The great defalcation

The sordid tale of how everything went wrong for the University of Manitoba

TESSA VANDERHART STAFF/ ILLUSTRATION TED BARKER

When the story broke, it seemed simple enough: one man with a little too much power and dreams of running away with the university’s money.

As the facts of the case came out, it was discovered that Machray had taken more than $901,175.30 from the university itself (in 2006 dollars, that’s $12.2 million), raided its endowment funds to the point where they were virtually nonexistent, and stole untold millions from St. John’s College and the Anglican Church. The true value of the “defalcations,” as the sordid tale would come to be known, could never be assessed — but were estimated to be in excess of $5 million (the equivalent of nearly $74 million today).

John A. Machray

Machray was “a citizen and business man of spotless reputation and unimpeachable integrity,” wrote W.L. Morton in his history of the University of Manitoba One University.

Appointed to the Board of Governors as bursar in 1916,

made chair of the university in 1924, and a member of the of the Land Board — which represented the university’s biggest investment, the site of the Fort Garry campus — in 1908, John Machray was the university’s biggest champion in the press, its busiest public servant.

In fact, it’s hard to find anything bad written about him, even in accounts of the Defalcation.

A successful businessman, Machray had been made partner of the Archibald investment firm, which conducted the university’s business, before becoming involved in university governance. By 1924, his name was on the firm: Machray and Sharpe investments.

Serving as bursar, Machray had overseen a golden age for the university; a number of endowments and scholarships had been established, and he was to monitor them and make investments for their benefit.

As chair of the board of governors (before the university president was a member of the board), Machray led the planning direction of the university.

Through the Land Board, Machray had helped to choose the location for the Fort Garry campus and managed a number of land sales to make it financially possible, increasing the Board’s role to that of managing the university’s finances.

Of course, Machray had also “lost in bad investments the university endowments entrusted to his care, a process which had begun as long ago as 1903, when the university was on the eve of its most significant departure and greatest growth,” as Morton so eloquently put it.

Simpler times

In 1931-32, the University of Manitoba had a banner year. The number of students enrolled was the highest ever — 4,290 — though the Depression had seen tuition go up from $115 to $150 per year, and the administration was gearing up to move to the brand-new Fort Garry campus.

The Great Depression had the noticeable effect of driving more students to the university; after all, there wasn’t much else to do. The Great Defalcation, as it soon came to be known, had the opposite effect. As the story came out in the days and months after September 1932, the extent of Machray’s betrayal became more and more evident — $5 million dollars more evident, as Morton estimates.

But there were other effects: notably, the defalcation led UMSU to protest rising tuition for the very first time. It lead to the enforcement of the 1917 University of Manitoba Act, that was supposed to introduce accountability to the new university. And it may have ruined the university’s reputation and finances for years to come.

According to the law.com dictionary, defalcation is “withholding or misappropriating funds held for another, particularly by a public official, or failing to make a proper accounting.”

And that’s precisely what Machray did: because he signed cheques for both the university and Land Board, and facilitated the work of the Board of Governors — then composed exclusively of other provincial appointees — effectually both the leader and watchdog of the university.

“Machray could cash securities by signing them twice, according to the two positions that he held, as Bursar and Vice Chairman of the Board of Governors,” the university’s history of the Land Board says. “It would appear that the other members of the Land Board and the Board of Governors were not aware of the significance of Machray’s extraordinary control over the University funds. They were only too willing to leave all financial decisions to his judgement, in which they placed complete confidence and trust.”

And whether he began to embezzle money in 1903 or 1925, as differing accounts suggest, the concentration of power in John Machray was the problem from the very beginning.

The initial discovery

“Things went wrong a long time before they found out that something was wrong, didn’t they? Actually it was in the 1920s that things went wrong, or maybe even earlier than that. Machray had been robbing Peter to pay Paul for years,” said John Bumsted, a retired history professor and author of An Illustrated History of the University of Manitoba.

If things started to go wrong for the university in the 1920s, they really started to go wrong for John Machray when provincial auditor John Major began the 1932 audit for the university on Jan. 9, 1931.

“Practically nothing had been done” with the university’s investments since 1929, Major wrote in his workbook on Jan. 12. There were few, if any, recorded transfers into the university’s account from Machray’s firm. On Jan. 14, he discovered that the investments of the Doupe medical scholarship fund had been exchanged for others, the dividends received by the university dramatically reduced, and the “bank accounts short ten to fifty cents” each. That Machray had purchased a cash book for the university in 1929 but not made a single entry in it since then.

Major knew something was up. He started calling Machray’s law firm, the Land Board offices, the university Comptroller-General. No one answered his calls. So he kept looking.

The Sir David McMillan Fellowship hadn’t

received any donations since April 30, 1925 — and since 1930 hadn’t reported a single transaction, not even the collection of interest. Only later would it be discovered that this fellowship, along with most of the university’s scholarships, had been almost entirely transferred into the general account of the Machray and Sharpe firm.

More shockingly, the Land Board — a separate financial entity — had paid the university’s taxes in 1930, ostensibly to cover his indiscretions. And the university had noticed, and assessed the Land Board a four per cent interest charge to pay it back. And then promptly forgot about it.

That’s when things got really weird. Major was told to stop pestering the officials, that the university’s financial information would be provided by Machray’s business partner and secretary, R.H. Shanks.

“In the meantime I had better go on with my holidays ‘as planned,’” Major noted sarcastically on July 22, 1932.

Audit? What audit?

But the university hadn’t been audited between 1924 and 1932.

And there were clear signs that Major, who had also conducted the university’s first audit in 1918, should have been suspicious even then.

In a letter to the university Comptroller about this first audit, addressed August 10, 1922, Major wrote: “With the continued growth and development of University affairs the unfitness of the system was accentuated and while we could not certify owing to lack of records as to the cash that should have been received.”

In 1922, Major still didn’t know where the cash was from the university’s first audit in 1918. And he was already complaining that more so than actually auditing, the provincial revenue agents were “hunting the necessary information.” So what took so long?

The 1920-1924 audit, presented on Jan. 26, 1925, shows that the university had $971,063.33 invested through Machray’s firm, and land value insured for $996,900. It also says that two buildings were purchased by the university but not insured, nor recorded in the cash books. Machray even told the auditors he had exchanged the Rockefeller endowment fund’s War Loan Bonds for higher-interest bonds to make the university $24,000 — but “the proceeds of these had not yet been deposited to the University nor is there trace in the University books or accounts of any of the transactions.”

After this audit was presented, Major’s co-auditor, A.R. Ross, was appointed chief accountant of the university, and later its official internal auditor, by the Comptroller-General. And Major? Shut out by Machray when he was assigned to audit the Machray and Sharpe firm, he busied himself in the province’s Depression-addled books for the next six years, forgetting about the discrepancies he’d already noticed. After all, his colleague Ross, the university’s new accountant, was on it.

“Early in May [1933], in a dismally comic sub-plot to the tragedy of the Machray defalcations, it was discovered that while the honourary bursar of the university had been embezzling his thousands from the endowments, the accountant [Ross,] had been stealing his tens from the operating account,” Morton writes. At least there’s some humour to be found in the whole thing.

Who knew?

On May 23, 1932, university Comptroller- General informed the Province that John Major had found a shortage of $589,633 in Machray’s books. Machray was reappointed to the university Board two months later.

Finally the story came out, in the Winnipeg Free Press Evening Bulletin on August 23, 1932, when the case came to court.

And the accusations flew.

Even trusted university chancellor Archbishop S.P. Matheson was implicated of taking money, allegations that were later denied.

On Sept. 19, 1932, there was an even more shocking revelation. During in the bankruptcy proceedings for the Machray and Sharpe law firm, as the provincial government forced it into receivership, the Winnipeg Tribune printed a damning transcript..

Machray’s accountant, James Kerr, was called to testify in a court proceeding to save F.J. Sharpe, Machray’s business partner, from being implicated in the scandal.

“Mr. Kerr said that he had never told Mr. Sharpe of his suspicions that there was a shortage in the university funds. ‘I thought that was the position of Mr. Machray,’ he said, in explaining his apparent delinquency.”

Kerr asserted that a large number of personal cheques for Machray, and of his partner Sharpe, were cashed from the university trust funds. Other university cheques, he said, had simply been deposited into the firm’s general account. And he’d personally known about it for 10

years. Prosecutor W.L. McLaws, defending Sharpe from implication in the scandal, asked Kerr: “You knew it was a thing that shouldn’t be done, to take those bonds?”

Kerr answered: “I was told to do it and I was a servant there and I did it.”

McLaws continued: “At that time did you know there was any difficulty in connection with the funds of the university?” “I had an idea,” Kerr said.

The Turgeon commission

The province’s solution, three days later, was to call an inquiry, the records of which remain the best source for information on what happened.

Headed by Justice W.F.A. Turgeon of the Saskatchewan Court of Appeal, the Turgeon Royal Commission looked back to 1918 to find exactly where things went wrong, but unfortunately there wasn’t a lot to find. The shoddy record-keeping that allowed Machray to keep the defalcations secret also kept their true value a secret.

W.C. Murray, president of the University of Saskatchewan, joined the commission and recommended ways for the university’s governance structure to be improved. Five seats were added to the board of governors for a total of 14 — three members elected by alumni, the university president and chancellor in ex-officio status. Murray noted the strangeness of the two executives of the university not being included sooner. The university council, later to become the senate, was established, something Murray’s report is incredulous did not happen before.

The official report of the Turgeon commission was presented in the legislature on March 29, 1933. It found defalcations totalling $1,917,044.60 among all of Machray's clients, and criticized just about everyone involved — finding successive boards of governors and the provincial auditors guilty for the lack of accountability that allowed Machray to dodge an audit for nearly a decade.

The commission placed most of the blame on the firm of Machray and Sharpe, and its auditors and partners, for the clear failure of due diligence. It wagged fingers at both the board of governors and provincial government for allowing Machray to continue in the capacities of investment agent and board member/chair. And the Comptroller-General was censured for failing to produce an audit of the university.

“The very nature of the recommendations revealed what in fact had happened in 1917,” Morton notes.

“The old habits, the personal trust, the amateurness of the early days had in consequence been carried over into the administration, both financial and clerical, of a large university. One result was a slackness in financial matters of which the board was unaware, which the president did nothing to check, and which may have contributed to the success of Machray’s evasions.”

UMSU demands fee reductions

But wait! There was a crisis happening while the commission was making all of these recommendations.

A new board was elected and appointed, and they got right down to their next challenge: funding the university with $130,000 less in revenue from the province, which was struggling to pay its own bills.

The grant had been reduced already for the school year from $500,000 to $400,000 as a result of the Depression, and was now further reduced to $270,000 in order to reallocate money lost in the defalcation.

The government’s message: students should pay nearer the full cost of tuition. After all, it was hard times for everyone.

To make up for the cuts, the university notified all faculty that their contracts were to expire June 30, 1933; professors’ salaries, which had already been cut by seven per cent, were cut again.

Tuition fees, which had already been increased by 20 per cent for September 1932, were increased by another $50 to $200. UMSU protested. Extra copies of the Manitoban were printed, begging students not to pay their fees until tuition was reduced, because UMSU discovered that the university was saving $50,000 to begin to repay the money lost in the defalcations.

St. John’s College, hit much harder than the university — though the investigation was conducted by the Anglican Church and the exact figures were not as well publicized — relied exclusively on student fees for funding for several years, and had to undercut the University of Manitoba’s tuition policy to attract students. Machray, nephew of Robert Machray — Archbishop of Rupertsland and the first chancellor of the University of Manitoba — had also been entrusted with the Diocese’s bank account.

In the second term of 1933, UMSU threatened to go on strike. But falling enrolment in the faculty of arts and science made a clearer point: students transferred to affiliated colleges where tuition was $15 cheaper, exacerbating the problem, according to Morton.

Fees in arts and science were reduced to $115; fees in medicine, engineering, and pharmacy were subsequently increased to make up for this.

The government replaced the funds stolen from the Isbister and other memorial scholarship funds, as well as the Rockefeller grant. The Land Board revenue, originally a gift from the province, would have to wait until land values rose.

The university looked at ways to save money, either by abandoning the old Broadway campus or the new Fort Garry one. Markers stopped getting paid. A new by-law (recommended by the Turgeon Commission) stated that no professor could be secure in tenure.

Chancellor Archbishop Samuel Matheson concluded his term, and gave notice that he did not wish to be renominated. President James MacLean also retired, having reached the age of 65, at which the new board policy stated faculty could not expect to keep their jobs. Morton’s history looks kindly on the first, and blames the second.

W.J. Dafoe, editor of the Winnipeg Free Press, and Sidney Smith, dean of Dalhousie’s law school, succeeded them as the university’s third chancellor and second president.

Where did the money go?

And, as all this was happening, John Machray was given the maximum sentence of seven years in prison, after pleading guilty to the theft of $560,000. Though records later showed that at least $900,000 had been taken, the government took Machray’s illness into consideration, expediting because of the limited information available. Magistrate R.M. Noble “expressed a regret that, in the passing of his duty, he found it necessary to pass judgement on a man who has been a personal friend for over 25 years.” Noble, as reported in the Manitoban on Sept. 23, 1932, didn’t expect Machray to live out his term in prison. Afflicted with stomach cancer, Machray hadn’t even spent most of the money when he died in prison.

“‘Poor judgement,’ was the phrase used by Sharpe in summing up Mr. Machray’s actions. Certainly, he said, they were never prompted by any desire to add to his personal fortune,” the Winnipeg Free Press reported on Sept. 6, 1932.

Sharpe said that Machray’s control of the finances of both the university and the Anglican Church was “absolute . . . over 99 percent” — and criticized the respective boards of governors for not taking control.

The defalcations likely originated, Sharpe said, during a real estate transaction, when Machray might have used university funds to “meet a liability.” Sharpe noted that after the 1924 audit, the provincial audit recommended the number of men trusted with access to the university’s bonds be reduced to one — and that Machray be the one.

Sharpe added that Machray’s eminent standing in the community was the most important thing to him, that he would take “undue risks to protect it.”

“His expenditures were not on life’s luxuries. Both he and his family lived frugally. His main, and for that matter his only revenue, was from the profits of his legal firm and in the old days from real estate investments.”

“Right up until the time of his trouble he continued to enjoy the confidence of churchmen, laity and officials,” the Free Press report stated.

Eventually, it was discovered that Machray had found a loophole through which he could temporarily deposit funds from the university’s account with the Archibald, Machray and Sharpe firm into a general account — to be paid back later, or from the Land Board’s account.

In 1911, a system of fictitious mortgages was taken out by Machray to cover the losses from transfers to the general account, according to the Land Board history. The account was used to finance the firm, as well as Machray’s — and possibly his partner Sharpe’s — personal investments.

In 1917, the new University Act, and an audit, temporarily put an end to the defalcations. However, in 1921, Machray began again to cash university securities for his private use. In 1925, the last audit of the university for the next seven years didn’t detect a thing. And Machray became Chair of the Board.

Machray was never well enough to testify to the Turgeron Commission, having been diagnosed with cancer 10 months before the defalcations were discovered. He died in prison, sad and alone.

The great comeback

The funds were, by and large, replaced. The provincial government, by the time it had pulled itself out of the depression, immediately refunded $40,837.77 of the $869,065.27 the university claimed was missing, and more in land grants after the Depression. Private donors did the rest.

U of M president Emöke Szathmáry said, however, that this wasn’t quite enough — that the university would have had a much larger endowment had the defalcation never occurred.

“The interest from a bigger endowment over the years could have been used to strengthen the institution in so many ways!

“But we lost that money, along with the chance to use it to build a stronger academic entity. That the institution survived is due to Sidney Smith’s leadership and the courage of the academic staff that they would not be deterred from re-building U of Manitoba, and the faith of the students who came to study here in spite of the school’s problems. Well, the university survived the Great Depression, the effects of which were made worse by the defalcation. Things became better in the 1940s, and after.”

Bumsted isn’t so convinced. “From the five-year perspective, the defalcation was fairly significant. It took all the money away. Realize, though, that most of the money was put back —

“Still, it was damaging, it was damaging to St. John’s College. It was probably more damaging to the Anglican Church than it was to the university, actually.

“It certainly suggested that the care of its money . . . which was damaging.

But in the long term? “I don’t know,” said Bumsted.

“You could say that if the university had invested its money over 50 years, the amount of money would have been substantial. And it would have been in endowment funds where it could have been used.

“On the other hand, my suspicion would be that the university would have spent every penny. There would never be an endowment fund, not with that money anyway.” What if?

Would U of M be different if the defalcation had never happened? Sure —

“No, I am never tempted to ‘run away with the university’s money,’” writes Szathmáry.

“Speaking practically I don’t know how it could be done anyway, because two signatures are needed from Board-authorized people to access money. Our financial controls are strong perhaps because the Defalcation occurred without such controls in place.”

The 1917 University Act was finally fully implemented, and the U of M well on its way to recovery, before anyone wondered what could have been.