Chapters on the History of the Southern Pacific

CHAPTER IX

THE CASE OF DAVID D. COLTON

Meeting the Associates

During the seventies the associates took a new partner. This was David D. Colton, one-time sheriff of Siskiyou County, brigadier-general of militia, second to Broderick in the famous Terry-Broderick duel, and still later colonel of United States Volunteers. In spite of these various military titles, Colton seems never to have seen service. But he had been active in California politics as a delegate of the Union Democratic party in 1861, and as chairman of the state central committee of that organization, and was widely known throughout the state. He was a man of fine physique, and endowed with a quick if not a profound intelligence.

Colton first made the acquaintance of Charles Crocker in 1867, when the latter was on his way to inspect the work of construction of the Central Pacific beyond Elko. Three years later Crocker invited Colton to accompany him to Evanston, California, where he intended to look over, and perhaps to purchase, certain coal mining properties. According to Crocker, Colton said that he also would like to have an interest in the mines in question. Crocker, who had in the meantime completed negotiations for the purchase, replied with an offer to make Colton president and manager of the coal company if he would buy a thousand shares of its stock, which Colton immediately did.[217]

The relations thus begun rapidly became more intimate. As early as 1868, Mr. and Mrs. Colton had invitations from Mr. Crocker and passes to travel on the Central Pacific. In 1869 or 1870 the two families visited the Yosemite together, and in 1871-72, when the Crockers went to Europe and the two Crocker boys were left behind at a military academy in Oakland, the Coltons looked after the children generally, and had them at the Colton house for week-ends.[218]

It was through his acquaintance with the Crockers that Mr. Colton met the other members of the Stanford group. Mr. Huntington was favorably impressed with him; Stanford and Hopkins less so. Huntington was becoming dissatisfied about this time with the amount of work done by his associates, and the suggestion soon made that Colton join the other members of the group and share the burden of managing the Central Pacific enterprise with them, met his approval. “I was worked,” he said later, “up to my full capacity, whatever that might be. Mr. Crocker was in the habit of going to Europe and having a good time and the Governor owned ranches, and his horses took a great deal of his time; in fact, the Governor never could confine himself right to the office; that is, I don’t consider that he could, to close, hard work, and we wanted somebody there to do that work; and Mr. Colton convinced me that he, of all men, was just the man that we wanted.” And again, speaking of his partners and of Colton, Huntington said: “He knew I was not satisfied with some things that my associate co-directors were doing there. The way they used to go to Europe and go away from business, while I was working every day in the year almost, and about fourteen hours a day; he knew I was not quite satisfied with the hours they put in.”[219] The fact that Mr. Hopkins’ health was not strong was an additional reason for taking in a new partner.

Agreement Signed

The result of these preliminary discussions was the conclusion of an agreement, dated October 5, 1874, whereby Colton received 20,000 shares of Central Pacific Railroad stock and 20,000 shares of Southern Pacific stock in return for his promissory note for $1,000,000, maturing in five years.[220] At the same time it was mutually understood that Colton should share in all the responsibilities and liabilities of the associates for five years in proportion to his stockholdings, and should stand in their shoes, as it were, holding the same positions and relations which they had to the Central Pacific Railroad, and to the Contract and Finance Company. The contract called for no cash payment, for obvious reasons.

Mr. Huntington says he felt in 1874 that Colton was receiving something very handsome, and the opinion was not without some justification. Certainly, in the long run the opportunity to share in the profits of the associates was valuable. Colton was not a man of large means to begin with, yet after two years and three months with the Central Pacific, he inventoried his assets at $961,506.18,[221] and at the time of his death his rent roll alone amounted to $2,500 to $3,000 a month.[222]

This was a very substantial compensation, even for very valuable service. But on the other hand, it is evident that Mr. Colton put himself entirely in the hands of the associates when he signed the agreement and the promissory note which have been described. He not only pledged his services for five years, but he assumed an unconditional liability to pay $1,000,000 at the end of this period, in return for which he obtained only 40,000 shares of unsalable securities and a right to participate in the management of the associates’ property which was revocable at the pleasure of Huntington and his friends at any time within two years. This was a dangerously exposed position. It was not a wise thing even for the Huntington-Stanford group to put Colton in such a predicament, and much subsequent difficulty resulted therefrom.

In 1876 the associates served notice on Mr. Colton, dissevering his connection with them. Mr. Crocker relates that Colton was very much affected. He said, according to Crocker, “It is generally known that I am here with you, and there is no one knows these relations are only temporary, and it will be next to ruin to me to have them dissevered now.” In fact, he wept. Crocker later testified that he liked the general very much, and was touched by his distress. Colton wished him to go and see the others, and Crocker did so. The result was that the notice was reconsidered and a second contract made.[223] After this, Colton bought one-ninth of the capital stock of the Western Development Company, and commenced to deposit money with that organization in the same manner as did the other members of the group.

“Financial Director”

During substantially the whole period from 1874 to 1878, Colton took active charge of the financial affairs of the Huntington group at the San Francisco end. His office and title beginning August 31, 1875, was that of “financial director.” Formally he acted under the direction of the treasurer of the company, Mr. Hopkins. Practically he reported to Mr. Huntington and perhaps to Mr. Crocker, more than to Mr. Hopkins, but exercised a good deal of independent initiative.[224] With the operation of neither the Central Pacific nor the Southern Pacific had he anything to do. On the other hand, it was either Colton in San Francisco, or Huntington in New York, as we shall presently see, who attended to the negotiation of short-time loans, often necessary to take care of interest on the railroad properties. It was also Colton who had particular charge of the many affairs of the Western Development Company;[225] it was Colton who was responsible head of the Rocky Mountain Coal and Iron Company’s mine at Ione; and it was Colton who took particular interest in finding a market for the output of this corporation.[226]

From the tone of Mr. Huntington’s letters to Colton, it seems as though the former was reasonably well satisfied with the way the business in the West was conducted after 1874. On his part, Colton cultivated the idea that the interests of the five associates, himself included, were inextricably bound together. “I have learned one thing,” he wrote in 1878, “we have got no true friends outside of us five.... People will profess friendship to one of us, just to either try to find out something, or when the time comes, lie about the rest of us. We cannot depend on a human soul outside of ourselves, and hence we must all be good-natured, stick together, and keep our own counsels.”[227]

Yet, in spite of his assumption of the permanency of his relations with the Huntington group, Mr. Colton certainly understood that his position had no legal security whatever. Of this the episode of 1876 must have been a disagreeable reminder. In particular, as has been observed, there was a reasonable likelihood that he would be called upon to pay his note for $1,000,000 in 1879, before the Central Pacific and Southern Pacific shares, which secured it, had become salable. It is evident that these matters were in Mr. Colton’s mind constantly, and gave him great concern. No other reason can be offered for his efforts to secure title to property with such feverish rapidity. How should he protect himself against the automatic presentation of a note which might require the sacrifice of all his accumulations to pay? How should he put himself in a position where his income was not wholly dependent on the forbearance of four men, with only one of whom he had ties of personal friendship? If Mr. Colton’s moral fiber weakened somewhat under the strain of the situation, the fact need occasion no great surprise.

Western Development Dividend

Some time after 1874 Colton suggested to Crocker that the salaries of the associates be raised. They were all drawing $10,000 a year, and were giving all their time for that salary. Colton said it was an insignificant sum. Men such as the associates ought to have $25,000 a year, at least. But Crocker replied prudently that a salary of $10,000 could always be justified, while one of $25,000 might not be. He preferred to let the matter stay as it was.[228]

Three years later, when the period of his contract was drawing to a close, Colton took more drastic action by causing the Western Development Company to distribute a substantial part of its assets in the form of a dividend. This provided him with property, upon which as security he might have borrowed considerable sums of money. A dividend was declared on September 4, 1877, which consisted of $13,500,000 in Central Pacific stock, $6,300,000 in Southern Pacific Railroad bonds, and $1,562,500 in other securities, amounting to between one-half and one-third of the holdings of the Western Development Company. Colton’s personal share was one-ninth.[229]

Ostensibly the Western Development Company’s dividend was a distribution of surplus profits. In reality it was a division of capital. Nobody knew, in 1877, how great the profits of the Western Development Company had been, nor even whether the assets of the company equaled its liabilities, for the reason that the value of these assets was speculative and uncertain, and if realized on all at once, would have amounted to scarcely anything at all. It was known, of course, that the creditors of the company were also its stockholders, so that the distribution was not quite so reckless as it otherwise might have appeared; but yet the various stockholders were not holders of stock in the same proportions as they were creditors, and the heavier creditors, such as Huntington, might well have felt that their interests were not being sufficiently protected.

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Nothing was said about the Western Development dividend to any of the associates at the time it was declared. Charles Crocker was in San Francisco, but knew nothing of it.[230] The fact came out, however, in August of the following year, when Huntington was in the West. Stanford, Huntington, and Crocker were all together in one of the Southern Pacific offices when Colton came in, accompanied by a couple of subordinates with their hands full of bonds, and said, “Gentlemen, here are your dividends.” Both Huntington and Crocker became at once very angry, and hot words seem to have passed. Huntington said that there was no sense in the dividend—it was wrong, the company ought to pay its debts before it paid a dividend—the stocks and bonds were of no particular value, but their distribution would leave the Western Development Company shorn of its resources, and they must be returned. Crocker agreed with Huntington. Colton begged the others not to injure him in the eyes of the employees of the company by compelling a return of the securities, and pledged his honor that he would not part with his shares, and would return them if needed. Stanford thought the matter might be passed with this understanding, and it was so agreed, not, however, without a good deal of resentment on the part of Huntington and Crocker.[231]

Misappropriation of Funds

The Western Development dividend and Colton’s request for a higher salary were, in a measure at least, open and above board. The same cannot be said of a number of other operations—in general, it is true, of minor importance—which took place between 1874 and 1878, and which became known only after Colton’s death. How far Colton was guilty of positive dishonesty during these years has been a matter of bitter dispute. There is no question, however, that he drew or credited himself with considerable amounts of money without the knowledge of the other partners, and that no vouchers were ever made out which sufficiently explained these transactions. Charges of embezzlement were even later made and not disproved. Three of four illustrations of such incidents may be given.

1. Salary drawn from the Rocky Mountain Coal and Iron Company. Mr. Colton was made president of this company in 1871 at a salary of $100 a month. In 1874 the associates agreed that Colton should receive a salary of $10,000 a year, as partner. No separate mention was made of the Rocky Mountain Coal and Iron Company in 1874, but it is reasonable to suppose that the new salary of $10,000 covered Colton’s work in supervising the coal property, as well as his share in the general administration of the railroad, especially as the coal business took comparatively little of his time. As a matter of fact, however, Colton restricted himself to $100 a month only during 1871. In 1872 he drew $400 a month, except during the month of March, when he took $366.50. In 1873 he took $23,500, of which a considerable amount was for back salary. In 1874 Colton drew $12,000, and in 1875, 1876, and 1877, $6,000 annually. According to the testimony of expert accountants who later went over the company’s books, Colton took $54,966.50 in salary during the years 1871-77 in excess of what he should have taken according to his agreement with Mr. Crocker, and beyond the amounts which the other associates intended he should have.[232]

2. Interest on Rocky Mountain Company balances. It is admitted that Mr. Colton deposited the balances of the Rocky Mountain Coal and Iron Company, running all the way from $30,000 to $90,000, in his own private bank account, and used them in his own private transactions.

3. Receipts from sale of coal. It appears that the Rocky Mountain Coal and Iron Company sold coal to the Central Pacific. For some time this coal was paid for at the rate of $2 and $2.65 per ton. In July, 1874, the Central Pacific made an extra payment of $11,622 to Mr. Colton for the purpose of increasing the price paid during the months from January to May, 1874, to $2.85 per ton, and arranged to pay this increased amount thereafter. In his instructions to the superintendent of the mine, Mr. Colton made no mention of the retroactive payment, and apparently pocketed the $11,622.

4. Appropriation of interest coupons. In 1876 Mr. Tevis wished to exchange some Southern Pacific bonds which he held, for certain lands owned by the Railroad Company. Colton agreed to facilitate the transaction by taking the bonds and giving his individual check for $140,700. Tevis delivered the check and $10.13 in cash to the Southern Pacific land agent, and got his deed. Colton eventually redeemed his check by delivery of the bonds to the treasurer of the Southern Pacific, but when the bonds came in, two interest coupons were missing. A similar transaction between the same parties, but for a lesser amount, took place later the same year, and again interest coupons were clipped from the bonds before Colton turned them in.[233] In each case Mr. Smith, the treasurer of the Southern Pacific, was compelled to hold Colton’s check for a considerable period before it was redeemed, and during this time Colton had, of course, the use of the money.

In addition to matters such as those here partially enumerated, there were a multitude of instances in which Colton charged relatively small sums to various accounts without supplying any evidence that the charges were legitimate. Doubtless the other associates did the same, but Colton’s position in the group was peculiar, and he could not afford to allow himself equal freedom with Huntington and Stanford. It would serve no useful purpose to discuss these instances in detail.

The aggregate of all the sums which Colton thus gathered into his control was considerable. The Western Development dividend alone supplied him with 700 Southern Pacific bonds that might have been used as collateral security for a loan, as well as with other securities, mostly of still uncertain value. Items of excess salary, interest on balances, and miscellaneous unaccounted-for expenses totaled $130,831.13. Had Colton succeeded in increasing his salary as financial director to $25,000, he would have added from $75,000 to $100,000 to his resources. Substantial progress was evidently being made toward meeting the million dollar note.

Colton’s Death and Mrs. Colton

Upon all the activities which have been described, Colton’s death in October, 1878, in the prime of life, fell with crushing force. In the first place, Colton’s manipulations were such as to be unforgivable by his business friends. Devious as Huntington’s ethical code was at times, he had no hesitation in pronouncing Mr. Colton guilty of robbery; that he himself was partly responsible was not likely to occur to him. In the second place, Colton’s assets at the time of his death were such as to render immediate liquidation impossible, and yet this was precisely the thing most likely to be demanded. Mrs. Colton, the sole heir, was a woman of unusual ability, clear-headed, definite in speech, and, although inexperienced in business, apparently quickly able to understand business problems. She had, moreover, a good adviser in the person of a San Francisco lawyer named S. M. Wilson. Her position was, nevertheless, one of disadvantage, which was intensified by her wish to shield her husband’s reputation.

It does not appear that the associates were aware of the true state of affairs during the weeks immediately following Mr. Colton’s death. Mr. Huntington wrote cordial though not altogether sincere letters to Mrs. Colton, expressing willingness to serve her in those matters in which General Colton was interested with the associates,[234] and Crocker called at Mrs. Colton’s house and wept there while speaking of the death of Mr. Colton. This attitude soon changed, however, and Mr. Crocker became less friendly in his intercourse with Mrs. Colton, and at last ceased to visit her altogether.[235] In fact, all pretense of sympathy with Mrs. Colton was presently abandoned, and negotiations between her and the associates were continued upon a cold business basis.

The attitude of the Stanford-Huntington crowd was officially that they were willing to have Mrs. Colton pay her obligations and continue with them. This meant a settlement of claims arising out of the improper withdrawal of moneys by Mr. Colton, but also more particularly the payment of the $1,000,000 note. It involved, also, for the future continued investment of funds in the Western Development Company, and the payment of assessments which might be levied upon Southern Pacific stock. It was insisted, however, that the matter be settled quickly, partly because Mr. Huntington was about to leave the city, and partly because the period for filing claims against the Colton estate would soon expire.[236]

In the event that Mrs. Colton should not desire to continue with them, the associates demanded an accounting in which the liabilities of Mr. Colton on account of the $1,000,000 note, his share of the net indebtedness of the Western Development Company, and the sum of the alleged embezzlements, should be set against the estimated value of the stock and bonds of which Colton died possessed. In estimating the value of Mr. Colton’s securities, moreover, the associates declared that the question was not as to the amount which could be realized eventually and after the underlying property had had a chance to prove itself, but the market value at the time of negotiations.

Mr. Crocker’s testimony on this point expresses very fully the attitude of the associates. He said:

Mr. Wilson and I had frequent conversations, and he sometimes asserted we could do so and so with these bonds, that we could realize 80 or 90 cents on them. I said in reply, “Possibly we can; I don’t know; it is a matter of speculation; it depends on the future of the roads.” Sometimes he would claim they would bring 80 or 85 cents; and then I would say, “Very likely they may,” but it would require time to do it, and a great deal of management necessarily to bring that out, and if Mrs. Colton desired to realize the full value of these securities after this lengthy handling of them, all she had to do was to pay the amount of the note and continue in the company and we would manage them for her, as well as we would for ourselves, of course, and she should receive the full benefit of our knowledge and experience in handling these securities, and we would get every dollar out of them we could, and she should have her share to the last cent. Then he would reply: “Well, that can’t be. We are determined to go out of this.” “Well,” I says, “then it is a matter of speculation.”[237]

Unquestionably these were hard terms, for it was out of the question for Mrs. Colton to continue with the associates in 1879, a fact of which these gentlemen must have been well aware. She did not have the necessary money, she could not afford in any case to risk her livelihood in so speculative an undertaking as building railroads in southern California, and the relations between her and the Huntington group did not savor of trust and confidence. The expressions of willingness to continue to treat Mrs. Colton as one of themselves cost the associates nothing, and were worth as much. Nor was the standard of valuation of the Colton assets offered by the associates, easily to be defended on ethical grounds. Mr. Colton had not played fair, it is true, but on his part he had been led into an improvement agreement and caused to sign a $1,000,000 note, in at least partial reliance upon the value of the stock of railroads under the associates’ control, which was given him in exchange. It was hardly appropriate for the Huntington group now to insist that the collateral security had no value.

Settlement with Mrs. Colton

Hard as the terms were, Mrs. Colton finally acceded to them. By agreement dated August 27, 1879, she turned over 408 shares of the capital stock of the Rocky Mountain Coal and Iron Company, all of the shares which she held of the Occidental and Oriental Steamship Company, all claims to the 40,000 shares of Central Pacific Railroad and Southern Pacific Railroad stock, pledged as collateral for the $1,000,000 note, all of the capital stock of the Western Development Company standing to Colton’s credit, and some $587,500 in par value of bonds of the Central Pacific-Southern Pacific system, of which $500,000 was in first mortgage bonds of the Southern Pacific Railroad itself. In return for all this, the associates agreed to cancel Colton’s note for $1,000,000, and to release Mrs. Colton from any claims on the part of themselves, the Western Development Company, the Central Pacific, and its allied companies.[238]

This settlement left Mrs. Colton with property reasonably valued at half a million dollars, and with an income of perhaps $28,000 a year. That she withdrew with so much to her credit was due to the interposition of Mr. Tevis on her behalf at the last moment, in consideration of a contingent fee,[239] and to the fact that the associates were on the point of floating large amounts of Central and Southern Pacific securities in New York. Mrs. Colton felt, however, that she had been robbed, and in May, 1882, commenced suit to reopen the whole transaction, and to annul the compromise agreement. It has been estimated that this famous suit cost the parties $100,000 apiece. Mrs. Colton alleged fraud and the withholding of essential facts which the associates should have disclosed by reason of the trust relations which had existed between Colton and his partners. In particular she insisted that the statements given her in 1879 with reference to the affairs of the Western Development Company had been misleading and untrue. She now offered to pay Colton’s $1,000,000 note, and other liabilities, and asked for the return of the securities which she had previously surrendered.

The more important facts developed in this litigation have been dwelt upon in the preceding discussion, and need not be repeated here. The case went to the Supreme Court of the state, where Mrs. Colton was finally defeated. A careful reading of the evidence leads to the conviction that the court was right. Mrs. Colton had done the best she could under the circumstances and was properly held to an agreement she had made with her eyes open, some three years before. Yet the fault of the whole unsavory affair was not hers, nor altogether Mr. Colton’s, and the reputation of the associates thereby properly suffered in the public mind.

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