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Colonial Cases

Ludwig and Trub, 1884

[fraud]

Ludwig and Trub

Swiss Consular Court, Yokohama Japan
1884
Source: Straits Times Weekly Issue, 23 February 1884

 

EXTENSIVE FRAUD UPON THE HONGKONG AND SHANGHAI BANK.

    JUDGMENT was recently delivered at the Swiss Consular-General Court, Yokohama, in the case of Messrs. Ludwig and Trub, who were charged with extensive frauds upon the Hongkong and Shanghai Bank in connexion with advances upon silk.  The Court found that the charge of embezzlement was not sustained, although it is difficult to follow and approve the reasoning by which this judgment was attained, but the prisoners were found guilty of obtaining money under false pretences and sentenced to six months' imprisonment.

   The charges were brought under sections 263 and 246 of the German Criminal Code, and set out that the accused had obtained advances to the amount of $193,438.19 from the Hongkong and Shanghai Banking Corporation against fictitious certificates of deposit of silk and silk waste, and further that they, without the knowledge and consent of the said bank, unlawfully disposed fog goods which they held on account of the bank.

   It will be remembered that a somewhat similar case was tried here nearly two years ago, and although it was not such a flagrant one, the sentence by our Chief Justice, Sir Thomas Sidgreaves, was two years' rigorous imprisonment, which was concurred in by Mr. Justice Ford, both learned Judges declining upon appeal to modify it in any way or to recommend any change for the consideration of H. E. the Governor.  The China Mail reports the case as follows:-

In the Swiss Consular General Court

Yokohama.

Before A. WOLFF, Esq., Consul General, and Messrs. O. ZIEGLER, F. ABEGG, T. SCHLATTER and F. STRACHLER, Assessors.

Monday, 28th January, 1883.

The Swiss Federal Government, on the prosecution of the

Hongkong and Shanghai Banking Corporation,

v.

Herman Ludwig and Rudolf Trub.

   The charges were brought under sections 263 and 246 of the German Criminal Code, and set out that the accused had obtained advances to the amount of $193,438.19 from the Hongkong and Shanghai Banking Corporation against fictitious certificates of deposits of silk and silk waste, and further that they, without the knowledge and consent of the said bank, unlawfully disposed of goods which they held on account of the bank.

   Mr. Kirkwood was present to watch the case on behalf of the bank.

   On the opening of the court the accused were interrogated and both stated that they had never been punished for a crime.

   The charge was then read, after which the accused, in reply to the court, said they would reserve their defence until after the witnesses had been heard.  Mr. Walter, the manager of the Hongkong and Shanghai Banking Corporation, was then called.

   J. Walter, sworn - On the evening of the 15th instant, about 6 o'clock, I received a letter from Mr. Ludwig asking me to call on him.  I went and found Messrs. Ludwig and Trub there.  Mr. Ludwig said they had to make a very unpleasant announcement.  He then told me that the godown orders on which the bank had made loans were to a great extent fraudulent.  I then asked what amount there was represented in the godown orders.  He replied that there was very little security there at all. He then said he hoped the bank would have mercy on him, that he had a first rate business and good friends in Europe and that if the bank would only give them time it would get off without loss.  I told him that the bank would never condone an offence of the kind; and would rather lose the whole amount than look over the offence.

   In the course of the conversation I asked Mr. Trub, telling him I had always considered him an honest man, if he knew of these frauds.  He replied that he had been cognizant of them all through and was equally guilty with Mr. Ludwig.  I then requested Mr. Trub to go to the office and bring me any securities for value that they had there in the shape of documents.   He came to my house, No. 169 Bluff, a little after 9 o'clock and handed me some books, also some Japanese documents and title deeds which he said represented claims on Japanese amounting to $80,000.

   On the following day, the 16th instant, we made a formal demand on Ludwig & Co. for their indebtedness to the bank.  They handed us a letter saying they were unable to pay but would give us all their possessions.  In the course of the forenoon of the 16th, Messrs. Trub and Orth came to No. 62.  Mr. Trub was shown his godown order and he said, in reply to a question from Mr. Morriss, that there was nothing to represent the godown order.  Mr. Morriss said 'then it is a fraud;' and Mr. Trub replied 'yes.'

   The nature of our business with Ludwig & Co. was that they were allowed to pass cheques for the purchase of silk and waste silk, such cheques being marked silk or waste silk according to the produce bought, on the understanding that they were to hold the silk to the bank's order, and to keep us fully covered at all times.  After the end of each month they furnished us with godown orders giving detailed descriptions of silk and waste silk hypothecated to the bank. All of these showed the bank to be more than covered.  The receipt dated 1st November shows silk and silk waste to the value fog $234,500 held to the bank's order.

   On the 19th, after the disclosures made by Ludwig and Trub, Mr. Broadbent made an examination of their godown and found only silk and waste silk toughly estimated to be worth $10,000 to $15,000, a portion of which is claimed by Japanese.  I would state that Mr. Ludwig informed me on the 125th instant, that these frauds had commenced in 1879, and therefore as the frauds have been carried on for so many years and business of the kind cannot be carried on at all without such confidence as the bank have given Messrs. Ludwig & Co., their action amounts to a breach of confidence and the bank does not recommend the accused to any consideration whatever.  I would state that I know the documents handed into court to be in the handwriting of the accused (godown orders, &c. referred to).

   This statement was then read over to witness, who acknowledged it to be correct.

   The accused said they had never disputed the amount sue to the bank.  They wished to state that Mr. Walter's statement was partly incorrect; first they did not say the godown order was a fraud but that it was incorrect.  Second, with regard to the date when the fraud began they did not say it was in 1879 but that it was either in 1879 or 1880, but they could not exactly say without referring to their books. Thirdly, from the amount of the storage receipts for November $254,500, the shipments would have to be deducted.  Fourthly, Mr. Trub did not say 'yes' in reply to Mr. Morriss's question but said they would have to bear the consequences of an action in court.

   Mr. Walter asked permission to add that since the 1st January, when the amount due the bank was $139,438.19, only about $10,000 was delivered with the bank's consent.

   The court said it would have to ask Mr. Walter, as the fraud dated back to 1879, if during that time that the bank had inspected the godown belonging to the accused.

   Mr. Walter replied that it had not been done because it was felt to be impossible to check the value of the contents; only an expert could tell the values of the different kinds of silk.  The firm was doing a good business all the time and the bank had every confidence in them.  It was Mr. Trub's own statement that the fraud had been going on all the time.  The bank did not know about it.  The bank did not keep the godown keys.  In the case of exports of tea and silk the bank did not keep the keys as it would be impossible for merchants to carry on their business in that way.  They would lose several hours every day.  In the case of imports the keys were kept.  The bank did not hold any other documents but the storage notes, which were considered the best kind of security, they being made deliverable to the bank's order.

   I cannot say for certain, but I think Mr. Ludwig has shown me a statement of accounts.  They always told me they did only a commission business and took no risks.  I have made enquiries about them and even their competitors gave me a good account.  Mr. Trub was said to be a man incapable of a dishonest action, whose word was as good as his bond.  They have frequently spoken of their connexions and said what a good business they did.  I had confidence because they said they took no risks and nothing on their own account.  I don't think the accounts shown me were balance sheets.  Their account has been larger and for two years; I have been telling them it must be reduced. 

   If I had insisted upon obtaining the keys of the godown I considered I had a right to ask for them; and in fact I considered we had the right to remove the goods at any time we wished. The orders were worded with the object of giving me that power. If we had asked for their keys Mr. Trub might have said it interfered with their business, as they would only be able to work from 10 to 4.

   Edward Morriss, sworn: - I am now the manager of the Hongkong and Shanghai Banking Corporation here.  I took over charge on the 11th instant.

   I was present at an interview on the forenoon of the 16th between Mr. Walter and Mr. Trub.  I think Mr. Orth was present.  A statement was handed to me dated 1st January.  This statement contained a list of goods under lien to the bank.  I asked Mr. Trub if it was his handwriting.  He said, yes.  I then said, when you sent this statement you knew the goods were not there.  He replied 'yes.' I said 'you committed fraud in effect.' He said 'yes.'

   The statement was read over to the witness and acknowledged to be correct.

   The accused Mr. Trub  said he did not s ay 'yes' to the question of Mr. Morriss, but  said that he would have to bear the consequences of a judicial enquiry.

   J. F. Broadbent, sworn: - I am the accountant of the Hongkong and Shanghai Banking Corporation.  About the 14th of the month I received a list of the goods hypothecated to the bank.  I asked Mr. Trub kindly to let me know by what margin the bank was covered.  He told me the price named for silk and waste silk and money advanced would leave a margin in favour of the bank of about 15 per cent.  I afterwards sent a gentleman to inspect the godown.  He came back with an answer from Mr. Trub, who had said he was busy, and asked him to come the next day.  The following day I went myself and inspected the godown, and the document handed into court contains what I found. 

   I then went back to the office, No. 62, and reported the state in which I found the godown.  Afterwards Mr. Trub came up, and during the interview he was asked how he came to make such a statement when he knew the goods were not in the godown.  He replied that it was a great wrong and admitted that it was a fraud.

   This evidence was also read over to the witness and acknowledged to be correct.

   Mr. Trub said he had not said it was a fraud, but acknowledged saying the document was wrong.

   Mr. Broadbent to the court: - On no previous occasion have I inspected the godown.  I have been in Yokohama two years.  The reason why I made the inspection was on account of the change in the managership, and also I was not satisfied with the monthly statement rendered, and thought it required to be verified.  It is the duty of the accountant to check godown receipts.

   H. Orth, sworn: - I am in the employ of Messrs. Ludwig & Co.  I have no interest in the business.  I was present at an interview on the 16th instant between Messrs. Walter, Broadbent, Morriss and Trub.  I s rood a little apart and did not hear all that was said.  I don't remember hearing Mr. Morriss saying 'Mr. Trub, then you have committed fraud in fact.'

 I did not take part in the conversation and don't remember what was said.

   The defence, which was in French, was then read.  The following is a portion of it:-

   It is truly an easy task for me, gentleman, to demist rate most thoroughly the probity, loyalty, and the motives of the conduct of my clients and friends.  You know them as well and better than myself; for a long time they have lived in the midst of you: you have always seen them laborious, orderly, modest, and enjoying universal respect.  Before they established a business on their own account in 1878, they had both been employed in old established firms and had acquired the so very difficult knowledge of that beautiful but dangerous commodity 'sik.'  Their reputation for honesty and buses capacity was already so well accepted that in the first year of their establishment Messrs. Ludwig and Trub obtained from the Hongkong and Shanghai bank a credit of $30,000, which, from the second year, was extended to $100,000.  The importance of their business and their commercial honesty were the guarantee of the Bank, so much and more still than the receipts of which we shall presently speak.

   A first modification, without doubt more or less necessitated by the general state of business, which, however, was not a happy one, was then introduced into their business by the partners, viz.; to obtain orders of a real and continued importance they found it necessary to interest themselves to the extent of one third, and sometimes one half, in the shipments they made.

   A little later, the Japanese having commenced to produce filatures in European style, which met with great success; the house of Ludwig occupied itself with this branch of the business on its own account, which fact forced them to have recourse to a more extended credit; which was granted. If during the years which followed Japanese foreign trade had at least remained normal, the merchandise bought with the money loaned by the bank would have been resold with a considerable profit and the regular returns from Europe would have sufficiently covered the advances made by the bank.

   But the house of Ludwig as well as several others, found itself severalty tried; purchases made in the interior, on which heavy advances had been given, were not delivered, and goods shipped to Europe had been realised at a loss, and the security of the Bank progressively diminished as the debt increased under these difficulties, and at an interest of 8 per cent.

   The bank during a period of prolonged crisis, could not ignore the situation in which the firm must needs find itself, with the evidence of an increasing debt and the drafts which had been sold to it with a margin up to 20 per cent on the amount of the invoice.

   Nevertheless, in order to conform to its statutes, the bank demanded, but only since 1880, a monthly statement of the goods in  stock, and its debtors, in compliance with this demand, rendered such statements.  We shall now return to rest on this alone.

    These gentlemen had to their credit in Japan a sum nearly equal to half their indebtedness to the bank, which was, moreover, their chief and almost only creditor.  A forcible execution would have done away with their means of action against their  debtors, whilst by continuing to deal gently with the latter they were convinced of their ability, in course of time, to return the larger part of the sums due, and to cover, little by little, the deficit in their account with the bank, and in fact since the last six months their situation had brilliantly improved.

   I have spoken of their successive losses, and their outstanding to be recovered.  The money owing them and assets amount to $90,700 and their justified losses to $118,.900 in round numbers.  This already exceeds the $184,000  due to the bank, with which it cannot be  said my clients enriched themselves to the detriment of the bank.

   The second sum is lost to them without hope of recovery; the first, by right, belongs to the creditors, of whom the bank, so to speak, is the only one.  The actual loss of the bank will then be reduced by the sums to be recovered on the above mentioned $90,700.  In regard to this, we cannot at present specify an amount; the result will depend much upon the manner in which the debtors are proceeded against.

   The point on which we wish to lay the utmost stress is, that if our clients have caused the bank to lose an important sum, they have not retained anything of it themselves; their discretion, their cleverness, have been gravely at fault, but their hands have remained c lean.

   We would wish it to be noted that the amount to the credit of the bank does not represent a loss of so much actual capital, for in fact during the five years in which those advances were made, it has, in current account, written to its credit the sum of $59,500 interest: yes, gentlemen, $59,500 interest paid !  Whatever may be the legitimate profits which bankers have and necessarily must have on their capital, one  cannot say more in their case than in that of private individuals assimilate the loss of interest with that of capital, so all the less so, as in their case there is necessarily compound interest, that is interest on interest.

JUDGMENT.

(Delivered on Jan 31st.)

   The accused are found guilty, and sentenced each to six months' imprisonment.

REASONS.

   The accused claim that they are not guilty of fraud, having had no intention to commit a wrong; because, further, the Hongkong and Shanghai Bank never had examined the goods in the godowns of the accused, receipts of which had been given, they concluded that the bank was aware of the insufficient character of these receipts; and, finally, because the Bank never enforced the clause that the 'goods should knot be sold without the authorisation of the Bank.'

   Furthermore, the accused claim that they never attempted to abet or maintain a criminal act against their creditors, with the intention of securing to themselves an unlawful advantage.

   The force of the term 'fraud' lies in the damage done to the property of another by means of deception with intent of unlawful profit.

   By means of the false receipts, the accused abetted and maintained a wrong against the Bank, inventing, as they did, the existence of goods in their godowns which did not at all, or only, in unimportant quantities, exist.

   By thus doing intentional wrong to the Bank's right of property they procured for themselves unlawful profit, and this was the profit they wished for.  Whether they intended to cover their indebtedness to the Bank at some future day, or whether they actually intended to do detriment to the Bank, are not questions to be considered.

   The illegal condition of their right of property is due to the fact that they obtained certain objects, the property of the Bank, objects to which they had no claim.

   Although the Court admits and takes into consideration on  behalf of the accused, that the Bank could hardly have lost so large a sum had they been more careful in the examination of the receipts, yet this does not by any means prove that the Bank was aware of the insufficiency of the securities given them; and the fact that the bank during  several years never enforced the clause' that the goods should [not] be disposed of without its authorization,' does not at all free the accused from the observation of the condition.  A condition which was repeated on every monthly receipt, and which was signed every month by the accused.

   The accusation of embezzlement is not recognised by the Court, as embezzlement only includes the appropriation of property belonging to another, and the goods certified in the receipts given to the Bank were only pledged to the Bank, but not property.

   It is reported, says the Japanese Gazette, that Messrs. Ludwig and Trub, convucted of fraud onb the Hongkong and Shanghai Banking Corporation, intend to appeal aganst the finding of the court.

Published by Centre for Comparative Law, History and Governance at Macquarie Law School