THE CON: Richard Whitney, the youngest man appointed president of the New York Stock Exchange, was widely credited with calming the panic in 1929. That’s why no one expected him to steal from the funds he oversaw.
THE DAMAGE: $6 million, or about $92 million today.
THE OUTCOME: After spending three years at Sing Sing, Whitney served a brief parole as the manager of a dairy farm. In response to the fraud, the NYSE was re-organized: a full-time Exchange president was appointed and house brokers began to outnumber floor traders.
In 1938, just a few years after he became president of the New York Stock Exchange, Richard Whitney pleaded guilty to grand larceny. Widely credited with helping to calm the panic of 1929, he had stolen more than $200,000 from funds he oversaw. A shock wave rolled down Wall Street – though there were certainly individuals who knew something wasn't right. One man testified in court as to why he didn't step forward when he discovered that a fund in Whitney's custody was short of cash. “It seemed he [Whitney] was above criticism,” he said.
By all appearances, Whitney certainly didn't seem a likely candidate for embezzlement. Born into a prominent New England family, he attended the best schools and, at 23, bought a seat on the New York Stock Exchange. As head of a brokerage firm, he made a deep impression that later secured him a no mination to lead the Stock Exchange. On “Black Thursday” in 1929, investors were panicked. As the legend goes, the tall and well-dressed Whitney crossed the floor of the Exchange and made a generous bid for Steel stock. His move to restore strength to the faltering market was recognized - “Richard Whitney Halts Stock Panic” blared the headlines - and, a year later, he was nominated president of the Exchange.
At 41, Whitney was the youngest person in history to fill that role. To the outside world, he seemed confident and accomplished. He lived in a fine townhouse, had a stable of racehorses and was an active member of several social and sports clubs. But just beneath the surface, Whitney had serious problems. He later admitted to having lost $2 million in the market crash in 1929. In spite of his troubled financial situation, he often spent as much as $5,000 in a single day.
To finance his lifestyle and dig himself out of gambling debt, Whitney borrowed from members of his wealthy family, including his brother and uncle who were senior partners at J.P. Morgan. He also took out bank loans using the securities he oversaw as collateral, dipping into funds set up by both the New York Yacht Club and his late father-in-law.
In 1937, he borrowed more than $1 million from his brother to replenish the Gratuity Fund, which paid death benefits to the families of Exchange members. An official discovered that the fund was short and confronted Whitney – but, as he admitted in his testimony – didn't press the matter because he worried it would be “embarrassing.” Several months later, when a chairman of the Exchange’s Conduct Committee asked the official if he had heard any rumors about Whitney, he said nothing of the episode.
The rumors caught up with Whitney and, in 1938, he was expelled from the Stock Exchange. He declared bankruptcy and was found to be $6 million in debt. He pleaded guilty and was sentenced to five to ten years in prison. He served three years in Sing Sing and, on his release, found work as the manager of a dairy farm outside Boston.
Following his conviction, the Securities and Exchange Commission wrapped up an investigation in which it was concluded that an “unwritten code of silence” allowed Whitney to get away with his crimes. Years earlier, the Securities Exchange Bill of 1934 – which Whitney had vehemently opposed – mandated tighter regulations at the Stock Exchange. That oversight was further strengthened in the wake of the scandal; Whitney continued to influence how the Exchange was run long after his last walk across the floor.