known that the bank had been a dishonest concern for ten or twelve years, was it conceivable that he would have sought to introduce his two sons into it?

The attorney-general then made his closing address, following which the judge opened his summing-up. Mr. Justice Greer, in a most impartial and comprehensive address, said that before the case the three defendants were men of irreproachable character. The case was one of great gravity, and the interest of the public demanded, if the charges were proved, that such conduct should be treated with the utmost severity.

The jury might think, he continued, that when the defendants first embarked on the fallacious method of dealing with the bank's properties, they did not suppose it would be necessary to go on year by year taking in larger sums from those imaginary reserves to meet the contingencies; but having found that was the only way to keep alive the financial child of Farrow's they decided to keep on until they were found out.

When the judge had ended his summing-up, the jury at once retired to consider their verdict. After an absence of a little more than an hour, during which the defendants anxiously speculated upon their verdict, they re-entered the court, and in response to the customary inquiry by the judge, the foreman announced that they had found all three guilty of conspiracy, but Hart from 1918 only. Farrow and Crotch were also found guilty of publishing fraudulent balance-sheets, and Hart of aiding and abetting them. The last-named was strongly recommended to mercy.

A long and emotional speech was made from the dock by Farrow, who declared that by waiting for a maximum of seven to ten years it would have been possible to pay all the depositors in full. It was through no fault of his that failure had come to the bank; he had done all he could, and had never knowingly or willingly committed himself to anything that was in any way wrong. He concluded by appealing for mercy on account of his past good record.

Crotch also made an appeal to the judge, pleading that he had never at any time intended to inflict injury on the public.

In passing sentence on Farrow and Crotch, Mr. Justice Greer said: "You are both men of great intelligence, men who have done useful things in the course of your lives, and I take that into account, as I am entitled to do. I am also entitled to take into account the fact that neither of you, so far as can be ascertained, has lived an extravagant life or used the moneys of the bank for your own personal gratification. But you have brought distress, and in some cases ruin, upon the very people for whom, I believe, you started this bank with a notion that you were going to help."

To Hart the judge said that he had not originated the false and fraudulent scheme under which the balance-sheets were prepared from year to year. When he became auditor he had followed in the path laid out by his predecessor, who was his father. He had been rather weak in giving way to the situation which had been created, and in continuing it. The disgrace which the defendants had brought on their families was part - arid perhaps the greatest part - of their punishment.

The judge then pronounced the sentences. Farrow and Crotch were each sent to penal servitude for four years, and Hart received twelve months' imprisonment.

The result of the trial was in accordance with general expectations, resulting as it did, after long and thorough investigation, in the three men being convicted on the indictment for fraud. Even from the moment of foundation, the methods of the bank foredoomed it to certain failure. Having suspended payment on December 20, the crash brought to its many thousands of small depositors not the happy and carefree Yuletide festivities that they had been anticipating, but a shock and financial dilemma from which most of them could never hope to recover.

Many of them had been encouraged to open accounts with just a few pounds, to which they occasionally added from their small and hard-earned savings, by reason of the promise to pay interest, not only on moneys placed on deposit, but also on current account. It was an inducement to which a ready response was obtained, only to bring misery and distress to those who were so ill-advised as to grasp this "golden opportunity."

It proved a salutary lesson to these unfortunate people, the majority of whom, because of the arduous demands of their humble occupations, were incapable of exercising a wise precaution and the necessary calculation, and, therefore, were unable to resist the blandishments held out to them.

Many were the distressing stories that were related at the time. One depositor, who had held a responsible position with a prominent London firm of advertising agents, and had taken a small country cottage in which to spend his declining years in well-earned retirement, was left entirely without resources. He was obliged to return to London and seek further employment. More fortunate than many others, he was able to secure a minor position with his former employers, but thenceforward was compelled to lead a life far different from the carefree and peaceful one to which his long years of faithful service had entitled him.

Even more pathetic was the case of a woman who had by the death of her husband been left the sole support of herself and three young children, all under the age of twelve years. She had succeeded in securing a moderately paid secretaryship in a not too flourishing broker's office, but her salary was barely sufficient to meet the requirements of the home. Occasionally, therefore, she found it necessary to withdraw from the bank small amounts from the money left by her late husband in order to provide clothes and other necessities for her children. The sum entrusted to the charge of the bank would, with care, have lasted until her children were old enough to start out in life and help to keep the domestic accounts balanced.

This poor soul, however, suffered a double calamity, for not only did she lose the precious nest-egg that was her safeguard against contingencies, but just after the crash she was informed by her employer that owing to declining business he would reluctantly be compelled to dispense with her services.

The widespread havoc occasioned by the collapse of Farrow's Bank was appalling, but the full extent of the tragic consequences was never disclosed. Hundreds of trusting people were with dramatic suddenness brought face to face with poverty, and of these many were, from circumstances of age or infirmity, debarred from attempting a fresh start in life. It was a catastrophe from which they could find no escape, and which left them without any hope of a brighter future.