Wall Street Crime And Punishment: Richard Whitney, From Blue Chip To Behind Bars

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall that chronicles the bankers, brokers and financial ne’er-do-wells whose ambition and greed takes them in the wrong direction.

In the annals of Wall Street miscreancy, few titans of business have experienced a more celebrated rise and ignominious crash than Richard Whitney. In October 1929, he was praised for an act of unprecedented bravery that singlehandedly halted an epic panic — but nine years later, he was sitting in a cell in Sing Sing after being convicted of embezzlement.

How did Whitney go from such a glorious point A to a tragic point B? Well, it’s a bit complicated.

A Privileged Life: Whitney was born in Boston on Aug. 1, 1888. Whitney’s lineage could be traced to the Puritans who arrived in New England on the ship Arabella in 1630. His family tree included some of the most financially and politically prominent individuals in U.S. history, most notably cotton gin inventor Eli Whitney, the astronomer Mary Watson Whitney, and the investor John Hay Whitney who provided David O. Selznick with half of the money used to buy the screen rights for Margaret Mitchell’s “Gone with the Wind.”

As the son of a wealthy bank president, Whitney’s education represented the finest that late 19th-century money could buy: The Groton School, where he was captain of the baseball team and school prefect, and Harvard University, where he was tapped for membership in the elite Porcellian Club. After receiving his degree, he relocated to New York City and opened his bond brokerage firm, Richard Whitney & Co., in 1910.

After two years in business, the 23-year-old Whitney borrowed money from his deep-pocketed family to purchase a seat on the New York Stock Exchange. Whitney’s uncle Leo Whitney and his older brother George K. Whitney Jr. worked at J.P. Morgan & Co. and provided him with a lucrative stream of business clients who quickly enriched his fortune.

In 1916, Whitney married Gertrude Sands, the widow of banker Samuel Steven Sands III. Whitney’s father-in-law was a former president of the Union League Club and arranged for Whitney to become part of New York’s most exclusive clubs, including the New York Yacht Club, where he was named treasurer — a circumstance that would later play a significant role in his downfall.

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A Man of Great Character: When the U.S. entered World War I, Whitney put his Wall Street career on hold and became an officer within the U.S. Food Administration, a federal agency headed by Herbert Hoover that coordinated the production and distribution of food during wartime. Whitney waived a full salary and took a symbolic one-dollar annual salary during this time.

After the war was over, Whitney resumed his work and was elected to NYSE board of governors, later becoming its’ vice president.

On Oct. 24, 1929, Whitney unexpectedly found himself in the national spotlight. The Dow Jones Industrial Average opened the trading day at 305.85 and suddenly plummeted by 11% amid intra-day trading levels that were three times the average amount of activity. Fearing a panic that could derail both the financial markets and the wider economy, a trio of Wall Street executives — Thomas W. Lamont of Morgan Bank, Charles E. Mitchell of the National City Bank of New York and Albert H. Wiggin of Chase National Bank — called Whitney with a plan halt the panic from spreading.

Whitney went to the Exchange floor and enacted a highly dramatic bid to buy 25,000 shares of U.S. Steel at $205 per share. The traders on the Exchange floor were unaware that Whitney was using funds from the three bankers to finance the transaction, and they were equally astonished when Whitney made additional bids on other blue-chip stocks. By day’s end, the Dow was only down by 6.38 points and Whitney was hailed as a hero for his dramatic actions.

Whitney would serve five terms as NYSE president, stepping down in 1935 while remaining on its board of governors. And while he could not singlehandedly prevent the Great Depression from taking root, he nonetheless became one of the most respected figures in the financial services industry. Alas, if only his story wrapped up at this point.

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The Road to Ruin: Despite having a sterling education and being part of a savvy banking family, Whitney wasn’t actually very good at managing money.

Complicating matters was the lifestyle he grew accustomed to enjoying. By the early 1930s, Whitney owned a $100,000 townhouse in Manhattan, a 231‐acre estate in New Jersey and a stable of thoroughbred racehorses. With expenses averaging $5,000 a month, it was a great life, to be certain, except that he was increasingly unable to cover his bills.

Generous loans from his brother George and from wealthy friends were only able to solve some of Whitney’s problems, and in desperation, he turned to embezzlement. Whitney pilfered funds from the NYSE Gratuity Fund and the New York Yacht Club, and also helped himself to $800,000 worth of bonds from his father-in-law's estate.

Whitney had been a vocal opponent of the creation of the Securities and Exchange Commission and its regulatory regimen, arguing its policies hampered the free flow of capital and stifled economic growth. In 1937, many people believed Whitney was correct when the stock market nosedived and the nation that barely recovered from the Great Depression veered into a recession.

But Whitney had another reason to fear the SEC: the old-school casual corruption of Wall Street's halcyon days were erased in favor of strict regulatory compliance. His worst fears about the agency’s authority were realized when word spread across Wall Street in early 1938 that Whitney’s firm was insolvent. As they used to say back in the day, the gig was up: SEC investigators discovered Whitney had borrowed more than $30 million from his friends, his family and the accounts in his trust. He declared bankruptcy, leaving a debt trail of approximately $6.5 million.

Whitney ruefully cooperated with authorities investigating his chicanery, and on March 10, 1938, Whitney was indicted on embezzlement charges by New York County District Attorney Thomas E. Dewey, who would later ride the notoriety of the Whitney case to election as New York governor and two-time Republican presidential candidate.

Whitney pleaded guilty and received a prison term of five to 10 years at Sing Sing. Reportedly, 5,000 people turned out at Grand Central Station to see him escorted in handcuffs to the train that would carry him to incarceration.

A Quite Fadeout: Whitney was treated with respect in Sing Sing — the guards and his fellow inmates referred to him as “Mr. Whitney” and he conducted himself as a model prisoner, taking on a teacher’s role and indoctrinating new prisoners upon their arrival. He was paroled after serving three years and four months.

Whitney’s brother and his wife helped to pay off the debts he incurred while he secured work as a dairy farm manager in Massachusetts. He later became president of a small textile firm that made fabrics made from the Florida-harvested ramie plant.

Whitney died on Dec. 5, 1974, at his daughter’s home in New Jersey at the age of 86.

New York Daily News columnist Nancy Randolph, in covering Whitney’s departure to prison, probably described him best: “Whitney was Sir Richard when he went into battle in shining armor against the 1929 crash and again when he stood up and defied Washington and the reformers. Now it turns out this Great White Knight was an optical illusion.”

(Photograph of Richard Whitney from 1937, courtesy of the Library of Congress)