Modern Get-Rich-Quick Schemes.
JOHN MOODY IN MOODY’S MAGAZINE
Endless are the ways in which the public may be duped by clever swindlers. Mr. Moody gives two or three examples, in which the deception was so apparent that it was a wonder the victims did not discover it. A few rules are given by which a person can test the worth of any financial scheme.
THERE are many methods in vogue for inducing people to part with their money, but the most effective way to interest a certain very considerable portion of the American public in propositions with this ultimate purpose in view is through what is known in Wall Street as the “get-rich-quick” scheme. It is an old saying that the American public likes to be fooled, and judging from the way these many fraudulent schemes keep bobbing into sight with never-ending regularity, it would seem that the saying has lost none of its truthfuless.
There are get-rich-quick schemes of many kinds, and they, are exploited in many ways ; sometimes through the columns of newspapers, sometimes in financial or mining journals, but more often though circulars or other advertising matter. The most successful are usually mining propositions, although many other kinds have flourished equally as well.
One of the most notorious promotion frauds of this\ kind was a “guaranteed egg company,” the stock of which was offered for sale in New York City a few years ago. The promoters of this company sent broadcast a roseate prospectus, offering the sale of 7 per cent, guaranteed preferred stock at par, with a large bonus in common stock. Careful inspection of the prospectus revealed the fact that the prospective earnings, which were to amount to a fabulous sum, were to result from the sale of eggs at high prices, the said eggs to be laid without fail at a certain unceasing rate by several thousand hens, which were the entire stock in trade of the company. These hensi were supposed to do the double work of hatching new broods of chickens and at the same time laying their regular guaranteed proportion of eggs. It was also assumed that only hens and not roosters would be hatched and that every egg would be good.
The essence of the “guarantee” on the preferred stock appeared to be wholly based on the theory that the hens had somehow been forced into a promise to lay eggs night and day, if need be, in order not to allow the preferred stock dividends to lapse in any possible way. The company was capitalized in the neighborhood of a million dollars and its only tangible property, aside from the chickens, was a farm of twenty acresi located about thirty miles from New York.
Absurd as this whole proposition was, there were enough investing idiots walking around loose in New York City to “nibble” at this bait to the extent of over $80,000 in cash. And it was stated on good authority that most of these subscriptions came from New York City people who had never seen a chicken farm in their lives, and probably didn’t know any more about the chicken and hen-laying business than the chicken themselves knew about the preferred stock on which they were assumed to be guaranteeing the dividends. Shortly after this exploitation, the promoters quietly folded their tents and stole away, as certain kinds of promoters have a way of doing, with the result that the innocent but superficial investors are still waiting for their dividends, and are holding their stocks as “permanent investments.”
Another instance of the get-richquick scheme which fooled a large number of supposedly sane investors was the promotion of the “sea water gold” enterprise a few years ago. A certain man named Jergensen, who was more avaricious than honest, happened to discover an article in an encyclopedia which brought to ais knowledge the fact that sea water contains a small percentage of gold, but that no method has ever been dis-
covered whereby the separation of the two could be brought about. He then devised a scheme for pretending that he had himself invented a secret process for doing this very thing, and thereby induced investors to pass their ready cash his way. He built a small plant on the water’s edge at South Lubec, Maine, a portion of the plant being constructed out of sight, and under water. He then secured a small quantity of gold bullion (a small, genuine gold brick) and exhibited it to certain people in the city of Boston, at the same time making the statement that it was the result of a test of his secret process for washing gold from sea water. His incredulous listeners were invited to go to the government assay office with him to test the genuineness of the little brick. This they did and, to their surprise, found that it was all pure gold. Then, as a further proof of his discovery, Jergensen invited them to go to South Lubec with him and see his plant. They did so and saw the mysterious looking machinery, part of which was under water. They were duly impressed. He theo explained that lie could not let them see how he did it, as he must naturally guard his secret. But the next morning he appeared with a small can full of new gold dust, which lie said he had secretly washed out during the night. After that, for a whole week, while his visitors remained, he appeared every morning with a moderate quantity of gold dust which he exhibited as a result of the previous nightwork. As this production steadily continued his audience grew. Others came on from Boston, and the wonderful discovery was on the lips of a steadily increasing number of people. When he next went to Boston, taking the gold dust with him,
and converted it into cash at the assay office, many apparently shrewd people were thoroughly convinced and regarded his claims! as absolutely proven. He then organized a company and began to sell stock, and, as the snowball had begun to roll, it very quickly increased to gigantic proportions.
Within a short period, investors in Boston and vicinity were sacrificing good bonds and stocks, and savings bank deposits, and generally falling over each other in a mad rusn to get in on the ground floor in this sea water gold bonanza. It was afterwards estimated that before the fraud was publicly exposed, Jergensen and his accomplices had secured nearly a million dollars. The final outcome was, that Jergensen secretly escaped to Europe with most of the money, and his| victims are whistling for their “great profits” to this day.
Many other schemes, equally fraudulent, have been worked during recent years in Wall Street and elsewhere; and, though constantly exposed in the newspapers, new ones crop up nearly every day, and the public continue to bite. The advertising columns of the newspapers and magazines are full to overflowing with roseate propositions for the investment of money; gold and copper mines; industrial undertakings; new railroad projects; traction companies, and various other promotion schemes. Millions of dollars are invested every week by small investors in this country, and a large proportion of it is constantly “steered” into unsafe channels, with a resultant loss to thousands of investors. As an illustration of how persistently and easily unsuspecting people are misled and swindled, instance the following:
A very conspicuous concern has
been operating for the past five years or so one of the larges! and cleverest mining swindles ever known in the United States. Sumptuous offices are maintained in Broadway, New York, and about forty branch offices have been established in various cities of the United States and Canada. A number of honest men have been drawn into the scheme by baits of alluring commissions, and have pondled the rotten shares of this firm of stock-jobbers among their friends and neighbors, to the loss of their own peace of mind and reputations. The plan of this swindle is neat and comprehensive. The firm announced that it would operate on the law of averages,, and by handling many mines the good ones! would make up for the failures. Considerable bluffing has been done in the way of crude mining operations, but none of the “mines” have proven sucsessful, and none are likely ever to be surcessful.
This firm of sharpers began paying dividends! on shares, when no profits were earned, for which they should be jailed for the common swindlers that they are. Stock in the worthless companies was exchanged for stock in equally worthless companies whenever shareholders grew tired, and ihe victims of conspiracy were tolled along by the “dividends” paid out of the money they had themselves furnished. Recently cash dividends have been suspended, and “scrip” dividends substituted therefor. It is reported that this firm hasl billked something like 16,000 small investors, in the United States and Canada, to the tune of several millions of dollars.
The methods for promoting all kinds of swindles have in recent years been refined down to an exact science. Experience has proven that the most
vulnerable class of people to be attracted by investing swindles, aside from women, are ministers, doctors, teachers and other professional people. There are in New York a number of concerns who make a business of supplying classified lists of possible investors for the use of those who wish to exploit mining swindles and other schemes. These lists are classified into ten dollar investors, twenty-five to one hundred dollar investors, one hundred to five hundred dollar investors, and investors, having $10,000 or more available. The “ten dollar investors” are mostly made up of a class of people who are in the habit of taking a small “flyer” occasionally of not over ten dollar, investing this amount on the theory that it may turn out with a big profit, but that in any event the loss cannot exceed ten dollars. This clasjs appeals to the swindler also, in spite of the fact that the amounts invested are small, for the reason that even if the scheme is exposed as a swindle, the individual amounts invented are so small that it would not pay any single person to resort to iarv for the recovery of his money. True it is that a large number of such investors, if acting in concert, Avould become a menace, but as a rule such investors are too widely scattered, or too unintelligent or indifferent to make any move of this kind. In number, these ten dollar investor lists run into the hundred thousands, and are the main avenue for floating schemes of the cheaper and more openly fraudulent variety.
The “twenty-five to fifty dollar” list is made up of country investors, Methodist and Baptist ministers, country doctors! and all classes of teachers; also barbers, waiters, hospital nurses and the general class of
people who are able in one way or other to set aside for a rainy day from $25 to $100 per year. These lists are used in slightly more pretentious schemes, of course, Avitli sometimes a little more merit to them. The $100 to $500 investors consist of doctors of slightly higher grade than those referred to above; also college teachers and professors, small Wall Street lambs, Episcopal and Presbyterian ministers, mercantile clerks, some country merchants and other thrifty people who annually accumulate a feAV hundred dollars over and above their cost of living.
Such lists are used for more pretentious schemes, and, in addition to the promotion of frauds, they are sometimes used in perfectly sound and legitimate enterprises. The higher grade lists, covering $1,000 to $100,000 investors, largely explain themselves, and while they are as often used by schemers for offering their wares, yet as they are largely made up of more sensible and cautious people, they are not so popular in the “get-rich-quick” promoting fraternity as the larger lists of more modest investors.
While swindles are promoted to a gigantic extent through circulars and by mail, yet much business is also done through the medium of newspapers, magazines, and class publications. Many (but not all) of the large metropolitan dailies will sell advertising space in which notorious swindles are promoted ; magazines, also of high-grade in other Avays, constantly sell space for the exploitation of mining, real estate and other schemes; the columns of country dailies and Aveeklies are not only open, as a rule, to such schemes, but for a consideration they Avili often publish “write-ups” recommending
or booming a particular enterprise. The “write-ups” generally consist of editorial or other special articles which are prepared or endorsed by the promoters themselves, and they, of course, passi in the reader’s mind as genuine and truthful.
These are, of course, frauds of the most palpable kind, and the publication of such matter is entirely unfair to the readers of the paper. It is a species of cheap and insidious deception which should, wherever found, be condemned in unmeasured terms.
In considering the roseate prospectuses and the various other plans which are constantly found in the public prints offering shares for sale, one of the rules of nearly universal application, which will usually go a long way toward the protection of the investor, is. this : Always question any proposition offering stocks or bonds for sale where such offers are made directly by the company itself, and not through a banking house or other reputable concern. If no bankers are handling the sale of securities it is usually the case that there is something “shady” about the scheme. There are exceptions, of course, but not many. If the securities are
offered by bankers and brokers, the next step should be to ascertain the standing, reputation and financial strength of the bankers or brokers themselves. Wall Street and the
other financial centres of the country have their full share of irresponsible concerns of this class.
The apparently plausible statement is frequently made that money is saved to the company and its stockholders by avoiding the employment of a banker or agent to market securities. But this is not so in ninetynine cases out of a hundred. If a proposition has merit, the promoters
always find it much more economical to go to a concern who have specialized and have developed the proper machinery for the floating of securities, rather than undertake to do it themselves. The banker not only has the clientelle, but he has the organization for handling the business effectively and economically; and, of course, his prestige and general reputation have, in many cases, much to do with making the floatation a success. For all this he frequently charges a good round commission; sometimes, but not so often as is generally supposed, too much. Indeed, it would, in most cases, upon investigation, prove to be a fact that, without the banking medium, the floatation would cost far more than the usual amount represented by an apparently heavy discount or commission. It is a part of the business of the banker to float securities, just as it is a part of the business of the trust company to pay coupons.
People sometimes think it strange that a large corporation, with an office in New York City, should pay a commission to a trust company to cash the coupons on its own bonds each six months, when it apparently might do this work itself. But the answer to that is that the trust company maintains the machinery and organization for paying the coupons of not merely one but of perhaps one hundred companies, and, therefore, can afford to do such work at a minimum cost and for far less than the corporation itself could possibly do it.
It will be seen, that the simplest and quickest way of avoiding the “get-rich-quick” scheme, no matter where or how presented or however roseate and plausible its promises and claims may be, is to never entertain
any proposition which is not offered through a banker or other agent, and then, having adopted this rule, to go one step further; never have dealings
with a banker, broker or financial agent until you have investigated and are satisfied as to his character, standing and general reputation.