ARTICLES

The rough-and-tumble world of penny stocks

Why do they soar—and tumble? Who makes money— and who loses? Here’s a sharp and lively look at this legal lottery and the lively people who call the shots

ALAN PHILLIPS September 26 1959
ARTICLES

The rough-and-tumble world of penny stocks

Why do they soar—and tumble? Who makes money— and who loses? Here’s a sharp and lively look at this legal lottery and the lively people who call the shots

ALAN PHILLIPS September 26 1959

The rough-and-tumble world of penny stocks

FINANCING A MINE — THE LIFE CYCLE OF A PENNY STOCK

Why do they soar—and tumble? Who makes money— and who loses? Here’s a sharp and lively look at this legal lottery and the lively people who call the shots

ALAN PHILLIPS

Every weekday thousands of Canadians, dreaming of sudden wealth, invest some or all of their savings in penny stocks.

It's one of the world's most enticing gambles: 400-odd "specs" that sell on Canadian exchanges for less than a dollar, the largest collection of oil and mining stocks in the world. For a loss, at worst, of a hundred percent—and that rarely— they yield gains of up to a thousand percent and more. One will skyrocket almost daily when metals are in demand, blaze across the financial firmament briefly, then drift down spent, perhaps to erupt again the following week.

In these seemingly inconsistent gyrations one fact is constant: four out of five investors buy or sell at the wrong time. "Not one person in a thousand has the slightest idea of what lies behind the movement of a stock,” says T. H. Mitchell, author of the weekly market letter Mitchell of Canada, Inc. “Fifteen percent break even and five percent win what eighty percent lose.”

The winners, mostly professional traders, know that in the mining market chance is usually fate in

THERE’S NO “TYPICAL PROMOTER” — THEIR BACKGROUNDS ARE VARIED

disguise. When a little mining prospect. Consolidated Northland, leaped from twenty-five cents to $1.24 in July, an Ottawa trader, watching the ticker tape, remarked, ‘'They’re taking Northland for a ride.” Always, noting such penny antics, traders talk of “they,” as if—behind the façade of supply and demand—a penny's moves were dictated by some mysterious stock-market masterminds.

They frequently are. What seems caprice in a penny stock is sometimes calculation, a job of brokerage engineering by Bay Street supersalcsmen, creators of moods that persuade the public to buy or sell their stock, masters of illusion, psychologists in cupidity irreverently known as “promoters.”

Toronto has more than a hundred mine promoters. A few are the kind of parasites on the lusty body of mining that caused Mark Twain to describe a mine as “a hole in the ground with a liar on top." Others play their nerve-wracking, risky, high-stakes gambling game with a solid moral integrity and their deals are avidly followed by a host of speculators.

They make the Toronto Stock Exchange a turbulent arena where bulls and bears match wits in cold-blooded combat, where fortunes form and re-form with the plunging of the pennies. They make it a mccca for brokers, investment advisers, professional traders, mine speculators, all that strange Toronto coterie which comprises the complex entity known as the Street, hub of Canadian mining finance.

The promoter, often unfairly maligned, is as old as capitalism, and his role is vital to mining evolution. He leads the treasure hunt for the buried wealth dug from Canada’s crust at the rate of 2.1 billion dollars a year. Under his Midas touch and the nurturing bankrolls it provides, some present penny prospects will probably grow into great mines.

It was a mine promoter of the Twenties, J. P. Bickell, who raised the funds to develop the McIntyre Porcupine Mines while the sheriff waited to seize the gold bricks as soon as they were poured. Today the shares Bickell sold for fifty cents are worth ninety dollars.

“I can remember when Harry Oakes peddled Lake Shore on this Street at twenty-five cents a share,” says Norman Urquhart. president of the Mining Corporation of Canada. “Jt was promoters who made Quemont, Denison, Algom.”

The modern mine promoter may be a mine president, like Consolidated Denison’s Stephen Roman, who started out in a cold-water flat in 1946 and now lives in a mansion in the suburbs. The promoter may be a prospector, like Viola MacMillan, who lives in a stylish penthouse, but most likely is a broker, like Joseph Hackett, a lean dry Bostonian who as partner in Streit & Co. buys and sells stocks in companies financed by his holding company. Alator.

However they differ, promoters share one aim: to sell stock at a profit. In 1956, Dobieco, a private holding company of the H. W. Knights, a father-and-son team, paid income taxes of $2.000,000. Lou Chesler, son of a Peterborough storekeeper, made four million dollars backing the right Bay Street prospects before he went to Wall Street in 1956 and piled continued on page 68

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“The good promoter has ice water in his veins. He’s closemouthed and he never gets emotional”

up paper profits of 30-odd million. Joe Hirshhorn, a Latvian-born graduate of Brooklyn’s slums, can show profits of 60some million. “If 1 were twenty years younger,” he once said, "I’d own half of Canada.”

Most companies who want exploration money turn to a Bay Street promoter. He buys a block of the company's stock, often with options on more, then sells it at higher prices on the exchange or through a broker in what is called “overthe-counter” sales of “unlisted” stock. When his selling results in an over-supply the price drops. Now the promoter “accumulates”—that is, he buys the stock back cheaply for another “distribution” at higher prices.

One well-known promoter sold stock in three unlisted companies, bought it back at bargain prices, merged them and sold stock again. Again he bought it back, applied for and got a TSE listing, and sold it for the third, though not the last, time. “Merchandisers of paper,” a financial reporter describes this type. “They buy wholesale, create a demand, mark their merchandise up and sell retail.”

“The good promoter,” says Norman Albert, of Timmins & Co., brokers, “knôws exactly what he’s got. He’s closemouthed. He never gets emotional. From 10 o’clock to 3.30 he’s got ice water in his veins. He’s tougher than a Florida real-estate man.”

He needs to be. He operates under strict rules. Before he can list a stock on the TSE today he must reveal its cash, holdings, plans, options, officers. He must file an engineer's report to show he has an ore body. There must be enough money in the company’s treasury to sink a shaft. He must report any change in control or assets. Even his profits are restricted. The public is carefully protected — as long as they know how promoters work.

The promoter’s primary instrument is the mechanism of news: the mining press, the industrial press, the daily papers, which print more news of mining than of any other industry, the "tip sheets," letters of market advice sold weekly by subscription, brokers’ bulletins known as “promotion sheets.” “Most promotions

are tied to news,” says Norman Albert. “If you don’t get continued news it falls flat.”

Some promoters try to buy news space with “calls.” They tell a reporter they’ll hold him a few thousand shares of a stock at, say, thirty cents. If he mentions it in his paper and the stock goes up to forty, he can buy in at thirty, sell at once for a profit, or hang on in hope of a killing. The few reporters who yield to temptation may not even distort the news but they do gild the promotion with optimism.

“We have a firm rule that none of our staff is allowed to take calls on a stock,” says The Northern Miner’s editor, John Carrington. "We believe we pay them enough that they’re removed from temptation, but if not they’re fired immediately.”

When metals are high-priced and money is plentiful, drill-hole results gleam like gold in newsprint across the country. Now “the promoter buys to start it moving," says Randolph Reynolds, Bay Street investment adviser. “If it sags he buys again. As the public comes in he sells his shares.”

Sometimes a promoter simultaneously buys and sells the same stock. Or he makes a deal with a colleague to buy as he sells and then they reverse roles, ending up even. This is “wash selling,” creating a false activity on the ticker tape without any change of ownership in the stock.

"That’s collusion," points out brokerpromoter Joe Hackett. “It’s illegal. It’s criminal. Such a promoter should be kicked out. He’s lowering the standard of the exchange. A reputable broker wouldn’t take a chance. He’s bound to be caught. The exchange can always check buyer and seller.”

On August 6, 1957, the stock of Aconic Mining, extracting iron from sand on the shore of the St. Lawrence River, fell from $11 to $1. Six weeks later the TSE suspended trading in the stock. In two subsequent trials. Ontario Securities Commissioner Oswald Lennox has tried without success to convict its promoters of wash selling. “Each time,” he says, “it’s

resulted in a nung jury. As one of the jurymen told me, ‘Well, the public didn't get hurt.’ It's one of the most difficult problems in the business.”

A promotion may also get a push from the freelance investment advisers who write the market letters known as tip sheets. The writer of one popular letter swears he’s been asked “to front for just about every promoter in town.” Another well-known adviser was on a promoter's payroll for years before he began writing market letters. In 1958 his former employer left Toronto and coincidentally the adviser went out of business.

An adviser can lose his license if it’s proved he accepted calls or recommended a stock he owns himself without printing that fact. “I’ve put about sixteen out of business,” Commissioner Lennox says, “but there’s always a new one applying for a license. They come in here and I ask them six simple questions. Some don't even know what ‘yield to maturity’ means. I say, T don’t like to refuse you, but would you like to withdraw?’ and most do.” (“Yield to maturity,” a common brokerage term, refers to the value of a maturing bond.)

In 1953 a Toronto ex-alderman, Robert Colucci, went on the air with “the inside story of what is happening on the Street.” “Look for action in the New Brunswick camp this week,” he said. “Watch for the advent of . . . Maritimes Mining Corporation and Bathurst Mining Corporation.” For advising on stocks without a license he was fined $500.

This Bathurst, N.B., strike was a highly successful promotion by Matthew James Boylen, a buoyant burly scrapper who ran away from home at twelve and parlayed a prospector’s license into a string of mining companies. In 1952 he flew from Toronto to New York to try to raise a million dollars. In his briefcase he carried a map that showed what G. S. McKenzie, professor and part-time geologist, thought was a big lead-zinc deposit. With the million in his pocket Boylen told his Wall Street backers, “Kiss your money good-bye—you’ll probably never see it again,” and flew to New Brunswick to drill eleven holes as the map instructed.

He found nothing. Discouraged, Boylen sunk one last hole. Its values were sensational: 28,000 tons of lead-zinc-

silver a vertical foot. Boylen swore his men to secrecy while he staked 900 claims in the names of some of his 24 companies. Then he broke the news in The Northern Miner.

The market ran wild. Speculators rushed into brokers’ offices in New Brunswick waving $20 bills. The ticker tape ran twenty minutes behind sales. In one day Boylen’s New Larder U traded 1.2 million shares. From twelve cents it shot in less than a month to $2.65. Boylen sold shares in his companies, as one broker puts it, “like toilet paper.” He organized Brunswick Mining & Smelting and offered its shares at $10. Traders promptly bid them to $21.75.

Brunswick was the sole fruit of all this activity. It has now outlined what may be the world's biggest zinc-lead ore body, 58 million tons, and Boylen says building a smelter awaits only higher metal prices. Yet Brunswick now sells for less than $3.

It is here, on the first drill holes, long before the mine is brought in, that the big speculative money is made—and lost. Willroy, a zinc-copper mine since 1957, now $1.45 a share, sold for $4.25 when production was still three years away. Merrill Island, now $1.16, brought $4.65 in 1956, two years before it became a copper producer. Three years before it became a working mine, Anacon Lead,

another Boylen promotion, now 75 cents, sold for $5.70.

Boylen asserts that “there’s never any effort on our part to promote. We don't use literature to create a false demand. We give the news from the ore bodies to the public and the press and that creates the demand. When the demand is there we take advantage of it to fill the treasury.”

There are two kinds of promoters: those who want a mine, and those who want only to mine the public purse. “Some wouldn’t know what to do with a

mine if they found it.” says Ozzie Lennox, who had two Bibles on his desk before someone stole one. ‘if I were to retire and get interested in the market, seven out of ten issues would go in the basket as soon as I saw the name on the prospectus.”

“There are a lot of chiselers,” says Viola MacMillan, president of the Prospectors & Developers Association. “All they do is chisel, chisel, chisel. If they’re in on the roll that's all they care about. When that last big boom was on a lot of good guys didn't get a penny. It was all

sucked off by guys out for a fast buck. They’re not the mine-makers. They’re not the developers.”

Broker Joseph Hackett, one of the shrewdest, most active promoters on the Street, says: "Lve never put our stock up on nothing. You've got to protect your reputation. If you're scrambling, everyone knows you're scrambling."

"If the money's legitimately spent the investor has had a run for his money,” says Viola MacMillan. “Some companies only let you have one run. If there's anything loft in the treasury they live

off it. Or they sell some land to the company for five times what it’s worth and the first thing you know there's nothing left. Other promoters will go on and try again and again and give you many runs for your money.”

In 1947 a little northwestern Quebec producer called Hosco Gold Mines closed down because of rising costs. Its stock had slumped from a dollar to eight cents. Says one of its promoters, broker Malcolm Moysey, of Hevenor & Co., “I sat and looked at a bank loan of $95,000 with my name on it. Only a lucky sale of equipment took me off the hook.”

Hosco now became New Hosco. It issued and sold more stock. Then it bought claims near Eldorado in northern Saskatchewan. Its price rose to 68 cents. It fell to 13 w'hen the drill brought up nothing. It rose again to 50 cents when the company went into Chibougamau, a mining camp in northern Quebec. Again the drilling proved unsuccessful. “We bought it all the way down from 50 to 12 cents,” says Moysey. “We bought it because no one else did. We felt an obligation. We were loaded to the gills with worthless wallpaper. About a quarter of a million shares.”

The company now bought some claims in Mattagami, in northwestern Quebec, and a geophysical survey in 1958 gave them a map with a red arrow on it. “Drill there,” the engineer said, “and you’ll find a mine.” Moysey was unimpressed but to keep the rights required some work so he okayed two drill holes and went fishing.

As he brought his boat into his dock his wife, hair blowing, was waiting. "They've hit it.” she called excitedly.

"Hit what?” Moysey asked.

“Hit fifty-seven feet of three-percent copper.”

Incredulous, Moysey phoned engineer Bill Hosking. It turned out to be seventyseven feet of four-percent copper.

The stock had been selling at 10 cents. By the close of trading June 30 it was 45 cents. The next trading day it opened at $1.05. Ten minutes later Moysey’s telephone rang. “Have you gone crazy?” a TSE official demanded. “They thought maybe I was creating an artificial price,” Moysey says. "I explained what our drill core had shown.”

New Hoscos upward surge set the market on fire. A half dozen neighboring companies climbed from a few cents to a dollar. T rading a half million shares each, they helped set a new TSE record: 15,836.680 shares sold in one day. On its second drill hole New Hosco hit $7.25. “We were sitting on a keg of dynamite,” Moysey says. "We could have had another Norunda, a Geco.”

The third hole was a failure. The stock fell to $4 and kept sliding. (Now, with an ore body outlined, it sells for about ninety cents.) “My telephone rang from morning till midnight." says Moysey. “Women called me from all over the country. They abused me for spreading false rumors. They said when they saw my name they thought it would be an honest run. I said, ’I never told anyone to buy it or sell il.' I sold half my own shares on the way up. But one of our other directors bought on the way up, and he’s out quite a lot of money."

The promoter plies a risky trade. If he falls ill, takes a holiday, runs short of cash, bearish traders pounce upon his promotion and sell it short: i.e. sell stock which their brokers borrow for them and which the bears must replace—at a price they are betting will be lower.

Sometimes the bears knock a stock down with rumors. Lou Chester’s General Development Corporation dropped

$18 this spring on rumors that the Securities Commission was going to investigate it, that a news magazine was writing an expose, that threats had been made on Chester’s life. A promoter went into hospital for a check-up recently and a rival started a rumor that he had heart trouble.

"We have to watch that our ticker isn't used for manipulation,” says Ken White, of the Dow-Jones Company, which sells a wire news service to brokers. White had a call last June from a man w-ho said, “This is Pat Hughes, president of New Mylamaque. Our negotiations for new capital have broken off.”

New Mylamaque was then at its high, a target for bears. White asked the man for his number and the telephone company traced it. The call came from a phone booth on Bay Street.

The bears sometimes outsmart themselves. One bearish promoter shorted New Hosco at just over a dollar and took a $50,000 loss when it kept on rising. Another left town, inviting the bears to sell his promotion short, only to find that he held so much stock they couldn't borrow any to cover their positions. They had to plead for terms with the promoter.

Joe Hirshhorn sprang a classic beartrap in 1936. Geologist Douglas Wright had come to him with a story of gold in a burned-out deserted mine called Preston East Dome. Its stock, selling for less than five cents, was sometimes used on Bay Street to make change in poker games.

Hirshhorn put up $25,000 and Wright’s drill hit gold. The stock went up on rumor. As it rose Hirshhorn bought. The bears jumped in jubilantly. Hirshhorn continued to buy, ending up with most of the floating stock. Unable to buy to cover their short sales, the bears took a costly beating.

Secrecy is everything

A successful promotion often depends on a next-to-impossible secrecy. Secretaries who type the drilling reports phone boy friends at coffee break. Promoters send planes to see what a rival's engineer is up to. They plant spies in each other's drilling crews and engineers have to send their communiqués out of the bush in code.

"Everyone’s trying to master-mind this thing,” Malcolm Moysey says. “The drillers look at the core. They guess it as three percent. They drop their drills and run to the telephone. By the time the stories hit the Street they're exaggerated three times over. But the boys on Bay Street don't want to miss a bet so they get in. The stock jumps up. The core’s assayed. It's one and a quarter percent. So the stock falls out of bed.”

"You sure can lose,” says broker John Rogers, partner in Doherty Roadhouse and a once-in-a-while promoter. “Suppose copper looks hot and you underwrite a copper stock to the tune of $300,000, and copper falls off five cents. You're likely to lose your shirt. I know a promoter who's just filed in bankruptcy — all his deals went sour. 1 know one of the biggest dealers in Toronto whose firm is owned by the bank. 1 remember Irving Is bel. He made and lost three fortunes. Deke Wells, a wonderfully charming guy and a good promoter, also died broke. A promoter should promote before the property is drilled. If he doesn't the chances are he'll end up owning a hole in the ground.”

But as the promoter sells his stock he is haunted by the spectre of what his drill may reveal. In 1954, Consolidated Denison, a little thirty-cent prospect,

was drilling near Blind River. Its promot er, Stephen Roman, a prewar immigrant from Slovakia, sold as its price rose to a dollar. Then his drills proved up the biggest uranium mine in the world. “Steve had to sit on the news,” a friend said, “white he scrambled and bought his stock back.”

This happens rarely. “Out of three or four hundred tries, out of all the money we've raised.” says Joe Hackett, who has raised tens of millions of dollars, “I think there have only been five producing mines.” Few promoters depend for profits on their drill striking pay-dirt; they depend on their skill in arousing anticipation of a strike. Yet every promoter with mining in his blood dreams of a big one.

“I remember Jack Coghlan,” John Rogers says. “Fle’s dead now, a big lovable Irish prospector turned promoter. He bought Bouzan at thirty cents, got it up to fifty and sold. It kept on going up and he kept watching it and finally he said to me, T was a stupe to sell it,’ and he bought it back at $1.50 to $2. He had the stock coming out his ears when the bottom fell out. He went broke on it. The guy believed in his own promotion.”

The cardinal rule of promotion is: never marry your own deal. “If you gel out, stay out,” says a promoter. “You’ve spent your money trying to find ore You've got no results. So the stock falls. But you're out. You’ve made your profit. You're looking for another deal. If you always did that you’d always have money. But you don't.”

Jack Hammell, fabled Paul Bunyan of Bay Street, broke the rule consistently and won. When his stock touched a new high on the exchange he showed no interest. “I never sell if I can help it,” he once said. “I'm in everything I go into to the end. All that matters to me is what happens in the mine. That's what counts. The amount of gold you can wring from Mother Earth.”

Hammell won his stake as a “darkroom fighter,” fighting blindfolded in a dark room, a California pastime of the Nineties. He hated the kind of promoters he called “share-pushers.” When one tried to rent a home near his suburban Toronto estate he went to the owners and said, “If you rent your place to that blank-blank share-pusher I’ll turn my grounds into a skunk farm and the house into an orphan asylum for Negro and Chinese children.” The owners decided not to rent.

Hammell went broke eleven times and each time climbed back. An energetic soldier of fortune with a muleskinner's gift for profanity, he once dictated for 36 hours using four secretaries, and in between shifts recuperated by standing on his head, a bit of Yoga he picked up in India. He married at 81 and died last year at 82. In his will he decreed that his Pickle Crow mine was not to be sold to a broker.

"Brokers are only interested in money,” agrees Jim Boylen. who says he has brought in eighteen ore bodies. “I always take the first gamble. We spend several million dollars on a property before the public is asked to put money up.”

Boylen has been hailed by Lord Beaverbrook as "the father of mining in New Brunswick.” Newfoundland’s Joey Smallwood has publicly blessed the day he “invited M. J. Boylen over.” “You need the promoter,’’ Boylen argues. “You need him to raise the money for the kind of property big companies won't touch. It's those moose pastures that come through that make mining what it is in Canada. I love to see the drill holes coming in and the promotions. That’s what it takes to make mines.” ic