THE FARROW BANK CASE.

Press, Volume LVII, Issue 17104, 28 March 1921, Page 9

THE FARROW BANK CASE.

BALANCE-SHEET SIGNED UNDER PROTEST.

EVIDENCE FOE THE PROSECUTION.

(TKOM OUR OWN COP.BE3FQXDEHT.)

LONDON, February 3

When the case of Rex v. Farrow and others'was proceeded with two days ago, before Alderman Sir C. C. Wakefield, at tho Guildhall, ono of tho chief questions that arose was whether Mr W. A. Read (formerly of New Zealand, and partner in the firm of Messrs Norton, Road and Co., of New York and Pall Mall, the financiers who agreed to pay half » million to secure control of Farrow's Bank, and whoso discoveries led to tho bank suspending payment) would be called to give evidence. TJie defence wore anxious to know.

Sir It. Muir (leading counsel for tlio prosecution) said that in owning the case ho mentioned that Mr Read might give evidence towards the end • of the mouth. "Our information is that Mr Head is in Mexico, and that there are difficulties in tho way of his getting ouj- of that' couhtry—passport difficulties, what they are I will leave to the imagination of those > who know the facts. If we have definite knowledge at the next hearing that lio will be in this country we shall call him, but if we cannot foresee at what date ho will be here we shall proceed without him. Tho prosecution is anxious to call Mr Head, and will do so if possible." Tho defendants are Thpmas FarroW, founder and chairman of the bank; William Walter Crotch, deputy-chairman, and a. director of tho bank; and Frederick Duncan Yabrun Hart, accountant and auditor of the bank, and thp charge against them is one of issuing iv false balance-sheet.

Walter Henry Jones, formerly a clerk in th» bank, and latterly joint manager with Mr Keogh, said, with reference to tho balance-sheet of 1919, he was called up to the board-room and asked to sign by Mr Crotch. He know that his colleague, Mr Keoffh, had refused to sign it, and he. made a protest, saying lie knew of his liability to sign one side of the sheet as ho had a good deal to do with that. As to the other sido, witness pointed out that ho had no means of ascertaining whether tho assets right or not, the investments and uuvances to custoiiiers being kept in private books, which ho had'never seen. Farrow, Crotch, and, lie believed, the secretary, were then in tho room, and Hart camo in later. He asked Hart whether proper allowances had been mado for bad and doubtful debts. Hart gave him an assurance that that had been done, and as no believed tho balance-sheet to bo peifcctly correct sftd signed by tho chairman in whom he had complete confidence, witness signecl it. He also signed tho 1920 balance-sheet. He was told ho should bo required to -sign it. Ho knew that Mr Keogh had been asked and had refused, to sign. He spoko to Hart about ifr, and aeked hini questions similar to those he asked m the previous year, and trusted to the correctness of his replies. Witness was quito satisfied that everything that should bo done had been done. Crotch brought the balance-sheet down to his room and put it in front of him, saving : "This has to go to tho printers to-day, and they are waiting for it." Mr T. R. Harker made an application fyr tho reduction of Farrow's bail. Tho position was that the Lord Major, when Farrow appeared before him on tho first occasion, fixod tho bail at £14,000 for himself and an equal amount in sureties. Since then every effort had been made by Farrow, so far as he "was able to make an effort from prison, by his familv, his friends and his legal advisers to" obtain tho necessaty sureties. "As often happens" said Mr Harker, "when a man is down poople who ho thought were his friends have deserted liim, and the result of continuous effort has been that Mr Farrow i» unable to provide more sureties than in a sum of £5000." The present bail was prohibitive, and meant that Mr Farrow would have to reinaifa in Brixton Gaol. How was it humanly possible for Farrow in Briston Prison to have justice done to him? It was obvious that there were many matters of investigation into the books which must be done by Farrow himself.

Sir C. Wakefield said that at that stage he could not see His way to reduce the bail. He thought it would be unwise.

Arthur H. Elliott, managing clerk with Messrs Price, Wntcrho.uise, aucl Co., chartered accountants eaid lie liud been engaged in examining tho books and documents at Farrow's Bank sinco ".December 7th, 19i0, under the guidance of Sir L. E. llalsey, a member of the iirm, who was appointor the speciul manager I by tho Court of C'haueory on December 1 21st. Witness found the books which [had been oxhibitod in Cour?. Some of the documents relating to tho balancesheets wero found in a cupboard in Hart's room, which tho Official Receiver representative broko open. Arthur H. liicho (of 'tho firm of Norton, Head and Co.), did not attend interviews with tho directors of Farrow's 13ank until he was Appointed a director. After that ho analysed tho balancesheet of the bank for 1919 as printed in tho pamphlet circulated. He saw tif& auditor's certificate) attached, and observed that' regular dividends had been paid for a long period of years,' and especially, during that most difficult period, 1914-1918. lio found also that tho Bank had seventy branches, and thought that for a bank with eueli a small capital it showeu very progressive trade. It seemed tho sort of bank that could bo improved with additional capital, and he believed tho statements' absolutely. Mr Head reported to him tho result of tho various interviews with the officials of Farrow's Bank, and witness knew a provisional _ agreement had been entered into by which ho (witness) was to become a director, Mr Read tho managing director, and Mr Norton and Mr C. J. member of tho iirm) also directors. On October 4th witness, with Mr Itead and Mr Wray, wero at tho head offices of Farrow's Bank; and following tho board meeting held that day witness received an intimation that ho had been elected a director. Between October ,4th and 18th ho paid a visit to (tie. Foreign Office of Farrow's at 1, Angel Court. Witness had fourteen years' banking experience. Ho found that tho money the bank held in foreign banks appeared in tho books-at the rate of exchango 'ruling when they bought tho stocks,, and higher than, the rato rnling at tho.timo of the Juno balance-sheet. The market value below the valuo recorded in tho book's left in round figures £40,000 unprovided for. Ho visited the Burton Aircraft and Manufacturing Company (Ltd.), Buf-ton-on-Trcnt, and went into their affairs. He found that large advances had bocn made at tho bank, but was unable at the time to form an opinion as to whether tho advances wero sufficiently secured. After October' 1 18 th lie examined the hooks under instructions. from Mr Head, and wanted to see the investment boolcs. These were locked in .Mr Hart's room. Ho was told the latter was on a motor tour, and that they could not get access to tnem. When.lie saw Hart about fiv&days afterWards ho refused *o let witness see the books, afterwards, on Farrow's instructions, consented. After examining tho investment 'books witness came to the conclusion that Farrow's Bank was insolvent. In his opinion at that time j they would havo been able to pay five> shillings in tho pound. Ho then called in Mr H. Morgan (of Morgan Brothers and Co., incorporated accountants).

Losses Not Disclosed. Mr H. Morgan said that in the bank's books the losses on trading aocoiiuts had been converteS into profits by writing up the valuo of tlio various assets, the account written up being credited to the profit and loss accotittt. He had formed an estimate by November 20th of tho deficiency on June 20th, and his figure was £2,685,757. The losses had been continuing, ho estimated, through June to November 20th, and at the hitter dnto the deficiency would bo about £2,800,000. On November 2oth, ho attended a consultation with Sir John Simon in csjmpany with Head and Churchill, tie and his staff started their investigations in Sir Hart's office, where ho first saw ledgers. Hart produced a bundle of papers which ho asked for. He said they were the offico cony of of nt June DOth, 1920. Ho saw a schedule of papers, which he believed was given hini by. llichc. A more detailed schedule was given by Hart. The latter's schedule showed on inner reserve of £427,116, to which were added two small reserves amounting to £49. "Witness said he asked Hart for his original list which should havo_ shown the_ allocation of that sum to individual items of debt, but Hart refused. Ho gave as his reason that the allocation of that amount was a matter for his own private information only. Ho asked Hart again, but witness never got it. /Sir Jlichard Muir: What do you mean by an "inner reserve" P—Witness: It is very difficult to explain. It is Mv Hart's expression. ' Hart never mentioned it to mo verbally. Witness said he discovered the source of a part of that reserve. It was a part of the application of tho £-500,000 debited to Bead and others, and coming into the balance-sheefof June 30th, 1920. On November, 18th, continued Mr Morgan, the subject of the inflation of the assets was discussed with Crotch. Ho told Crotch he was somewhat mystified 'that tho business should have gone on"iill those years, and wondered how any body of men had managed to carry that load on their minds. Crotcli ro. plied tliat in early years there had been a deficiency on tho profit and loss account, and they had valued up certain assets to make it good. They thought something would turn up to justif«#he inflation. This did not occur, and the inflation, which in early years Was a small one, subsequently became much IjiggftT. Sir f,. E. Haljey was appointed on Dec-ember 21st special manager by tho Court of Chancery in proceedings for winding-up tho bank. He examined the books since tho bank became limited company in 1908. In twelve years they appeared to have lost £1,107,460 on trading. In addition to that, there were losses on bad debts and depreciation of investments. The

losses from 1909 to 1920 wero not shown on tho balance-'sheet for those years, nor wero the losses on bad debts and depreciation. Tho balance-sheet showed tho bank to bo making prolits each year. That result was arrived at Ly writing up certain assess on iho books, and taking credit for that in the brolit and loss account. Front- Juno aOtli, IyOS, to June 30th, 1S:20, tho total assets written up wero £2,371,031, including £500,000 debited to Norton, Head, and Co., in the 1920 balancesheet. In his judgment - as a chartered accountant, tho accretions on tho books were not justified. It was also uujustiiiablo to take credit for them in tho profit and loss account. • • Sir Laurence described' a document produced by, counsel as a first edition of one balance-sheet, and added that never in his experience had ho 'seen such a thing beforo. Another uniquo discovery, said tho witness, was that £4500 had been drawn in advance uy Farrow as his fees for services as managing director.

What a Bank Should 80. Some amusement was caused by th<i reading of a paragraph in "Farrow s Bank Gazette," in which Crotch,, ns editor, was stated to. haro described himself as ft "litterateur of distinction and a keen student of social problems.'' Counsel (to William Davies,- manager of- tho printing firm which did work for Farrow's): Who wna tho editorr--Mr Crotch. ... , Counsel: That might be called an appreciation. (Laughter.) Aiiother article on the finance of the Homellulo Bill, by "an Irish said counsel, had an introduction by tho editor, wUp said: "Tho respected member for ——■ deals informatively with tho 'financial problems which will arise in determining what contribution Ireland will mak'J to tho Exchequer.'' At vho end of the article tho following appeared'A bank should stand for social and industrial service. Farrow's Bank claims to do this in excelsis. It will adviso. you in all directipns on the purchase of property, the investment of monoy, tho salu of shares—on everything you. wantjjliti know." This 'manuscript was m Crotdh's 'handwriting. . - • Mr J. B. Perry stated, -at a meeting of creditors of Farrojv's Bank, at Birmingham, that nearly 150 bUsinoflft moil in'tne city wore.on the vorga.of bankruptcy as a result of the closing of, bank. Three thousand accounts, -were unpaid, ami could not be paid •,until there was ft distribution of the dssetaby tho Official lloccivcr. There wfere 716 depositors and 748 current' dccpuntg in the bank in Birmingham, reprcseiitiug ay annual turnover of £2,44)0,000. At a mooting «t Woolwich (Mr J. 35. Mills, M.P., in the chair) it wbb urgeiJl that, as the members and customers of the-bank wdire of the working-class who had .tried to save from' then; limited earnings to avoid having to apply for old-age pensions later on, tho Government should eee that the naseta bo conserved to the utmost; that *ho liquidation expenses be kept down to tho lowest possible minimum; that the wclifitios be hold until such tipie as markets wero favourable; that means be found to iolieve- those suffei-ers who ivCro in immediate w4nt by advancing to thom a certain percentage of tflieir savings j and that other banks be'approached with a view to taking over the Business of Farrow's Bank.