America is a great land, and still one of very few places in the world where a small businessman can grow and flourish, creating a bright and vibrant star of free enterprise from little more than a dream, some innovation, and a lot of hard work.
But sometimes, that dream goes horribly wrong, and political and corporate forces can kill that spirit of free enterprise, and stifle the entrepreneur behind it, out of greed, self-interest and self-preservation. Such was the case in the story of San Francisco-based Hamilton Taft & Company (HTC). The subject of extensive news coverage some years back, reports outlined in the Wall Street Journal referred to it as the “white collar scandal of the decade,” in which Hamilton Taft CEO and flambuoyant Texas businessman Connie “Chip” Armstrong and his associates allegedly embezzled $80 million of client funds in an elaborate Ponzi scheme. Hamilton Taft was a payroll tax processor with Fortune 500 clients. Hamilton Taft’s business was processing local, state, and federal payroll taxes on behalf of clients, collecting funds from clients for this purpose, and dispersing them to the various taxing agencies.
Armstrong, once an oil field fireman in Texas, acquired this company with little more than his wit and a clean shirt when it was in serious trouble and on the brink of disaster. He and his associates then acquired high-profile clients, designed innovative IT procedures to refine the entire process, and built the business up to a point where HTC was processing over $7 billion a year in payroll tax funds. It was a classic American success story.
HTC made its money from two areas; from fees charged to clients, and from contractual use of the “float” between the time funds were received from clients, and when they were paid to the various taxing agencies. It’s how virtually all such service companies, insurance companies, banks, and other enterprises that handle large amounts of money, earn their profits.
The fall of HTC involved a “whistleblower” accusation from a former employee, who informed HTC clients that their funds were being fiddled with. Because of the accuser’s former position in the company, the accusation went unquestioned, and clients immediately pulled funds out of HTC, causing a “run” that put the company’s existence in jeopardy. Eventually, the dust settled, and those major clients that violated their contracts and pulled out millions in funds without notice, realized that there was indeed a chance that the accuser had been talking into his sleeve. The spectre of liability loomed large, and it became obvious that these large corporations, led by Federal Express Corp., could be held liable for the demise of a company that had been doing billions of dollars worth of business a year; a liability FedEx and other clients could ill afford. What ensued was the most unusual series of legal maneuverings, political pressure and outright violation of law and due process ever seen; all perpetrated to kill off HTC as quickly as possible so as to avoid having to Ã?Â¯Ã?Â¿Ã?Â½fess up to jumping the gun.
The company was forced into involuntary bankruptcy by a theory of law that had not been proven and never should have seen the light of day. After a meeting between clients, the U.S. Attorney, the accuser, and news reporters from the Wall Street Journal, FedEx filed a civil action on March 13, 1991, requesting a Temporary Restraining Order against Armstrong. Said action was properly denied by the courts because of lack of evidence. The court also properly set an evidentiary hearing on the docket, although an end run was made around this as well. Shortly after FedEx was denied its request, the story was carried in the media, at the urging of Congresswoman Nancy Pelosi and Senator Barbara Boxer, both of whom had been lobbied by FedEx for that purpose. Remarkably, before the evidentiary hearing could even be held, HTC was placed into involuntary bankruptcy on March 20, and on March 21, the court-appointed trustee shut down the company.
The purpose of a bankruptcy trustee, of course, is to make a knowledgeable assessment of the company’s status, and attempt to allow the company-in-reorganization to continue to operate. This was not done. The trustee shut the company down and liquidated its assets as quickly as possible, took his substantial fee, and left. No attempt at reorganization was made. It would seem that somebody wanted this company dead and buried, and in short order.
Hamilton Taft’s business strategy was to use a portion of the float to make strategic business investments designed to generate a high return; these investments included oil and gas leases, real estate and other business ventures. This was generally understood by all parties concerned; and it was the foundation of Hamilton Taft’s business. It was the reason clients received services at very low fees. Mr. Armstrong never denied doing any of this, and he saw it as the most advantageous way to build up a business from nothing; to build it up into a major business conglomerate, which he had done in spades and remarkably well. In retrospect, one may say that some of the investments were too “risky,” but that’s an issue for business school seminars to mull over, not the California courts. The fact of the matter is, HTC’s investment strategy, whether one agrees with its wisdom or not, was out there for all to see from the very beginning. Hamilton Taft used some of the float to make these investments, and still made all tax payments as required by the end of every quarter. If a payment was made late, HTC paid the penalties itself. All tax payments for every client had consistently been made by the end of every single quarter, with the exception of the quarter the company had been shut down. Payments had not been made then, not because of a Ponzi scheme, but because the company had been rendered unviable by its own customers.
The theory of law this all hinges on is that the funds held by Hamilton Taft were held in trust, and therefore HTC did not have the right to use those funds for investments that were made at the discretion of Mr. Armstrong. But were the funds held in trust, or did those funds belong to HTC? That was the big question from the beginning, and the question on which everything hinged. The answer, it seemed, changed over time to suit the trustee and the petitioners.
It had been held by the FBI before Mr. Armstrong even acquired Hamilton Taft, that the funds held by HTC were the property of HTC, and so long as clients’ taxes get paid and HTC upholds its end of the contract, HTC was free to invest those funds at its discretion. The FBI had already made an investigation and determined that HTC’s investment scheme was valid, there were no victims, and no crime involved. At the time of HTC’s involuntary bankruptcy however, trustee and petitioners claimed otherwise, saying that despite the fact that no “trust accounts” had ever been set up, that the money was a “trust”, and therefore, HTC had no discretion in its use. But in a remarkable game of three-card monte, the trustee flip-flopped again in an attempt to collect as much money as possible. The trustee later filed suit against S&S Credit, an HTC client, to recover preference payments that had been made by HTC on behalf of S&S Credit prior to the shutdown. But, to collect this money back from S&S and several other clients, the trustee had to contend that the funds were the property of Hamilton Taft, and not, in fact, the property of the clients that had been held in trust. The Bankruptcy court, and later the Federal District Court, said that the funds were trust funds, and the trustee could not collect. But the trustee continued to shuffle the deck, and went to the 9th Circuit Court of Appeals, which reversed the ruling and said that the funds were in fact the property of Hamilton Taft, and not trust funds. Now watch the trustee’s hands carefully, where the cards land, nobody knows.
In that brief interim period after the Federal District Court said the funds were trust, and before the 9th Circuit Court said that they weren’t, Mr. Armstrong was convicted of fraud, based on the assumption that the funds were trust, and he did not have the right to invest them in ways to which the trustee had taken exception. But what happened afterwards? The trustee’s slight of hand continued to amaze. With Mr. Armstrong safely out of the picture, S&S Credit and the Trustee made a settlement agreement, part of which involved S&S Credit going back to the court and asking them to vacate their opinion. Acknowledging the agreement, and seeing it as a routine matter, the 9th Circuit issued a one line order, stating merely, “The Court is advised that the case has been settled. Accordingly, the appeal is dismissed as moot and the decision . . . is vacated.” Case won. Trustee put back on his straw hat and went on to the next customer. First it was Hamilton Taft’s property, then it was trust funds, then HTC’s property again, then trust again-all depending on what suited the trustee and petitioners at the time. But unfortunately for Mr. Armstrong and the former Hamilton Taft & Company, the decision was most assuredly not moot, as the Circuit Court had been led to believe.
The great American success story-rising from nothing to create a major successful enterprise-is this still our dream, or is it an ideal whose time has passed? Successful small enterprises are to be admired and encouraged to grow. Unfortunately, when their growth gets in the way of larger players, the dream dies.