GENERAL ARTICLES

Beware the Stock Racketeer

Avoid being fleeced of your savings—Here’s how the high-pressure boys make millions

RONALD A. McEACHERN April 1 1945
GENERAL ARTICLES

Beware the Stock Racketeer

Avoid being fleeced of your savings—Here’s how the high-pressure boys make millions

RONALD A. McEACHERN April 1 1945

Beware the Stock Racketeer

Avoid being fleeced of your savings—Here’s how the high-pressure boys make millions

RONALD A. McEACHERN

Editor of The Financial Fost

HAVE YOU BEEN HOOKED?

If you have been a victim of the type of racket described in this article and would care to send us an account of your experience, we’ll be glad to have it. It will be regarded as confidential. Address letters "Confidential," Editorial Department, Maclean's Magazine, 481 University Avenue, Toronto, 2.

THE BIGGEST mass fraud in Canadian history is now being perpetrated on the Canadian people. It’s the stock racketeering scandal.

Stock racket gangs are pocketing millions of dollars. At a recent national convention of security commissioners in St. Louis, Mo., Toronto was held up as the stock racket’s plague spot of North America.

Some of these hoodlums of the financial underworld are native “talent”— Canadians with slippery fingers and no conscience. Others are refugees from the police in the United States—gamblers, confidence men, and swindlers who have fled from indictments and looming jail terms.

The stock racketeer hopes to make a terrific killing when the troops come home. Their savings, their demobilization pay, etc., is money you have paid to help re-establish servicemen in civil life. If the stock racketeer isn’t stopped he Ls sure to get a lot of it.

How the stock racketeer works—and the fabulous profits he makes—Ls an astonishing story.

Do you realize, for instance, that when the stock racketeer talks you into buying 5,000 shares of Moose

Pasture Inc. at 40 cents a share ($2,000) he probably pockets nearly all of that $2,000?

Let’s look at a typical racket operation and see how it works.

John Jones of High River, Alta., gets an unexpected letter in the mail from a Toronto “investment firm.” It offers him free and expert advice on the handling of

his investments. It “proves” how its “analysts” have made wonderful profits for others who have followed their advice on what stocks to buy—and when.

Mr. Jones is a canny chap. Nobody is going to make a sucker out of him, no siree. He’s heard about these slick promoters. They won’t catch him.

But obviously he has nothing to lose by seeing what this “investment firm” has to say about the few stocks he has been holding. He accepts this free offer to have an “expert” look over his wealth, fills out the coupon and names some of the securities he holds—a tidy little batch he’s been working a long time to collect— worth somewhere around $8,000.

Back comes an impressive document giving him some general advice. Another mail brings the urgent suggestion that he sell his ABC stock and buy some of the relatively gilt-edged MNO. (Get him trading is the idea.) Another mail offers him “a unique opportunity to get in the ground floor” in the stock of Golden Tassel, the wonder mine of the decade. As a special favor he is going to be permitted to buy shares “below the market.” He Ls sure to make a profit.

Mr. Jones finds it rather pleasant getting something in nearly every mail from “the big Toronto investment firm.”

“Well, I guess I can take a little flier for once in my life,” he says, writing out his cheque for $100—a thousand shares of Golden Tassel at 10 cents a share.

Sure enough, Mr. Jones makes a profit. Not a week later the stock is quoted at twice what he paid for it. He sells at 20 cents a share—back to the promoter, but Mr. Jones doesn’t know that.

“That sure was the easiest $100 I ever made. That firm must be pretty smart. They sure treated me fine.”

Mr. Jones is on his way to the cleaners—if it’s racketeers that caught him.

So he buys more stock and there are more profits. Now he’s getting a special investment advisory service ($50 a year it says on the cover) through the kindness of his brokers, free subscriptions to things that look like financial papers, personal letters, telegrams and telephone calls—long, 20-minute calls all the way from Toronto. It’s very exciting until the racket play is completed and Mr. Jones has lost a couple of thousand —or his shirt.

That story is being duplicated all over Canada. In many cases the money is not yet finally lost—or at least the victims don’t know it yet—because their particular stock racket bubble hasn’t yet burst. It will.

Now let’s see what happened, Mr. Jones, and how.

Very few of the racket stocks have any “market price” in the ordinary sense of the term. They are not like the stocks whose prices you see listed day by day in the city newspapers.

Most of the time the racket-stock operator simply says the price of Golden Tassel is 20 cents or 40 cents or 90 cents. In other words, in many of these stocks the sponsor can move the price up and down much of the time, just about as he wishes, to his own profit. Remember some people make money when a stock is going down, just as others make money when it’s going up.

So it was no trouble at all to give John Jones in High River and the John Joneses in Moncton, Haileybury and Neepawa a profit that first time. It is a worth-while come-on expenditure.

Get him buying and selling stocks is the first racket rule. Then get his Victory Bonds. Then start loading him with the racket stock or stocks. Get him in deeper and deeper. That’s the procedure.

Then put on a big final mail, telegram and telephone campaign. People are feverishly urged to buy as much as they can as fast as they can“before sensational news moves the price much higher.”

Continued on page 53

Beware of the Stock Racketeer

Continued from page 12

Now the racket gang chief decides his current crop of victims has about all the Golden Tassel stock it can buy. He has moved the price up and down a couple of times, say from 10 cents to 80 cents. The time has come to “pull the plug.”

The price begins to topple. Golden Tassel stockholders soon find they can’t get any buyer for their stock at any price. They are stuck.

On that kind of operation the racketeer may make anywhere from $100,000 to $1,000,000. Perhaps half of that goes to salesmen, selling and promotion expenses. The rest he keeps for himself. Because of the way these things are handled in the financial underworld, it’s a good guess that his $50,000 or $500,000 profit will almost completely escape the income tax collector.

“But what about developing the mine?” you ask. “That’s what I paid over the money for besides having a little gamble on the market.”

That’s what you thought. Mining the public is much more profitable, and much less troublesome, than mining a piece of ground in the north country. For a few dollars an operator can get control of a piece of ground somewhere in a mining area. After that all he needs do is spend a hundred or so dollars a year going through a few motions resembling efforts to find or develop a mine. So when you put, say $200, into the purchase of a racket stock, perhaps less than one dollar of that money actually “goes into the mine.”

Of course more than this dollar goes to the “mining company.” Some of it goes in salaries for “mining company executives and expenses.” These may include salaries for wives and sweethearts, rent of an apartment or a hotel suite, running of a couple of motor cars, liquor and theatre tickets. In these days of high income taxes, neat little setups having “office expenses” are just dandy.

But the only kind of money that actually develops Canadian mining is, obviously, only the money that is spent in the difficult, expensive job of trying to find and develop a mine.

Honest by Accident

Usually racketeers put little money “into the ground.” But there have been cases where they have done so, and there have also been cases where, to their own and everybody else’s surprise, the property proved worth while. But that’s the exception. Loss for the public is the rule.

“Loading” is the slang of the financial underworld for what happened to John Jones. Here are some other tricks of this lucrative trade.

Phony pricing is common. It is remarkably easy and common because so many people think there is something definite and public aboutwhatanardent salesman calls “market price.” Thousands of people have paid 90 cents for a stock to an interested salesman or broker when they could, by enquiry among those reliable brokerage firms specializing in the street market, have bought the stock for 50 cents, the price at which the stock was currently quoted “on the street.”

When a stock is not listed on an organized stock exchange the public should be very sure of the dealer with whom it does business.

The fa^e “confirmation” is another racket trick. Last night, let’s say, you got a telephone call from Toronto urging you to buy Golden Tassel. You stoutly refused. But today you receive in the mail a printed form “confirming your order to purchase,” along with a firm note requesting your cheque by return mail.

That stunt pays very well. Some people will react this way. “Oh, well, I’ll just take a little flier and see what happens.” Others fear that they have done or said something in the telephone talk which legally obliges them to buy. To cover their ignorance and to avoid trouble they pay up and buy the stock foisted on them. Of course if anybody complains it’s easy for the racketeer to say, “Sorry, just a mistake.”

The “holdback” is another trick. You agree to buy 1,000 shares of Golden Tassel. You pay your money. But the weeks go by and you don’t get delivery of your stock. When you enquire about it you get excuses and promises. You find out that the price has gone up or down. You want to sell. You are fed up with promises, the salesman and his firm. You want to get clear of the whole business.

The racketeer may be holding out for two reasons. He may hope to prevent you selling, which would complicate his market operation, or he may be bucketing. That’s a complicated stunt. Bluntly, it means nonexecution of your order and possibly speculation with your money.

Another racket device is where the racket chief operates through two, three or more “fronts”—ostensibly independent brokerage firms. This opens up tremendous possibilities for market rigging, for trapping and fooling the public.

Stock racketeering is a highly developed business, hence there is a lot of division of labor.

There are the “old lady specialists.” These are salesmen who specialize on women. They cultivate their “friendships” carefully, sometimes with gallantries, such as sweeping off the front steps or sending flowers.

Long-range Persuaders

There are the telephone troops — specialists on the long-distance telephone. Like radio announcers they

work from written or memorized scripts, have a stock answer ready for all your objections. This week these experts may be working for one outfit, turning the blast on this stock; next week for a different outfit, pushing another stock.

“Investment advisory services” are important links in the racket chain. They are paid, in one way or another, for tipping the stocks of the people who hire them.

Other laborers in the stock racket community are the peddlers of name or sucker lists; the bird dogs who mosey around planting “information” and spying out the activities of other operators; the underwriters or stock wholesalers; the legal advisers and, finally, “the window-dressing”—the ordinary citizens of reasonable reputation who are dumb enough to be flattered into accepting the presidency or a seat on the directorate of some of these companies. They usually pay for their honor by their stock purchases. Sometimes they know what’s going on; sometimes not. One Toronto janitor became president of five or six “gold mines.”

But, you ask, isn’t there a law?

No law on earth can prevent you being foolish with your own money. If you really want to throw it away or hand it over to a crook nobody can stop you.

As for laws restricting the operations of crooks and confidence men, there are lots of them but they haven’t been getting adequate enforcement where enforcement counts most—in Ontario.

Securities control is exercised by the provinces. Most of the stock racketeers have congregated in Ontario. Chiefly by mail, telephone and telegraph they carry their racket operations into the other provinces and into states of the American union. Under present law there Isn’t very much effective control that security commissioners in other provinces and states can exercise against it. Hence the kind of stockselling control imposed by Ontario pretty well determines, under present circumstances, the situation nationally.

All stock brokers and stock salesmen are supposed to be registered by the Ontario Securities Commission. Most of them are, though there are some outlaws. According to court rulings, the Securities Commission is supposed to license only men of “good repute”— meaning, in the broadest sense of that term—men whose personal and business record is such as to suggest that they can be trusted with the handling of other people’s money.

But Ontario has licensed men with criminal records, and others with such odoriferous business experience that you wouldn’t hire them to run a potato peeler. In addition the racket community includes some who can’t get registration even under the present elastic standards.

As this is written the Ontario Legislature is about to consider a new securities act, and the Ontario administration professes there will shortly be improvement. As with pudding, the proof is in the eating.

Here’s an important point to keep in mind.

The people I’m talking about, and the methods I have been describing, are those of the financial underworld. Generally speaking, they have no connection with the financial community proper, though here and there the tentaclesof this underground octopusdo reach into places of great influence and seeming respectability.

The vast majority of Canada’s brokers, stock promoters and stock salesmen deal honestly and fairly. You can trust them in the handling of your money. The Investment Dealers’

Association imposes very strict standards of conduct on its members. Membership in a stock exchange also carries its responsibilities. And there are a host of other firms, members of neither, who do and must subscribe to the standards of this business which, to a degree unparalleled in any other kind of business, depends so much on a man’s word.

What, then, should you do when somebody asks you to buy stock?

Investigate First

Find out about the salesman and, particularly, about the firm he represents. Really “find out” about them. Don’t just assume they’re all right because you’ve seen their advertisements in certain kinds of publications, or because you like their letterhead. Get the advice of your bank manager or your life insurance agent. They can get a report from head office. Or ask the Better Business Bureaus in Montreal, Toronto, Ottawa, Winnipeg or Vancouver. Don’t expect any of these people to tell you all they know or suspect. That might mean a libel suit. You will be wise to follow their general advice, however.

Remember that in brokerage, as in all businesses, there are some “hot” operators who, all or most of the time, keep just within the law. They are well known in the financial community which has means of protecting itself against them. You haven’t So know your firm.

When an unknown salesman tells you to make up your mind fast, watch out. This may indicate a rigged market. For every dollar of market profit made by acting fast, tens of thousands have been lost by not stopping to think, investigate.

When an unknown salesman, representing a firm you don’t know, telephones you long-distance, don’t be flattered. Decently run brokerage business can’t afford anything like that selling expense. But for the racketeer $5 or $25 for a telephone call is peanuts, and it’s safer for him, because this makes it harder to get evidence that will convict him of fraud.

Next time you are telephoned by one of the stock pushers listen politely until you get his name, his firm’s name, the name of the stock he is selling.

Then report the matter to your attorney-general.

Telegrams are in the same category. You can nearly always be pretty sure that something is wrong if you get a telegram from somebody you don’t know very well urging you to buy or sell any stock. All of us are being constantly urged not to interfere with essential wartime communications by unnecessary use of telephone and telegraph. But that doesn’t bother some operators. Telephone and telegraph companies don’t like this business, but there’s nothing they can do about it.

Suspect Advice

Watch out for stock promotion literature until you are absolutely sure of the people who are sending it. Be particularly on your guard against socalled “investment advisory services.” There are very few legitimate operators in this field. Most of the ones from whom you are likely to get unsolicited mail have some tie-in with stock operations you should stay clear of.

Now don’t think I’m writing only for investors, for people who want to put their money for a long time into dividend-paying stocks. This applies equally to people who simply want “to take a little flier,” to speculate, to gamble.

If you want to speculate on the stock market, there are lots of honest brokers around who will handle your business, tell you where your chances for profit are good and show you where you will get an honest-to-goodness run for your money.

If you do lose money on the stock market don’t leap to the conclusion that you have been swindled. Mines are hard to find and expensive to develop. No matter how honest the promoter or the broker there are probably a hundred mine failures for every mine success. What may have been a failure last year or five years ago may be a success next year or 10 years hence, so never throw away “worthless” stock.

Canada needs more mines. In the making of mines the legitimate promoter, the honest stock-selling organization and the alert speculating public all have a place.

But when you deal with the racketeer you do Canada harm, imperil your own future.