A slashing exposé of the flimflam artist and his brother, the “respectable” bucketeer
THE property,” said the young gentleman of earnest manner and slightly hawk eye, “is on a straight line with Noranda and has the same geological formation. We have over eight million dollars in sight now in indicated ore, and diamond drilling is adding to this accumulation at the rate of a quarter of a million a week. This is one of those things where you can’t miss, Mr. Simpson! No, the stock isn’t listed yet. I said that already, remember? But it’s going on the board in Toronto ten days from now, and we are prepared to guarantee you a price for it that will give you forty points profit!”
“How can you prove that?” enquires the voice at the other end of the wire, believing itself no end of a clever fellow.
“Prove it? Now Mister Simpson! Prove it? After what I told you about the protection which this house gives its clients, and about this secret offer from the Noranda people? Figure that out for yourself!”—this in an aggrieved tone, as Galahad might have spoken if you had suggested that the quest of the Grail was a fly-bynight scheme. “And remember what I told you about Consolidated Smelters. If you don’t think the fact that two of the biggest groups of operators in the country are bidding against each other for control, and neither of them able to get it, is worth an increase of sixty-six and two-thirds per cent, then don’t buy. I’m not stuck for buyers, believe me, Mr. Simpson!”
And so the story goes, ad infinitum. Thus the silvertongued, high-pressure salesman of bogus or quasi-bogus mining shares at his telephone in search of the morning’s “mooch.” Perhaps Simpson buys. Perhaps he consents, but on mature thought, or after consultation with his wife, neglects to send along his cheque, as many do. Undoubtedly you have heard such fantastic Arabian Nights tales yourself. Perhaps you have been a “mooch,” blood-brother to the common or garden sucker. Most people have, at one time or another.
A House to be Cleaned
ANYONE who has given the remotest consideration ■ to the promotion of mining companies, as practised in this Dominion of Canada, is bound to reach the conclusion that certain phases of that business stand in need of a thorough housecleaning which for the good of the industry ought to come from within. It may be asked justifiably why mining should be singled out from the general run of company promotions for such attention. To which query one replies that mining is within a stone’s throw of being our greatest single enterprise. Two years ago, according to a railway executive with whom I lunched one day recently, mining companies in Canada received and shipped more freight than the Dominion’s agriculture provided for the railroads—and the trade of the agrarian, mark you, has always been considered the backbone of our national prosperity. So if it is said that the money-raising division of mining needs cleaning up—and this includes certain aspects of public trading in listed shares—the statement is made in the hope of helping to maintain public confidence in a basic industry which is marked for the high places of our national future.
Mine-making is speculation—or gambling, if you will—for the development of the natural resources of any young country is a
gambler’s job at best. No true Canadian of this century can have any quarrel with the theory of speculation, for without speculation and the courage that goes with speculation we cannot populate our country and bring its vast resources to the world’s market-place.
But speculation is one thing and a stacked deck is another. By running the risks entailed in honest minein-the-making effort a poor man may become rich or he may go stony-broke. Here is a game built for men of high courage. But when the speculator is led into investment by the come-on bait of the high-pressure artist, who accumulates his money by falsehood or the giving of promises which have no foundation in fact, and promptly proceeds to divert sixty per cent of the funds so received to his own uses—or more, if he has enough vendor stock in his strong box—then the time has come to give serious attention to the deck and the dealer.
Here is the phase of mining company promotion which needs the hand of the housecleaner, for in a large percentage of the share issues in so-called mining projects offered for public subscription in Canada no effort is made to give the public a run for its money. In a majority of cases, providing the entire capitalization is sold, once the promoters and ipse dixit investment houses have taken their share, there is not enough money left to make a mine, even though the properties under development are capable of producing commercial ore in profit-making quantity.
That is a broad statement. Let us investigate.
A veteran prospector makes a strike. The find is staked. Samples from it reach the sumptuously furnished promoters’ quarters to be found hard by the corner of King and Bay. At last the discoverer makes a desirable contact with a socalled mining operator. His angel assumes ownership of the claims in question, paying off the prospector in cash, or perhaps with part cash and the balance in shares in a company to be formed subsequently to develop the property. We have now reached the point where the promoter owns the discovery.
Stage Number One is complete.
The promoter then proceeds to organize a public company, and to that company he sells the prospector’s
discovery-claims for enough shares to fill a bushel basket and overflow on the floor. That is Stage Number Two.
Stage Number Three marks the beginning of what schoolboy English would label the dirty work at the crossroads, with the arrival on the scene of the brokerage house commissioned to sell the share issue to the public. Up to date, perhaps, there is little room for quarrel with the methods employed in securing a means for the development of the property. True, the promoter may have taken too much stock for himself in exchange for the properties involved, but it must be remembered to his credit that he has paid some cash to the prospector, has financed the organization of a company, and has probably placed funds at the disposal of the treasury for early development work. We have reached the juncture, therefore, where the promoter either remains comparatively honest, or sets about the task of cleaning up at the expense of an ever gullible public.
In some parts of the country we have made laws which ban brokers from taking more than a fair percentage of the funds accruing from the sale of shares as their own remuneration. But no one, so far as I know, has devised or put into effect a system to prevent the bonusing of brokers with blocks of vendor stock, which is stock already issued in payment for claims or for service rendered. There are other quirks to the racket, but one of the most popular habits in vogue is to take a large block of the shares given away by the promoters to themselves for properties, or for so-called services rendered, and to interlard the treasury shares offered for public subscription with this vendor stock, so that for every treasury share sold at least one vendor share is added. The salesman may tell the prospective purchaser that out of the dollar asked for a share, ninety cents goes into the treasury for mining purposes, but he will neglect to add that only every second share is sold for the treasury, reducing actual mining money to ninety cents in every two-dollar bill, so that in the event of a producing mine coming along at some hazy future date the mine manager’s ninety cents will be called on to earn dividends on the Canadian investor’s two-dollar bill. The equity is insufficient, in this writer’s humble opinion, and it would not constitute an even-Stephen opportunity for the investor even if he were told of the methods in vogue, which, naturally, he is not.
That is one phase of the system. One might add that this is one of the healthiest phases. Others permit the sale of an entire company treasury for a comparative song, placing the whole share structure of a company, capitalized in the millions, at the disposal of the promoters at whatever selling figure they deem compatible with the public interest in their ballyhoo, all proceeds accruing to those who sell the issue.
There are still some one-time promoters who do not even bother their heads about sending any money out to their hole-in-the ground, though this school of thought has become more or less démodé in these enlightened times, when even flim-flamming is accompanied by the aspects of finesse. But the method outlined will serve the purpose of pointing out the pitfalls which await the unwary writer of cheques and the lover of a well-painted fairy tale.
Telling the Tale
THE method of share-peddling outlined in our opening paragraphs is not gross exaggeration, although it may appear to the average reader as verging on the imbecile. I have sat o’ mornings in salesmen’s rooms in more than one leading mining brokerage house, and listened to enthusiastic batteries of
stock-pushers on the hunt for the day’s commissions via the telephone route. There comes to my mind at the moment the case of a seaboard promotion of no little merit which one of these days may be a dividend-
paying mine. The property had been worked some years ago, but had been closed down as the
result of a diminished bank account, when the brokers in question heard of it and made arrangements to take it over, organize a new company and make a mine, if possible. So far as I have ever been able to see, their effort is an honest one. If there is a mine to be made they intend to make it. Engineers investigated the properties and made certain recommendations which were accepted. Then shaft-sinking operations were begun on the principal lead, and one fine morning there came an enthusiastic night letter from the manager on the spot, which stated that excellent showings of free gold had been uncovered, and that generous samples were being hoisted to the surface which he would ship to a firm of analysts for assay. It was good news, which showed the promoters that they had been right in their assumption that the property was worth spending money on. So far, so good. Now hearken to the voice of the stock salesman !
“But Mr. Brown,” I heard one remark into his telephone, “this, is not a gamble any longer! This is surefire! They are hoisting ore to the surface now! This isn’t a prospect, it’s a mine! You can buy stock for thirty cents today, but don’t blame me if it is a dollar tomorrow! Don’t say that we didn’t tell you!”
All of which, as a comedian would say, was a lot of boloney. The property in question was and still is a healthy prospect, nothing more. Its shares are not listed. The selling price of those shares is still determined by the underwriters, and there is no market where the investor may dispose of his stock if he wants his money back, unless the brokers concerned are willing to take it off his hands. In this particular case the organization in charge of the so-called underwriting of this company’s securities is as honest as custom permits. It keeps its word, endeavors to paint an honest picture in its prospectuses and house organs and, generally speaking, is trying to keep the goodwill of the public, because the man at its head believes that he can become wealthy more rapidly by keeping faith than he can by going in for highway robbery. But consider the manner in which
his salesmen vindicate their wares on their telephone ! O tempora! 0 mores! Telephone selling is the pièce de resistance of the shady share-house. You may tell a man that you can double his money in ten days in a maverick mining security, but it is dangerous to put your promises in writing. You can
whisper imitation secrets having to do with imaginary deals involving mammoth mining formations; but letters, if they mention such items, might lead to embarrassing conversations with the crown prosecutor or the attorneygeneral. Things can be said on the telephone which would be dynamite when committed to a
typewriter, but you can sell a lot of stock over the wire if your battery of high-pressure boys is large enough. Well-organized swindlers can even tell you the normal percentage of sales to be expected from an active phone canvass of stock buyers, for this is the day of efficiency, and even the wolves have caught the spirit of the card index and the filing cabinet.
There is an infinite variety to the methods of the sucker-fisher and the mooch-hunter in the mining-share field which custom can never stale. Apparently there is no limit to the ideas which a wide-awake promoter can think of as a means to the end of raking in a golden pile of dollars to his personal account. Public issues in the veriest holes-in-the-ground have been listed on mining exchanges and prices quoted on the trading sheets, whib hustlers were out in the highways and byways peddling scrolled certificates which have never served any better purpose than the papering of country bathrooms.
One or Two Remedies
BUT how to curb such activities? That is the poser faced by governments and Better Business organizations everywhere. Restriction-making is not an easy task. Various provinces have brought down blue sky laws and commission-limitation legislation. All manner of wrinkles have been invented by legislators to hold down the money-sucking giant of share-swindling. But as rapidly as new thou-shalt-nots are written, loopholes are found in laws, their emasculation is provided for, and the high-pressure expert finds new roads on which to travel to easy money. Always it must be remembered that no law should be written which, perchance, may prohibit the development of the country, and that if stumbling-blocks are placed in the paths of the crook, they may also trip the straight-travelling feet of the honest man. That is the difficulty which faces the lawmaker. Provincial and federal governments are anxious to curb share-swindling. Complaints receive thorough investigation from ocean to ocean. Often they are followed by criminal proceedings against the malefactor, but too often when the complaint is lodged the bird has flown, or else nothing is to be won back for the victim merely by putting a miscreant behind the bars, for the casy-money man has the faculty of disposing of his assets as quickly as he comes by them. He lives high and spends zealously.
As a result the investor’s greatest protection must come from himself, and he must provide his own safeguards against the pillager. Any man who is invited to invest in the shares of any company, whether it be a mine-in-themaking or a railway, is entitled to complete proof of every claim made by the salesman offering its stock for purchase. By following the formula of proofhunting, the investor can provide himself with an insurance against lies which no attorney-general in the realm can give him.
When the stock salesman calls at your door and offers you his wares for examination, examine them. Do not be led away by tales of double-your-money. When he tells you the price of his shares, ask him what those shares have cost his employers. And when he gives you the figure, make him prove it. Ask him if every share which you purchase is treasury stock. And when he replies in the affirmative, demand proof of his affirmation, for if he and his sponsors are honest men that proof can be forthcoming with ease, and he will put his case in writing over his name. Do not be led away by the names of prominent men on a directorate. Do not be led away by records of high assay values from a prospect mine-in-the-making. Listen more seriously to the man who tells you frankly that you are being invited to gamble than you do to the certainty-spieler. Once in a decade by accepting this advice you may miss an opportunity for profit, but for every chance to win a dollar you will be given an even hundred opportunities to lose. Consult your banker. Perhaps he is a conservative soul and will advise you against gambling or speculation in any form, but at least he will endeavor to save you from loss. Investigate first. Buy last. Too many people transpose this method of procedure and find, when the subsequent investigation takes place, that they have played the rôle of milch cow to the high-pressure broker’s milkmaid.
In certain European countries promoters of companies are forced by law to imprint on the face of certificates, when issued, the class of stock which they are selling and the destination of the funds accruing from its sale. There can be no reason in the world why the investor should be prevailed upon to purchase vendor shares. When the public is invited to participate in an attempt to make a mine, every dollar of the money so raised should go into mine-making, with a reasonable deduction for the expenses of selling the company’s securities. Punch holes in this theory if you will, but if the promoter has faith in his own venture he should be willing to wait with his shareholders who speculate with their cash, and the stock which he has received for promotion work and other services ought to be held in the strong box until the rank and file of the company’s shareholders win or lose with the promoter. There is no argument against the promoter earning an honest living, and a good one, as he goes along. But there is serious quarrel with the theory that the promoter of a company is entitled to unload his free shares on the public and leave it holding the bag alone when ultimately his company is wound up. Any man is entitled to fair play, even from a professional gambler.
Laws governing the setting aside of vendor stock until a property’s value is proved or disproved would go far toward rectifying the prevailing state of flimflam. Government scrutiny of the closest nature into all transactions by promotion share-sellers, the reporting of all sales, and the rigorous application of the criminal code to those who do not play fair with the public would help to set aside the condition of rookery which exists today, by dangling the picture of a penitentiary cell before the eyes of gentlemen given to the making of easy money by any means at hand. Perhaps the imposition of such restrictions would bring a blight upon the present-day lush acres of mine-promotion, but at least it would do away with the promoter who promotes only for his bank-roll’s sake, and any move in that direction is good.
The Bucket Game
'"PHERE remains another phase of this L mining racket which has absolutely no relation to mine-making but is merely outand-out gambling, and must be closely scrutinized and housecleaned before any possibility of an even break for the public can exist. This is the practice at present associated with buying and selling of shares on margin on the mining exchanges.
The function of a stock exchange, as my mind has always understood these matters, is to provide an open mart where the shares of companies may be traded in freely. If I purchase shares through a broker on a margin basis, he is supposed to buy my shares in the market and, in exchange for the privilege of margining which he extends to me, I grant him the right to hypothecate my stock with his
banker. At any time when I choose to pay the balance due to clear off margins I am entitled to delivery of my certificates within a reasonable delay of a few days. The margin-broker, in effect, agrees to purchase the stock, carry it on his books, and hold it for delivery upon payment of balances due. Presumably he must be in a financial position to make his deliveries on call, but—
A pretty little method has been evolved by a certain type of mining broker who realizes that artful bookkeeping can cover a multitude of sins. Such brokers hold to the view, as a brotherhood, that an equity in certificates of, say, thirty-three and one-third per cent in the strong box constitutes a margin of safety. In other words, he thinks that not more than a third of a broker’s clients will appear on the same day to ask for settlements of their accounts. Therefore if a trader purchases 120 shares of International Nickel this morning, on margin from such a broker, the one-third law will be put into practice. An order to purchase 120 International Nickel will be transmitted to the floor of the exchange. The purchase will be recorded and the margin buyer will be informed of that purchase, probably with an annotation on the confirmation slip informing him that it has been bought from so-and-so, another broker. Apparently everything is serene and the trader’s affairs are in the hands of a scrupulously honest Gentleman of the Bourse. But an Ethiopian lurks in the woodpile, for such a broker, after accumulating several or many such orders, will then sell sufficient shares of the same security back into the market for his firm’s account, thereby maintaining his recognized equity status. By this practice bucket-shops are enabled to carry a portion of the securities listed on their books and bucket the balance, an item which sometimes leads to failures where brokers are insufficiently capitalized and which often leads to even more serious results in the way of market malpractices.
YOU may have noticed a distinct tendency to bull and bear markets in the mining world. For two months everything on the board will move upward. Then the crack of doom sounds and the bottom goes tumbling from the market, leaving the innocent gambler-on-margin holding the bag while the brokers clean up.
As market levels are on the upgrade brokers acquire large balances of stock in their strong boxes, even those who work on the so-called equity basis of sharecarriage. Prices climb and profits are written on paper for the speculator, while house organs and market letters and related forms of share-ballyhoo urge buying and more buying. Then, all of a sudden, some sunny morning the plug is pulled out and the bottom falls out of the market, as brokers with accumulations in certain stocks dump their holdings against the interests of their own clients and send prices cascading. Calls for margin go out. What is laughingly called reasonable leeway—and what would be reasonable leeway if such brokers were carrying their clients’ stocks in their entirety—is given to the speculator to cover up. Many fail to send in their cheques for lack of funds and so are sold out. Others pay up and ask for their certificates. If short, all the broker has to do is to buy in at the depreciated price and make delivery. What a charming business this is. The financially sapient may roar with merry laughter, but members of exchanges should be denied the right to traffic in shares, if this is the best they can do for the public. After all, why should a Xbroker who has just instructed his floor man to buy so many shares of, say, Dome for a client, be permitted to sell Dome into the same market for his own account, so that he can bear down on prices or maintain his precious equity position? I realize that a brokerage house—an honest brokerage house, that is—will try its level best to protect the market of a stock which it has sponsored from the raids of marauders, but I will venture, correctively, the suggestion that for every honest broker who protects a market for a given mining security you will find six who will bear prices in their own interests, even when such interest is directly opposed to the interests of their clients. I do not profess that this is peculiar to the mining racket, but I do suggest that the broker who indulges in such enterprise in any market is no fit associate for honest men, and I will further venture the view that some of the brokers who have won vast hoards of personal wealth in recent years have not done so by the route of buying and selling on commission in the open market-place.
These things have not the slightest relation to mining. The margin trader in listed mining shares is not a speculator in mine making. He is a gambler, out and out. Some of the Solons of the Street will tell you that he is just a little chiseller, trying to chip his puny profits off the edges of the market and that as such he is not entitled to much consideration from anyone. Granted, except for one point. Board-room trading in stocks is government-licensed gambling and cannot be set down honestly in other words. The gambler must venture into such precincts prepared to win or to lose. This is completely excellent. But inasmuch as this is government-approved gambling he at least deserves the protection of knowledge that when the broker twirls the little pea around the circle of his roulette wheel it will be an honest spin for the gambler’s money, for the broker—who is in exactly the position of the gamblingjoint operator—is protected against loss by the establishment of a commissionkitty from which it is presumed that he earns his own daily bread. There are many eminent members of the brokerage fraternity who will go pink above the collar-line when informed that they merely act in the rôle of bookmakers taking bets for transmission through the exchange clearing-house. But when you consider margin-trading anywhere on any exchange, mining or industrial, that is the alpha and the omega of its programme.
A Drastic .Suggestion
IN THE opinion of many people marginbrokers ought not to be permitted the privilege of trading in stocks on their own account, and have no right to enter the market other than to buy and sell stocks for their customers. This applies equally to all exchanges, mining and otherwise. Promotions and the formation of new companies ought to be withheld from the hands of the margin-house, and such houses should be controlled in a manner which does not permit of their entry into the market to buy and sell for other than bona fide customers. Furthermore, for the benefit of the general public, the closest supervision should be exercised over the mining-share exchanges in order that the listing of mavericks cannot come to pass. Regard the listed mining shares on any of the boards. Look at the companies whose shares have been listed, say, for five years. In how many cases will you find that a stock has been listed in its early days when it was a mere prospect; that market prices have been run up out of all proportion; that via such market operations promoters have fed their stock to the public on the crest of a wave of ballyhoo, only to retire from the scene with their profits,
leaving the public—the gamblers if you will—to hold the bag while prices recede to three cents a share and remain there evermore? And that, ladies and gentlemen, is not honest. It cannot be labelled clean under any ethical code known to man.
To regularize the efforts of brokers who are members of recognized mining-share exchanges is a far simpler job for governments than is the task of regulating the efforts of the vendor of promotion issues which are not listed.
Why not prohibit the listing of and public trading in mining issues until the mine has passed beyond the prospect stage? Make the promoter and the public wait future developments, for if the mine-in-the-making has the goods the market will come of its own volition and there will be ample profits for all concerned.
Why not prohibit the participation of margin-brokers, directly or indirectly, in any public market? Let them earn their living by the rates of commission which their exchanges permit and which governments recognize. And when a broker oversteps these boundaries, directly or through some prête nom or a subsidiary concern, give him short shrift and send him to rest in those cool halls where an easymoney gentleman may reflect in solitude on his sins. If you are to permit the public the right to gamble—with which I am in complete accord—at least provide the gambler with the only protection to which he is entitled, an honest deal.
Brokers Should Carry Stock
"VATE HAVE remarked on the fact that W margin brokers ought to be forced by law to carry on their books the shares which they have bought for their clients and should not be permitted to go short any stock on his personal account. To this, of course, the mining broker will answer that this must be in the realm of mining share dealing, inasmuch as the banks will not carry the average mining stock as security against brokers’ loans. Here, perhaps, is a matter difficult to circumvent. But there is one obvious ] solution. Refuse to brokers the right to carry any stock on margin on which they cannot secure loans from their bankers, providing they do not possess sufficient capital, as brokers, to carry their clients’ holdings themselves. As matters stand at this writing, in the world of mining-share margin-trading the broker without ample capital is forced to become a bucketeer or else he must close his doors. Such is the lack of restrictions imposed on the fraternity by people whose duty it is to lock doors before horses escape from the stable.
Anyone who regards mining for what it actually is must feel concern about these things, for mining is destined to become the spinal column of our national prosperity before many years are gone. To me it seems a reasonable view that it will go farther if held within the bounds of common honesty. Gambling in the future of this country, via the purchase of shares in mining-promotions, is an excellent thing, once the trade is purged of the pillagers. Gambling on margins, while having next door to nothing to do with the making of mines and the creation of mineral wealth, has come to be recognized as part and parcel of life in civilized countries. As such it is in order in our present day and age, providing the gambler is given an even break and the assurance that the cards have not been stacked by the dealer.
Editor’s Note: Certain conservative fi-
nancial men with whom this article was discussed incline to the view that remedial legislation as suggested by Mr. Roberts is not practical and that the solution must be a housecleaning inside the brokerage business.