Only the contributions of the asset-rich Milwaukee Land Company was keeping the railroad out of bankruptcy. Indeed, in June, 1975, it became apparent just how much the Milwaukee Land Company was contributing. Forbes magazine remarked that:

"For 25 years, the Land Co. has tossed off a million or so dollars of profit yearly, mostly from the sale of stumpage rights on roughly 200,000 acres of splendid Pacific Northwest land. From its fat kitty of retained earnings, the Land Co.'s handsome dividends boosted railroad earnings in lean years." [Forbes, "No Visible Means of Support," June 15, 1975, p. 19.]

The magazine pointed out that in the early 1970's, the Land Co. began selling off timberlands -- nearly one-third of them -- and that the stockholders were not informed of this except that each year's annual reports simply listed smaller acreage, without comparative figures or disclosure that land was actually being sold. Perhaps more importantly, in 1971, the Land Co. stopped making dividend payments to the Railroad Corporation, and instead began making "loans" to it.

Forbes, in closing its second article, "The Mal-waukee Road?," quoted one "long time observer" of the Milwaukee as remarking that "it was a candy store then. It is a candy store now." The phrase was intended to be a reminder of the scathing ICC commentary on the events leading to the Milwaukee Road's 1926 bankruptcy and reorganization, and Max Lowenthal's remarks that the railroad had been, since 1926 and even earlier, in the hands of persons who wanted control not because of the inherent profitability of railroading, but because "that control would determine who should have the profitable posts as its bankers, its lawyers, and its suppliers of equipment and materials." [Lowenthal, Max, op. cit. p. 269.]

The SEC investigated. Among the items of minor interest discovered during depositions was Worthington Smith's confusion as to whether he was an officer of the railroad holding company -- Chicago Milwaukee Corporation -- or not. After reviewing an annual report, he concluded that he was a director, but not an officer. [Deposition Testimony, Worthington L. Smith, Investigation, Securities and Exchange Commission, File No. H.O. 837, September 23, 1975, p. 8.]

Smith described the process relatively forthrightly to the SEC, [Deposition Testimony, Worthington Smith, Ibid, pp. 107-108.] but his interrogators did not fully comprehend the significance of the information. They did understand Smith's testimony that certain rebuilt cars had been given altered numbers and altered "built" dates. Altered numbers violated certain of the financing agreements on the rebuilt equipment -- which saved the Railroad some money -- and the altered "built" dates brought the Milwaukee higher revenues which railroads received when newer equipment was used by other lines under "per diem" agreements -- the Milwaukee had earned over $50,000 in increased per diem charges on certain cars. Smith maintained that the changes had been accidental. [Deposition Testimony, Worthington Smith, Ibid, p. 100.]

The SEC also confirmed that the Company had been quietly selling off vital and profitable timberlands of the Milwaukee Land Company to raise cash to finance operations. [Since 1920, the Milwaukee Land Company contributed more than $83,000,000 in interest, dividends, and loans to its parent Milwaukee Road. More than $35,000,000 of this was during the years of 1975, 1976, and 1977. Letter, Wallace Abbey to Rick Applegate, February 16, 1979, p. 3.]

Although Smith admitted that "an extreme circumstance affecting the railroad does not bring about an automatic sale of the lands in order to try and meet this need because it would amount to trying to dispose of property, a situation which would not be good business judgment," [Deposition Testimony, Worthington Smith, Ibid, p. 150.] the SEC found that the Milwaukee had done just that, and had not informed either its stockholders or the SEC.

Interestingly, Smith had justified the practice on the grounds that the Milwaukee was desperately seeking funds to avoid bankruptcy. This "desperate" situation was confirmed many times by the Company publicist who stated that the SEC did not understand the Milwaukee's situation [Letter, Wallace Abbey to Rick Applegate, February 16, 1979. "I personally regard it as extremely unfortunate that the process required by the SEC, by which the Complaint and the settlement of the action came to light at exactly the same time, never permitted one extremely important fact to become equally well known: that if the alleged actions had indeed taken place, the reason was because the railroad's management was fighting a desperate battle to avoid bankruptcy in the late 1960's and early 1970's, the period in question. It is only in that connection that there is a relationship between the SEC matter and the 1977 condition of the Milwaukee." Emphasis contained in the original. p. 2.]

Smith also disclosed to the SEC that the Milwaukee Land Company proceeds, however, did not go entirely to the Railroad Company. The Milwaukee's holding company, Chicago Milwaukee Corporation, had been trying to channel its investments into other, non-rail, activities. It had purchased a large paving company named Vulcan-Hart for approximately $20 million. Concerns had been expressed by the ICC that railroad holding companies had been attempting to channel assets out of railroads and into more lucrative investments.

Although the Chicago Milwaukee Corporation maintained that no Milwaukee Road assets were used to finance any CMC purchases, [Letter, Abbey to Applegate, ibid, "...[T]he impression that assets of the Milwaukee Road were diverted from the railroad to the formation of Chicago Milwaukee Corporation ... is patently untrue... [subsidiaries] were acquired through the method known as "bootstrapping." p. 2.] soon after the purchase of Vulcan-Hart, the Milwaukee Land Company "purchased" nearly $12 million in Vulcan-Hart "property" [Deposition Testimony, Worthington Smith, Ibid, p. 156.]-- property which was never clearly identified -- as an "investment." Again, the SEC did not fully understand what it was being told by Smith, but it was clear that, at a time the Railroad was claiming a cash-flow crisis, and a need to sell off timberlands to finance ongoing operations, twelve million dollars was taken out of the Milwaukee Land Company and given to the Chicago-Milwaukee Corporation through its Vulcan-Hart subsidiary in return for "investment property". Once again, the Milwaukee engaged in incomprehensible behavior. The Railroad was asset rich. The Milwaukee Land Company was asset rich. The Company could hardly justify a need to invest in more "assets". What the Milwaukee Road needed was cash. But, what the Chicago Milwaukee Corporation wanted was cash out of the railroad properties at the sacrifice of "investment" in things like rolling stock and track maintenance. The Chicago Milwaukee Corporation, not the Milwaukee Road, got cash for the sale of Milwaukee Land Company assets.

Following the depositions, the Securities and Exchange Commission filed charges in federal court alleging that the railroad management had defrauded the company and its shareholders by selling assets without informing the stockholders or the SEC, with deferring maintenance on the track facilities without proper disclosure, and of otherwise falsifying the Company books. [SEC Digest, June 15, 1976, p.2]

"The move followed a year-long confidential inquiry by the SEC and study of testimony and exhibits by a committee of outside CMC directors who recommended that the decrees by accepted because, in the committee's opinion, the costs and other burdens of litigation would create no offsetting benefits. Matters involved in the complaint, the committee concluded, related to financial recording and reporting, rather than to questions of personal malfeasance or moral improprieties on the part of officers and others. Under the decrees, when the committee has completed its investigation, it will file a formal report with the SEC and also make a submission to shareholders. Individuals involved are William J. Quinn, chairman and chief executive officer of CMC and Milwaukee Road; W.L. Smith, president of the railroad; R.F. Kratochwill, vice-president -- finance and accounting of the railroad and treasurer of CMC; and C.E. Crippen, retired vice-chairman of Milwaukee Road". [Railway Age, "Consent Decrees Signed in Milwaukee Case," July 26, 1976, p.8.]

Pursuant to the consent decrees, the Milwaukee agreed to pay contingent bond holders $3,900,000, with additional sums payable depending on the future profitability of the railroad. The overall settlement, of $4,100,000, was expected to become effective January 5, 1978. [Moody's Transportation Manual, 1978, p. 682.]

That payment date was to provide one trigger -- incentive -- for the filing of a bankruptcy petition. The costs of leasing its own used equipment, nearing $70 million annually, was surely to provide another.