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Wall Street Crime And Punishment: Samuel Insull, A Utility Mogul Unplugged And 'Citizen Kane' Inspiration

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Wall Street Crime And Punishment: Samuel Insull, A Utility Mogul Unplugged And 'Citizen Kane' Inspiration

Samuel Insull is mostly forgotten today by the general public, but from the 1890s through the 1930s he was one of the most prominent figures in the U.S. economy. Indeed, Insull was such a notable personality that Orson Welles borrowed a chapter from his life and fashioned it into a segment of the landmark film “Citizen Kane.”

At the peak of his power, Insull’s fortune totaled roughly $100 million. But by the time of his death, he had only $1,000 to his name — which had been sullied during the wreckage created by the Great Depression.

Shining in Edison’s Glow: Insull was born in London in 1859, the son of a tradesman who focused his Sunday energies on being a Congregationalist lay preacher. Insull’s education was patchy and by the age of 14, he began a series of clerking jobs in London-based offices, including a stint as a stenographer for the publication Vanity Fair.

When he was 19, Insull landed work as a secretary and bookkeeper to George Gouraud, the London-based representative of Thomas Edison's business ventures. Insull became enamored with the success that Edison achieved across the Atlantic while recognizing his own personal fortunes would never blossom within the ossified class system of Victorian England.

When an opportunity arose to work as Edison’s personal secretary at the inventory’s laboratory in Menlo Park, New Jersey, he applied for and secured the position.

The 21-year-old Insull arrived in the U.S. in 1881 and immediately made a strong impression on the inventor. During the 1880s, Insull took on an increased depth and scope of responsibilities related to Edison’s development of electrical power stations.

In 1898, Insull participated in the formation of Edison General Electric, which later evolved into General Electric Company (NYSE: GE).

Windy City Visionary: Insull had hoped to be promoted to a leadership role at Edison General Electric, but he was passed over in favor of another candidate. Sensing that he had no further opportunity for advancement within Edison’s East Coast operations, he accepted the opportunity to run Chicago Edison Company.

When Insull arrived in Chicago in 1892, he found a city with 20 power plants serving only 5,000 customers — at the time, Chicago had a population of one million. He also discovered Chicago Edison was losing money because electricity was too expensive for most households and businesses, hence the extremely small customer base.

Insull switched Chicago Edison’s one-size-fits-all pricing scheme for its customers into a demand-metered billing system that charged different prices for electrical use during different times of the day, thus encouraging increased usage by households during off-peak hours. He also formed a battalion of installers to wire Chicago’s residences and businesses for electricity and even sold appliances that could be powered with this energy source.

In 1897, Insull launched a second utility called the Commonwealth Electric Light & Power Co. He merged his companies in 1907 to create Commonwealth Edison Co., which today is Chicago’s sole electric provider, Illinois’ largest utility and a subsidiary of Exelon Corporation (NASDAQ: EXC).

Into the early 20th century, Insull made additional investments into other utilities, including Peoples Gas, the predecessor of today’s Peoples Energy, part of WEC Energy Group (NASDAQ: WEC), and Northern Indiana Public Service Company, the forerunner of today’s NiSource Inc. (NYSE: NI). By the end of the 1920s, Insull's utilities were valued at nearly $3 billion, spanning 32 states and boasting a customer base of four million.

See Also: Wall Street Crime And Punishment: Richard Whitney, From Blue Chip To Behind Bars

A Very Rich Man: As Insull’s wealth expanded, he began to invest heavily in the railroad companies serving Chicago and the surrounding Midwestern states. He shrewdly advocated for state and federal government regulation of both the railroads and the electric utilities, recognizing that the level of oversight to be applied was worth the price of enabling these industries to maintain their respective monopolies.

Insull also became fascinated with the commercial possibilities of radio broadcasting, which was beginning to catch public attention. He arranged for Commonwealth Edison to team with Westinghouse Electric to launch KYW in 1927 as Chicago’s first radio station.

The “Citizen Kane” Connection: In 1929, Insull financed the construction Chicago’s Civic Opera House, a mixed-used property that included an apartment complex above the grand theater.

Although Orson Welles primarily based “Citizen Kane” on the life of publishing tycoon William Randolph Hearst, he acknowledged Insull as the inspiration for the Chicago-based opera venue built by the billionaire title character for his would-be soprano wife.

But it was through Welles’ collaborator on the “Citizen Kane” screenplay, Herman J. Mankiewicz, that Insull became firmly laced into the film classic. Insull was married in 1899 to Gladys Wallis, a former Broadway actress who was 17 years his junior. After her marriage, she acquiesced to her husband’s request that she steps away from show business.

In 1926, Mrs. Insull became nostalgic for the stage and announced to her husband that she wanted to play the role of Lady Teazle in the Sheridan comedy “The School for Scandal.” Incredibly, Insull not only agreed to his wife’s desire, but guaranteed $125,000 for a two-week run at Chicago’s Illinois Theater as a charity event to benefit a local hospital.

Mankiewicz was a New York-based theater critic when this production was being staged and he was sent by his newspaper to Chicago to write a review. Appalled by the sight of the 56-year-old Mrs. Insull trying to play the role of the 18-year-old aristocrat in a production that only existed due to her husband’s wealth, Mankiewicz got drunk after the performance and began writing his review of Mrs. Insull as “an aging, hopelessly incompetent amateur” before passing out at his typewriter. While his review was never completed or published, Mankiewicz incorporated the incident into “Citizen Kane,” reviving the phrase “hopelessly incompetent amateur” to describe the disastrous performance by Kane’s talentless opera-singing wife.

See Also: Wall Street Crime And Punishment: Joseph P. Kennedy, The Crooked Dynasty Patriarch

Decline and Ignominy: Insull used the holding company structure to finance his utility endeavors. This was not a new idea — General Electric created the Electric Bond and Share Company in 1905 to fund its business ventures.

But this strategy had a fatal flaw: too many firms created a pyramid of sub-holding companies that served no purpose except to hold the securities of other sub-holding companies. Even before the Wall Street crash of 1929, the Federal Trade Commission was investigating holding company abuses.

Alas for Insull and his investors, the 1929 crash exposed the weakness of his holding company set-up. Although he controlled business operations valued at $500 million, there was only $27 million in equity. When his holding company failed at the onset of the Great Depression, it vaporized the life savings of 600,000 shareholders.

Insull did not profit from the collapse of the economy. He was forced to declare bankruptcy and sell off his extensive business and real estate holdings.

Yet he was publicly vilified as being one of greedy tycoons that drove the economy into ruin. When Franklin D. Roosevelt campaigned for president in 1932, he mixed Biblical and contemporary treachery in promising to punish "the Ishmaels and the Insulls whose hand is against everyman's."

Using a minor income stream from pensions, Insull and his wife left the U.S. for Europe in 1932. In their absence, prosecutors sought to reposition Insull as a criminal. A Cook County grand jury indicted Insull and his brother Martin on embezzlement charges related to their leadership roles at the Middle West Utilities Company and Mississippi Valley Utilities Investment Company, while a federal grand jury indicted Insull and 16 others, including his son Samuel Jr., on mail fraud charges.

Insull learned of the indictments when he arrived in Paris. Because the U.S. and France had an extradition treaty, Insull and his wife relocated to Greece, which did not have an extradition pact with the U.S. But when his visa expired, Greece expelled him. Insull tried to move to Romania, which refused him entry, and then sought to reach Egypt, but was apprehended by Turkish authorities and sent back to the U.S. in 1934.

Despite the best efforts of Chicago and federal prosecutors, Insull was acquitted on all charges brought against him. But the financial and emotional stress created by his legal problems damaged his health. The Insulls left the U.S. for good and returned to Europe. Insull died of a heart attack in a Paris subway station in July 1938 and his body was returned to London for burial.

Insull’s legacy resulted in two significant achievements in the Roosevelt presidency: the passage of the Public Utility Holding Company Act of 1935, which prevented the abuses that led to Insull’s downfall, and the impetus for the creation of the Tennessee Valley Authority, which enabled the federal government to elbow its way beyond the private sector into becoming a player in the electricity transmission business.

Wall Street Crime and Punishment is a weekly Benzinga series. Starting with Charles Ponzi of the famed “Ponzi scheme,” Benzinga's Phil Hall will chronologically profile bankers, brokers and financial ne’er-do-wells to see what happens when ambition and greed criminally collide.

If you have any suggestions, email them to: editorial@benzinga.com and philhall@benzinga.com.

(Photo courtesy Wikimedia Commons.)

 

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