BANKING SENSATION.

New Zealand Herald, Volume LVIII, Issue 17723, 7 March 1921, Page 5

BANKING SENSATION.

THE FARROW PROSECUTION. AMAZING ' STORY TOLD. PURCHASE AND ITS SEQUELI I JfEW ZEALAXDER'S DISCOVERY | A. youngs New Zealander figured prominently in the Farrow's Bank case at the Guildhall, London, on February 19. | when Thomas Farrow, 58. chairman and director of Farrow's Bank. Frederick '■ Duncan Tabrum Hart, 44. accountant, and "William Walter Crotch, 46. banker, j were charged on remand with making, circulating, and publishing, and con- ' curring in making, circulating, and pub- | lishing, a written statement and account — ! namely, the 16th annual report and i balance-sheet, dated June 30, 1920— j of the bank which they knew to be false j in certain material particulars, with intent to induce depositors and investors to i entrust and advance moneys and valuable I securities to the bank. Specific charges were made in respect of a statement in the balance-sheet that C'amonn the assets I I was £2,473,012 13s 9d, representing loans j and advances to customers, etc., and also I in regard to a sum of £780,000 which was j said to be the value of certain land in j Cambridgeshire belonging to the bank. j Mr. Farrow, who had been ill and was not able to attend at the previous hear- j ing, was in the custody of a police j official from Brixton prison, and with the j otner two defendants, who surrendered j to their bail, sat on chairs in front of the clerk's table I Mr. William A. Read was the New I Zealander in question. A native of Wanganui, he is now the head of the • London branch of the firm of Norton, i Head and Company, and it is this firm whose relations with the Farrow Bank • were responsible for bringing to the light j of day tiie affairs of the bank. Decision to Own a Bank. Last year the firm of which Mr. Read ; is partner decided to own a bank of j their own, and with thai end in view they ; opened up the negotiations which have j had such a dramatic conclusion. At the opening of the tnalj an ama/ing. story of the bank's position was related j bj Sjr Richard Muir, for the prosecution, j Civ-'ng a short history of th* bank, counsel mentioned that it was first started by the defendant Farrow, as a private trading concern, but in May, 1907, it was registered as a public company. Starting with a nominal capital of £100,000,1 that item was increased from time toj time until last- October the capital stood at £1.000.000. The head office was in Lon-J don, and there were 72 branches. Far-! row was the head of the bank. Crotch j took a leading part in the management, j while Hart was head of the audit depart-, ment Counsel read from a pamphlet which the bank had issued and which gave a glowing account of the stability and financial position of the bank. The public were expressly invited to open accounts on deposit with the bank, and were also obviously encouraged to purchase shares—

■Mr. Bead's Negotiations. Messrs. Norton, Head and Company, were attracted by the supposed standing j of the bank, and Mr. ReacL opened up | negotiations with Farrow with a view to! his firm obtaining a. controlling interest in Farrow's Bank. There were several interviews. In May, Mr. Read saw Farrow, and the defendant then produced the balance sheet for 1919. and described Farrow's as one of the finest banking institutions in the country, and he said he rather wanted the assistance of expert financiers, as, with the exception of Crotch, he did not get scch assistance from his fellow directors as he wished. Crotch, who was in America, had called upon Mr. Norton in New York and represented the bank as being one of the soundest banks in Great Britain. As the negotiations proceeded, Farrow stated that there would be some depreciation to be written off of about £100.000. but would not exceed at the most £200,000. The agreement was that Norton, Read and Company were to take up a considerable number of the bank shares, about £300,000 and were to make themselves responsible for a further large number of shares. Mr. Read was, under the proposed agreement, to become managing director of the bank in the place of Farrow, and Norton's firm were to pay compensation to Farrow, and to the directors who were giving up their directorships. Eventually it was agreed that Messrs. Norton's firm was to provide half-a-million, of which £400,000 was to be placed to a reserve account and £100,000 was to compensate Farrow and the retiring directors.

A "Hidden Reserve." Crotch declared that there was a "hidden reserve." That meant, said counsel, that there were assets in the books which appeared at less than their full value. The agreement under which Messrs. Norton were to take over a large share of the capital and be responsible for a large number of the shares was drafted by Crotch himself, and signed by Read at the office of the solicitors to the bank. Counsel next referred to Farrow's speech at the annual meeting of the bank as a speech full of optimism. Then Mr. Read came on the scene m earnest, and wanted to. take up the position of managing director at once. Farrow, however, refused to permit this until Read had taken up £300,000 worth of shares. This h e agreed to do, and on October 4 last Mr. Norton, Mr. Read and Mr. Greetch, another partner, attended a meeting of the board to be elected directors. Farrow, however, held up the election until Mr. Read had agreed to pay him £5000 in cash as part of his compensation for loss of office. Mr. Read agreed to pay, and in fact did pay. Then a difficulty arose with regard to Mr. Read becoming a director at all unto the £300,000 had been paid. That difficulty was also adjusted, and on October 19 last Mr. Read was elected managing director, and the other two partners were elected directors.

Hopelessly Insolvent. Immediately on taking up the appointment Mr. Head started an investigation of the books of the bank, and instructed Mr. Greetch to carry ont a proper investigation, but, strange to say, Mr. Hart declined to allow either Bead or Greetch access to the private ledgers. Eventually, however, the books were produced. While the preliminary investigation of the books had shown that the position was not quite satisfactory, the investigation completed by November 8 made it clear that the financial position of the bank was entirely different from what it had been presented to be by Farrow and Crotch and by the balance-sheets.

Mr. Read discovered that though his agreement with the company „was not completed until August, he found in the accounts of the bank for the year ending June 30 last that there was a debt of about £500,000 against the firm of Norton, Bead, and Co., and the bank took credit to that amount. " That fact," Read told them, " does not make it very hopeful with regard to the future investigation of the books, but I will continue seeking for the hidden treasure." On November 8 a firm of chartered accountants were called in, and a Mr. Morgan examined the books, and eventually reported to Mr. Read that the bank was hopelessly insolvent, and the balancesheets wholly misled the true position Mr. Read consulted Mr. John Simon and Mr. Schwabe, two eminent counsel, in regard to his position, whereupon Mr. Bead, on behalf of his firm, cancelled the agreement on the ground that Farrow and his two colleagues had been personally guilty of publishing false balance-shseta, and "the matter was raised Before the Board of Trade and the Treasury. What, asked -counsel, was the-- object -oi- h-aroow^

and Crotch in indacing Mr. Bead to coma into the concerts'? Thev thonghi that as socn as the crash canv> Mr. Road wooid ne in the same boat as themselves, and ' tU ' t j , avilJ g become enmeshed in tbia iraadolent basiness, Mr. Read, in order £ sav o his honour and his credit, -woaid hnd :t necessary to save exposure, &ad woa-d agree to shoulder the btav dec Although Farrow w*s head of Sue bank. counsel said Crotch was the heading spirit in the concern. The deficiency was eetii matedto be not less than £2.800.000. On i June 30 they professed, to have a surplus | and a reserve fund, but had a derkjenrv j of £2,685.000. I ' Oa«i of the most extraordinary feateres j of this bank," proceeded Sir Richard Muir, "is the huge debit balances standin? j againiit the names of isa directors, sum* j due apparently from dire*aors to the ! bank." Crotch apparently awed the bank | anything from between £180.000 and I £200.000. There was also an item of j £55,000 in the b>x>ks standing against ! the name of Mrs. Janvrin, wife of a di- ; rector. Neither she nor her husband knew anything of the matter, and it was I discovered that this item was also a debt j of Crotch' 3. and he admitted that it was. | All the time the bank was caving inj terest on deposit and current accounts, i and interest to the shareholders. There , was only one sonrve from which these- pay. ! ments cxmld have been made, and that j was oat of the capital funds standing in ■ the accounts of 'he bank to the credit of | depositors and customers. These losses were concealed by the fictitious values put upon the bank's assets. The reserve fund was absolutely netij tions, and however astonishing it" might j seem, this amount did not exist even in j the books of Farrow's Bank. In Hart's ! room at the bank there was a locked rnp- ! board. This was broken open and there I were found papers which showed how the ( fraudulent balance-sheets had been prwpared. For each year a document nad j been prepared showing the true p-v-u"Uon of affairs and the deficiency for each year, I and from this do-mmejit, said counsel, j Hart " cooked " th« balance-sheet- showing how the profits had been made. I "It is difficult." added Sir Richard. ~ to say what all tie defendants have £rot- ont of the bank. We know they kid ' their salaries and their dividends. Farrow had a salary o" £1500 a year, and he promptly drew three v ears' "salary in ad- ' vance, and. remarkable to relate, that j sum was still in the hooks of the bank .as an asset. Farrow also got from Mr. I Read £5000 in cash. There are larre j rams standing to his debit account in ihe books of the bank as well,** contained Sir ! Richard. " The public, of course, are | the sufferers from this frand. They havo i at least lost 17s in every pound theV bav« j placed in the bank." A cablegram from London recent lv stated that the accused had been sent far trial.