1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 42

“The most dramatic show in town is the trial of Charles Mitchell, lately head of America’s largest bank,” wrote columnist Howard Vincent O’Brien. “It is not the trial of a man, but of an era.”

The proceedings opened on May 16 in the musty courtroom of Judge Henry W. Goddard, with a crowd of well-dressed men and women jockeying for seats. Though the case promised no murder, mayhem, or sex, it did feature money, and plenty of it.

The setting, however, was dreary. In contrast to the elegant setting of the Senate hearings, the federal courtroom had cream-colored walls stained by decades of cigarette smoke, their wood trim “blackened with age.” Wrinkled linoleum covered the floors, with “spittoons strategically placed” for the use of jurors and spectators. The twelve jurors sat on “ stiff, straight-backed chairs,” the better to keep them awake.

Mitchell’s lawyer, Max D. Steuer, short and balding with closely trimmed gray hair, dressed the part of the flashy criminal defense attorney in a double-breasted powder-blue suit with a pocket square. Mitchell dressed as the epitome of the conservative banker, subdued in bespoke navy.

Prosecutor Medalie had been sick with the flu, delaying the trial from its April start date. Now he presented the government’s opening statement, contending that neither the initial sale of stock by Charles Mitchell to his wife nor their later repurchase were bona fide transactions but were intended “ to deceive the government.” The prosecutor also contended that a transfer by Mitchell of 8,500 shares of Anaconda Copper to a lieutenant of Anaconda’s president in 1930 and repurchased five months later was “ another device to escape payment of tax on a net income over $700,000.”

When it was Steuer’s turn to provide an opening statement, he told the jury the case wasn’t really about tax fraud at all. He argued the trial was a political exercise. Mitchell, he said, was a “big fish” being brought to trial solely to appease “mob psychology,” as the government sought to find a scapegoat for the crash. “ When mob psychology controls, who is then to be made the victim? Some underling?” he asked the jury. “No!” he intoned. “We need big fish. And Charles E. Mitchell was a big fish.”

Steuer portrayed Mitchell as a fiduciary for National City who helped the banking giant avert a financial crash, the extent of which “ God alone could foretell.” Steuer said Mitchell sold the stock to his wife instead of disposing of it on the open market to protect the bank.

“Mr. Mitchell never, at any place, at any time, has denied that his purpose in making this transaction [was] so he could deduct it from his income tax, and he never, at any place or time, will deny it,” he told the jury.

“Every man who is an honest and decent citizen uses every possible legal means of reducing the tax he is called upon to pay the government,” Steuer argued. “When a citizen actually suffers a loss, for the purpose of recording the loss, he may sell any security which will record the loss.” Mitchell, Steuer said, was advised by his lawyer that the sale was “bona fide and legal.”

Hoping to gain some sympathy for his client, Steuer declared that Mitchell was now “worse than broke.” Mitchell still owed the House of Morgan almost $6 million on loans secured by collateral now worth only $5 million. “ Almost any other man except Mitchell would file a petition of bankruptcy and clear himself of that burden,” Steuer shouted into the overflowing courtroom. “Every scrap he possesses is pledged against that loan and he hasn’t a cent.”

The first witness for the prosecution was National City’s vice president, Edward F. Barrett, a longtime colleague of Mitchell’s, who made his way to the witness stand as Medalie waited for him.

With a large ledger open on his knees, Barrett testified that from 1922 through the crash, Charles Mitchell had helped Elizabeth make a profit of nearly $300,000 in pool stock transactions. In one pool alone, she cleared $35,785.95.

Medalie’s questions were aimed at trying to show that the Mitchells had long been engaged in a variety of unethical trades over many years.

Then came Steuer’s cross-examination.

Steuer quizzed Barrett in an effort to demonstrate that the same facts proved the opposite conclusion: that these transactions were so common that one could hardly suggest there was illegal intent involved. In 1928, well before the crash, Steuer showed that Mrs. Mitchell had made a profit of nearly $200,000 by selling 275 shares of National City stock she had originally bought from Charles. With Charles’s substantial assistance, her inheritance had increased from $250,000 to almost $1 million at the time of the crash.

Then the questions turned toward the days in December of 1929 when Mitchell raised the prospect of selling his shares to his wife for $212 a share.

“ On the 20th of December, 1929, could you conceive that National City stock, did it ever occur to you in the remotest degree that National City stock would go below $212?” Steuer asked Barrett, citing the date of the sale.

“No, sir.”

“ Isn’t it a fact that about that time employees of the bank petitioned to be allowed to buy the stock at $212?”

Barrett nodded and testified that at the time of the sale, Mitchell told him that he thought Mrs. Mitchell would make a handsome profit on the stock and recoup some of the losses she had sustained since the crash.

Medalie, on redirect, homed in on the fact that the interest on the stock Elizabeth purchased from her husband, which she was expected to pay, would total $190,000 per year. But neither Mitchell nor Barrett had warned her of that.

“In order to show the unreality of this transaction,” Medalie told the judge, “I am asking this witness everything to establish its unreality. Here is an investment banker in charge of this lady’s account passing by something which no investment banker would permit his client to embark on without the direst warning.”

On a Monday morning, after eight days of back-and-forth about accounting, the trial finally promised some real drama as the prosecution rested its case and Steuer prepared to mount Mitchell’s defense.

The spectators and press got to the court early that morning: Charles and Elizabeth were scheduled to take the witness stand.

Elizabeth, wearing a blue suit and pearl necklace, sat behind the rail with her husband as the prosecution wrapped up its case, waiting to begin her testimony. She stood up to be sworn in but then, in a moment of seeming confusion, she was asked to sit down next to the stenographer as the lawyers debated with Judge Goddard about whether she should be allowed to testify. After a lengthy battle between Medalie and Steuer, Judge Goddard barred her from taking the stand, citing a Supreme Court decision that said the wife of a defendant in a criminal case could not testify. Steuer protested. When the judge stood firm on his ruling, Elizabeth left silently, pausing to clasp her husband’s hand.

After lunch, Mitchell finally took the stand, looking directly at the jury, interlocking his fingers on his lap. Wearing a dark blue suit with a white pocket square and occasionally using his index finger for effect, he contended that his decision to sell the shares to his wife was completely legal.

Leaning forward, he testified in an “ earnest, husky voice” that he sold the shares to his wife to record the loss because he “couldn’t throw it into the market without causing a drop of $150 a share.”

Sitting in the witness chair, Mitchell rocked back and forth, turning his body from the lawyers to the jury and back again. For their part, the jurors sat perched on their chairs intently focused on his every word.

Mitchell, who answered the questions with a rapidity that suggested a sense of confidence, also defended omitting monies received from the management fund from his income tax filing because he did not consider them income, but as an advance that would have to be repaid.

“ There was not a man” among the eleven officers who participated in the management fund, he said, “who would have raised a question that the money could not be paid back out of future earnings of the fund,” and the directors’ legal counsel advised them the money should not be included on their income tax return.

As his testimony returned to the sale of the National City stock to his wife, Mitchell added a new twist.

“I had, of course, expected the National City Company would relieve me of the shares,” he said, explaining that he always expected the stock would rebound and that he would sell it back to the bank. “[But] as I saw the market continue to go down…I realized my reliance on the National City Company was not to be well-founded from that point on. In other words, I clearly realized that the stock was very definitely mine.

“ My loss on those 18,300 shares was equal to or in excess of my entire income for the year. I began to consider selling that stock to record my loss and show the real situation, so far as my income was concerned.

“ I considered selling it to the market, but 18,300 shares would have been a considerable amount for the market to absorb. Furthermore, a group of the employees had asked to be allowed to buy some of the bank stock.

“ Their petition had been considered and they had been permitted to subscribe $200 a share and were to be carried over two- to four-year periods. Officers were permitted to subscribe at $220 a share. Here was our entire organization stepping in eager to buy stock.

“ I believed in that stock, as firmly as the employees did. I went home on December 19 and talked to Mrs. Mitchell about it.

“ She did not have sufficient cash or means to buy those shares. She knew it and I knew it.

“ She had an enthusiasm regarding the National City Bank shares. Mrs. Mitchell was surrounded almost from day to day by my associates, by directors of the bank, by officers of the National City Bank…She was an enthusiast about it.”

Mitchell agreed to sell it if he could legally record his loss for income tax purposes and said he got his lawyer Harry Forbes to sign off on it.

“Mr. Forbes finally told me it was entirely proper to make the sale and the loss could be registered on my income tax report,” Mitchell told the jury.

As National City continued to fall in value, he turned over insurance premiums and other money to his wife to buffer her losses, and he later repurchased the stock he sold her, “ because it was a nightmare to me to think that the transaction was in any way resulting in eating into the corpus of her estate.” He described the “embarrassing position” in which he found himself, still owing $6 million to J.P. Morgan. The stock he posted as collateral was no longer worth anything close to that.

“In October 1931, do you recall whether you had delivered to J.P. Morgan & Co., as collateral all the stocks you had?” asked Steuer.

“I still had some odds and ends in my box—stock that wasn’t worth putting up.”

“Did you execute mortgages on your real estate in favor of J.P. Morgan?”

“Yes, in March 1931.”

“So by March 1931, you had deposited behind that loan practically everything you had?”

“Yes, sir.”

“Did you ever get anything back on any of that stock?”

“No, sir.”

Mitchell said he ultimately discussed his personal financial mess with several colleagues at the bank.

“I told them that I was under great embarrassment as head of the National City Bank with having an under-margined loan with J.P. Morgan & Co. I told them I thought that considering the circumstances under which the loan was obtained, I thought the company owed me some obligation in the matter and asked them to give it their consideration.”

But he felt as if he could not press his claim against National City Bank “ because I had given myself so freely to them that it would be like making a claim against one’s own mother.”

“ Later, Mr. Swaine [Robert T., his attorney] advised me that my best course would be to repurchase the stock from Mrs. Mitchell and he sent to my office drafts of the letters to be exchanged between Mrs. Mitchell and myself,” Mitchell explained.

“I’d ask him where to sign it, see that my signature was witnessed, and that was all.”

The letters quickly became known as “Dear Charles” and “Dear Elizabeth” letters.

Mitchell’s testimony ended on June 9, and his brother-in-law Joseph Rend, a wealthy coal dealer, took the stand soon after. He testified that he had seen his sister Elizabeth at the Drake Hotel in Chicago on November 12 and 13, 1929. “I told her I thought she ought to buy some National City Bank stock, five thousand or ten thousand shares. And I offered to finance her.”

“How much were you worth then?”

“About ten million dollars.”

Rend again urged her in December 1929 to buy the stock. He had purchased seventeen thousand shares and planned to buy an additional three thousand.

“The next time I talked with her about the National City Bank stock was in the fall of 1930. She told me she was deeply worried, that she had purchased a very considerable amount of National City Bank stock and had suffered severe losses. I was very much embarrassed because I had suggested that she buy it.”

When it finally came time for closing arguments, Mitchell’s lawyer turned to the jury and asked them to put themselves in his shoes.

“There isn’t anybody who can so read the law as to say that no matter how a man may acquire stock, he may not sell it to record a loss on his income tax return, provided there is an actual sale and an actual loss,” Steuer argued.

“Suppose he had sold any of you the stock instead of Mrs. Mitchell,” Steuer said. “You’d have been the sufferers as the stock went down instead of himself and Mrs. Mitchell. But would the government have received one cent more?”

The answer, he said, was no.

When it was Medalie’s turn to address the jury, he took a decidedly more argumentative approach. Raising his voice, he dismissed Mitchell’s claims of sacrificing his own fortune to aid the National City Company as “sanctimonious rubbish.”

“It was a terrific hoax!” Medalie shouted. “Since they have brought in this sanctity, it is incumbent upon me to remove it from the case in order that you may not go to your deliberations thinking he is the public benefactor he would have you believe.”

Medalie indignantly decried Steuer’s charge that Mitchell had been singled out for trial as a symbol of Wall Street.

“The people have as much a right to expect that such men shall be prosecuted if they betray their trust as a fraudulent merchant or a little bank teller,” Medalie said. “And when one among those in high places betrays his trust it does not lie in his mouth, or he that represents him, either morally or in the spirit of sportsmanship, to say he is singled out for dastardly persecution.

“ Let him face the music like a man, and not complain.”