He Booked $18 Million of Sales of Drugs That Never Existed

New York City, 1938

0:00This is New York City.

0:00A comparison with prints in the old files of the Sheriff Street Police Station proved, the police inspector announced, that a company president was Philip M. Musica, a notorious swindler who had twice before pleaded guilty to commercial frauds.

0:18The president was F. Donald Coster, of the drug company McKesson and Robbins, and the company's head office was in Fairfield, Connecticut.

0:26The copy of Musica's prints had been found on the evening of the fifteenth of December, nineteen thirty eight.

0:37By nineteen thirty eight, the company he ran had been assembled from more than fifty separate corporations, with its head office and plant together, just outside Bridgeport.

0:48At the end of nineteen thirty seven, its certified accounts reported total assets of more than eighty seven million dollars.

0:53About nineteen million dollars of that, the Commission found, was entirely fictitious.

1:04Ten million dollars of it was an inventory of crude drugs, the raw materials of medicine. On paper, it was held for the company in the warehouses of five firms in Canada.

1:16The firms, the Commission's investigators found, were mere mailing addresses.

1:23The paperwork from those firms was typed, on printed forms. From April nineteen thirty seven, much of it was typed here, in Room seven eleven, at three hundred Main Street, Stamford, Connecticut.

1:33The typist who did much of that work, the Commission's report says, had seven typewriters in her office. Five portables, of different makes. Two standard machines, one with a large carriage and one small.

1:52For fourteen years, the same firm of public accountants audited Coster's companies.

1:57The man inside the company who finally went looking for the drugs was its own treasurer. By his own account under oath, he began, he thought, with a telephone book.

Act One: The Man in the File

2:20The Commission took Philip Musica's past from the police department's own files: records, and news clippings.

2:26In nineteen oh nine, the report says, he pleaded guilty to bribing a customs official to mark down the weights on imports of cheese.

2:35He was sentenced to a year in prison and fined five thousand dollars. In less than six months, he received a Presidential pardon.

2:48In nineteen thirteen, he pleaded guilty to grand larceny, in the affairs of the United States Hair Company.

2:53The report describes faked shipments, and faked documents, on human hair. Twenty two banks, it says, are estimated to have been involved, in a loss of over one million dollars.

3:04The Musica family was caught on a boat leaving New Orleans for Honduras. Honduras, the report notes, was a place from which they could have avoided extradition.

3:19Philip Musica took the entire blame upon himself. His sentence was delayed for three years, then suspended, the Commission says, apparently in return for aiding the authorities in investigatory work.

3:33In nineteen twenty, he was indicted for subornation of perjury, in connection with a murder case.

3:39That indictment was dismissed in nineteen twenty nine.

3:44By then, the Commission observes, he was well launched on a new career, as F. Donald Coster, president of McKesson and Robbins.

3:55The new career began on the thirty first of January, nineteen twenty three, when a company called Girard and Company was incorporated in New York.

4:00It began business that March, in Mount Vernon. It was reputed, the report says, to make chemists' products, most of which contained alcohol.

4:11At the beginning of nineteen twenty five, its shares were reputedly held by three people. Frank D. Coster, president and treasurer, with eight hundred and fifty shares. George Dietrich, bookkeeper, with fifty.

4:27And the vice-president, P. Horace Girard, with eight hundred and fifty.

4:35Horace B. Merwin became a director of the company early on, and stayed on when it became McKesson. At the Commission's hearings, he was asked who P. Horace Girard was.

4:46He testified: I never saw him. I do not know of anybody else who ever did.

4:49He remembered asking Coster about him, and being told Girard was ill with tuberculosis. As he understood it, Girard died soon after.

5:03A footnote in the report, citing the company trustee's own report, says it seems P. Horace Girard was another alias used by Philip Musica.

5:14Merwin himself would later be tried, and acquitted by the jury on all counts.

5:21Price, Waterhouse and Company first audited Girard and Company's books at the end of nineteen twenty four, and did every regular audit after that, of Girard and of McKesson. The firm was not among those indicted. The Commission later found its audits substantially conformed, in form, to what was then generally considered mandatory, and criticised how the work was done.

5:45That year, Girard contracted to buy a plant at Fairfield, near Bridgeport, from a bank that had taken it over.

5:50In the autumn of nineteen twenty six, Girard merged with McKesson and Robbins of New York. The prospectus called the old firm ninety three years old, with a line that ran from tooth powder to milk of magnesia.

6:05It described Girard's side as a modern plant with direct contact, throughout the world, with the original sources of its raw materials.

6:11Coster became president of the combined company.

6:18The fictitious transactions, the Commission found, had begun early in the life of Girard and Company.

6:23From there, they grew until the day the fraud was exposed.

Act Two: Building Number Two

6:38In August nineteen twenty eight, a new McKesson and Robbins was formed in Maryland, as a holding company. Its purpose was to buy wholesale drug houses throughout the country.

6:48In the later years, the Commission found, Coster was helped above all by three of his brothers. All three worked under false names.

6:59George Musica became George E. Dietrich, assistant treasurer of the corporation.

7:05Robert Musica became Robert J. Dietrich, head of the shipping, receiving and warehousing department at Bridgeport.

7:11And Arthur Musica became George Vernard. He managed the offices, the mailing addresses and the bank accounts of the dummy firms.

7:21The report calls all four brothers by their assumed names, and so does this film.

7:29In the early years the fraud used real money.

7:29Before nineteen thirty one, McKesson paid actual cash for fictitious purchases, from a group of vendors inside the United States. Then it recovered a large part of that cash, recorded as collections on fictitious sales.

7:46The money went out, and most of it came back.

7:52The accountant for the company's trustee later worked out the whole circle. Of nearly twenty five million dollars in real cash paid out on these transactions, all but about two point eight seven million came back.

8:08Until the middle of nineteen thirty five, the fictitious goods were supposed to arrive physically at the Bridgeport plant, and be shipped out again from there.

8:17Robert Dietrich supervised the taking of the crude drug inventories.

8:17An employee who worked under him for eleven years described to the Commission how the count sheets for these drugs were made.

8:27He was asked whether it was always a case of copying quantities off the cards, rather than of physical counting. He answered: That is right.

8:37On the nineteen thirty four inventory book sheets that included the foreign crude drugs, the report notes, no initials appear over Counted by, or Recounted by.

8:51He was asked whether Building Number Two could have held the quantities on those sheets. No, sir, he said, it would be impossible.

8:56He gave one line as an example. Gum camphor slabs, two thousand cases. With the space they had, he said, it would be almost an impossibility to get that one item in.

9:15The books said the drugs were at Bridgeport.

9:15But attached to the company's Connecticut income tax return for nineteen thirty four was a schedule, signed by Robert J. Dietrich, that said something else.

9:24It stated, we are holding in our New Jersey Warehouse the following merchandise, as of the thirty first of December, nineteen thirty four. The itemised crude drugs came to more than six point three million dollars.

9:44In nineteen thirty one, two new names came into the paperwork.

9:50W. W. Smith and Company became the company's sales agent for crude drugs, with a guaranty, the contracts said, from a firm of the same name in Liverpool, England.

9:59And Manning and Company, of Montreal, became the bank through which the money was supposed to move.

10:05After that, less and less real cash had to go round the circle. The payments and the collections were made, on paper, by Manning and Company.

10:17Smith, Manning, and the five Canadian vendors, the Commission found, were either entirely fictitious, or blinds used by Coster to support the fictitious business.

10:29From the middle of nineteen thirty five, the drugs no longer had to fit in Building Number Two. On paper, they never left Canada.

Act Three: Room 711

10:48In August nineteen thirty one, a typist went to work for George Vernard, at an office on Montague Street, in Brooklyn.

10:53In April nineteen thirty seven, her office moved to Room seven eleven, three hundred Main Street, Stamford.

10:59At the Commission's hearings, she described the work, step by step. The records this film draws on do not show her charged with anything.

11:15Once a month, she testified, she received a batch of McKesson and Robbins purchase orders.

11:21From each one, she typed a purchase invoice, on the billhead of the Canadian vendor. And a Manning and Company advice of debit, to match.

11:26Once a month there was a second batch, of McKesson factory orders.

11:32From those she typed Smith purchase orders. Smith notices of shipment. And letters from McKesson to the customers.

11:41The letters, she said, were always typed on blank sheets of paper. Originals, without any carbon copies.

11:52From copies of McKesson's sales invoices, she typed Manning and Company advices of credit, one for each.

11:59As she typed each Manning advice, she listed it in a black book. From that list, each month, she prepared a Manning and Company statement of account.

12:05A bank statement, from a bank, typed in an office in Brooklyn, and later in Stamford.

12:16And twice a year, she typed inventory confirmations, on the letterheads of the five Canadian vendors.

12:21Everything was done in two sets, one for the Connecticut business and one for the Canadian company.

12:33Seven typewriters. Seven firms on the paperwork: five vendors in Canada, one sales agent, one bank in Montreal. For each firm, she testified, she kept to particular machines. Whether all seven stood in Room seven eleven, the report does not say.

12:56When she started, she said, the orders came to her by mail from McKesson and Robbins. When the typing was finished, she sent it back, in care of George Dietrich.

13:07At Stamford, it changed. Robert Dietrich would bring the orders in, or she would simply find them in the file. Who had brought them, she said, she would not know. When the work was done, she testified, Robert Dietrich would call for it. Or else, in her words, during the night, somebody else would call for it.

13:29The forms themselves were printed. Invoices, advices and other documents, on printed forms in the names of these firms, were used, the Commission found, to give an appearance of reality to the fictitious transactions.

13:46Every month, the pages went back to Bridgeport, and into the books of the Connecticut business and the Canadian company.

13:50And twice a year, from Bridgeport, a letter went out asking the Canadian firms what they held.

Act Four: The Confirmations

14:09From the middle of nineteen thirty five, the Commission found, this is how the business worked on paper.

14:14McKesson bought crude drugs from five vendors in Canada. The vendors kept the goods in their own warehouses, for McKesson's account.

14:26W. W. Smith and Company sold the goods for McKesson, and shipped them straight from the Canadian vendors to the customers.

14:31And Manning and Company paid for the goods bought, and collected for the goods sold.

14:39None of it happened.

14:39The customers, though, were real firms. They had simply done no business of this kind with McKesson.

14:49Each sale came with a Smith notice of shipment. Down its side were five boxes, for the documents enclosed. Bill of lading. Consular invoice. Invoice. Warehouse receipt. Insurance certificate.

15:00Every box was ticked except one. The one for the warehouse receipt.

15:08And no one who testified, from the comptroller to the office manager to the billing department, remembered ever seeing any of the documents that were ticked as enclosed.

15:21The company's letters to the vendors did not describe the merchandise. They asked only for, in the report's quotation, a statement certifying the amount of merchandise you hold in storage for our account.

15:34At the year end, the requests went out by Price, Waterhouse and Company, and the replies came back directly to them.

15:39The replies came back on different coloured stationery, in varied language. None of them stated the exact location of the goods. None gave any markings that might identify them.

15:51At the end of nineteen thirty seven, these confirmations covered about ten million dollars of crude drugs.

16:01Twice a year, the typist had testified, she typed inventory confirmations, on the vendors' letterheads.

16:10The office manager who handled the confirmations remembered none that failed to match the inventory cards.

16:15One year end, the auditors' own request, covering more than two million dollars, came back undelivered. On the list the company's office manager had supplied, the address was forty eight Queen Street, Ottawa, instead of forty five.

16:34The pattern is in Price, Waterhouse's own year-end price test schedules, for nineteen thirty four to nineteen thirty seven, as the Commission set them out.

16:39A drug would be bought in one large lot. Aloin, for example, eighty four thousand pounds. It would be sold in lots of eleven or twelve thousand pounds.

16:52Yet at the year end, only in rare instances did the stock left over fail to equal, exactly, one particular purchase. None of the goods, in the Connecticut business, was ever held over from one year end to the next.

17:10The crude drug business was never discussed at any meeting of the board of directors, or of its executive or management committees.

17:14One member of both committees testified that early on, riding the train to Bridgeport, he had seen buildings along the railroad with the company's name on them, and been told they held crude drugs.

17:30And the auditors saw paper.

17:30In the final three years, the Commission found, their contact with this part of the business was limited to examining supposed documentary evidence, of transactions carried on completely offstage, through agents unknown to them.

17:45Price, Waterhouse, like a substantial part of the profession at the time, held that checking the quantity and condition of an inventory should be confined to the records.

17:58For nineteen thirty seven, the fictitious sales came to more than eighteen million dollars. On those, the books recorded a fictitious gross profit of about one point eight million.

18:14The fraud was not everywhere. The wholesale houses held about seventy percent of the reported assets and made eighty five percent of the sales. It appeared to the Commission that they had been audited thoroughly.

18:24It sat in two units under the direct charge of the company's principal officer.

18:28At forty five Queen Street, Ottawa, there was an address.

Act Five: The Treasurer

18:43Julian F. Thompson was the treasurer of McKesson and Robbins. Everything that follows is his account, as he gave it under oath at the Commission's hearings.

18:54In April nineteen thirty seven, with the company's bank debt growing, a committee decided to cut inventories by four million dollars in four months.

19:03A million of it was to come out of the Connecticut business.

19:09Thompson watched the monthly inventory report. As the months passed, he testified, the crude drug department was going up steadily, instead of coming down.

19:20He raised it with Coster, who said it would come down. He thought he raised it again late in the year.

19:27In January or February nineteen thirty eight, Thompson showed him the whole year.

19:33Coster, he testified, blamed two vice-presidents, who had over-bought and were not selling.

19:40That, Thompson said, I knew was a lie, because I knew they did not have anything to do with that department.

19:49He decided, he said, that something must be seriously wrong, or Coster would not have lied. He thought to himself, he said, that he had better not ask him any more questions.

20:02He asked the comptroller for the details. He took down the names of the warehouses in Canada, and their addresses.

20:06The first thing he did, he thought, was go to Grand Central, get a Montreal telephone book, and look them up.

20:11He found a W. W. Smith and Company, Limited. It was not either of the companies that had made the contract.

20:23He did not want to ask for credit reports through his own company. So he asked an old college roommate, the president of a varnish company, to get Dun reports.

20:28They indicated, he said, that there apparently was no business done at those addresses that amounted to anything.

20:42The company's own files held Dun reports on Smith as well. Thompson testified that he suspected those were forged. The Commission later found that forged credit reports on Smith had been used.

20:58The summer went on letters to England, and on deciding what to do.

20:58Then, that autumn, his lawyer's partner found W. W. Smith in the Brooklyn telephone book.

21:10Someone sent to that address found the office of George Vernard. And on the same building's bulletin board, Thompson said, some of the Canadian vendors turned up, tied in with the Vernard name.

21:24He needed to see where the money went.

21:24The division's cancelled checks were kept in George Dietrich's office. So, not to arouse suspicion, Thompson went to the bank, Guaranty Trust, and asked to see the checks before they were sent on to Bridgeport.

21:39He found a check to W. W. Smith for something over ten thousand dollars. It had been deposited at the Hamilton Trust branch of the Chase National Bank, in Brooklyn.

21:54He asked, by chance, whether they held an account for Manning and Company as well. They did. At the same Brooklyn branch.

21:59He had hoped, he said, to find large funds flowing in from foreign creditors.

22:05Instead, he testified, about sixteen checks went through in the entire month, against a million and a half dollars of sales a month.

22:19It was, he said, the first tangible piece of evidence.

22:19There was a reason to move fast. The company was negotiating the sale of three million dollars of additional bonds, and that meant a listing application, and figures to be certified.

22:35In the middle of November, he took it to the company's outside counsel, who felt there was nothing to do but put it to Coster at once.

22:44On Sunday the twenty seventh of November, he put it to Coster.

22:44Coster never admitted, Thompson testified, that anything was wrong with the account. He said he would supply warehouse receipts. He said the goods were insured with Lloyds, and that he would give him the evidence.

22:58He accused Thompson, Thompson said, of disloyalty.

23:06At the end of that week, he told Coster he wanted the information by Monday. On the Monday, he thought, he gave him an ultimatum. If it was not there the following day, he would report to the executive committee.

23:16He was asked whether that was the evening the receivership became public.

23:21He said, yes.

Act Six: December 1938

23:36On Saturday afternoon, the third of December, a New Haven lawyer handed stock certificates for two thousand shares of McKesson common to the Mayor of Hartford. The lawyer said he represented an officer of the company, whom he did not name.

23:46By comparing certificate numbers, the Commission found that those same shares had been delivered that morning, by a Stock Exchange firm, to Robert Dietrich.

24:02On the Sunday, a second New Haven lawyer, the one who would become a receiver, consulted the judge, about a meeting he had had with George Dietrich.

24:07The Commission's account shows where the shares came from, and whom the second lawyer met. Why, the records this film draws on do not say.

24:22On Monday afternoon, the fifth of December, the city's Corporation Counsel filed a complaint in the federal court in Hartford, as a stockholder, using those shares.

24:32It alleged that the company's accounts included inventories and receivables which, in its words, do not and have not existed. They came to more than ten million dollars, the complaint alleged.

24:43The judge appointed the Mayor of Hartford and that second lawyer as temporary receivers.

24:52That night, company directors and officers met at a director's apartment in New York. Thompson was there. Coster was not.

25:01The director, who testified to the Stock Exchange two days later, put a call through to Coster.

25:05He asked him what it was all about.

25:05He recalled Coster's answer. I know nothing about it. Here I am, living in Connecticut. Surely some one would have told me.

25:20Coster said he would be in New York at ten the next morning. In the morning, he telephoned instead. The receiver, he said, had just arrived at the Bridgeport office and ordered him to stay there.

25:31That morning, the New York Stock Exchange held up trading in McKesson securities. At eleven thirty, its governors voted an indefinite suspension.

25:39They did it, they said, not for the things they knew, but because of the things they did not know.

25:49That afternoon, the Securities and Exchange Commission ordered an investigation. Its people went straight to Fairfield.

25:53On Thursday, the eighth, the Commission's report says, a federal court in New York approved the company's petition to reorganise, and appointed trustees. A nineteen forty two appeals court opinion puts it a year later, the eighth of December, nineteen thirty nine.

26:17On Friday, the Commission referred the matter to the Department of Justice.

26:22Investigators went to Brooklyn, to George Vernard's offices, and to the bank accounts kept in the names of Smith and Manning.

26:26Others went to Montreal, to the offices of Smith and Manning and the Canadian firms. Those firms, the report says, were disclosed as mere mailing addresses.

26:40And some went to Stamford, where the brothers had used an abandoned office as their headquarters for preparing the documents.

26:45There, a discarded piece of wrapping paper, addressed to George Vernard in Brooklyn, gave the clue to where the stationery had been printed. Every letterhead, statement form and billhead for Smith, Manning and the Canadian vendors.

27:05By cable and telephone, officials in the Province of Quebec, and the police in London, England, helped confirm that the inventories and receivables did not exist.

27:16And in New York, a Brooklyn attorney disclosed, unwittingly, that he had known F. Donald Coster as Philip Musica.

27:26On Tuesday the thirteenth, the Commission's chief accountant-investigator swore out a complaint for the arrest of Coster, George Dietrich and George Vernard.

27:36Coster and George Dietrich were arrested the next day. That was when Coster's picture, and his fingerprints, were taken for the first time.

27:45On the fifteenth, a federal grand jury indicted Coster, George Dietrich, George Vernard and the company itself, over the company's annual reports. That evening, the prints were matched to Philip Musica.

27:55At noon the next day, as a United States Marshal arrived at his home to re-arrest him, Philip Musica committed suicide.

28:04The three remaining brothers were taken into custody.

28:09On the twenty second, a federal grand jury indicted the three brothers under their real names.

28:16On the nineteenth of December, the Commission turned from the criminal investigation to the audit.

28:20It set out to examine, in its words, the auditing practices and procedures which, for a period of fourteen years, failed to disclose the gross inflation of assets.

28:31On the twenty ninth of December, it ordered public hearings.

Act Seven: The Findings

28:48The hearings began on the fifth of January, nineteen thirty nine, and ran to the twenty fifth of April.

28:55Forty six witnesses were examined. One, the Commission's list says, was a person who prepared many of the fictitious documents.

29:03The testimony ran to four thousand, five hundred and eighty seven pages.

29:10On the thirtieth of March, nineteen thirty nine, a third federal indictment named the three brothers, and six other men.

29:19The brothers pleaded guilty before trial. So did Benjamin Simon, who, it appears from the report, had early on done some of the work later done by George Vernard.

29:30John and Leonard Jenkins, Coster's brothers-in-law, pleaded guilty during the trial.

29:37Two directors, Horace B. Merwin and Rowley W. Phillips, were acquitted by the jury on all counts.

29:45John H. McGloon, the comptroller since nineteen twenty eight, was acquitted of conspiracy and of mail fraud, and on the counts for the nineteen thirty five and nineteen thirty six annual reports. The jury found him guilty on one count, over the report for nineteen thirty seven.

30:01When the Commission wrote its report, his appeal was pending.

30:07Sentence was passed on the twenty second of May, nineteen forty, by Judge Grover M. Moscowitz.

30:13George Vernard and Benjamin Simon, three years each. George Dietrich, two years and six months. Robert Dietrich, one year and six months. John Jenkins, one year and one day. Leonard Jenkins, a suspended sentence, and probation. And John H. McGloon, on his one count, one year and one day, and a five thousand dollar fine.

30:47On the twenty ninth of March, nineteen forty, McKesson's securities were restored to trading on the New York Stock Exchange, while the reorganisation went on.

30:52Of the real cash that went round the circle, about two point eight seven million never came back.

31:03That, in the trustee's report as the Commission quotes it, was the amount definitely lost. It appears, that report says, that nearly a million dollars of it was traced to bank or brokerage accounts of F. Donald Coster. It is not the loss to shareholders. What they lost in all, the records this film draws on do not say.

31:28On the fifth of December, nineteen forty, two years to the day after the receivership, the Commission published its findings.

31:35Price, Waterhouse's audits, it found, substantially conformed, in form, scope and procedures, to what was generally considered mandatory at the time.

31:46But in doing the work, it found, they failed to employ that degree of vigilance, inquisitiveness, and analysis of the evidence available that is necessary in a professional undertaking.

32:00Price, Waterhouse argued that no balance sheet examination could be expected to catch a conspiracy run by a company's own president, and that such cases were too rare to justify the extra auditing it would take to guard against them.

32:12The Commission answered that an audit should not exclude the highest officers of the corporation from appraisal of how the business was conducted.

32:20It looked at how the auditors had been hired. Every appointment, it found, was made by a letter from Coster, or from the comptroller, near the close of the year to be audited. With rare exceptions, the directors testified, the board had no part in it.

32:41Over fourteen years, it found, there were numerous circumstances within reach of the auditors' own procedures which, if carefully investigated by resourceful auditors, should have revealed the inflation. It did not say that every one of them should have been recognised.

32:59Meticulous verification of the inventory, it said, was not needed in this case to discover the fraud.

33:04It pointed instead to the failure to ask the employees who actually took the inventory, and to determine by inspection whether there was an inventory as represented by the client.

33:17Before the hearings, the Commission recorded, inspecting inventories and confirming receivables had been considered optional steps.

33:22After the fraud, it found, the profession adopted confirmation of receivables as a required procedure, where practicable and reasonable. And it adopted, as normal, procedures requiring physical contact with a client's inventory.

33:45The overstatement, it found, should have been disclosed if the auditors had corroborated the company's records by actual observation and independent confirmation. Steps, it said in the same sentence, that the profession had not then considered mandatory.

34:04From nineteen thirty one to nineteen thirty eight, the Commission's witness list says, a stenographer prepared fictitious papers. Her offices were in Brooklyn, and then in Stamford.

34:15After McKesson and Robbins, the profession expected its auditors to go and look at the goods.