30 August 1930
It was Saturday, 30 August 1930. Two men, soberly dressed in dark suits, waited quietly in an Ottawa courtroom to hear their fate. They had just pleaded guilty to conspiring to defraud the public and to manipulating the prices of mining companies’ shares. Judge Daly broke the news—three years for each of them in the Collins Bay Penitentiary. It could have been worse. The law allowed for a sentence of up to seven years for their crimes. But they had hoped to get away with just two. However, Justice Daly said that he couldn’t see how a sentence of less than three years would meet the circumstances. He had to look toward to future cases and this would set a precedent. After the pair received their sentences, former colleagues came up to shake their hands and offer condolences. Then, the two men were taken back to the Nicholas Street jail before being processed and sent to Kingston to begin their prison sentences. What had gone so very wrong?
The story began six years earlier. On 29 February 1924, two young men, Robert H. Mowat and Duncan A. MacGillivray, announced the opening of a brokerage partnership in Ottawa, operating out of the Union Bank building on Metcalfe Street. The new firm specialized in mining shares, and had a seat on the Standard Stock and Mining Exchange in Toronto. It also provided a statistical service, reporting on developments, production and earnings of mining companies, and produced a publication called The Gold Mines of Ontario which they gave away free to customers.
Mowat, who was a native of Campbellton, New Brunswick, had prior financial market experience. Before establishing the brokerage firm, he had been employed in a prominent Toronto bond house. He was a graduate of the University of Toronto, and had served as an officer in the 26th New Brunswick Battalion. His partner, MacGillivray, was born in North Evans, New York. He also had attended the University of Toronto, and had taken an engineering course at the Kelvin Institute in Glasgow, Scotland. Like his partner, he was a war veteran, having served with the 2nd Canadian Mounted Rifles in France.
Their firm, Mowat & MacGillivray, flourished. It was the Roaring Twenties. The North American economy was growing rapidly, and corporate share prices were effervescent. Once the domain of the wealthy, stock markets were now attracting the savings of the middle class. Stock brokerage firms opened everywhere.
With share prices shooting up, easy money could be had by all…for a time. This was particularly true for investments in junior Canadian mining companies. In 1927, the Ottawa Citizen ran a mining supplement that extolled the virtues of investing in Canadian mining companies. “‘Optimism’ Watchword in Canada’s Mining Areas” the headline read. One article argued that if you were willing to take a chance, the “promising prospects of our great North Country are certainly a wonderful purchase because the prospect when it does develop into a mine brings the investor a reward that he cannot look for in any other industry.” Past “promising prospects” had led to profits of 5,000 to 20,000 per cent. It was hard for people to resist such a sales pitch. And it was hard to distinguish between the truly promising and the truly fraudulent. For a time, it didn’t seem to matter. The price of everything rose in a speculative frenzy.
Mowat and MacGillivray were in the thick of it. In that same Citizen supplement, MacGillivray wrote a lengthy positive article about mines in northern Quebec above a two-thirds page advertisement for the Mowat and MacGillivray brokerage firm. Large pictures of the two principals featured on another page. The firm had sponsored and sold shares in dozens of junior mining and oil companies, including Aconda, Arno, Melnor, and Cold Lake Mines.
The partnership grew quickly. By 1927, they had moved out of their Metcalfe Street offices into larger and more prestigious quarters at 128 Sparks Street. Ironically given what was to come, this building had formerly housed a branch of the Home Bank of Canada. The Home Bank had failed in spectacular fashion in 1923, leading to the loss of millions of dollars, a government bailout of depositors, tarnished reputations, criminal charges, ruined investors, and even suicide.
In addition to their seat on the Standard Mining Exchange in Toronto, Mowat and MacGillivray bought seats on other Canadian stock exchanges that specialized in mining companies, including the Vancouver Stock Exchange, the Calgary Stock Exchange, and the Montreal Curb Exchange. The latter exchange was designed for stocks of companies deemed too speculative (i.e. high-risk) to be listed on the Montreal Stock Exchange. Mowat and MacGillivray also bought a seat on the New York Mining Exchange.
Their physical presence also grew well beyond Ottawa. By 1929, the firm had expanded throughout the Ottawa Valley with offices in Cornwall, Pembroke, Perth and Hawkesbury. The partnership established a limited liability company of the same name in Hull. The establishment of a Quebec company was necessary for them to avoid paying high taxes if they were to transact business in Quebec. Their Hull subsidiary had branches in Trois Rivières and Quebec City. Other Ontario offices were located in Belleville and Brockville. The firm also expanded into the Maritimes, with offices in Halifax, Sydney, Yarmouth, New Glasgow, Glace Bay and Windsor in Nova Scotia as well as in St. John and Moncton in New Brunswick.
The two young brokers became pillars of the Ottawa business community, always ready to support local charities and Ottawa events. They also sponsored an in-house hockey team that played in an Ottawa bank hockey league. The firm even donated the Mowat Trophy for the league’s annual competition.
The edifice came tumbling down with the start of the Great Depression in October 1929. Global share prices, led by prices on the New York Stock Exchange, tumbled. Investor losses were huge, exacerbated by the widespread practice of buying shares on margin. Investors put up as little as 10 per cent of a share’s value, borrowing the rest. In a rising market, margin is a way of leveraging gains. However, in a falling market, the reverse happens. Brokers and banks demand more money to cover margin losses, or sell their clients’ shares which only send the market down further. On Black Tuesday (29 October) alone, one local broker said that “hundreds of small Ottawa investors had been wiped out.”
For many stock brokers, after the heady years of the 1920s, the collapse of markets was a death knell. Few people were willing to buy shares of even the most conservatively run company let alone acquire shares in new enterprises, even ones that held promise. Customer orders dried up.
The hard times also exposed shady practices that weren’t apparent during the boom times. Some stock brokers were exposed for running “boiler rooms” or “bucket shops.” A boiler room operation is where stock dealers using high-pressure tactics to sell speculative penny stocks via telephone to the unwary or the gullible. The dealers might also sell the shares at inflated prices. A bucket shop is a stock dealer who sells clients what amounts to a derivative of a stock at some notional price. There is no purchase of shares on behalf of a client on a recognized exchange. Transactions simply goes “into the bucket.” It is a form of gambling with the client betting against the broker who plays the role of “house.”
On 6 March 1930, Ottawa woke to banner headlines in the city’s newspapers: Mowat and MacGillivray’s firm had failed the day before, their offices closed, and their accounts taken over by a receiver. An application against the firm had been filed in Toronto when their cheque in the amount of $933 issued to one W.W. Beaton, a resident of Haileybury, was returned owing to insufficient funds. The purpose of the receiver was to conserve the assets of the company on behalf of its many creditors.
There had been no warning of the failure. It came as a huge shock to the firm’s clients and the Ottawa business community. The previous Christmas, employees had been given substantial bonuses. Just a few weeks earlier, the firm had taken over the Ottawa brokerage firm of George R. Guy & Company. It had also financially supported Ottawa’s first international dog derby that ran at the beginning of February 1930. The company’s hockey team had just won the “Big Four” hockey series, and were in Ottawa’s industrial league playoffs. After beating the Post Office, the brokers’ team, now unemployed, were defeated by the Telephone Company in the finals at the end of March 1930. It was the last time the brokers’ team played.
Initially, Duncan MacGillivray suggested that the firm’s problem was illiquidity rather than insolvency. He claimed that the firm had sufficient assets to cover all its liabilities. But the problem was that the certain assets could not be realized immediately owing to poor market conditions. Later, he attributed their failure to overexpansion and excessive overhead. There was also considerable speculation that the firm would be consolidated with two other troubled brokers—Solloway, Mills & Company and Stobie, Forlong & Company—and reopened.
G.R.F. Troop, an accountant working for the receivers, took immediate control of the firm’s books, and commenced a comprehensive audit of its accounts. Thirty-five of fifty head office staff were laid off and paid their last week’s salary. The remaining fifteen remained to help the auditors go through the books. It didn’t take Troop long to spot financial irregularities. One week after the company failed, the provincial attorney general issued warrants for the arrest of Robert Mowat and Duncan MacGillivray on a charge of conspiracy to defraud their customers.
The pair were taken into custody but were treated with kid gloves. Instead of being held in the cells, Mowat and MacGillivray waited in the arresting officer’s office while bail was being arranged. They, and Inspector McLaughlin, chief of the morality squad, even partook of a substantial luncheon brought in by outside caterers. The two were released on $50,000 bail each. It took months for the receivers to go through the company’s books, delaying their jury trial. In the meantime, the pair remained free, even travelling to the United States in an attempt to find ways of bailing out their company.
In early August 1930, the Crown laid four additional charges of fraud and theft. With that, the two were taken into custody and held at the Nicholas Street jail. Meanwhile, Hull police stood ready to arrest them on Quebec warrants for conspiracy to defraud in connection with their Hull operations.
The day before their jury trial was to begin, Mowat and MacGillivray surprised everybody by pleading guilty to defrauding the public and stock price manipulation. Since they had pleaded guilty, the details of what they did were not revealed. However, there were reports that during a one-week period, auditors found that 65 per cent of client transactions had not gone through a stock exchange. The receivers also found that the company was missing three million shares of various companies that were owed to their customers. Press reports concluded that Mowat and MacGillivray had been running a bucket shop. The extent of client losses was not reported.
Before Justice Daly pronounced sentence, their defence attorney argued that in mitigation of their crime, Mowat and MacGillivray had been good citizens, and only did what “was common practice to that business.” He argued that overhead had swallowed up the firm, and that the pair were now virtually penniless. After sentencing them to three years in the penitentiary, Daly said that he hoped that they would reduce the length of the sentence by good conduct and making some effort to reimburse those who had suffered financially from their crimes.
Two years later, Mowat and MacGillivray, now dress in prison denims rather than banker grey, were taken to a Hull courtroom. Found guilty of conspiracy to defraud their clients related to the actions of their Hull subsidiary, the pair were sentenced to two more years in jail.
Globe, The, 1930. “Brokers’ Fines Total $250,000,” 24 June.
————-, 1930. “Penitentiary Terms Imposed on Brokers,” 1 September.
Ottawa Citizen, 1927. “Optimism Watchword In Canadian Mining Areas,” 31 October.
——————, 1927. “Taking A Chance,” 31 October.
——————, 1930. “Further Donations To Dog Derby Fund,” 24 January.
MacGillivray, D.A. 1927. “Interesting Stage North Quebec Mines,” Ottawa Citizen, 31 October.
——————, 1930. “Mowat And MacGillivray Assigns And Interim Receiver Is Appointed,” 6 March.
—————–, 1930. “Text Of Statement By D. MacGillivray,” 6 March.
—————–, 1930. “Expect Report on Defunct Firm About Weekend,” 10 March.
—————–, 1930. “Mowat And M’Gillivray Face Conspiracy Charge,” 12 March.
—————–, 1930. “Bail Bond Hitch Causes Delay In Brokers’ Arrest,” 13 March.
—————–, 1930. “R.H. Mowat Granted Release On $50,000 Bail,” 13 March.
—————–, 1930. “D.A. M’Gillivray Secures Release On $50,000 Bail,” 13 March.
—————–, 1930. “Telephone Hockey Team Scores Second Victory Over Brokers,” 31 March.
—————–, 1930. “Ottawa Brokers Hope To Pay 100 Cents On The Dollar,” 10 April.
—————–, 1930. “Mowat and MacGillivray Committed For Trial,” 11 August.
—————–, 1930. “Brokers Ready To Plead Guilty To Conspiracy,” 29 August.
—————–, 1930. “Ottawa Brokers Given Sentence OF Three Years,” 2 September.
Ottawa Journal, 1930. “Mowat and MacGillivray Have Failed And All Their Offices Are Closed Accounts Taken Over By Receiver,” 6 March.
——————, 1930. “Audit Of Brokerage Firm’s Books Now Underway,” 7 March.
——————, 1930. “Warrant Sworn Out For H. Mowat And D.A. MacGillivray,” 12 March.
——————, 1932. “Mowat and MacGillivray In Hull Court,” 30 March.
——————, 1932. Brokers Given Two Years By Judge In Hull,” 18 July.
Winnipeg Tribune, 1930. “MacGillivray and Mowat Go To Prison,” 30 August.