A routine review by a Railroad Commission auditor forced the State to take a closer look at the railroad's management. As a result, in early 1903 the Attorney General proposed suing the company on several grounds: (a) it had issued $1.7 million of bonds without authority, (b) it competed with the GH&SA, which was owned by the same interests, and (c) it was owned by the SP, a corporation located outside the state.
The principal point involved was whether the company had legal authority to issue the bonds. Texas had enacted a stock and bond law ten years earlier in 1893. Between the time that the law was passed and the date it went into effect the Company's board of directors authorized the issue of $18 million in bonds. All but $1.7 million were issued before the law went into effect. The remaining bonds were issued in four blocks after the law became effective, the last block of bonds having been issued in 1899. On this point the Aransas Pass held that the making of the order providing for the issue of the bonds prior to the time that the law went into effect legalized the bonds that were issued thereafter.
The Railroad Commission held a hearing in April of 1903 to consider whether the railway's charter should be forfeited for issuing fraudulent bonds. At the hearing the SP announced the Aransas Pass was about to pass into the hands of another company! The prospective purchaser was rumored to be the St. Louis & San Francisco Railway. Its president, Benjamin F. Yoakum, had helped build the Aransas Pass and had been appointed one of its receivers thirteen years earlier. At this time Yoakum also controlled the Chicago, Rock Island & Pacific, the Chicago & Eastern Illinois and a string of railroads between New Orleans and Brownsville. It was authoritatively stated that the matter had never been considered at a meeting of the Southern Pacific directors. President Yoakum of the Frisco declined to say anything about the reported transaction. Certainly the deal had not been completed at the time of the Commission's hearing. It was taken as a fact, however, that the Southern Pacific Co. had decided to dispose of the property.
The Texas Railroad Commission ruled in June, 1903, that the bonds worth $1.7 million were to be cancelled and that the Aransas Pass was to segregate itself completely from the Southern Pacific. The Company accepted the requirements of the Commission, and at the same time announced that it would build a line from Alice to Brownsville within two years. In response the Railroad Commission agreed to allow the suspect bonds to stand to finance the construction of the Brownsville line.
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| E. H. Harriman |
As for control of the Aransas Pass, New York City financier Henry Ruhland held the majority of the stock, about 47,000 shares out of 50,000 outstanding, as trustee for the Southern Pacific. He transferred the stock to Mr. William H. McIntyre of the Equitable Life Assurance Society. The SP accordingly filed a statement with the Railroad Commission that it had completely segregated itself from the Aransas Pass. The state obtained judgement (1) forever enjoining the Southern Pacific Company from voting the stock of the San Antonio and Aransas Pass Railway Company, and (2) forever enjoining the San Antonio and Aransas Pass Railway Company from recognizing the Southern Pacific Company as the holder or owner of any of its stock. Texas closed its case in December, 1903.
Everybody still believed that the Aransas Pass road would be transferred eventually to Rock Island-Frisco interests. Overlooked at the time was the fact that E. H. Harriman, who controlled the SP, had a financial interest in the Equitable Life Assurance Society, the new holder of Aransas Pass stock.