"INSIDE" MARKET SUPPORT
The removal to New York of B. H. Scheftels & Company, Chicago stock brokers, representatives there of Nat C. Goodwin & Company of Reno, and a merging of brokerage and promotion interests of the two firms took place.
There was precedent for the move. There are a thousand other corporation interests in this country that are closely affiliated with Stock Exchange and other brokerage houses, through one or more of their directors or owners being partners in the business. As a matter of fact, it would be difficult to lay your finger on a single big interest of this kind that has not such a representation. These houses, of course, make it a rule to recommend the purchase of stocks in which their principals are interested. Affiliations of this kind are found essential to successful financing of enterprises. A number of New York Stock Exchange houses which are headed or controlled by men who are heavily interested in mining ventures that require financing are exponents of this method in the mining field.
Most of these have succeeded in promoting projects in which they or their associates are heavily interested, with the aid of the banking and brokerage facilities thus afforded. Principally by the use of the market literature and accompanying market manipulation, these houses have placed with their customers the securities of their firm members and associates. They have encompassed this by maintaining a brokerage, banking and promotion business without parading before the public, although never denying, the mixed nature of their business.
For the reader to comprehend the necessity for transacting the business this way, he should understand the underlying principle of financing an enterprise by the route of the listed stock market.
There are two ways of financing any enterprise with other people's money. One is by the primitive method of appealing directly to the public for subscriptions in huckster fashion, taking the money and then refraining from listing the stock or establishing an open market for it. You can't finance an enterprise of consequence these days by any such procedure. It is practically impossible to borrow from banks or from loan-brokers on any security that has no fixed market value. A market must be established, for without a market on which to sell, intelligent investors won't buy.
The method, therefore, in common use, and the only one which has been found effective by financiers, is to create a demand for the security, encourage speculation, establish an active market, and dispose of stock on the market as necessity demands whenever financing is required. This implies and necessitates that the inside interests must support the security in the open market. Therefore, it becomes necessary for the successful marketing of the stock by the promoters, once a demand is created and public buying is under way, that stockholders shall be kept in full touch with the latest transpirations on the property and in the market—be furnished with news concerning their interests so that they may judge the value of their stockholdings. This process is particularly essential during the financing period of the company and the security-digesting period of the public.
In fine, the ultimate purpose in this regard of all the promotion machinery of Wall Street—the machinery that has been putting out billions of dollars' worth of securities to investors—is to place stock where it will "stay put," that is, not come out on the open market again to embarrass the interests that are behind the enterprise, and who for a long period are compelled to support the market.
On the question of the ethics of market support by "the inside," a whole tome could be written. I will not attempt to discuss the subject at length here. Suffice it to say that in my opinion "inside" support of a listed security is not base when it is done with a view to creating a broad market, to stimulate public interest, and to increase the price to a point within the bounds of intrinsic plus reasonable speculative worth. Support of the market to the point of stimulation is moral obliquity, however, when dishonestly performed for the sole benefit of the "inside" and to the hurt of the stockholder. This sort of market support is only a shade less reprehensible than manipulation that has for its purpose the reduction of the market price of a security to beneath its real value, which, in my opinion, is nearly always infamous.
I might place myself on record right here to the effect that only once did I ever "bear" a stock from "the inside," and on that occasion it was a temporary affair, caused by a desire to secure at a reduced price a big block of stock that was pressing for sale from a quarter that I was under no obligation to. Even in that instance I gave the investor much of the benefit my associates secured by letting him have stock at the same figure at which "the inside" secured it. Nor have I ever tried to push the price of a stock to a higher level than that which I considered warranted by the reasonable speculative and demonstrated intrinsic value behind the security.
CHAPTER X
Enter, B. H. Scheftels & Company
B. H. Scheftels & Company, Incorporated, mining-stock brokers, successors to B. H. Scheftels & Company, for many years stock brokers in Chicago, opened its doors on Broad Street, New York, on January 18, 1909. For a long period B. H. Scheftels & Company of Chicago had been advertised as the Eastern representatives of the corporation of Nat. C. Goodwin & Company of Reno, of which Mr. Goodwin had been president. It was now announced that Nat. C. Goodwin had become vice-president of the new corporation of B. H. Scheftels & Company. Because Mr. Goodwin was by profession an actor and not a stock broker and because of the personal abuse he suffered in unfair newspaper criticism which followed the "break" in the market price of Rawhide Coalition a month before, he was quite willing to serve as vice-president instead of president. Besides, he could not spare the time from his profession to attend closely to the business.
The new corporation of B. H. Scheftels & Company made its bow to the public by at once featuring in its market literature advice to purchase stock of the Rawhide Coalition Mines Company. I became publicity manager for the Scheftels corporation, manager of its promotion enterprises, and was placed in charge of the protection of the corporation's interests in all markets where its stocks were traded in.
Soon I was conducting a fresh campaign with investors that became so hot, so exciting and so big that for nineteen months I labored on an average sixteen hours a day, including Sundays, without being able to complete in a single day a day's accumulated business. The business grew until B. H. Scheftels & Company were actually spending more than $1,000,000 annually for office and publicity expenses. In the nineteen months of its existence it bought, sold and delivered approximately 15,000,000 shares of mining stock. The Scheftels corporation broke every record in this regard that was ever made by a mining-stock brokerage and promotion house in the history of Wall Street. Throughout its career it was viciously attacked from many directions, but it held its own. Through its hold on the mining-stock speculating public, who were getting fairer treatment than ever before, it survived the concerted onslaughts of a number of important interests which it had competed with and antagonized, until one day in September, 1910, on a warrant sworn to singly by one George Scarborough, since permitted to resign, clothed with the office and power of a special agent of the Department of Justice, its offices were raided, its books and papers seized, its property confiscated, and its officers and employees arrested.
The annual expense of B. H. Scheftels & Company was $1,000,000 or more.
Follows a tabulated statement of the expense item. The figures are approximated. The books of the corporation, which are now in the possession of the Department of Justice of the United States Government, will probably show that the annual expense was larger. The books not being readily available, an attempt is made here to be ultra-conservative in setting down figures:
ANNUAL EXPENSE OF B. H. SCHEFTELS & COMPANY
| Establishment of main office and six branch offices(furniture, fixtures, etc.) | $ | 40,000 |
| Office rentals | 35,000 | |
| Private wire system connecting branch offices insix cities with New York | 25,000 | |
| Telephones | 5,000 | |
| Telegraph tolls | 100,000 | |
| Salaries (all offices) | 200,000 | |
| Daily and Weekly Market Letter (printing andpostage) | 100,000 | |
| General office expense, etc. | 100,000 | |
| Miscellaneous postage | 25,000 | |
| Miscellaneous printing and stationery | 25,000 | |
| Advertising, publicity, etc. | 200,000 | |
| Expert accountants | 15,000 | |
| Commissions and salaries to Curb brokers | 50,000 | |
| Mining examinations, engineers' fees, legal fees,etc. | 50,000 | |
| Interest charges | 30,000 | |
| Total | $ | 1,000,000 |
Before the Scheftels corporation was in business a month it became plain that it was "filling a long-felt want." In almost every branch it was performing some function in a manner more satisfactory to mining-stock speculators and investors than were its competitors.
Its Market Letter news service, usually 16 pages, was the prime article. It soon gained a circulation of 34,000 among the highest class and best informed stockholders of mining companies in the country. It was also regularly sent to more than 2,500 stock brokers, including members of the New York Stock Exchange, New York Cotton Exchange, Boston Stock Exchange, New York Produce Exchange, etc.
Before the Scheftels corporation was five months old the work of its Market Letter was supplemented by the Mining Financial News, a weekly newspaper which had been published for a long period at Reno as the Nevada Mining News, latterly as the Mining Financial News, and which removed to New York when the Scheftels company found the mining-stock public was hungry for real live news and the truth regarding the mining propositions of other States as well as those of Nevada. The Mining Financial News and the Scheftels Market Letter, which were published three days apart, were supplied with news from practically the same sources. The newspaper was mailed to all readers of the Market Letter.
The ablest and most reliable mining correspondents obtainable for money in Tonopah, Goldfield, Ely, Rawhide, Cobalt, Butte, Globe and other mining camps, and the most experienced market news-gatherers in the mining-stock-market centers of Salt Lake, San Francisco, Boston, Philadelphia, Toronto and New York, were placed on the pay-roll. Brokers in these and other cities, including Duluth, Seattle and Butte, supplied more news.
Wherever there was mining or market activity, representation of the very highest character was sought. News was always wired, no matter what the cost, whenever it was important to traders in mining shares. Expense was never spared when the information was considered of value to the speculator or investor. In the New York offices of the Scheftels corporation and the Mining Financial News, which adjoined each other, a staff of newspaper men with a mining financial experience of years was gathered. Little that transpired in the mines or the markets ever got away from them. Days before the mining newspapers of the West reached the East the Scheftels Market Letter or the Mining Financial News communicated the news regarding mine developments. They also contained a daily and weekly stock-market diagnosis and prognosis. These were based on the news, as gathered by trained forces and aided from time to time by secret information which filtered into the offices. This service soon obtained an accuracy theretofore unknown on the Street.
There is probably not one stock broker in five hundred that would know a mine underground if he saw one. On the pay-rolls of B. H. Scheftels & Company and the Mining Financial News there were thirty men who had been literally brought up in the mines and who, when they put their pen to paper, knew what they were writing about. The Scheftels company and the newspaper furnished mine and market information of quality to investors who had before been inundated with misinformation, guesses and twaddle. It sought to guide mining-stock speculators right.
It was really a delicate job to handle the Mining Financial News in a manner which would not lead stupid people to believe that it was an entirely independent paper. It was desirable that its independence be maintained to a degree, so that the full value of the Mining Financial News, as a property, might grow. The intention was some day, when the Mining Financial News found itself on a paying basis, to sever the Scheftels alliance.
The Mining Financial News had always been an entity. It had up to then been assisted financially at periods by mining promotion concerns with which I had been identified and was always a quasi house-organ for this reason. But it invariably preserved a certain independence in its news columns and at least such partial independence of ownership as enabled it to stand on its own bottom.