Walkabout: The Great Defalcation, Part 1

Great Defalcation. George Brainerd, Coney Island, 1879, Brooklyn Public Library

Read Part 2, Part 3, and Part 4 of this story.

On a warm summer day in July, 1873, Ethelbert S. Mills, the president of the Brooklyn Trust Company, took a couple of days off to go to the beach at Coney Island. The rest of his family was summering in the country, but Mills had banks to run, extensive real estate holdings to manage, and was president of the Brooklyn Arts Association and a member of the Academy of Music Company.

He stayed in Brooklyn that summer, but even a busy mogul needs some time off. He took the train to Coney Island and checked into the Oceanic Hotel, enjoyed a pleasant dinner at surfside, and retired for the evening.

The next morning, on July 15, bright and early at 5 am, he left the hotel to take a swim in the ocean. Mills walked on the beach, picked his spot, took off his clothes, folded them into a nice tidy pile, and ran into the ocean to greet the dawn.

The 55-year-old Mills was in good shape, and was an expert swimmer. He took brisk strokes, his arms cutting deeply into the approaching surf, and was soon far away from shore. The sun was rising, and it was a beautiful day. Ethelbert S. Mills was never seen alive again.

At 7 am, his absence was noted, but there was no alarm. His clothes were found on the beach soon afterward. The groundskeepers and attendants of the nearby bathhouse were getting ready for a new day of work when they found his clothes.

Just then, one of them waded into the surf to dip a pail into the water and found the body of Ethelbert Mills floating face down in the shallow water. He was about 200 feet from where he had gone in. The body was taken up to the hotel, where an inquest was quickly held by Justice S. J. Voorhies, the acting coroner.

It was known that there was a fierce undertow out where Mills was swimming, and the verdict was that he had been pulled under and drowned, no doubt exhausted from trying to break free of the current. His death was ruled accidental.

Mills’ wife, who was the sister of Abiel A. Low, one of Brooklyn’s most powerful and influential citizens, was notified, and she and their children left their country estate in Nantucket to take care of the grim and unexpected duty of burying a husband and father.

As more details emerged the next day, it was surmised that Mills had been overheated at the time of his death. He had been wearing an overcoat in the morning when he left the hotel, as it was chilly, and walked briskly to the beach, raising his body temperature.

Those who opined on the subject thought that he had tossed off his coat and clothing, and was not sufficiently acclimated to the much colder temperature of the water, and the shock of plunging his overheated body into the cold water had caused him to drown. There was no autopsy, as the accidental nature of his tragic death was evident to all.

The Brooklyn Trust Company had an emergency board meeting, and Mr. Daniel Chauncey, the president of the Mechanics Bank, was chosen as the head of the Brooklyn Trust, pro tem. They would meet after the funeral to decide what to do next.

The important folk of Brooklyn gathered at the Mills house at 150 Montague Street to bid a fellow elite a fond farewell. He was laid out in a handsome open rosewood casket, clad in a fine suit, with his hand on the Scriptures. He looked to be at peace.

After the private service, the casket was moved to the nearby Second Unitarian Church, where more people would be able to say goodbye, and where he was eulogized by his colleagues in the financial world, and the arts and charities.

Mills was hailed as a great businessman, a fine father and a true son of Brooklyn, a man who ran several businesses, belonged to the right clubs and gave generously to the right charities, including his church. He would indeed be missed.

But there were already rumors floating around that Ethelbert Mills did not die accidentally, that he had committed suicide. They also suggested that the Board of Directors of the Brooklyn Trust Company was going to have a shock coming its way.

“Everything,” said Daniel Chauncey,  “is in the most perfect order.” The Brooklyn Eagle noted that “the [Brooklyn Trust] Company is well known, and managed by some of Brooklyn’s most solid and best known citizens.”

“Mr. Mills’s wealth and a cruel rumor of suicide started yesterday,” the Eagle continued. “What possible reason for such a story can exist it is hard to imagine, as not an iota of evidence can be gathered tending to show any such intention on Mr. Mills’s part, or cause for any such intention.

There is no doubt at all that Mr. Mills came to his death accidentally, and in the manner stated.” Ah, but the paper would soon regret those words. Only two days later, the earthy effluvia was about to meet the revolving blades, to clean up an apropro metaphor.

Two days later, the Brooklyn Eagle ran a long story called “The Mills Defalcation – the Tragedy Succeeding the Tragedy.” It was a tale of two Ethelbert Mills. One was a leading Brooklyn citizen who had been honestly mourned and roundly hailed for his many accomplishments.

“They had been prepared to embalm him in memory with the fragrance of the good he did, which lives after him,” the paper wrote. The other Ethelbert Mills  was not so admirable. “Suffice it to say that the untimely ending of his career has revealed a fatal fault in a single quarter, fatal so far as the rounded completeness of his life is concerned.”

The paper continued, “the late President of the Brooklyn Trust Company is posthumously discovered to have let out its monies on enterprises whose accepted securities may be regarded as virtually worthless, and to have employed others of the monies committed to its custody, in the attempt to maintain private speculations of his own, on a vast scale, speculations declared to be greatly in excess of the sums to which he was entitled on private accounts – an excess which came out of the funds of the institution he was set and believed honorably to guard and protect.”

In plain English, he used the bank’s money to make bad loans and to (badly) play the market for himself.

According to the dictionary, “A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof. The term is more specifically used by the United States Bankruptcy Code to describe a category of bad acts that taint a particular debt such that it cannot be discharged in bankruptcy.

Defalcation occurs when a debtor commits a bad act while acting in a fiduciary capacity. The classic example of defalcation is when a trustee recklessly invests trust funds and loses the money.” As the days went by, it was becoming clear that this was a defalcation of the first order.

Mills had granted a loan to the Georgia Railroad for $150,000. The loan was to be secured by bonds, but the bonds had been tainted by other malfeasance from other individuals and were considered worthless.

The news of the bonds’ insolvency was common knowledge in the financial community, and the surrounding scandal had been all over the national and local papers. You gotta love the Eagle, they did have a way with words: “The bonds were conceived in sin, and brought forth in iniquity, and they wore their rottenness from their issue to their outlawry.” In other words, Mills had not been paying attention. And he was running a bank?

On top of that he made a couple of other dubious loans to other railroad projects, but those at least were guaranteed by secure bonds. The big unforgivable sin was that he had made loans to himself for a total of around $200,000, a sum that would be around $38 million today. He had invested it, over time, in real estate speculations and land.

Those in the know thought he may have made the money back in time to return it before it was missed, but then again, maybe not. It was all moot. As the Eagle opined, “It will be seen that Mr. Mills’ sins were on the side of his qualities.

No moral vices, no vulgar tastes or pursuits absorbed his embezzlements. He swamped them on houses which, in design, were a credit to Brooklyn, and in location an incentive to and prophecy of her development. He doubtless indulged the elusive home that in time he would make all things even.”

But Ethelbert Mills was now dead, and beyond the punishment of mortal man. However, he didn’t do this alone. He had help within the bank. The powerful Secretary of the Brooklyn Trust was in on the scams, and worse yet, had made a few “investments” to help himself out too.

And then he went too far. It turns out that the Secretary was one Mr. M.T. Rodman, and he was not only a trusted official of the Brooklyn Trust, he was also the Treasurer of the City of Brooklyn. And his dipping into the till was not confined to the bank. He was robbing the City coffers, as well. The public’s money. Oops.

The plot thickens, next time.

(1879 photograph of the beach at Coney Island. George Brainerd. Brooklyn Public Library)

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