How Oil Speculation Pauperized Thousands

By: 
Claudine Burnett

Prosperous times swept America following the discovery of oil on Signal Hill, helping end the depression of 1920-1921. A new industry had been born. By 1924 oil surpassed agriculture as the leading industry in California. In Southern California alone that year 230 million barrels of crude oil was pumped out of the ground.

Everyone seemed to want to make a quick buck from all the oil flowing on and around Signal Hill. Oil deals were being made every day, many of them by Long Beach businessmen like Willard C. Campbell, John McDuffie, Walter Lee Tully, Charles P. Knight and William R. Buck of the Bay Hills Oil and Land Company.

In the fall of 1922, the five original promoters of the Bay Hills Oil and Land Company contributed $5,000 each ($77,000 today) to begin their corporation. Their first course of business was to buy five town lots on Signal Hill for $20,000 ($308,500 today). John McDuffie made the purchase in his name, taking title and later transferring title to the company for $35,000 ($540,000) – the five investors pocketing the $15,000 ($231,375) profit.

With actual land in their possession, they quickly lured backers into purchasing 2,250 units of stock for $100 ($1,545) per unit, telling investors they would drill one oil well when $225,000 ($3,471,000) was raised. Fifty percent of those encouraged by “oily” talks of promoters were women over 60 years of age, who invested their life savings in the company.

The promoters promised their shareholders they themselves would derive no money from the sale of any unit until the investors had received all their money back. This was an out and out lie, for Campbell, McDuffie, Tully, Knight and Buck were drawing monthly salaries ranging from $1,000 ($15,450) to $1,500 ($23,137) each.

Other transgressions followed. After the original stock was sold, the five set up another company, the Special Delivery Oil Syndicate, which they opened to investors. Questionable practices included purchasing an oil lease for $12,500 ($193,000) and then selling it to the Special Delivery Oil Syndicate for $15,000 ($231,375), splitting the profit between them.

On October 14, 1924, Willard C. Campbell, who had become one of the most prominent and respected oil stock salesmen in Long Beach, was arrested for mail fraud along with John McDuffie, Walter Lee Tully, Charles P. Knight, William R. Buck and their attorney Joseph G. Richardson.

Mail fraud was one of the few legal ways to pursue the sharks who fed off the hopes of the small investor. Long Beach folk were shocked that such noteworthy members of the community had been scam artists.

John H. McDuffie, president of the Bay Hills Land and Oil Company of Long Beach and its subsidiary the Special Delivery Oil Syndicate, denied the company ever did any business through the mails. Instead, he claimed, they hired passenger buses to bring the public to the oil fields. It was common practice among oil promoters.

Every morning the buses lined the streets in Los Angeles and other Southern California communities advertising free lunches and band concerts as well as a chance to see the gushers first hand. McDuffie neglected to mention that along the way salesmen made their pitch. As they motored past the mansions of business tycoons, movie stars and especially oil moguls, oil promoters made sure to point out that anyone could live a life of leisure if they invested in oil development. The passengers, primed by the promotion, responded emotionally, rather than rationally, and lined up eagerly to purchase shares in not only Bay Hills Land and Oil, but other oil companies as well.

McDuffie told the press that the trouble with his oil firm was brought about not through any intent to defraud anyone, but by poor management. Somehow, McDuffie said, the bills began to pile up and creditors began to demand payment until investors began to get worried. Shareholders weren’t buying his sob story.

On July 6, 1925, the Bay Hills Oil partners and the company’s attorney, Joseph Richardson, went on trial for mail fraud, having delayed the legal action as long as they could. Investors wanted their money.

“The law is full of loopholes,” Los Angeles Times writer Walter V. Woehlke later wrote about another fraud, the Julian Pete scandal. “To the layman it is perfectly clear that a criminal fraud of vast proportions has been committed, that tens of thousands of innocent people have been bunked out of an unknown number of millions, but the way to legal proof and conviction lies through a jungle of technicalities in which it is easy to get lost.” (Los Angeles Times, 10/17/1927)

Woehlke was right. Though Willard C. Campbell, John McDuffie, Walter Lee Tully, Charles P. Knight, Joseph G. Richardson and William R. Buck had defrauded 5,000 investors of $750,000 ($11.6 million) , they merely got a slap on the hand, fined $2,500 ($38,500) each and given ten months suspended jail sentences. However, the story has a happy ending.

In February 1929, “Special Delivery No. 1,” located at Locust and 31st Street, which had been taken over by the Cypress Petroleum Company, hit pay dirt, with promises of over 2,000 barrels of oil a day. The property that was nearly lost for taxes and given up as hopeless, had now became a valuable asset.

However, few had recorded their deeds to the well and over half of the “unit holders” could not be found. Those that had recorded their deeds were entitled to a portion of the earnings. For those that couldn’t verify a legal filing, the funds accrued would revert to the state in five years. Many were lucky to recover their original investment, but little else. The Great Depression would see the price of oil fall to an all-time low.

Though this story had a happy ending, this was just the tip of the iceberg, the first of several local oil scandals to follow.

C.C. Julian

The biggest Ponzi scheme of all involved Courtenay Chauncey Julian – “C.C.” as he was known to millions – who appeared so folksy and down to earth that investors believed his sales pitch and that he really cared for the little guy.

Born in Manitoba, Canada, son of an impoverished farmer, Julian had worked in the Texas oil fields before drifting to Southern California. He soon began to speculate in oil leases, and from his point of view his luck was phenomenal. On a four-acre lease he drilled five wells and all five came in, producing gushers.

Now, as a successful independent operator, he decided to form a production, refining and distributing company to compete with the major oil companies and open his company to small investors. Soon he was acquiring more leases and opening gas stations which sold his appropriately named gasoline, “Defiance.”

In June 1924 his new company, the Julian Petroleum Corporation, purchased the holdings of the Grump-Steele Company of Long Beach, including contracts on the production of 20 Signal Hill oil wells for $75,000 ($1.13 million today). Julian also had interests in the Alamitos Heights oil field with wells near Colorado Avenue and Ultimo Avenue. This was but a small portion of Julian’s supposed massive oil investments.

Julian bypassed the usual techniques used by oil promoters who laid siege to Pershing Square in downtown Los Angeles each morning. Impressive buses heading for the oil fields filled the streets advertising free lunches, band concerts as well as a chance to see the wells up close.

Julian’s approach was different. He didn’t rely on bus rides to entice people. Instead, he wrote his own ads, which encapsulated the hopes and dispelled the fears of the small investor. He charmed many into putting money into his oil syndicate, despite warnings from the California Corporations Department and Harry Chandler of the Los Angeles Times who finally caught on to Julian’s schemes and refused to print his ads.

Penniless when he began, Julian managed to raise a lot of money from those he conned. C.C. Julian was the Bernie Madoff of his day. It was not long before 40,000 folks had invested $11 million ($166 million) in the stock of Julian Petroleum. His appeals for funds were so successful that one particular stock issue was oversubscribed by $75,000 ($1.13 million). However, the law eventually caught up with him.

Bribes and high salaries to bankers and government officials hid what was really happening – more Julian stock was being traded than was supposed to exist. But the Ponzi scheme, where early investors are paid off with the money of later investors, began to spin faster and faster, demanding more and more cash. As the “little guy” investors began to get a putrid whiff of what was really happening panic spread. The “Average Joe” saw his money in Julian vaporize.

The Julian fiasco was merely the prelude to the devastation that came after 1929. When the Richfield Oil Company went into receivership in 1931, an audit revealed an operating loss of $54 million ($920 million). Items such as alimony, hotel rooms, purchases of jewelry, repair of speedboats and so forth had been blithely charged to the company.

Then the Guaranty Building and Loan Association failed (its president had embezzled $8 million), then the American Mortgage Company failed for $18 million ($306 million). Nearly every major financial debacle involved some political figure, a judge, public official or some well known fixer, Carey McWilliams wrote in Southern California Country. McWilliams also pointed out that in earlier times investors had purchased something physical, such as property (at whatever inflated price), but with Julian stock certificates all they had were pieces of paper.

The Julian scandal, coinciding with the onslaught of the Depression, pauperized at least 500,000 Southern Californians. Its consequences would ripple on and on, gaining force until in 1930 the region led the nation in the number of bankruptcies and in the amount of net losses in bankruptcy proceedings. The scandal contributed to the collapse of the First National Bank, the election of former Ku Klux Klansman John Porter as mayor of Los Angeles, and the defeat of California Governor C.C. Young in his bid for re-election.

Claudine Burnett is a retired Long Beach Public Library librarian who compiled the library’s Long Beach History Index. In her research, she found many forgotten, interesting stories about Long Beach and Southern California, which she has published in 11 books as well as in monthly blogs. Read about them at www.claudineburnettbooks.com.

Category:

Add new comment

Beachcomber

Copyright 2020 Beeler & Associates.

All rights reserved. Contents may not be reproduced or transmitted – by any means – without publisher's written permission.