In My Own Words:
Commentary

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In the wake of the Enron collapse, I think it is only fitting to remind readers that corporate greed, managerial malfeasance, and the dangers of poor oversight are neither rare nor new. What follows is a summary of a banking scandal of the 19th century (alas, with a few family connections) with links to appropriate sections of the relevant newspaper articles of the time.

Defalcation or Embezzlement:
John C. Eno and the Second National Bank of New York

The 'Lectric Law Library's Lexicon on defalcation:

DEFALCATION - The reduction of the claim of one of the contracting parties against the other, by deducting from it a smaller claim due from the former to the latter.

The law operates this reduction in certain cases, for if the parties die or are insolvent, the balance between them is the only claim; but if they are solvent and alive, the defendant may or may not defalcate at his choice.

Defalcation also signifies the act of a defaulter. The bankrupt act of 1841 (now repealed), declares that a person who owes debts which have been created in consequence of a defalcation as a public officer, or as executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity, shall not have the benefit of that law.

Perhaps defalcation is a nicer word than embezzlement, or perhaps the definition blurs the action of the guilty party, lulling the reader into a sense that this is something less than illegal. However, the case of the Second National Bank of New York in the spring of 1884 put defalcation into the national vocabulary, caused an international incident with Canada, and then -- as was done with so many problems involving society's finest -- was swept under the rug.

The story begins with rumors circulating in the financial districts that the Second National Bank of New York was having troubles. Its president, John Chester Eno, then 36 years old -- and certainly quite old enough to know better -- had been speculating on Wall Street. When his investment sense had proven faulty, he had made up his financial shortcomings with the ready supply of funds he had in the family bank to the tune of $4,000,000, rendering the bank insolvent and his father extremely angry.

The Family Bank

Organized in 1863, the Second National Bank of New York was a small, yet strong bank, attracting many wealthy families. The directors, who included several members of Mr. Eno's family, met on the evening of May 13th at the house of Isaac N. Phelps to consider their options. Those present included Amos R. Eno (John's father), John's brother "Amos F. Eno (a stockholder, but not a director), Henry A. Hurlbut, Isaac N. Phelps, James A. Trowbridge, Anson Phelps Stokes, O. D. Roberts, cashier of the bank, and William Walter Phelps . . . " (2)

The Phelps and Eno families had been linked by marriage and by business for several generations. The bank was a natural extension of their enterprises. In one interview, Mr. Isaac N. Phelps said,

" . . . Why, that bank has been the most successful institution of its kind in the city. Nineteen years ago ten gentlemen, of whom I was one, started it. We put in $30,000 each, and on this capital of $300,000 we at once began paying large dividends. In thirteen years $680,000 was paid out in dividends on the $300,000 invested. I remember it was conducted on the strictest principles of business and honor while I was actively associated with it. After the death of Mr. Trowbridge, the former president, I withdrew from it, and since that time I have known little about its management." (3)

John C. Eno, who had taken over management of the bank upon the death the former manager, promptly resigned upon the reports of his "defalcation." While the bank's directors publicly denied that any financial problem existed, they quickly elected James A. Trowbridge, the son of the late manager, to replace Eno, and started to ante up large sums to fill the coffers left bare by the former president.

Despite the public protestations of the directors and reassurance from Augustus M. Scriba, National Bank Examiner, there was a run on the Second National Bank of New York, but every dollar withdrawn was made good by the wealthy directors, who felt that even though they were not at fault for the deficit it was a matter of family honor that the bank not fail.

Shouldering the bulk of the financial burden was Amos R. Eno, whose first reaction to his son's naughty behavior was to have him "arrested and treated as a common criminal. In his excitement he lost sight entirely of the bank itself and visited his wrath only upon its president. The directors finally led him to consider the position in which they themselves and the officers of the bank were placed, and prevailed upon him to make good a part of the deficit." (4) The effort cost the elder Eno $3,000,000 and forced him to borrow a further $1,250,000 from the Mutual Life Insurance Company upon his property, the Fifth Avenue Hotel which housed the bank. (5) Another $500,000 had been contributed by the other directors. After the bank's depositors had been satisfied that their money was, indeed, safe, confidence returned to the Second National Bank of New York.

The Wheels of Justice

The story might have ended on that happy fiscal note, but there remained the matter of justice, which was moving ever so slowly to the idea that maybe young Mr. Eno had done something illegal and should be arrested. He was not alone in drawing such attention. One Ferdinand Ward had been "unmasked as an unparalleled swindler, but none of his numerous victims has made any criminal complaint against him, and neither the District Attorney of county nor the Grand Jury appears to have taken any step toward his indictment. Ward is in jail, but on civil process." (6)

An associate of Ward's, James D. Fish, had gutted his bank Marine National Bank, causing its failure and a panic on Wall Street. It was into this environment that Eno's financial bombshell dropped.

The law of the time stated:

A section of the Revised Statutes, relating to National banks, provides that any officer of a National banking association who
"embezzles, abstracts or willfully misapplies any of the moneys, funds or credits of the association; or who, without authority from the directors, issues or puts into circulation any of the notes of the association; or who without such authority, issues or puts forth any certificate of deposit, draws any order or bill of exchange, mortgage, judgment, or decree; or who makes any false entry in any book, report or statement of the association with intent, in either case to injure or defraud the association or any other company, body politic or corporate, or any individual person, or to deceive any officer of the association, or any agent employed to examine the affairs of any such associations; and every person who with like intent aids and abets any officer, clerk, or agent in any violation of this section shall be deemed guilty of a misdemeanor and shall be imprisoned not less than five years or more than ten." (7)

Yet the press complained of the desultory manner in which the District Attorney's office pursued the case. On May 24, 1884, Deputy Sheriff McGonigal denied that he was on Park Avenue the night before to watch the Eno house and said that he had no orders to arrest Eno, even if he knew where the house was. Yet, he and his officers remained in the neighborhood.

The directors of the Second National Bank of New York also said that they knew of no warrants and were satisfied that all was right with the bank. The rumors of arrest, according to the paper, stemmed from the fact that, according to the new President Trowbridge " 'the day after John C. Eno's defalcations were confessed to his father he [John Eno] drew a check on the bank for $95,000, which he cashed downtown. The amount of this had to be met by the directors. It is now claimed that many others have turned up'." (8) He went on to deny the rumored overdrafts, but in truth the $95,000 was the final straw. Eno sold his prime real estate during the next few days, all to members of his family, thus he was well-infused with funds .

McGonigal and his assistants remained watching Eno's house. Visitors were turned away, either "by a servant girl, who said that Mr. Eno was not home, or Charles Wood, his brother-in-law, who said that he was sick and confined to his bed." (9)

Complications in Canada

A warrant for the arrest of John C. Eno, the former president of the Second National Bank, was issued by United States Commissioner Shields yesterday morning at the request of District-Attorney Root. Mr. Root has been engaged since the first reports of the peculiar financial transactions of Mr. Eno in examining the laws relating to National banks, and became sufficiently satisfied that the law had been violated to lead him to take decisive action. The warrant was given to Deputy Marshals George H. Holmes, Grimes and Peters. (10)

We now come to one of the more mysterious figures to enter the story -- a Catholic priest named Father Ducey of St. Leo's Church, described as "a personal friend of the Eno family." (11) The priest arrived before the arrest warrant was issued, coming and going several times. Upon attempt to serve the warrant the next day the officers were first told that Mr. Eno could not be seen and upon a search of the premises (which failed to include the roof or the cellar) found nothing.

On June 1, Eno was captured, along with Father Ducey, in Quebec, as they were about to depart on a steamer for England. At first the Pinkertons picked up the two men on a warrant issued against several other Americans, then had to release the two when they prove to be none of those named in the warrant. The Pinkertons then re-arrested Eno and Ducey, demanding them held while lawyers argued the finer points of extradition law before the Canadian courts.

The arrest on Canadian soil proved a legal roadblock because the treaty with Great Britain covered "only murder, assault with intent to murder, piracy, arson, robbery, and forgery or the utterance of forged paper." (12) Neither "defalcation" nor "embezzlement" made the list of offenses.

The papers were particularly biting in their commentary:

Eno, with his family pretensions and wealthy friends, after having virtually robbed the bank of which he was chief officer, sneaked away in disguise and under cover of the night a fugitive from justice. The Rev. Father Ducey, of St. Leo's Church, appears to have aided him in his flight and accompanied him to administer comfort and consolation in his exile. As the fugitive was well supplied with funds, the priest probably played his part for a money consideration. It is a fine business for a minister of the church which professes to exercise a special rigor upon offenders against the criminal law. (13)

Eno remained in Canada while debate raged in the press and in Congress over the nature of the U.S. extradition treaty with Britain and why British justice could not stretch the definition of "robbery" to include that committed with a pen as well as that committed with a pistol.

Eno remained in Canada for nine years, returning only when it was certain that the indictment against him would be quashed. His father died in 1898, leaving his son an undeserved inheritance which was soon gone. When John Eno died in June, 1916, all he left was debts, but he never spent time in jail, and never paid a dime on his defalcation. And while his obituary made much of him as a "big defaulter," the National Cyclopedia of American Biography, lists him as a

"Financier . . . elected president of the Second National Bank of New York in 1879, but resigned in May 1880 [sic] and went to Quebec, Canada, where he became interested in the building and financing of Canadian railways. He was instrumental in completing the constructions of the Quebec and Lake St. John and Canadian Northern railways between Quebec and Montreal and succeeded in attracting American capital to Quebec. In 1893 he returned to New York and during the later years of his life spent much of his time abroad. A delightful raconteur, he was a man of rare personal charm and broad culture.

This biography, when read in full, was obviously crafted to avoid mention of Mr. Eno's most spectacular career move and thus constitutes a pious fraud of history.

Fraud is nothing new, of course. Nor are corrupt business practices that benefit the few at the expense of everyone else. But the difference between the Second National Bank's Directors and the executives at Enron is that the former were gentlemen who saw to it that no innocent investor was harmed by the actions of one corrupt man. They made no profit, but the bank remained whole. Can anything of the like be said about Enron?

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