The Sun.
London, England, 1844-04-29 00:00:00

JOINT•STOCK COMPANIES.
FIRST REPORT.

The Select Committee appointed to inquire into the
state of the Laws respecting Joint-Stock Companies
(except Banking Companies), with a view to the
greater security of the public, and who were em-
powered to report their opinion thereupon, from
time to time, to the House, have made a progress in
the matters referred to them, and have agreed to the
following Report and Resolutions:—
Your Committee have had laid before them the report
on the law of partnership, which was prepared by Mr.
Bellenden Ker, by the direction of the Lords of the Com-
mittee of Privy Council for Trade, and presented to Par-
liament in the year 1837.
This report contains the evidence of several eminent
merchants, bankers, and lawyers, conversant with mer-
cantile transactions, upon which was founded the exist-
ing Letters Patent Act, 1 Vic. c. 73 (1837), by which
her Majesty is empowered to grant letters patent, or
charters of a limited nature, to joint-stock companies.
lek addition to the above mentioned evidence, your
CoMmittee, in pursuance of the declared end of the re-
ference to them, viz., the better security of the public,
have received evidence of other persons conversant with
joint-stock companies as to their operation, and as to the
improvements which may be made in the 1e al and
equitable remedies at present available to companies, and
to their directors and shareholders.
In further pursuance of this object, your Committee
thought it desirable, notwithstanding the notoriety of the
circumstances which had attended the concoction, pro-
gress, and termination of some bubble companies, to re-
ceive evidence of a few remarkable cases of miscarriage
or fraud, with a view to practical remedies to be specifi-
cally directed to such eases.
Bret as an inquiry of that kind could not be satisfac-
torily conducted without involving the character and
conduct of a great number of persons, which would make
it necessary to give them an opportunity of being heard,
and that necessity woi4d involve a course of investigation,
which, from its extent In point of time, as well as from
its complicated nature, must be beyond both the com-
petence of a Parliamentary Committee, and the demands
of the occasion, your Committee felt compelled, in
taking this course, to confine themselves within the nar-
rowest limits. .

Although these inquiries were so restricted, it was
found impossible to conduct them without in some mea-
sure implicating individuals by the necessarily ex parte
statements of witnesses incidentally made before your
Committee.
Under these circumstances, your Committee have de •
termined, at the risk of sacrificing some portion of the
weight which their recommendations would derive from
the publication of this part of the evidence, to state sum-
manly the general results of it, and to give at length the
remainder, to which objection does not apply.
With regard, however, to one particular scheme, as
the circumstances connected with it have been brought
fully before the world in judicial investigations, your
Committee have not thought it necessary to maintain the
same degree of reserve.
In perusing the evidence thus curtailed," it will be ne-
cessary to bear in mind that the intimations of the cha-
racteristics of bubble companies must necessarily be more
faint than if the condition in life, circumstances, and
character of the individuals concerned in the concoction
and conduct of them were stated In detail, with the in-
cidents which indicate, on the one hand, the cunning of
the fraudulent promoter ; and, on the other, the gross
negligence and censurable acquiescence under which in-
telligent and respectable persons have assisted to sup-
port such companies by their names, or by their contri-
butions and liabilities. _ _

But probably this will not be deemed of much import-
ance, since, generally speaking, the circumstances of
fraud and mismanagement in the conduct of such com-
panies are so notorious as to have provided the least ob-
servant with instances of the necessity for the suggestions
which your Committee propose.
From the evidence which has been taken on this head,
it appears that bubble companies may be divided into
three classes :-
Ist. Those which, being faulty in their nature, inas-
much as they are founded on unsound calculations,
cannot succeed by any possibility :
2dly. Those which, let their objects be good or bad,
are so ill-constituted as to render it probable that the
miscarriages or failures incident to mismanagement will
attend them ; and-
-3dly. Those which are faulty or fraudulent in their
object, being started for no other purpose than to create
shares for the purpo 4: of jobbing in them, or to create,
under pretence of carrying on a legitimate business, the
opportunity and means of raising funds to be shared by
the adventurers who start the company.
All the companies of the last class of course adopt, as
far as possible, the outward characteristic common to
those of the best kind. They exhibit an array of direc-
tors and officers—announce a large capital—adopt the
style and title of a company—issue plausible statements
intimating excellent purposes—declare that they are
sanctioned or empowered by Act of Parliament—use
some conspicuous place of business, in a respectable si-
tuation—and employ throughout the country respectable
dents and bankers.
But many of these characteristics are fictitious. The
Directors have either not sanctioned the use of their
names, or they are not the persons they are supposed to
be. 17ot only is there no capital, but neither subscribers
nor deed of settlement. The style of the company may
be true, because any company may adopt such style ,•
but their purposes, though plausible, are often founded
,on calculations which do not admit of success, and they
base not only not received the sanction or authority of
Varliament, or of the Crown, but the very statutes which
mre cited as conferring the authority will be found to
'—we a very different object.
',ugh their place of business may have all the indi-
Tn. N respectability, the persons employed there will
cations 01 _ found to be of a corresponding character;
not always be - ..zents are employed, it will be found
and though good a
tr ,
irked into acceptin. g. the aency
that they have been
tions or, respectability employed
partly by the other indica. by tempting commissions;
by these companies, and pars Y
and the bankers are no further' parties than that, in the
have permitted the con-
ordinary course of business, thei
cerns to open an account with t
publication of the
With this class the remedy is easy;
directors, of the shareholders, of the deed of settlement,
of the amount of the capital, and whether subscribed er
not subscribed, nominal or real, would baffle every case
of fraud which has come under the notice of your Com-
mittee. The public would have the means of knowing
with whom they deal; and agents and bankers would be
enabled to avoid participating in the discredit of such
concerns, by giving the sanction of their names to ques-
tionable undertakings.
The difficulty is greater with the second class of com-
panies for good objects, but ill-constituted. Companies
of the third class, which are fraudulent in their objects,
are commonly short-lived ; circumstances of suspicion
soon arise, which under the precautions already men-
tioned, would avail to counteraet the projectors,
but the character and credit of the persons en-
gaged in companies of this second class lull sus-
picion. The directors themselves are often indiffe-
rent and careless, trusting too much to their of-
ficers ; shareholders purchase on the strength of their
names, without due inquiry, and thus confer factitious
support ; so that one set of persons relying upon another
set, the delusion is sustained for a longer space of time.
Publication of the directors and shareholders, of deeds
of settlement, and of the capital, will not meet this class
of cases ; but it may be met by the periodical holding
of meetings, by the periodical balancing, audit and
publication of accounts, and by making the direc-
tors and officers more immediately responsible to
the shareholders, which may probably be ac-
complished by facilitating and improving the
remedies available to joint-stock companies and their
shareholders, inter se. Periodical accounts, if honestly
made and fairly audited, cannot fail to excite attention to
the real state of a concern; and by means of improved
remedies, parties to mismanagement may be made more
amenable for acts of fraud and illegality..
The only class which is beyond certain cure by the
Legislature is the first class--companies faulty in their
nature. No antecedent check will avail; any authority
appointed to act as censor would be as liable to be de-
ceived as the promoters of the schemes, and it might
sometimes sanction bad, and at other times prevent good
schemes.
The early publication, resulting from registration,
of their prospectuses and circulars, will doubtless be
useful in controlling such undertakings at their outset,
and if all ether causes of failure are lessened, failures of
this class will, in all probability, strike the attention
more, and by the exposure of failing companies, public
opinion and public conduct on this head may be improved.
In accordanee with these views, your Committee have
rased sundry resolutions, limited to the objects above
indicated ; if it shall be found hereafter that the expe-
dients thereby contemplated do not meet the full extent
of the evil, they feel that by the establishment of the
proposed plan of registration, the Legislature may ob-
tain information of a trustworthy character which will
thus be collected, and may proceed with more confidence
to supply the provisions which
eshatatbiehfound wanting.
In the recommendations to registration of
joint-stock companies, your Committeepersos are supported by
the testimony of almost every
wnellonasuted_or ex-
Amined by Mr. Bellenden Ker, as
examined s by the wit-
messes generally who have been examiby your Com-
mittee.
On the subsidiary points the evidence is not so
general ; but in reference to them, your Committee have
bad regard to the practice of Parliament with respect to
the incorporated companies, and to the instances of abuse
which have come under their notice, and which appear
to them to call for the adoption of direct measures of
prevention and punishment.
On the Suggestions for the improvement of the law
relating to private partnership, and to partnership en
commandite, upon which so much valuable,, evidence has
been afforded by Mr. Bellenden Ker 's report, your
Committee forbear to express an opinion, because,
though highly worthy of consideration, those subjects do
not appear to fall with the scope of the reference which
has been made to them.
In the evidence of Mr. Parkes, one of the witnesses
examined by your Committee, will be found some
curious information as to the extent of two of those
paroxyams of speculation, which would seem to recur
periodically. The causes of such paroxysms forbid the
hope of wiggly preventing the recurrence of them, but
your Committee trust that the adoption of those recom-
mendations which are directed to prevent the use of
joint-stock companies as mere instruments of share
jobbing, and to punish parties guilty of illegal or
fraudulent conduct, will narrow the range of mischief
produced by those paroxysms. Your Committee also en-
tertain the hops, that, by recording the instances of
failure, with the, cause thereof, and by the exposure of
cases
of fraud, tl information thus obtained and dis-
semineted will s erve to counteract, in some measure,
the susceptibility iof ignorant persons to be deluded by
fraudulent schemes. But probably the greatest benefit
in this direction will be produced by enabling the share.
brokers, and oth vr persons professionally employed in

making investments of this kind, to learn more easily
and more accurately the real nature of these companies;
so that, at least, the ignorant may not be so much mis-
led by the example of persons of weight and intelligence,
who have sometimes, with extraordinary recklessness,
connected themselves with companies, which, whether
the objects of the promoters, the nature of the enter-
prise, or the constitution of the company be considered,
must be regarded as of a questionable character.
The bubble companies, which were the immediate oc-
casion of this inquiry, eing concerned in effecting as-
surances and granting annuities, the attention of your
Committee was naturally directed to companies and so-
cieties engaged in that most important class of =dr.
takings. They believe that, generally, they are deserv-
ing of the highest credit on account of the respectability
of their managements and the soundness of their schemes;
but instances of abuse which have occurred justify and
demand inquiry, Ardingly, your Committee have
taken some evidence 7h the subject ; and for the pur-
pose of obtaining further and more complete information,
they issued at the close of the last session a list of aueries,
in answer to which they have received returns from a
considerable number of those companies. _ .

Your Committee propose, as soon as the information
to be supplied by the answers to these queries can be
properly collated, to prosecute their inquiries in this di.
rection, with a view, on the one hand, to suggest such
practical facilities and encouragements as it may be in the
power of the Legislature to afford to these companies for
the furtherance of the system of Life Assurance, so im-
portant to the well-being of the nation at large ; and, on
the other, to prescribe such reasonable precautions as may
be requisite to ensure the faithful observance, on the part
of such companies, of the extensive obligations into which
they enter with the public.

Your Committee now proceed to submit the summary
to which reference has been made. It shortly des-
scribes :--

The cases examined, and the character of their objects,
concoctors and managers.
The modes of deception adopted.
The duration of the companies.
The amount and distribution of the plunder.
The circumstances of the victims.

The impunity of the offenders.
CASES EICAMINED, AND CHARACTER OP THEIR OBJECTS,

CONCOCTORS, AND MANAGERS.

The examinations by which the conduct and character
of individuals are implicated, and which are therefore
excluded from the annexed evidence, relate to ten com-
panies for the following purposes :
Seven insurance, annuity, and loan companies.
Three mining and general companies.
In eight of these oases the concern is represented to have
been founded by mere adventurers, and upon schemes
evidently fraudulent, or greatly miscalculated.
In one of the remainder, the company was bona fide
in its object and in its construction; but owing to the
negligence of the directors in superintending the ex-
change of certificates of shares for scrip, and the can-
celling of the scrip, one of the officers was enabled to
possess himself of the latter, and to deposit it as a col-
lateral security for loans to himself, by which the shares
became nearly doubled in number. This officer is re-
presented to have been the more easily enabled to prac-
tise such a fraud, as the directors left the management
in all its branches to him, as they considered him a very
superior man, being a man of science, in an independent
station of life, and a Government contractor. •
The case appears to be one not of general fraud in the
concoction and management of a company, but of over-
confidence on the part of the directors in their officer, and
of breach of trust on his part.
In the remaining case the concern, though of a multi-
farious and questionable character, was originally bona
fide, and conducted by or under the superintendence of
a respectable direction; but subsequently the parties to
the direction appear to have retired, and left the con-
cern to the management of a single person, who became
bankrupt. Latterly, therefore, this concern was of a
fraudulent character, two of the parties by whom the re-
cent policies had been signed being bankrupts.
It was a provision in the rules of the concern, which was
a benefit society as well as a joint-stock company, that this
officer was to hold his office for life; and it is to be ob-
served, that in other eases of a fraudulent kind provisions
are made of a similar nature, securing to particular in-
dividuals offices for life, as well as considerable advan-
tages in point of emolument or shares. Such a provision
is to be found sometimes in concerns that prove to be
bona fide and successful; but it is probably a common
characteristic of the worst kind of cases, and is always
liable to the disadvantage of inducing a want of care and
attention on the part of the persons in whose favour
it is made. In another case auditors were appointed
for life.
One of the schemes to which allusion was first made
was founded by the enterprise of a family of swindlers,
one of whom changed his name and became a trustee and
chief manager of the company. He was a person without
means, but succeeded in inducing several Members of
Parliament and other persons of station to act in the ca-
pacity of directors and trustees, upon the persuasion
that it would do good, and on the understanding that
their names were to be uses, but that duly were not to be
liable; and these gentlemen appear to have considered
that they were merely doing an act of kindness to the
individual who was the chief promoter of the company,
and not to be sensible that it inflicted injury upon the
public, and upon the parties who placed undue confi-
dence in a concern supported by their names. One of
them, a trustee, held that he was only responsible for the
moneys which came into his hands, and that he was not
bound to see that the moneys of the coneern came to
him. In fact, be received nothing ; while the company
had the advantage of the credit which was given to it on
account of the respectability of the names under which
it was announced.

It appeared that on the breaking up of the concern
there were few bona fide shareholders, and some of them
had become such by compulsion, it being made part of
the terms upon which they were favoured with dis-
counts, in order that they might not be able to take
proceedings against the company of which they were
members. Others were minors, married women, la-
bourers, and small tradesmen.

Another company incorporated by Act of Parliament,
was established for an object not in its nature question-
able, but the scheme was based on fraudulent representa-
tions. Several prospectuses were issued, each differinc,
in some important particular from the other, and the
list of shareholders was filled up by a sicilful canvass
privately conducted; the usual method of proceeding by
advertisement not being adopted in this case.
After the establishment of the company an Act of
Parliament was obtained; a board of directors thereby
appointed, to remain in office for three years and up-
wards; one of them, the chief mover, being appointed
the managing director. Owing to the want of power to
inspect the books and papers of the company, and to call
a meeting, the shareholders were unable to remove
their directors on discovering the mismanagement of
the concern.

Injunctions were obtained from the Court of Chan-
cery to restrain their proceedings, and subsequently the
Legislature passed another Act giving the shareholders
the necessary powers to remove the Directors.
The other companies have not been the subject of di-
rect examination, but were incidentally mentioned.
An insurance-office was established by an individual
upon the terms of receiving, in the capacity of ma-
nager and concoctor, 1,0001. per annum, under the
direction of mea of the highest character and respec-
tability, but left to the conduct of that individual who
defrauded them.

Another insurance-office was established by one or
two persons, one an uncertificated bankrupt, upon terms
highly advantageous to himself as resident-manager
and shareholder of 100 shares, but which, owing to dis-
putes among the parties, was dissolved, after effecting
insurances to a considerable extent.

On behalf of the company, W prospectus was issued,
containing highly respectable names. It appeared, from
some legal proceedings, that the number of shareholders
was only eleven, who were all directors.
Some of the parties to the last concern were found
again establishing another insurance-office under a dif-
ferent name, and also another society for a different
purpose, which has failed.
THE MODES OP DECEPTION ADOPTED.

These concerns continued to accomplish their frauds
by the following modes of deception, from some of which
good concerns are not wholly free, and so far they
sanction the adoption of them by the worst, and ac-
custom the public not to regard them as a type or test of
dishonesty.
By the use of the names of persons having no existence:
By the use of the names of distinguished persons, and
persons of respectability and wealth, without their autho-
rity:
By the use of the names of such persons as patrons
and honorary directors, with their consent, while such
persons have been ignorant of the nature of the concern
and of its transactions, and have exercised no control
over its management:
By the issue of prospectuses and advertisements, con-
taining false statements as to the authority under which
it exists, as to the amount of capital of the company, or
as to the period of its establishment, as well as to the
directors, &c., above-mentioned:
By getting reports of pretended meetings, and puffs
relative thereto, inserted in the newspapers :
By prospectuses fraudulently varied from time to time:
By the employment throughout the country, on very
tempting rates of commission, of respectable agents
whose character has cloaked the want of respectability
of the company. In one or two remarkable cases this
!appears to have been the most efficient means of success;
it has procured business at a distance, where inquiries
could not be readily made as to the character of the
concern:

By open banking accounts with the Bank of England
and other respectable banks:
By the selection of offices in respectable situations, and
fitted up in a respectable manner:
By the concoctors and managers living at great ex-
pense, entertaining their neighbours, and thereby endea-
vouring to fortify themselves against suspicion:
By tthe making up of fraudulent accounts, so as to de-
ceive the directors and the shareholders, which has been
facilitated sometimes by the accounts not being audited,
or by the accountant being a near kinsman of the ma-
taking an active part in
naging director, the only party
the concern:

By declaring dividends out of capital on false repre-
sentations of profits realised:
By concealing the names or proventtinegttohnea-fimdeeetsihnagre..
the shareholders, and falsifying the books containing
of
transfers of shares ; by the creation of fictitious votes so
as to secure the means of outvoting the
holders
By the use of the names of respectable solicitors and
counsel attached to the prospectuses and circulars of the
company, by which mercantile men and others are de-
ceived into a belief of the bona fide character of the
undertaking.
THE DURATION OF COMPANIES.
One insurance company lasted two or three years,
and another loan company three years. Both were
stopped by the remarks of the press ; but one com-

menced actions for libel, and was carrying them forward
with success ; but it became necessary to produce the
deed of settlement, which exposed the character of the
transaction. The parties, too, quarrelled about the spoil.
An annuity society lasted from ten to twenty years,
daring which period the direction, which had com-
menced as a pension society, with the names of persons
of great respectability, dwindled down to the manager
and one or two other persons, bankrupts.
In each of these cases the concern had good agents in
tb• provinces.
Another society for effecting general life insurances
existed for about two years, and then transferred its
business to another company under a new title.
Another existed for four years, the manager having
deluded the directors by flourishing statements of ac-
counts, until some of them became suspicious, and on
examination found that they had no funds. They were
obliged to pay the manager 2,000/. to induce him to re-
move, there being in the deed of settlement a provision
that he was to have 1,000/. a year.
A mining company remained in operation for two or
three years, till the money paid for shares had been all
expended. In the meantime it had declared dividends
out of pretended profits, when none had been realised.
Ono of these dividends was founded ea a fictitious sale to
the auditor, a brother of the manager, to sustain which
a false entry was made in the books.