BUSINESS & INVESTMENTS

FRAUDULENT STOCK PEDDLERS RAKE IN CANADIAN MONEY WITH SUCH PATHETIC EASE

J. HERBERT HODGINS August 1 1925
BUSINESS & INVESTMENTS

FRAUDULENT STOCK PEDDLERS RAKE IN CANADIAN MONEY WITH SUCH PATHETIC EASE

J. HERBERT HODGINS August 1 1925

FRAUDULENT STOCK PEDDLERS RAKE IN CANADIAN MONEY WITH SUCH PATHETIC EASE

BUSINESS & INVESTMENTS

J. HERBERT HODGINS

HE STRODE down the maplearched pathway toward the large, white frame house with an air of complete confidence.

He saw the three persons he wanted on the wide verandah, taking life leisurely. There was the father, typical gentleman of the old school, well removed from the "tricks” of business practice. There were the two daughters, each belonging to that reserved period when a trailing black, high-waisted skirt and white blouse were good style.

Alice, the more aggressive of the pair, gave the young man his first welcome and, with Flora beside her, led the way to the high-ceilinged parlor where they sat stiffly upon walnut furniture that you and I might be disposed to put among our most treasured antiques.

“It's a wonder proposition,” he cried, with a flourish of his hands. “The rarest opportunity I have ever had to offer my clients.”

Your high pressure man makes a specialty of superlatives!

“The Magic light,” he went on to explain, “is a winner. It puts daylight into the gloomiest kitchen. No woman wants to be without it. The company can't begin to keep up with the demand. The factory is running day and night. No telling what the earnings will be— dividends will be ten, twenty per cent.; perhaps more. It’s a gold mine!”

“It certainly sounds well, Mr. Dank,” acknowledged Miss Alice, who hesitated to have the young security salesman think she was in the least sceptical of his offering. Nevertheless she felt she should make some slight inquiry if for no other reason than to demonstrate that she had an intelligent interest in the subject. “But are you sure, Mr. Dank, that the company will continue to make these fine earnings?”

“Sure? Am I sure?” he tossed back his patent-leathered hair with a boisterous laugh. “There’s nothing surer on little old mother earth! I’ll let you into a secret; it is not generally known, but I don’t mind telling you that the Magic Light Company has sold its entire output to the Eaton Company—need I say more?”

The trio nodded their heads in complete agreement.

In the parlance of the high pressure man, himself, he “had ’em sold.” If Eaton's had contracted to buy the Magic light the success of the company must be assured!

So Mr. Dank, the suave young member of the sales force of Getem and Doem, financial agents, permitted Miss Alice, her sister, and her unquestioning father to “get in on the ground floor.”

Lure of Big Dividends

THEY were lured by the magic of twenty per cent, dividends. They were convinced by glib mention of an enterprise of national repute. It never occurred to them, before parting with their nest egg, to find out positively if Eaton’s had consummated a contract with the Magic Company.

That’s the way of these fraudulent stock peddlers. They get their money with such pathetic ease; pathetic, that is, having regard for the resources of the “investors” concerned.

Miss Alice, her sister and father are like so many hundreds of Canadians. They are ultra-conservative in their mode of daily life; they cling to the oldfashioned. But they order up jazz when they step out to “invest.” They spurn

five and six per cent., which is good enough company for seasoned, cautious, successful investors.

It is not surprising, then, that millions are lost annually, in the aggregate, by the small investors of the Dominion. It is estimated that the yearly loss to the public in the United States, through the operation of sellers of hazardous and fraudulent securities amounts to the stupendous sum of $700,000,000.

“In Canada no such figures so far have been compiled,” says a report of the Vigilance Committee of the Bonddealers’ Association of Canada, “but if you divide the amount by twenty, you get the sum of $35,000,000, which might be regarded as an approximate amount, lost by the people of Canada through the purchase of undesirable securities.” Thirty-five million dollars, annually, lost by Canadians in worthless investment! They don’t get a speculative run for their money!

A National Wastage

WHEN it is considered that this means a distinct loss to approximately that amount, not only in large part in depleted bank deposits and to the business of sellers of legitimate securities but a loss also in the purchasing power of the retail buyer, it is a situation, worthy of the careful consideration not only of the bonddealers’ association but also of the wholesale and retail mercantile organizations throughout the country.

The Belleville Ontario, Chamber of Commerce took up the subject with vigilance in an effort to stop the flood of worthless investments into that city and district. “Any lawyer or banker can cite dozens of instances where the entire savings of a thrifty man’s lifetime, amassed by years of sacrifice and toil, are swept away simply because a widow or an orphan trusted one of the bogus stock salesmen or other smooth crooks who rob women as a means of livelihood,” is a declaration contained in an official warning issued by the Belleville Chamber. One Belleville merchant tells of a case where two of his women employees put six hundred dollars and seven hundred dollars, respectively, into a scheme that never brought dividends; ultimately, the principal sums were lost.

Had these women sought advice before “investing,” any informed business man might have warned them. “Women will go into any kind of a scheme that promises rich returns,” investment bankers frequently tell me. “They do not stop to analyze the practicability of an undertaking. Their chief concern is the promised dividend return.”

Hundreds of persons will buy bonds and stocks on the mere say-so of a salesmen, a complete stranger.

You would think that “song hits” would be the last thing to be promoted among farmers. It remained for Joseph X. Hearst who came to Winnipeg in 1921 of unknown antecedents, to stimulate enthusiasm for commercialized music among the small investors of the prairies.

Joseph X. started Hearst Music Publishers and was not long in attracting public attention by “dispersing” one hundred per cent, dividends. Those who received these abnormal dividends left their cash with Mr. Hearst; pyramiding their stock holdings. _

This merry financing went on until December, 1924, when Mr. Hearst suddenly left Winnipeg. In the words of the Manitoba Free Press: “In three years he abstracted some six or seven hundred

thousand dollars from the pockets of credulous victims in Manitoba and he has now disappeared; thirty-five dollars to the credit of the fake company he organized and promoted are all the cash assets he left behind.”

It was another instance of neglect minutely to investigate glib statements of promoters. Hearst salesmen circulated statements to the effect, for instance, that the company had sold fourteen million copies of a single song to Marshall Field, Montgomery Ward, Jerome H. Remick, Sears Roebuck, and others.

Like the salesman for Magic Light stock Hearst capitalized the psychological effect of healthy sounding names.

And like Miss Alice and her kin the public ‘‘fell for it.”

Pyramiding of “Profits”

IT IS a favorite dodge of fraudulent stock brokers to operate as a trust with the public’s savings and to announce super dividends every month; at least quarterly. Now and then “investors” are permitted to withdraw profits; at least in the initial stages of the “come-on.” But the underlying idea is to persuade the “investor” to pyramid profits into stock holdings.

Charles Sheldon tried this scheme in Montreal a decade or more ago. Ponzi put over the same trick in Boston more recently. A “savings company” in Toronto, a few months since, distributed a brochure promising eighteen per cent, dividends. The Vigilance Committee of the Bonddealers’ Association initiated inquiry and the “company” passed out over night!

An ingenious attempt to extract unwary dollars is the sale of “bankers’ shares” in the Ford Motor Company of Canada. A number of concerns dealing in these “shares” have made their appearance in various parts of the country. One method is to take an actual share of stock of the Ford Motor Company of Canada, Ltd., and divide it into one hundred units, selling each unit for $6.50, thereby making the cost of one share $650 and upwards.

The “joker” consists in the fact that one share of the stock can be bought in the open market at this time for less than $500.

“The whole scheme is a trap to the unwary or to those who have not had an opportunity of fully analyzing the meaning and effect of the misleading literature issued by the offering “brokers,” according to the decision of Justice Callaghan in the supreme court at Brooklyn, N.Y.

Many thousands of dollars have been sunk by small investors of the prairie provinces in milling, brick, cement—and even washing machine promotions. The ventures failed by reason of their economically unsound structure. Informed business men could have foretold their rapid demise. Most of them could not stand up against aggressive competition of entrenched concerns. But the small investor fails to consider this vital factor and is completely misled by a glowing prospectus.

Not so long ago two enterprising young promoters canvassed Ontario towns for funds to organize an aeroplane company to visit summer resorts. They got one thousand dollars from a man in Guelph who as soon as he found out no such company had been authorized had them arrested. I never heard if the Guelph capitalist got his thousand dollars back. I am chiefly reminded that here is another case where an individual parted with his money and investigated afterwards.

Oils and Mines Evergreen

FAKE mining and oil stocks are evergreen bait! It does not seem to matter how often men and women are “bitten;” they invariably nibble again if the bait is presented in new form. The salesman for a “dangerously optimistic” mining venture confessed his experiences in going about the provinces and chuckled at the gullible folk he met.

One day he encountered an irate individual; irate because at one time he had been stung with mining stock.

This young man was astute in high pressure salesmanship. He let the disgruntled person tirade, to his heart’s content, against mining stock salesmen in particular and in general.

“I have a fine proposition,” he said at the end of the other man’s abuse.

“But after all you have had to say of your experiences with mining stocks I shall not ask you to buy mine.”

Nothing could more completely have intrigued the other’s interest.

The next morning the man, who had foresworn mining stocks, appeared at the hotel where the salesman was registered. Reassured at finding him, he insisted upon buying one thousand shares without so much as making a single inquiry. Tribute to suppressed salescraft!

Now I ask you, is it any wonder that men and women get stung with stocks?

Education and Legislation

TN THE full knowledge that this A insidious drain of investment funds into false channels persists, what is to be done about it?

Clearly there are two possible corrective mediums: education of the public by publicity and definite, Dominion-wide legislation.

The bonddealers of Canada and the United States in conjunction with the National Better Business Bureau have done effective vigilance work in many parts of the continent. The Bonddealers’ Association of Canada has been insistently endeavoring to bring about “blue sky” laws by which the Canadian public will be protected. Provincial governments are alive to the situation to the extent that “blue sky” laws have been passed in the different provinces, with the exception of British Columbia and Prince Edward Island. These laws take different forms. Some, like Ontario’s, demand that security sellers be properly licensed; all endeavor to provide that full information be available to every investor before purchase. The chief difficulty with the provincial “blue sky” laws is their lack of uniformity. No doubt this fault could be overcome by federal legislation. Legislation similar to the methods employed at Washington during the war period when federal sanction—which was not, however, the equivalent of a federal guarantee—was necessary to a security issue, is along the line of what is needed at the present time. It will not be surprising if the concerted action of legitimate interests brings something of this character into being for Canada.

“It is, of course, impossible to provide a method by law or by any other means, that will entirely protect all classes of people against the influences of the glib salesman,” concedes F. J. Coombs, last year’s president of the bond-dealers’ vigilance committee, who, however, adds, “But we believe progress is being made in the right direction.”