The Trumbull Steel financial crisis was a corporate financial crisis and scandal which struck Trumbull Steel, a steel manufacturer based in Warren, Ohio, in July 1925. At the time, Trumbull Steel was one of the top twenty largest steel firms in the United States (by annual tonnage). The crisis emerged after years of financial mismanagement by the company president, Jonathan Warner. Evidence of corporate distress emerged when Trumbull attempted to float a $20 million bond offering (the third largest offering of 1925). Within a month, evidence of embezzlement by Warner had also emerged.
The company neared receivership, and sought to merge with Otis Steel of Cleveland, Ohio, to save itself. When stockholders pointed out that the bond prospectus was at odds with annual financial information, the merger collapsed. Cleveland financier Cyrus S. Eaton, who had already purchased a large block of Trumbull Steel stock are fire-sale prices, stepped in and saved Trumbull Steel from collapse. Within two years, Eaton had merged Trumbull Steel with Republic Iron & Steel, and ended Trumbull's independent existence.
Background
Trumbull Steel was incorporated in the U.S. state of Ohio on April 25, 1912.; The moving force and founder of the company was Jonathan Warner. Trumbull Steel acquired a site on the Mahoning River at Warren, Ohio, for its new mill. Trumbull Steel's plant opened on July 23, 1913,; employing more than 1,000 men.
By April 1915, Trumbull Steel had doubled the number of stands in its mill, practically building an entire new steel factory. Annual capacity increased to , and the workforce doubled to 2,000 men. To pay for the expansion, Trumbull Steel formally increased its capitalization to $2.5 million ().;
In July 1915, Trumbull Steel issued another $1.5 million in stock,; adding eight new hot-rolling mills. This gave Trumbull Steel a new capacity of a year, making it the largest steel sheet-rolling plant in the Mahoning Valley and one of the largest producers of sheet steel in the nation.
In January 1916, Trumbull Steel issued another $6 million () in new stock.; ; and added 16 cold-rolling sheet stands. The company also said it would use the money to build 10 open-hearth furnaces so it could make its own steel ingots and billets.; As Trumbull Steel was already one of the largest sheet and tin concerns apart from U.S. Steel, this would dramatically increase its annual output.
In October 1916, Trumbull Steel issued another $3.75 million in () in stock. Apparently, the $6 million raised eight months earlier was not enough to build the open-hearth furnaces, because Trumbull Steel pledged to use $3 million ()< of the new funds to immediately erect five of the planned 10 open-hearth furnaces. It also announced it would build a bloom and bar mill.
The company began construction on five open-hearth furnaces in late November 1916. Without informing stockholders or the public, Trumbull Steel began work on a much larger expansion than previously announced, including construction on a new cold rolling mill.
Despite having raised $9.75 million in new capital, President Warner told the Youngstown Vindicator newspaper that "additional monies are needed" and "have been provided for", but did not say where the money was coming from.
In April 1917, the company had decided to make yet another unannounced expansion by erecting a new hot-rolling sheet mill.
By the end of 1917, Trumbull Steel had opened seven open-hearth furnaces; and raised the number of employees to 4,000 from 3,000.
Trumbull Steel made an $8 million () issuance of new stock in May 1918.; In April 1919, Trumbull Steel executives made yet another expansion in the company stock, adding $4 million () to its total capitalization.
At the end of 1919, Trumbull Steel added an innovative, new continuous band, hoop, and strip mill, and two new hot-rolled strip mills.
In 1923, Trumbull Steel won stockholder permission to engage in a stock swap that sought to convert its $25 par value common stock into no-par value common.; ; Only part of the new issue would be used for the stock swap; the remaining capital would be spent expanding the number of open-hearth furnaces.
At the end of 1924, Trumbull Steel spent $500,000 on upgrades to its plant. By now, its annual capacity was .
The bond sale Beginning in 1924, Warner's management of Trumbull Steel became a subject of much discussion by the company's board of directors. Pro- and anti-Warner factions emerged on the board, and the issue became intensely personal for many board members.
The crisis began on July 23, 1925, when Warner announced that Trumbull Steel would sell $20 million () of 15-year 6% gold bonds to pay expenses incurred for plant expansion. They would not be sold all at once: $2.5 million of the bond issues would be held back and offered for sale at a later date. The firm said National City Co., the investment banking arm of National City Bank of New York, and the Union Trust Co., an investment bank located in Cleveland, had agreed to underwrite the sale.; Trumbull Steel told prospective buyers it would pay interest on the bonds before paying dividends on preferred stock. The offering was huge, the third-largest bond sale in the United States thus far in 1925.
Announcement of the sale elicited strong opposition from several Trumbull Steel board members and many stockholders. Several board members had opposed the plan when Warner told them about it, and tried to halt Warner's negotaitions with National City. Others said Warner had never informed them about a forthcoming sale. Some board members said all past improvements had already been paid for, and they had no idea what the proceeds would be used for. National City Co. executives heard rumors that some Trumbull Steel board members had opposed the offering before it was announced, and worried that a divided board might impede the bond sale. Warner assured them there was no dissension at all, and said the key directors had been working closely with him on crafting the proposal.
Several influential stockholders also said they had received no advance notice of a sale from the company. These included John Tod, Edward L. Ford, and the Wick family. Plant expansion in the past had been paid for out of earnings, they had been told; now, the company was saying it had gone $3 million into debt to pay for the improvements. Even Mahoning Valley banking institutions said they had no idea what Trumbull Steel wanted the money for.
On July 29, some directors and stockholders asked Warner to issue a statement explaining what the proceeds of the bond sale would be used for. None was forthcoming.
Discrepanices in financial and bond statements On July 30, holders of substantial blocs of preferred stock informed the press that there was a large $10 million () discrepancy between the company's 1924 annual financial statement and the financial information given to the underwriting banks. Somehow, in five months, Trumbull Steel claimed to have paid off $1.5 million in loans (). The retained earnings surplus, previously said to be $8.8 million (), had shrunk without any explanation. National City Co. apparently felt Trumbull Steel's finances could not support the bond floatation, for the press soon reported that the bank had successfully demanded that Warner pledge his personal fortune as collateral for the bonds before it agreed to purchase them.
This information triggered "pandemonium in Ohio" and a large sell-off of Trumbull Steel stock. Youngstown-area investors, owners of some of the biggest blocs of Trumbull securities, "were almost panic stricken" and sold more than 15,000 shares of common on the Cleveland Stock Exchange in the last six days of July, with 7,500 shares trading on July 24, nearly 5,100 shares on July 30, and 4,000 shares on July 31. The price of common stock reached an all-time low, and the Youngstown Vindicator reported that moneyed interests in Cleveland were freely purchasing the common stock.
Collapse of stock price and exposure of embezzlement President Warner attempted to reassure stockholders by issuing a statement on July 30, saying that money was needed to finance current operations as well as more improvements, such as completion of the under-construction open-hearth furnace, another hot metal bridge across the Mahoning River, and connections to the railroads. That alone, he claimed, would take $2 million ().
Attempt to calm the market Over the weekend of August 1 and 2, Warner re-emphasized the company's sound finances. He dismissed anxiety about the financial discrepancies, saying that changes seen in the bond offering prospectus had been insisted upon by auditors hired by the underwriting banks. He also claimed that he had financed recent "substantial plant additions" "with my personal credit". He had used his entire personal fortune, he said, and expected to be reimbursed about $10 million (). He then said that the company was planning to use the proceeds of the bond sale and the unissued stock in its treasury to acquire one or more competitors. His statements, some of which appeared to contradict earlier assertions as well as one another, did not stem the slide: Nearly 5,000 shares of common were sold on Monday, August 3, far more than any other stock on the local exchange, and the price hit another new low.
On August 4, the Trumbull Steel board of directors unanimously approved Warner's bond sale in a post facto vote. In a statement, the board said it was "the best Trumbull could do".
Second attempt to calm the market Large numbers of shares were no longer sold during the next two weeks. On August 11, Warner announced that the company wished to build a new blast furnace and an additional seven or eight open-hearth furnaces with the bond proceeds. His statement was received poorly by stockholders: The common stock reached a new record low on August 14.
On Thursday, August 20, a new spasm of rapid selling occurred as 5,800 shares of common were dumped on the local market. The price hit another new low on August 20 and again on August 21. Most of stock on the market was being offered by Youngstown-area investors. Many of these were industry insiders or wealthy people, those in the best position to know if Trumbull Steel would survive or not.
Third attempt to calm the market Over the weekend of August 21–23, Trumbull Steel attempted to stem the panic by pointing out how much operations had improved. It had spent $10 million () on expansion in the past two years,; building a new steam power plant, increasing the number of stands in the cold mill to 61 from 48, opening two new open-hearth furnaces, adding a pulverized coal fueling plant, converting its 16-inch mill to an 18-inch mill, adding three hot-rolling stands, installing a third heating furnace, and constructing another bed for handling hot steel. New molten metal, hot tar, and natural gas connections were made between the mill and the blast furnace across the river, and new machinery installed in the annealing, galvanizing, and pickling departments. There was a new shipping space, a new garage and charging building that could accommodate 20 electric tractors, several new cranes, a device to automate the fuel mixture in the open-hearth furnaces, and numerous other small improvements. The plant's total capacity was now a month, up from a month two years ago.
"Despite reassuring news Trumbull Steel Co. common stock holders continued to be panic stricken". Just over 3,700 shares were sold on Monday, August 24. Another 7,500 shares of common stock were placed on the market on August 25, and the stock reached yet another new low.
Evidence of embezzlement By August 23, some members of Trumbull Steel's board of directors had discovered evidence of embezzlement by president Warner.