Review of Its History, the Wrecking of the Property Under the Frost Management the Receivership and the Dishonest Reorganization.---Mystery of the Employment as Agent by the Canadian Owners of O. G. Laberee, Swindling and Grafting Operations for Many Years Are Known to Them and His Amazing Larceny in Connection With Alaska Coal Lands.
John E. Ballaine
Seattle, Washington, March 31, 1911
So many requests for information have been received by me since the United States Court at Fairbanks, Alaska, appointed a receiver for the Alaska Central railway on my petition, May 19, 1908, that I must ask the privilege of replying to all in the form of a circular letter.
On the date of filing my petition for a receiver, May 18, 1908, and for three years prior thereto, a majority of the stock of the Alaska Central Railway company stood in the names of A. C. Frost of Chicago and H. C. Osborne of Toronto. Mr. Frost was president and Mr. Osborne vice-president. The board of trustees was composed of men selected by them, a majority being their own employees, or former employees. Frost and Osborne owned also all of the stock of the Tanana Railway Construction Company, whose officers were likewise their employees. The construction company held the contract to build the railroad.
A.C. Frost individually was then in the hands of a receiver appointed by the United States Court in Chicago, and all of the corporations formerly controlled by him in Illinois and Wisconsin, including the Chicago and Milwaukee Electric Railway, were in the hands of receivers appointed by the same court. Judgments for many thousands of dollars had been rendered in the Chicago courts against both Frost and Osborne, and suits in involuntary bankruptcy were pending against Mr. Frost.
Examination of his books uncovered a total indebtness of $17,000,000, including receiverís certificates, against his Chicago and Milwaukee Electric Railroad, with interest charges of $850,000 a year, plus operating and other expenses of about $500,000, to be met by gross earnings of only $550,000 a year. Frostís financial ability to proceed with the construction of the Alaska Central was obviously at an end.
When I, as a minority stockholder, filed my application for a receiver for the Alaska Central Railway, construction work on the road had been abandon by Frostís and Osborneís construction company since the middle of October, 1907. Interest on some of the first mortgage bonds had been in default for two years, and on all the bonds since April 1, 1908. These items of indebtness exceeded $100,00 Labor and contractorís bills due added $17,000 to the indebtness. The interest on bonds was increasing at the rate of $700 a day. Mr. Frost was making no effort to finance the Alaska Central. He could have accomplished nothing in any event with all of his Alaska Central securities tied up in the hands of a personal receiver, his Illinois and Wisconsin properties all in the hands of receivers, and his credit ruined.
In this condition, with liabilities exceeding assets by from $4,000,000 to $8,000,000, he continued to serve as president of the Alaska Central Railway, refused to resign, refused to permit a meeting of the legal shareholders for the election of a new set of officers, and refused to consider any proposal for a sale of his equity in the Alaska Central except at a figure grossly inflated and fictitious.
The abandonment of construction on the Alaska Central was meantime working havoc with much of the completed work.
Company supplies and other property to the value of many thousands of dollars had been stolen during the winter and spring from the unguarded and in some cases unlocked warehouses. Added to this, Frost secretly sent an agent to Seward, Alaska, in April 1908, under confidential instructions to sell company property and to use the proceeds in the development of Frostís mining claims.
At this juncture I filed my petition for a receiver, and it was promptly granted.
Originally, the Alaska Central Railway Company was organized by a group of Seattle men, of whom I was one. In 1903 the Tanana Construction Company, of which I was the principal owner and the president, took a contract from the railway companies to build and equip the Alaska Central from Seward to the Tanana River, a distance of 420 miles. It agreed to accept in payment bonds and stock of the railway company, each accounting to $35,000 par value per mile. The road was to be standard gauge, of 60-pound rails, and the equipment was to include rolling stock, wharves, warehouses, depots, telegraph lines and machine shops.
During the summer and fall of 1904 the construction company under my management laid 18.3 miles of track on a substantial roadbed, over which trains regularly and safely made 20 miles an hour. It finished in addition 70 per cent of grading from the end of the track to mile 26, and made the permanent location to mile 34. The wharf and dock at Seward was the most substantial north of Vancouver. The equipment of the railroad consisted of two 60 ton locomotives, five cars, 15 horses, a sawmill with a capacity of 10,000 feet a day, and $11,000 worth of construction tools.
The work done that year was estimated by competent engineers, including G. A. Kyle, now general manager and chief engineer of the Oregon Trunk Railroad, to be equivalent to 21 or 22 miles of completed road.
The cash cost of this work was exactly $325,000, or an average of $16,250 a mile for the road and all equipment.
With this demonstration of conservative cost, which was the main purpose of the first seasonís work, I was enabled to enlist capital on a tangible basis for the completion of the road through to the Tanana River. A.C. Frost of Chicago, then president of the Chicago and Milwaukee Electric Railroad, and H. C. Osborne of Toronto, Ontario, a banker and broker, after examining the work done and the resources tributary to the Alaska Central, offered to purchase, and did purchase for a cash consideration, all of the stock of my construction company, and thereby came into control of the railway company. This was in December, 1904. As further payment, Frost and Osborne entered into a personal contract with me and my associates by which they obligated themselves to continue construction and to finance and build the Alaska Central through to the Tanana River. They especially obligated themselves not to increase the bond or stock issue above $35,000 per mile. The railway company ratified the transaction. The trust deed then existing limited the bond issue to $35,000 per mile.
In three and one-half years since the transfer, Frost and Osborne added 33 miles of track, completed the grade out to mile 69, and increased the bond issue from $700,000 to an authorized amount of $6,083,333. Every mile of their added construction was exactly similar to the first 20 miles, except two miles at 49 and 52, which are but moderately heavy.
Immediately following the transfer to Frost and Osborne, they elected themselves and employees as a majority of the board of trustees of each company, and had since kept both companies under their personal control. It is but fair to Mr. Osborne to say that all of the policies were shaped and all of the management was exercised by Mr. Frost
The first step taken by the Frost management was a studied disregard of the policy of construction followed in building the first 20 miles, by which the rails were kept abreast of work at all times and the cost held down to $16,250 a mile. He inaugurated a policy instead by which the work was opened in advance of the rails for a distance of 100 miles, through trackless forests, over mountain barriers, where the transportation of freight by wagon and horse entailed an expense ranging from $20 to $250 per ton, and the cost of construction was doubled and trebled.
This policy called for equipment in horses, wagon, boats, shops, commissary supplies, tents, warehouse and the like, valued at $500,000, the most of which has since been wasted and stolen, or has rotted or been sold at a great sacrifice.
Under such conditions, my action in obtaining a receiver was the only course open for the protection of the property and all interests in it. If the action had not been taken the railway must have remained idle and gone rapidly to ruin, probably ending in a total loss to stockholders and bondholders alike.
Under the receivership, 20 miles of additional road was laid in 1909, making a complete railroad from Seward northward to mile 72.
A large majority of the bonds were held by Canadians, principally by the Sovereign Bank of Canada, of Toronto. The Sovereign Bank in turn is in process of liquidation by three trustees in the interest of twelve of the principal banks in Canada, which assumed its obligations and took over its assets when it got into financial difficulty following Frost's failure. These twelve banks are therefore the real owners of the Alaska Northern. Realizing the hopeless tangle of the railroad tinder Frost's mismanagement, and the impossibility of raising more money to extend it under the excessive indebtedness Frost had piled upon it, the bondholders began foreclosure proceedings. The road was sold by the court at Valdez on the 9th of October, 1909, and bid In by P. G. Jemmett, general manager of the Sovereign Bank of Canada, for the bondholders. On that date the total indebtedness, including bonds and accrued interest, which the Frost management had piled upon the property, amounted to $96,600 per mile. A reasonable cash cost was about $30,000 per mile.
This sale operated to wipe out all stock, preferred and common.
The bondholders who bid in the property of the Alaska Central proceeded to reorganize it through a new company called the Alaska Northern, without protecting the preferred stock. As the money derived from the preferred stock was used in the acquirement of property of great value to the company, including the terminals and the right-of-way, I have insisted and am insisting that it to entitled to protection with stock in the new company. I am willing to have my preferred wiped out on condition that all other preferred held by other stockholders be protected.
The careful manner of expending and disbursing the money derived from the sale of preferred stock, and the recognition to which it is justly entitled are shown in a written statement by J. W. Godwin, one of the original promoters of the Alaska Central, and its treasurer continuously from the organization of the company in April, 1. 1902, until its transfer to Frost and Osborne in December 1904. Mr. Codwin Is a wholesale merchant of Seattle, a man of large wealth, and most highly respected. His statement says:
"Every dollar received by the Alaska Central from preferred stock was paid out on cheeks signed by myself as treasurer and countersigned by G. W. Dickinson as president on bills that had been audited by an auditing committee composed of President Dickinson and two other directors, ex-Gov. McGraw and Capt. E. E. Caine then president of the Alaska Steamship Company. The property, rights and information acquired through those expenditures, including the entire preliminary survey to the Tanana River. The terminals and the right of way, would require in any settled community an expenditure of many millions of dollars."
I do not know whether the new owners intend or desire that any bona fide investments In the Alaska Central shall be wiped out, particularly the investments in preferred stock.
But I do know that O. G. Laberee, president. of the Alaska Northern, who claims to represent them under a contractual agreement and to be the partner of Mr. Jemmett in refinancing the road, has made repeated assertions to many reputable people, and still makes them, that it is his and their intention to ìclean out" every class of investments but the bonds held by the Sovereign Bank of Canada..
ENTRANCE OF O. G. LABEREE
His Braggadocio Misrepresentations and Brazen Swindles.--- His Grafting of Frost for Thousands of Dollars, and His Connection With the Present Canadian Owners.
A clear understanding of. present conditions and future probabilities can be had only with a review of Laberee's part in the history of the railroad since 1904. It makes a strange and interesting chapter.
Mr. Laberee came to me with an introduction from then United States Senator Turner of Spokane in 1904, when I was the president and owner of the Tanana Construction Company was engaged in building the first 20 miles of the Alaska. Central. He represented to me in letters, the originals of which I still retain that he was the agent in the United States for Frank Thompson, "a Montreal capitalist," who had "charge of all of the Bank of England's investments in the United States and Canada"; that his principal had been "manager of a Canadian bank whose capital stock exceeded, the combined capital stock of all the banks in Spokane, Tacoma and Seattle"; that his principal had "twice refused the position of general manager of the Bank of England"; that himself and this Montreal capitalist were then engaged in financing a transcontinental railroad capitalized at $60,000,000 of which they had $42.000.000 actually subscribed; that he was himself a millionaire: and much more to the same effect. He assured me that if I entered into a contract with him and with Mr. Turner and Mr. Thompson to furnish money for the Alaska Central extension, it would mean virtually that the Bank of England was behind the deal.
On Inquiry of Senator Turner. he
wrote me that I might safely place implicit confidence in any state-ments
made to me by Mr. Laberee, whom he described as a man of large wealth and
of business integrity. Thus assured by a man whom I supposed I had every
reason to trust I entered into a contin-gent contract with Laberee
and Turner and through
them with Mr. Thompson, then unknown to me. By the terms of this contract they undertook to procure a loan of $2,100,000 for the Tanana Construction Company with which to extend the Alaska Central to Knik, and agreed to accept a specified commission .for their services.
Shortly thereafter, I discovered that Laberee's "principal" in Montreal had never had relations of any kind with the Bank of England, and never claimed to have bad; that he never had been manager of a bank in Canada or elsewhere, and never claimed to have been; that he was simply a stock broker doing a moderate business, a former post office inspector, and before that a clerk In a small bank, and had never represented himself otherwise.
I discovered also that Laberee himself was a French Canadian who had been for several years a dealer In worthless mining stocks and a promoter of fake mines that never had paid a dividend, with headquarters In British Columbia and Spokane; that lie had failed in business at the expense of many creditors; that his claim of being a "millionaire" was wholly a braggadocio pretension carried out with coarse display, and that his story in regard to financing a new transcontinental railroad was an unmitigated falsehood in every particular.
Laberee and Turner did not perform their contract with me. But indirectly, Mr. Thompson's efforts led to my negotiations with A. C. Frost and H. C. Osborne for the sale of my Tanana Construction Company to them and eventually to its sale, so I paid them the commission to which their contract would have entitled them if they had performed its provisions. By this means, through the grossest misrepresentation and without a dollar of expense, Laberee obtained a small percentage of stock interest in the railway company.
After my transfer of the construction company, and thereby control of the railway company, to Frost and Osborne, they added Laberee among others to the board of directors. Turner had been a director from the first, and was continued as such. As I retained a large amount of stock, although a minority, I continued as a director of the railroad Company. When a few months later Frost undertook to break down the limit of $35,000 a mile to the bonded indebtedness of the road, and to authorize an unlimited bond issue, Laberee and Turner vigorously opposed posed the undertaking for awhile, but suddenly and mysteriously ceased their opposition. They then entered into a secret contract with Frost, unknown to any of their associates or to any other stockholders, by which they agreed to support Frost in the proposed increase. At every subsequent meeting of directors and stockholders they voted in support of all resolutions providing for the increase.
When Frost originally proposed a new bond issue he did so on the ground that he wished merely to revise the trust deed to suit the requirements of prospective investors in London. I gave my consent on this understanding. But when the revised trust deed was submitted to the board by him for ratification I detected the deception and the true intent, and opposed it consistently from that time forward. When the board finally ratified it with the aid of Turner and Laberee and Frost's dummy directors, I refused longer to serve as a director.
The resolutions effecting the increase were brought to the meetings in typewritten form by Turner and were introduced in every case by him. Turner at the time was acting as trustee for the distribution or stock to his associates. He concealed from them the fact or his secret contract with Frost, and even denied the existence of the contract.
Under the terms of this secret contract, Frost paid Turner $25,000 in cash and agreed to pay him $75,000 more if Turner succeeded in lobbying a bill providing for a government guarantee of the interest on the railroad's bond issue
Turner lobbied for such a bill in the session following, but made no headway. The $25,000 was subsequently charged by Frost to the railway company.
Laberee received under the terms of the secret contract an increase in his proportion of stock.
This secret contract, resulting in a bond issue so inflated that Frost could find no buyers for the bonds, was followed swiftly by Frost's failure and the wrecking of the company.
A few months after the signing of the secret contract, Laberee went to Seward, there made the verbal announcement that President Frost had appointed him general manager of the railway, and moved into the general manager's office. He proceeded to issue orders as general manager, and began negotiations to award construction contracts, in which, it developed, he was to have a percentage interest. Fortunately for the company, I happened to be in Seward at the time and promptly exposed his imposture. In reply to cabled inquiries, Frost denounced Laberee and ordered him ejected from the building. Laberee went, under threat of one of the employees to give him a public horsewhipping. He hired an armed guard to protect him during the rest of his stay in Seward, locked himself in a stateroom of the first boat that arrived, and sailed away. He resigned, under compulsion, as a director on his return at Spokane.
Laberee and Frost had another difficulty about this time, resulting from their co-operative attempt to acquire a large number of coal claims in the Matanuska district, near the railroad route, by means of dummy entrymen. Frank Thompson, of Montreal, had obtained a group of coal options or relinquishments when he was with me in Seward in October, 1904, and turned them over to Laberee in Spokane on an agreement to divide equally between them any profit Laberee might make out of the options. Laberee in turn took them to Frost, to whom he falsely represented, among other deceptions, that he had paid the owners of the claims $2500 for the options, although he had not paid a dollar. On these and other swindling misrepresentations, Frost entered into a contract with him by which they agreed to form a Matanuska coal company to acquire and own coal claims in the Matanuska district, and gave him a cheek for $2500 to reimburse him for the amount he falsely represented he had paid to the Seward claimants. Laberee In addition was to receive 25 per cent of the profits in the coal company. He concealed the entire transaction from Mr. Thompson. Frost also issued and paid another check for $25,000, through an agent recommended by Laberee, to complete payment, as he was led to believe, to the Seward claimants. No part of the $27,500 has ever to this day reached those claimants, but their claims were relinquished and lost to them.
Frost discovered Laberee's amazing swindle a few months later, and in letters denounced him as an unmitigated liar, a contemptible scoundrel, and a conscienceless grafter. Those letters still exist. Laberee replied, not to Frost, but to Mr. Osborne, Frost's partner, suggesting that, as be was in position to break the Matanuska coal deal by exposure, Frost and Osborne had better buy him out for $1,000,000 - a brazen attempt to supplement graft with blackmail. Instead, Frost kicked him out. He could not prosecute him for obtaining money under false pretense at the time without exposing all of the Frost locations to the danger of cancellation, which sufficed to save Laberee from the penitentiary.
Early In March, 1911, when Frost and others were indicted by the Federal grand jury in Chicago for conspiracy to obtain coal lands in the Matanuska district by fraudulence entries, Laberee escaped indictment with the rest only through the statute of limitations. More than three years had elapsed since Frost kicked him out. The grand jury, however, refused to give Laberee immunity. He was not called as a witness. He is involved in other attempted swindles in Alaska, jointly with at least one Canadian. This is one of the few Instances in history where a notorious crook was enabled to escape the penalties of the law, temporarily at least, by overdoing a swindle.
Immediately after the appointment of a temporary receiver for the protection of the Alaska Central on my petition as a minority stockholder, Laberee hastened to Montreal and Toronto to interview the bondholders represented by the sovereign Bank of Canada, then in liquidation in consequence of Frost's failure. By pretending that he knew the details of Frost's business affairs in connection with the Alaska Central railway and the Matanuska coal deals, when as a matter of fact he did not, but had been kicked out by Frost two years, before under denunciation as a liar, a grafter and a swindler, and by other means characteristic of Laberee he obtained a contract from them, said by him to be for two years, to serve as their representative in foreclosing, reorganizing and refinancing the road.
In October, 1908, when the Canadian bondholders filed foreclosure suit at Valdez, and asked that the temporary receiver be superseded by permanent receivers, their attorney recommended Laberee and John F. Goodwin to be such permanent receivers, as the choice of the bondholders. Goodwin was a brother-in-law of the presiding judge. Silas H. Reid, and had been temporary receiver. I opposed the appointment of Laberee through my attorney in an affidavit filed in open court, in which I Informed the judge of Laberee's swindling career as a promoter of worthless mines, of his unsavory reputation and of the proof I had over his own signature that he was an unbelievable liar, a braggart, and a man utterly unworthy of trust. I asked instead the appointment of any honest and impartial person as receiver. Judge Reid announced that he could not appoint Laberee in the face of an affidavit so strong and specific, so he ordered the affidavit stricken from the files. He then appointed Laberee and Goodwin as permanent receivers. Judge Reid had previously arranged in private with the attorney for the bondholders to appoint Laberee if the attorney would recommend also the appointment of his brother-in-law, Goodwin.
Turner recommended Laberee to Judge Reid in a personal letter, notwithstanding that I had submitted to Turner conclusive proof of Laberee's swindling practices and fraudulent representations.
I took the case to Washington and preferred charges against Judge Reid for appointing as receiver a person so notoriously dishonest as Laberee in the face of my affidavit, and for striking my affidavit from the files. I submitted evidence to prove my charges. Other charges were filed at the same time. All were investigated by the Department of Justice, resulting in the peremptory demand by the Attorney General for Reid's resignation. He resigned. Ex-Senator Turner exerted himself in vain to save Reid.
Turner had acted for Frost in opposing the temporary receivership obtained on my original petition, but now deserted Frost, turned squarely about and became the attorney for Laberee.
Following the foreclosure sale in October, 1909 when the property was bid in by F. G. Jemmett as trustee for the bondholders, the Alaska Northern Railway Company was organized by Laberee and Turner, with the co-operation of Mr. Jemmett. Laberee was made president, and Turner one of the directors.
Laberee and Turner were in Washington promptly on the convening of Congress in December, 1909, and began lobbying for the passage of a bill guaranteeing by the government the payment of interest on their bonds, and granting to their road the privilege of buying 5,000 acres of Alaska coal land at $10 an acre. They did not succeed in persuading any member of either house so much as to introduce it after two months of fruitless effort. Laberee spent the rest of the winter in New York trying to enlist capital to go on with construction, but failed completely.
In the meantime the Canadian owners themselves have taken up the task of financing the road independantly of Laberee
Whether the Canadians were imposed upon when they entered into a contract with Laberee, or purposely engaged a man of his immoral habits and flagrant dishonesty, I do not pretend to say. It is certain, however, that F. G. Jemmet, general manager of the Sovereign Bank and one of the three trustees who hold all of the Alaska Northern stock for the twelve banks that own the Sovereign and through it the Alaska Northern, knows of Laberee's grafting and swindling career, but is compelled in self defense to shield him. Jemmett is himself implicated with Laberee in some very coarse transactions in Alaska. Those transactions may be known to their employers or may not be. Disclosures in due time will show.
It is equally certain that W. J. Boland, of Toronto, one of the three trustees acting with Mr. Jemmett as holders of the Alaska Northern stock in trust for the owners, is likewise informed concerning Laberee.
When the facts in this connection are publicly known, as they will be, there will of necessity be a weeding out in the Alaska Northern, which, I firmly believe, will result in the building of the road under competent and creditable management, with honest protection accorded alike to all bona fide investments in it.
Neither Laberee nor Jemmett has a dollar of investment in the Sovereign Bank or in the Alaska Northern, and neither has had at any time. Neither had, at any time, a dollar Invested in the Alaska Central. They are employees merely. Not one of the present officers or directors of the Alaska Northern owns, a share of stock in the company, except the one qualifying share assigned to each of them.
On the other hand, I have been from the beginning and am still an investor in the Alaska Central, in stock or bonds, and for two years prior to the sale of my construction company to Frost and Osborne, I carried the financial burden of the company practically alone. I am therefore exercising a legitimate right and performing a moral duty in insisting that the Canadian owners, if they wish the equal protection of American laws and the respect of the American people, shall earn that protection and that respect by honest dealing through clean hands. They outlaw their claims to protection and respect when they employ as their agent a man whom they know to be a fakir, a crook, a swindler and a thief. Their course so far, with Laberee's unsavory record, has brought the property into general ridicule and has earned for it a widespread sentiment of contempt and hostility in congressional and administration circles.
It is evident that if my statements in this letter are untrue I am guilty of civil and criminal libel in an extreme degree in making them. I challenge any man to bring suit for libel on the basis of those statements.
I have tried earnestly and consistently to do my part in protecting the Alaska Central-Alaska Northern property. I am doing and shall do all within my power to aid in carrying it to ultimate success on a basis of absolutely fair dealing with all interests involved. It can succeed on no other basis.
JOHN E. BALLAINE.
Seattle, Washington, March 31, 1911.