Opinion ID: 1473033
Heading Depth: 1
Heading Rank: 2

Heading: Prior History of the Southern Minnesota Joint Stock Land Bank.

Text: The scheme is alleged to have been formed on June 15, 1925, and prior. The first letter relied upon as having been mailed in execution of the scheme is dated June 23, 1924. The details of the alleged scheme centered around the Southern Minnesota Joint Stock Land Bank, hereafter sometimes called the Southern Minnesota Bank. It will therefore be helpful in examining the evidence as to the alleged scheme to know the prior history of this bank. The Federal Farm Loan Act was passed July 17, 1916 (12 USCA § 641 et seq.). It provided for Federal Land Banks and Joint Stock Land Banks. Both were placed under the supervision of the Farm Loan Board. The Southern Minnesota Joint Stock Land Bank of Redwood Falls, Minnesota, obtained its charter from the Federal Farm Loan Board pursuant to the above act on June 25, 1919. The organizers of the bank were defendant William H. Gold, his brother J. A. Gold of Big Stone City, South Dakota, and J. P. Cooper of Redwood Falls. The stock of the bank was originally $250,000 (2,500 shares, par value $100 each), of which J. A. Gold, his two sons, and two others of Big Stone took $125,000; defendants William H. Gold and Glenn W. Gold, his son, and J. P. Cooper took $125,000. All of the stock was paid for in cash. The bank was authorized to do business in Minnesota and South Dakota. Prior to the formation of the bank the defendant William H. Gold and J. P. Cooper had been in the business of making farm loans at Redwood Falls. The practical working of a joint stock land bank, as described by one of the government witnesses, is, we think, substantially correct. He testified as follows: Neither Federal nor Joint Stock Banks are banks of deposit. They are not commercial banks; they are simply a means for making loans for agriculture along the lines provided by Congress. Before any loan is made, there must be an application for a loan from the borrower. The law requires such application and does not require it to be sworn to, but this bank did so require. That application states the amount of land, kind of land, how farmed, number of acres in crops, number of acres rough land, and the applicant's estimate of value, and a very great mass of information. The Southern Minnesota Joint Stock Land Bank required this application to be signed and sworn to by the applicant himself before the bank would do anything about the loan at all. The application comes into the bank and is usually checked over roughly by someone in charge of loans in the bank. If he finds it isn't in territory where they want to operate, or can see it is a loan he doesn't want, or it is not in proper form, then it goes back, refused, or to be put in form. Then it is given to a Federal Appraiser who goes out and personally inspects the land. This appraiser, under the law, is appointed by the Federal Farm Loan Board, itself  works under regulations and rules given him by the Farm Loan Board, is responsible to the Farm Loan Board, but is carried on the payroll of the bank. The Board directs him how to do his work, and if he does not comply with the rules and regulations of the Farm Loan Board, or proves himself incompetent, then the power to remove him is in the Board, which has the right to hire and fire him. That appraiser is responsible to nobody, but the Farm Loan Board. The Federal Appraiser personally inspects the farm and character of the applicant, and reports back, covering in detail a large number of questions with reference to the land, and the loan, and the man asking for it, and in that report the appraiser is required to make a statement, or recommendation, as to how much he considers should be loaned on that application, if any. After the appraiser's report is made, the application goes to the Loan Committee or directors of the bank, who have to pass on these loans, who can cut down or reject as to the amount recommended by the appraiser, but cannot allow a higher amount. The law requires satisfactory title [or] which may be by abstract, insurance certificate or Torrens certificate; the title must be certified to be good by an attorney. After the application has passed through the foregoing procedure, the loan papers are made out, note and mortgage, mortgage recorded, recording shown on the abstract. The abstract then goes back to the attorney for his certificate, and having gotten all that done, the bank can give the money to the borrower. In regard to bonds issued against these mortgages, the witness said: In depositing mortgages with the Registrar as security for bonds, the mortgages must be assigned to the Registrar, and bonds can be issued against them after securing approval of the security by the Federal Farm Loan Board. If they are approved mortgages, you may borrow up to their face. The bonds may be sold at par, or at premium, or at a loss, if the Farm Loan Board approves. The law allows the bank a difference of one per cent. between the amount of interest the bank pays on its bonds and what it gets on the mortgages, provided the mortgage rate must not exceed 6 per cent. By the machinery that Congress has provided, by the Farm Loan Act, a bank with a capital of a quarter of a million dollars to start with, by loaning and putting up mortgages, borrowing on bonds, and loaning again, and repeating this process, can loan not only the original capital, but the original capital, and fifteen times more. As to the profits of the bank, assuming that there would be no expense of operation and no loss, if the bank loaned out all its capital at 6 per cent., it would produce an income of 6 per cent. on the capital, and on each of the 15 times that mortgages were put on farms the bank would get a spread of 1 per cent., which would make 21 per cent. on the capital, if there were no expenses or loss and everything is loaned out at the maximum rate. After a surplus has been provided in addition to the capital, bonds can be issued against the surplus, as well as the capital, in that case, the bank could have the advantage of issuing bonds to the extent of 15 times their surplus, as well as their capital, and if the bank got its surplus up to where it was 20 per cent. of the total capital, that would increase the return on the par value of the stock 20 per cent., so that, if the bank had a surplus of $20 a share, the bank would get a return of not only the original 21 per cent., but 20 per cent. of that, which would be, roughly, $5 more, making about 26 per cent., if there was no expense and no loss. That was the plan devised by Congress and put into operation in this law. Against the 21 per cent. must be figured expenses, losses, and the reserve required. The law requires the bank to carry to reserve 25 per cent. of its net earnings each six months until the reserve amounts to 20 per cent. of the capital of the bank, and thereafter 5 per cent. of the net earnings must go to reserve once a year. The money put into reserve is available to loan to borrowers. As to expansion of capital stock, after the bank has loaned its capital and has issued bonds up to 15 times that amount, the bank can only make additional loans as fast as borrowers pay; it cannot issue any more bonds against the mortgages until more stock is sold. If the bank wants to go on serving the community, if there are people that want to borrow money on these favorable terms, the bank must issue more stock and the law provides for that. Such stock is sold to any one who wants to buy it, and the proceeds of the stock loaned out and the bonds issued against mortgages the same as before. In Joint Stock Land Banks, borrowers are not compelled to take stock, but may, if they wish. As to the powers of the Farm Loan Board, no loan can be put up with the Registrar unless it has been passed by a Federal Appraiser and approved by the Farm Loan Board; a bank cannot issue any stock unless and until that Board approves the issue. The bank cannot issue bonds except with the approval of that Board. The Southern Minnesota Joint Stock Land Bank started in business. Appraisers were appointed by the Farm Loan Board to make appraisals for the bank. By November, 1919, it had nearly $2,000,000 loans on its books. By January 1, 1920, it had about $2,820,000. In the fall of 1919 an attack was made in the courts on the constitutionality of the Farm Loan Act. This made it difficult for the bank to sell its bonds, but it used them as collateral for money borrowed from banks in order to complete mortgage loans already begun. In December, 1919, it stopped making loans and canceled about $4,000,000 of applications. The expenses of the bank were reduced, but it ran at a loss down to the fall of 1921. Assessments were made upon the stockholders to meet the deficit. After the Farm Loan Act was held constitutional by the Supreme Court in 1921, the bank again began the sale of its bonds. Upwards of $2,000,000 were sold by February, 1922. About $700,000 loans were made between January 1 and May 1, 1922, when the capital stock limitations were reached. Loans then outstanding were approximately $3,750,000. The Southern Minnesota Joint Stock Land Bank was a member of the American Association of Joint Stock Land Banks. In attending the meetings of that association William H. Gold had become acquainted with defendant Guy Huston, who was president of the association, and who had been instrumental in building up the Chicago Joint Stock Land Bank. The Southern Minnesota Bank had not been able to sell its bonds at as favorable a figure as the Chicago Bank had sold its own bonds. Mr. Gold and his associates in the Southern Minnesota Bank in the spring of 1922 thought some of liquidating the bank. Mr. Huston had in mind the organization of another Joint Stock Land Bank in Minnesota. The outcome of the situation was that a contract was made between the Southern Minnesota Bank and Mr. Huston June 19, 1922. It was afterward assigned to the Guy Huston Company. The contract recited, Whereas said Bank is desirous of making arrangements for the sale as hereinafter provided of Ten Thousand (10,000) shares of its capital stock of the par value of One Hundred Dollars ($100) per share, to be hereafter issued, and for the sale of its issues of bonds to the aggregate principal amount of Fifteen Million Dollars ($15,000,000) to be hereafter issued. The contract appointed Huston sole representative of the bank to sell the stock and bonds mentioned; it provided that Huston should buy 1,000 shares of the stock at 115 per share and should use his best efforts to sell the remaining 9,000 shares at 115, and to retain as his compensation any excess of price over 115, except that as to the second half of the 10,000 shares his profit, if any, should be divided equally with the bank. The bonds were to be sold at the best price obtainable, but at a price to net the bank at least 101, unless the bank and Huston should agree on a lesser price. Huston was to get $10 for each $1,000 bond sold, payable one-tenth each year for 10 years. In addition, Huston was to have $20 for each bond as sale costs. On the second one-half of the $15,000,000 bonds he was to receive not more than one-fourth of 1 per cent. profit in any case. The contract further provided that Huston might buy all of the stock and bonds at a price equal to the best obtainable elsewhere. The contract was to remain in force until all of the stock and bonds were sold, but the stock was to be sold by January 1, 1924. If the stock was not taken up as the needs of the bank expanded, demand might be made on Huston on September 1, 1922, or any time thereafter to take up 500 shares per month. The bank agreed not to make any contract for the sale of stock or bonds until the 10,000 shares of stock and the $15,000,000 bonds were sold, unless by written consent of Huston. Huston sold all but $1,500,000 of the bonds and all but 1500 shares of the stock before the contract of 1922 was canceled by agreement in December, 1923. This cancellation contract was made to enable the bank to carry out an arrangement with J. S. Bache & Co. to handle the sale of its stock in connection with the merger of the Southern Minnesota Bank and the First Joint Stock Land Bank of Minneapolis, hereinafter mentioned. The cancellation contract with Huston was made effective in April or May, 1923, although not signed until December, 1923. This cancellation contract recited that there would become due to Guy Huston Company the sum of $150,000 upon completion of the contract of June, 1922, and the Southern Minnesota Bank in consideration of the cancellation of the contract promised to pay said sum in twenty semiannual installments of $7,500 each, commencing July, 1924. The Minneapolis Joint Stock Land Bank, above mentioned, was organized under the same act as the Southern Minnesota Bank, and had 100,000 shares of $5 each. Two or more men, referred to as the Strausses, owned 53,000 shares. Owing to the death of one of these men, this block of stock was for sale. William H. Gold made an examination of the assets of the Minneapolis Bank and found its loans of good quality. The bank had $6,500,000 of first mortgage loans. It operated in the same territory as the Southern Minnesota Bank. Negotiations for the sale of the Minneapolis Bank were carried on, not only with Mr. Gold, but also with certain interests which controlled the Des Moines Joint Stock Land Bank. Mr. Huston was identified with those interests. Finally, on May 22, 1923, the purchase of the Minneapolis Bank was made by the Southern Minnesota Bank. The merger was approved by the Farm Loan Board. Part of the stock of the Minneapolis Bank was obtained by exchange for the stock of the Southern Minnesota Bank. Part of the stockholders of the Minneapolis Bank wished cash. Five thousand shares of the stock of the Southern Minnesota Bank were issued, known as merger stock. Money to pay for the Minneapolis Bank stock, which was to be paid for in cash, was raised by William H. Gold and other officers of the Southern Minnesota Bank by negotiating their personal notes, secured by the Minneapolis Bank stock, with banks in New York and Chicago. Later this Minneapolis Bank stock collateral was replaced by merger stock of the Southern Minnesota Bank. This stock of the Southern Minnesota Bank used as collateral, known as merger stock, was carried in the names of William H. Gold and other officers of the bank, instead of by the bank itself, on the advice of the Farm Loan Commissioner. Guy Huston had nothing to do with bringing about the merger of the Minneapolis Bank and the Southern Minnesota Bank. This merger stock, so carried by some of the officers of the Southern Minnesota Bank, was sold later, partly through J. S. Bache & Co. and partly through Guy Huston Company. The expense of selling this merger stock and of clearing the secondary market was reimbursed by the Southern Minnesota Bank to the officers and persons who had carried the stock for the bank, by the payment of dividends on the stock while it was so carried. The situation of the Southern Minnesota Bank in the Spring of 1924 was about as follows: It had paid dividends of 8 per cent. per annum from July 1, 1922, to January, 1923; 9 per cent. from January 1, 1923. It had made loans as follows: 1919 ........................... $2,839,850 1920 ........................... 6,000 1921 ........................... 154,500 1922 ........................... 8,214,600 1923 ........................... 8,779,600 These figures do not include the loans taken over from the Minneapolis Bank of upwards of $6,000,000. These loans had been taken in accordance with the Farm Loan Act and under the safeguards therein provided. It had carried through a successful merger with the Minneapolis Bank. Its capital stock was $1,800,000. The sale of its stock and bonds after the termination of the 1922 contract with Mr. Huston was much less successful than it had been under that contract. There existed some delinquencies. Delinquent interest on farm loans .. $261,830.00 Lands acquired ..................... 212,145.69 Tax certificates ................... 122,099.96 But they were not unusually large in comparison with the volume of business done. Such was the condition of the bank at the time of the alleged making of the scheme to defraud.