Gravy Train

Since the Penn Central Railroad went bankrupt last June, Government investigators have been sifting through the wreckage to determine what part mismanagement played in the collapse. The Interstate Commerce Commission last week charged that the company violated ICC regulations by claiming as ae business expense the premiums an $10 million worth of insurance protecting directors and key officers against liability for wrongdoing. This week an official staff study by Wright Patman's House Banking and Currency Committee accused top officials of the railroad of using their corporate connections to line their own pockets--with the help of Manhattan's Chemical Bank.

Texas Democrat Patman, an old populist foe of both banks and railroads, called the case "a classic example of the use of corporate power for personal profit." If correct, the charges expose a skein of cozy deals and conflicting interests, and raise questions about the legality of some borrowing and the betrayal of fiduciary trust. The report singled out the activities of David C. Bevan, Penn Central's deposed chief financial officer, and Charles J. Hodge, a former partner in the Manhattan investment banking house of Glore. Forgan (now merged to become F.I. duPont, Glore, Forgan & Co.), who was the railroad's chief investment adviser. Their instrument was Penphil, a private investment company formed by Bevan. Hodge and 14 cronies in 1962, which they hoped to build into a large conglomerate holding company. The Patman report charged that Penphil prospered by buying the stock of companies in which the railroad also invested. As the Penn Central poured millions into these firms, under the illfated diversification program engineered by Bevan and Hodge, Penhil profits and stock prices rose too. The Penphil investors put up $16,500 each: those who remained with the investment group for eight years made a profit of $83,500.

Wielding Clout. The gravy train took many routes, according to the committee report. For example, in 1963 Penphil paid 165,000 for 10,000 shares of Great Southwest Corp., a Texas-based land developer in which Penn Central was also investing. After the railroad gained control of the company, Penphil sold its stock to Penn Central for $377,500, realizing a profit of $212,500 in less than two years.* Beginning in 1966, Penphil bought 21,380 shares of First Bank & Trust Co. of Boca Raton, Fla., for $332,924. A real estate subsidiary of the Penn Central, Arvida Corp., moved huge deposits into the bank, and as realty development helped the bank to thrive, the value of Penphil's investment grew to $964,772.

The key to Penphil's growth and continued existence, said the congressional report, was credit an "an unusually favorable basis" provided by the Chemical Bank. In deference to the clout Bevan and Hodge wielded at Penn Central, a major customer of Chemical, the bank loaned Penphil more than $1.8 million over seven years. Until last June, the investment group paid the prime interest rate, which is generally reserved for the most credit-worthy blue-chip companies. Nor was Penphil required to leave a compensating balance--usually 20% of the loan-- practice that is normal for almost all corporate borrowers. Charged the report: "Stock purchased with the Penphil loans was used as collateral to secure the loans themselves."

The committee's disclosures may well lead to closer scrutiny of commercial bank lending and additional restrictions on stock trading by corporate insiders. Still, a nagging question persists: do other Penphil remain to be discovered?

* Pulling no political punches, the committee noted that stock in Great Southwest was held by several former officers of Glore Forgan. Among them: Secretary of Commerce Maurice Stans, onetime Glore Forgan president, who held 38,000 shares.

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