This shows that the profits on these two contracts are Bonds, (cash value)...... Twenty-four million stock, at 30.. The profits on the Hoxie contract, as before stated, were..$6,272,232 71 Treating all of this as stock, except $1,125,000 of first-mortgage bonds, divided as hereinafter stated, the profits, cash values on this, would be as follows: $1,125,000 first-mortgage bonds, at 85..... $5,147,232.71 stock, at 30.. Total cash profit.... $11,310, 900 00 7,200,000 00 2,346, 000 00 20,856, 900 00 965, 250 06 1,544, 169 81 23, 366, 319 81 In making this calculation the stock is placed at thirty cents, because that is the value the parties have placed on it. If all the profits made have been divided, the dividend account should correspond with the amount of profit above stated. But it does not correspond, and whether the failure to correspond is attributable to inaccuracy as to the amount of profits or to disguises in making divisions, the House can judge in some degree from the facts hereinafter set forth. The following are the dividends as appears in the evidence. First, by Credit Mobilier, results of Hoxie contract: The Credit Mobilier on the day of January, 1867, increased its capital stock from $2,500,000 to $3,750,000, and for each $1,000 of additional stock taken, there was distributed to the subscriber a first-mortgage bond of the Union Pacific Railroad Company of $1,000. In this way there was divided $1,125,000 in first-mortgage bonds. Then, on the day of 1867, there was a dividend made of 12 per cent. (6 per cent. for each of the years 1866 and 1867) in stock of the Union Pacific Railroad Company, at 30 per cent. of its par value. This would amount to $1,500,000 stock par value. These two amounts aggregate $2,750,000. But the balance-sheet shows a profit to the Credit Mobilier— On the Hoxie contract of Add amount received on fifty-eight miles.. Total $5, 168, 232 91 1, 104, 000 00 6, 272, 232 91 This shows a discrepancy of $3,522,232.91. But that the above dividends are delusive, and are not all that was divided, is disclosed by the testimony of Mr. Ham, pages 277-383, to which attention is especially called. Mr. Ham was asked what amount of profit was made by the Credit Mobilier on the Hoxie contract, and what they had received on the fiftyeight miles west of the one hundredth meridian. A. The amount of profit they have received is $6,272,232.91. After stating that of this amount $1,125,000 was divided in firstmortgage bonds, as above, in his further examination as to the disposition of this profit, (see pages 377-383,) it appears that the whole of the profit above stated was divided. So it is apparent that much more has been distributed on account of this Hoxie contract among these stockholders than what the dividend statements would indicate. 2. The following are the dividends, as appears from the books, that were made out of the proceeds of the Ames contract: First dividend December 12, 1867, of sixty per cent., in first-mortgage bonds $2,244,000 Sixty per cent. in stock Union Pacific Railroad Company. Second dividend January 3, 1868, of twenty per cent., in first-mortgage bonds. Third dividend June 17, 1868, of forty per cent. stock Union Pacific Railroad Fourth dividend July 3, 1868, first-mortgage bonds.. Fifth dividend July 8, 1868, in cash Sixth dividend December 29, 1868, in stock. Total...... 2,244,000 748,000 1,500,000 2,250,000 2,791, 500 1,095, 168 7,599,000 20, 471, 668 Here, it will be observed, is another large discrepancy between the dividend account and the amount of profit made, as shown above. Whether this difference has escaped under the cover of some fog into the pockets of these managers, as was obviously the case under the Hoxie contract, or whether the books show too large a profit, your committee will leave the House to judge. The Ames and Davis contracts having been essentially the same, the accounts were so kept that it was difficult to separate them and know exactly the profit on either-this is the testimony of Mr. Ham and Mr. Crane-and a part of the profit charged to this Ames contract may have been divided under the Davis contract, as it will hereafter be seen that under that contract a division was made of largely more than the profit par value of the stock divided. NEXT, THE DIVISIONS UNDER THE DAVIS CONTRACT. The mode of making divisions under this contract was this: On the 2,750 first-mortgage bonds for. 2,750 land-grant bonds for......... day of, 1869, the trustees sold to the stockholders of the Union Pacific Railroad Company $275,000 275,000 Total....... 550,000 They distributed to the persons to whom these bonds were sold in stock two and one-half times the amount of bonds purchased, namely, stock Union Pacific Railroad Company.. 2. The trustees sold stockholders 3,901 income-bonds, at 80 cents to the dollar, amounting to $- and divided stock Union Pacific Railroad Company. 3. The trustees sold stockholders 1,909 income-bonds, at 80 cents to the dollar, and divided stock Union Pacific Railroad Company. Total stock................... $1,375,000 00 7,802, 000 00 3,818, 000 00 12,995, 000 00 This is a division largely in excess of the profit on this Davis contract in stock, par value, as shown above; but, as before indicated, this excess may have been carried from the Ames into the Davis contract. This excess of profit over the dividends appearing on the books, in all probability was disposed of in some such way as was used in the disposition of the Hoxie profits. Mr. Ham having given the amount of bonds, stock, and money embraced in this $37,657,095.43 profit on these two contracts from the books, is very strong if not conclusive evidence that the statement of profit is correct, and consequently that the books do not show all that was divided, or that there is yet in the hands of the trustees undivided profits. In this connection the committee calls attention to the following facts: And attention is also called to the time of the receipt of Government bonds, as shown by schedule thereof set forth in the evidence. It appears, then, speaking in round numbers, that the cost of the road was $50,000,000, which cost was wholly re-imbursed from the proceeds of the Government bonds and first-mortgage bonds; and that from the stock, the income-bonds, and land-grant bonds, the builders received in cash value at least $23,000,000 as profit, being a percentage of about forty-eight per cent. on the entire cost. The committee have examined, as will be seen from the evidence, the parties who have been participating in these transactions as to the amount of profits. Their testimony on the subject has been widely variant. The committee deem it proper here to direct attention specifically and separately to the following transactions in disbursement of portions of the assets of this road, which seem to the committee to have been wrongful, and to demand the immediate and grave consideration of the present directors of the Union Pacific Railroad Company and of whatever authority may be charged with the duty of securing the recovery of the property of the company from those who are responsible for or the recipients of these illegal disbursements: 1. One hundred and twenty-six thousand dollars were paid to C. S. Bushnell on the 9th day of March, 1871, and denominated "special legal expenses," which was disposed of as follows: Third. Amount retained by C. S. Bushnell on his own account.... Second. Amount paid by C. S. Bushnell to Thomas A. Scott on private account.... First. To G. M. Dodge for services in procuring the passage of the act of March 3, 1871, in relation to transportation by said company for the Government... $24,500 19,000 82,500 126, 000 2. Fifty thousand dollars were paid to Governor John A. Dix as a purchase by the railroad company of its own stock. 3. Twenty-five thousand dollars were paid to a Government commissioner to secure the acceptance of a portion of the road as completed. H. Rep. 78—————-II 66 4. Four hundred and thirty-five thousand seven hundred and fiftyfour dollars and twenty-one cents, designated as suspense account," were allowed to T. C. Durant, vice-president of the company, which appear from the evidence to have been disbursed in connection with the passage of the amendatory act of July, 1864, of the particulars of which disbursement the committee have been unable to obtain satisfactory account. For disbursement of such money, so far as ascertained, the committee refer to the evidence herewith reported, as they do also as to the disposition of the other moneys above named. Justice to the parties interested requires that the grounds on which they rely for their defense or extenuation should be understood by Congress and the country in their full force. The contractors, or some of them, justify these transactions on the following grounds: 1. That nearly every railroad which has been built in the United States for the past twenty years, although its charter may have required the payment of its capital in cash, has in fact been constructed under an arrangement by which the capital stock was in large part paid in road-building. 2. That it would have been impossible to build the road under the acts of Congress, if the condition requiring the capital to be paid in money had been strictly enforced. 3. That the act required the books to be kept open for subscriptions until the completion of the road, or until one hundred millions of capital stock were subscribed. If at any time before the completion of the road the stock was in actual value above par, it would be in the power of any person by subscribing and paying for new stock at par to avail himself of the value which the stock had derived wholly at the risk and through the labors of former subscribers, and that this provision. rendered a compliance with the act impossible. 4. That all the stockholders of the railroad company consenting and being parties, these transactions though in form a contract were in substance a dividend which they had a perfect right to make, and with which no outside party can justly find fault. 5. That the railroad company acquired by the transaction something more than the mere construction of a road for cash; that the arrangement called into their service the vast personal credit of Oakes Ames and others, without which it could never have been built, and which could not have been called into the service of the road at less expense. 6. That if the road had been built by contractors in the ordinary way, either under one contractor or cut up into numerous subdivisions, then a profit of 16 to 20 per cent. would not have been unreasonable or improper, and that no more profit has in fact been made here. 7. That the managers of the road believed they were complying with the requirements of the law in substance. 8. That they were advised by eminent counsel that they were so complying. 9. That the country has in fact received not only the vast public benefits resulting from the early completion of the road, but the pecuniary saving to the United States in postal and military transportation and the maintenance of troops is so great that they are entitled to gratitude and not censure for having departed from the letter of the law, which rendered the construction of the road impossible. 10. That it may be partly true that the capital stock ought not to be divided, and that the bounty of the Government or the moneys borrowed ought to have been kept in the Treasury; but that if they had dealt with a stranger, they could have got no better terms than they in fact got for building the road. And if they added to the credit of the road their own personal credit, it was not unreasonable that they should make a dividend of so much as they would have had to pay to a stranger as profit. These arguments the committee have carefully weighed. Some of them are not without force. We will consider them in their order. It is perhaps true that the clause in railroad charters requiring payment of the capital in money, has been of late years constantly disregarded or evaded. But these conditions are commonly inserted in charters granted by State authority as a protection to the public against the contracting of debts by organizations without either corporate funds or the power to pledge the personal liability of their members. The fund, as is said by Judge Story, is a substitute for personal responsibility. Where the purpose of the charter-namely, the construction of the railroad-has been accomplished, and the road acquired by the company by exchanging its stock for construction, and no person is misled, the public benefited by the enterprise has been disposed to deal leniently with the violation of law. But in this case the Government gave to this corporation its franchise, its right of way, including substantially its entire road bed, a vast area of public domain, its credit to the amount of over twentyseven million dollars, and enabled it to obtain a like amount by mortgaging the property the Government gave it. The Government never consented to trust its property to men who had not put their own money into the enterprise. It never consented to take security for its re-imbursement at the end of thirty years, solely on the property it had advanced. It never expected to rely for the performance of these great public duties upon a company whose debts equalled its whole property. The law-making power, if its mandates are to be obeyed or respected hereafter, cannot accept as an excuse for disobedience to its express directions, by the corporation it has created, that the members of that corporation have decided that those directions were unreasonable and unnecessary. In this case the provision of the charter requiring the stock to be paid for in money, has been grossly violated; because, as is apparent, nearly the whole of the stock that has been issued represents no value to the railroad company; or, to state it differently, was issued without any consideration whatsoever. 2 and 3. If it was impossible to build the road according to the act of Congress, they had no right to build it. They could easily have represented their difficulty to Congress, which has dealt generously with them from the beginning. 4. It may be that all the existing stockholders shared these profits, so that what was in form a contract was in substance a dividend. But nothing is better settled than that a railroad corporation has no right, either as against creditors or a minority of its stockholders, to distribute any part of its capital as dividends, and that a court of equity will interfere to prevent it. There can be still less justification for using the proceeds of moneys borrowed either of the Government or on the first mortgage for the purpose of a dividend. 5. The claim that these gentlemen had aided the enterprise with their own personal credit at first seemed a forcible one, but it disappears when carefully examined. Let us see exactly what risk was assumed at the beginning of the execution of the Oakes Ames contract. If the contract on the whole appeared at any time during the progress of the work likely to be unprofit |
