New Vistas of Rottenness - Part 1
By Patrick Gaffey
The Los Angeles Chamber of Commerce formed in 1888. A local boom had been followed by another predictable bust, and businessmen in the muddy little Western outpost felt something had to be done. They launched a national advertising campaign and eventually showed that slogans could build a festering little pueblo with no natural harbor or other special advantage into a major metropolis, as long as the slogans were repeated often enough. In later decades the Los Angeles Times, a strong backer, if not the owner, of the chamber, boosted the city with a slogan, which blended cleanliness, virtue and racial purity: "The White Spot." Despite the testimony of their own noses, many citizens bought the idea. They liked thinking of Los Angeles as the only American city still morally pure, where Anglo-Saxon Protestants lived in sweet-smelling, sunny dedication to true and original American ways.
A report of the 1936-1942 Civil Liberties Committee of the U. S. Senate, chaired by Wisconsin‘s Robert La Follette, took a different view of Los Angeles and other self-described "white spots," marked by restricted freedom of speech and extreme opposition to labor unions: "Our society has judged them not ‘white spots’ but cancer areas."
Prohibition dawned with the Nineteen Twenties, and the voters of Los Angeles heartily approved. Time and Hollywood have so changed the image of Los Angeles that we can hardly recognize journalist Morrow Mayo’s 1933 description of his city, filled with fundamentalist Baptists and Methodists: "Los Angeles is the western capital of the Anti-Saloon League and the Women’s Christian Temperance Union. On the surface it is the dryest place in America." Beneath the surface, especially outside city limits in the no man’s land between Los Angeles and the outposts of Hollywood and Beverly Hills, a world of saloons, race books and casinos flourished. The White Spot liked to think of this economy and the men who ran it as the Underworld. But the underworld was inseparable from the political machine that ran Los Angeles and from the Los Angeles Police Department, which protected, nurtured and often manned it. And the police department was fully controlled by the Otis-Chandler family, owners of the Los Angeles Times.
That family made Los Angeles the most anti-union city in the nation. The police department maintained a Red Squad, which specialized in spying on citizens and violently attacking union members, communists and socialists. In early 1909, the L.A.P.D. created a Purity Squad to watch over the sex lives of Angelenos. The Purity Squad regularly raided houses of prostitution and saloons and casinos which competed with its own such operations. The squad was also known to use its prostitutes to set up opposing politicians for blackmail. In one case this police unit developed an elaborate plan to discredit a city councilman by injecting him with the blood of a prostitute known to be infected with syphilis.
The story of Julian Oil, which exploded in scandal and indictments in 1927, is much like Mark Twain’s "The Man That Corrupted Hadleyburg": That fictional town also set itself up as morally superior. But Hadleyburg’s corrupter knew exactly what he was doing, while C.C. Julian was just trying to get rich, not puncture the smug piety of the White Spot or prove that any and every resident of the City of Angels would take the first bribe offered.
In The Great Los Angeles Swindle Jules Tygiel argues that earlier chroniclers of the scandal, especially Guy Finney in The Great Los Angeles Bubble, erred in finding a special greed and gullibility in Los Angeles. Tygiel notes that the speculative fever boiling around real estate, natural resources and the stock market was the same madness which caused the economic crash of 1929. In fact Teapot Dome, the national oil scandal which blackened the Harding Administration, broke open the year before the Julian oil scandal. Yet even in that context Tygiel admits that Los Angeles remains a special case, its economy built on a frantic inflation of land prices and growth for the sake of money and more growth: "Indeed, the city’s entire history resembled a Ponzi scheme of fantastic dimensions."
Chauncey C. Julian appeared in Los Angeles in 1922, selling shares in his proposed oil wells. A Canadian who worked as a roughneck in the oil fields around Bakersfield, he jumped into the second Los Angeles County oil rush near its beginning and followed a fevered boom to Santa Fe Springs, where he managed to obtain a drilling option on four promising acres. Then he set about raising money to actually pay for his leases and to buy the equipment and hire the men he needed to drill. In less than a month, before digging a single well, he raised $600,000—1922 dollars—from the excited public. He used every technique and gimmick available at the time, but his special talent lay in writing newspaper ads in which his direct, folksy approach made people believe that behind the sales pitch was a person they knew, who cared about them.
Julian so charmed Angelenos that even newspaperman Finney couldn’t believe C.C. was a fraud. Lorin Baker, in his feverish, conspiratorial That Imperiled Freedom, blamed businessmen, bankers, brokers and politicians, but he, too, thought Julian well-meaning and honest, if naive.
Tygiel, a history professor at San Francisco State, dug deeper. He shows that Julian knew the secret of Max Bialystock in Mel Brooks’ comedy The Producers: A good promoter seeking investors does best if he knows his business will fail. Then he can raise far more money than the business needs, and when it publicly implodes, no one will expect a refund.
Tygiel found Julian sold more units in his oil drilling syndicates than were supposed to exist and seems to have sabotaged some of his own wells. His first few were spectacular gushers, some of the best producers in Southern California, but they didn’t save the investors, who put $3,759,500 into Julian’s syndicates. By June 1924, when they had become worthless, Julian "had paid out only $1,000,000 in dividends." He was penniless when he began, but quickly became a multimillionaire.
As Julian’s ambition grew, he moved beyond his syndicates. In early 1922 he was only a wildcat driller; on May 15, 1923, he incorporated Julian Petroleum Corporation, conceived as the new Standard Oil, which would not only discover and produce petroleum, but refine, transport and sell it through the company’s own chain of service stations.
Intoxicated with his ability to raise cash, he oversold the first $5 million stock issue by $1.7 million. Ed Daugherty, California’s Corporation Commissioner, had watched Julian’s syndicates and was alarmed by what he saw of the new firm the public affectionately called "Julian Pete."
As long as money poured in, Julian did surprisingly well against John D. Rockefeller’s attempts to stop him and other small fry. But Daugherty cut Julian’s lifeline, convincing the Times and other papers to refuse Julian’s ads. Julian then hurt his own image. In Hollywood’s Cafe Petrouschka, a popular illegal nightclub, he drunkenly swung on diminutive movie star Charlie Chaplin, idol of millions. The agile actor knocked the former roughneck flat. When Julian’s brother attacked the little mime, Chaplin dropped him, too.
As Julian began to look hapless or worse, his stock’s price fell. The Los Angeles Record, realizing stories about Julian sold papers, publicly offered to rescue Julian Pete’s 43,000 investors. It called for the foremost businessmen to investigate Julian Petroleum and, if they found it legitimate, to advise Julian on guiding the business. Six of the most prominent Californians, including former Superior Court Justice William Rhodes Hervey, stepped forward, white hats to the public’s rescue. They were met by a torrent of salesmanship from Julian. In April the committee, backed by an audit from the firm of Price-Waterhouse, gave Julian resounding approval. The report by such a reputable firm buoyed Julian and his successors for years, despite the federal accountant who found the audit marred by major errors and the federal agent who labeled it “false and misleading.” As celebrated hands touched Julian Petroleum, money and tarnish stuck to their fingers. Julian bolstered the company’s image by adding three solid citizens to its board, including former California Governor William D. Stephens. The three drew fat salaries for a short time, but when stock prices fell again, they ran up the white flag and resigned.
J. Edgar Hoover, head of the Justice Department’s Bureau of Investigation, not yet the FBI, sent accountant J.H. Miller to investigate Julian Petroleum. Miller met Julian, listened to him for days, then, according to Tygiel, allowed Julian to essentially dictate his report to Hoover. While still on Hoover’s payroll, Miller began working for the swindler, eventually resigning from the bureau in favor of a $10,000 salary as Julian’s corporate comptroller. Julian Pete had dwindled to the brink of closure, but Miller and others drew fine salaries.
The Record failed to save the investors, but increased its own circulation. The prominent businessmen it brought in failed as saviors, too, but left with heavy pockets. Then J. Edgar Hoover’s agent failed the investors, but helped himself.
Before the swindle could reach its expected conclusion, with Julian jailed or fleeing at midnight, Julian found a savior for his corporation: Sheridan C. Lewis, an experienced thirty-five year old oil man from New York, who owned Lewis Oil Company. Lewis brought to the White Spot Senator William King of Utah and other impressive associates, none as impressive as Lewis himself, with his vast and detailed command of the oil business. Lewis awed everyone he met and attracted new financing. The Julian Petroleum Corporation traded C.C. Julian, now a white elephant, for S.C. Lewis and a new board of directors, including Senator King. The corporation accepted Lewis Oil as a subsidiary. Julian later said, "I figured I had saved the company."
But the brilliant Sheridan Lewis had built his credentials through sophisticated larceny, Lewis Oil being a fraudulent shell he used as a vehicle to take over other companies. Tygiel says Lewis "had mastered the art of the false financial statement." A worthy successor to Julian, Lewis had oversold Lewis Oil’s Gold Notes bond issue by 69%, printing $100,000 worth of unauthorized notes for himself.
Photo: Lewis and Berman
Lewis brought to Julian Petroleum a young Brooklynite named Jacob Berman, who, after using a number of aliases, had settled on "Jack Bennett." Berman was a cool, confident executive criminal, more polished than Julian and as able as Lewis. Lewis put him in charge of issuing stock, and though Julian had already issued more stock than was authorized, Berman churned it out tirelessly.
Julian Pete stock was sold on the Los Angeles Stock Exchange. To keep his swindle operating, Lewis had to fight downward pressure on stock prices, caused by the rocky operations of the company and the outpouring of Berman’s "stock mill." Posing as a savior of the stockholders, Lewis used a host of schemes to keep Julian Pete’s price high. One was the Julian Petroleum Trust Pool, created to buy up stock and take it off the market. But as he started the pool, Lewis subverted it. His control of Julian Pete depended on the 51% of common stock he owned. He secretly sold all of it. No one ever realized he had sold it, or that his control of the company relied from that point on pure fiction.
Lewis propped up prices again through a campaign of buying by his board members and by launching rumors that the stock would soon be listed on the New York Stock Exchange and that he was preparing a highly profitable merger: He had profited from corporate mergers at Lewis Oil. Lewis also orchestrated phony stock sales at high prices through the respected brokerage A. G. Wagy & Co. With millions rolling in, Lewis could afford to bribe Wagy for its cooperation. Despite its fine reputation, its owners did not hesitate to accept Lewis’ bribes; they grabbed the money, then double-crossed him several times, weakening the stock price to make themselves a bigger profit. Lewis responded by secretly buying the entire Wagy investment firm, one of the most important in Los Angeles. Owning a big brokerage made manipulating the market easier.