My Adventures with Your Money

by George Graham Rice

THE SCHEFTELS PRINCIPLES

When the corporation of B. H. Scheftels & Company opened its doors in New York it had no affiliations with any other Wall Street interests. It had no axes to grind except its own. It was practically a free-lance. It cracked up its own wares, careful always to keep within the facts, and never minced words about the quality of the goods of its contemporaries. The principle of both the Scheftels corporation and the Mining Financial News was to be always right in their market forecasts. The general order to mine and market news-gatherers and market prognosticators was to GIVE THE FACTS.

The law laid down was this: If the news is bad and is likely to injure the interests of our best friends, tell it in the interests of the investor. If it is good and the backers of the stock affected happen to be our worst enemies, tell it. No matter on what side of the market you think B. H. Scheftels & Company is committed in any of its own speculations, give the customer all the news. Put the cause of the mining-stock trader in front of you as the one to further always. Never exaggerate. Eventually, this policy must redound to our credit and profit.

Eventually, this policy resulted in our ruin. Our truth-telling policy was directly responsible for the loss of millions to competing promoters, and they banded together to destroy us.

The publicity, promotion and brokerage activities of the corporation were of such magnitude, and withal so simple, that they at once challenged the attention of the Street. Before the Scheftels corporation was half a year old veterans of the financial game began to opine that some big interest was behind the concern. Its dashing market methods, its mighty publicity measures and its unbridled assurance attracted much notice. From every quarter expert views reached the Scheftels company that its manner of doing things was convincing on the point that it knew the business. But the general opinion of the talent seemed to be that the new corporation was spending too much money and that it could not win out unless a big boom in mining shares ensued.

The market tactics adopted by the Scheftels company in its promotion enterprises were as old as the hills. On the New York Stock Exchange they had been employed in a thousand instances before. The method will probably survive all time. The corporation sought to distribute the stocks of which it became sponsor in turn—first Rawhide Coalition, then Ely Central, later Bovard Consolidated and finally Jumbo Extension—by the approved Wall Street system of establishing public interest and inquiry and causing an active market. The aim was to establish higher prices for the securities, always within the bounds of intrinsic and reasonable speculative value. All efforts were directed this way.

Plans like this are, however, sometimes thwarted. Markets get sick. More stock presses for sale than the "inside" has money to pay for. Stocks break in price. Then the promoter can't make any money and might lose a lot of it. Since money-making is his primary object, and stock distribution secondary, he has got to do some close figuring when markets are subject to the price-breaking habit. That's where B. H. Scheftels & Company, through its brokerage business, found, after a short period, that it held within its grasp the power to insure itself against declining markets.

Without promotion stocks on hand—obtained by wholesale at lower figures than values warranted—in which it could profit to the extent of hundreds of thousands of dollars on a rising market, the million-dollar annual expense of the Scheftels company would not have been justified. Once the market sought lower levels and no profit could be made on the promotions, it meant a discontinuance of the business on the large scale.

The corporation's insurance was the open market in stocks on the general list and its brokerage business.

From time to time it openly shorted tens of thousands of shares of stocks in which it had no promoter's interest whatever, by going out in the open market and selling them to all bidders against future delivery, by borrowing them from brokers and selling them for immediate delivery, and by short sales generally.

Speculators play the market and so did the Scheftels company, but never against its own stocks. Speculators, however, buy mining shares outright or on margin because they want to gamble. The Scheftels company played the market for just the opposite reason. It didn't want to carry its eggs in one basket and wanted insurance against market declines to cover promotion losses that must ensue if a general market slump occurred.

And the Scheftels company did not inaugurate any fake bookkeeping system or otherwise hide behind any bushes in doing this.

Moreover, the corporation didn't take advantage of anybody. The cards were not marked. The deck was not stacked. There was no dealing from the bottom. Market opinion for which the corporation was directly or indirectly responsible was genuine to the last utterance. No news was suppressed on any stock. The corporation divulged to its customers and to the general public every piece of important outside or inside information regarding any stock on the general list that was in its possession. At the very moment when it was going short of stocks in greatest volume its market prognostications were winning for it a reputation for accuracy never before recorded.

If the stocks which the corporation went short of—stocks on the general list and amounting to probably 15 per cent., of the volume of its entire business, the remainder of the transactions being all in "house" stocks (these "house" stocks it could not be short of because of its promoter's options on hundreds of thousands of shares)—if the stocks on the general list thus "shorted" went up in price and the corporation was compelled to go into the market later and "cover" at a great loss, it was always in the corporation's heart to sing a pæan of thanksgiving, for it could well afford to pay the losses sustained by it in the general list out of the greater profits which would be made in the "house" stocks, which must, forsooth, share in the general upswing.

Collateral securities put up by customers as margin for the purchase of other stocks were credited to the customers' accounts and mixed with the company's own securities. In every case proper endorsement of certificates, put up for collateral margin, was required. Every certificate of stock bears on the reverse side a power of attorney, in blank. The signature thereto of the person to whom the certificate was issued makes it negotiable by the broker. It was the rule of the house always to inform those who brought collateral to the offices for margin that the stocks would be used and that they would not receive the identical certificates back again. In a number of cases objection was made. Acceptance of the stock as collateral margin was then promptly refused. If there were any scattering exceptions to this rule, it was contrary to instructions and due to neglect or ignorance. Whenever a customer closed his account and demanded the return of his collateral, stocks of the same description and denomination were recalled and delivery made.

The same rule applied to stocks pledged with the corporation for loans, it being specifically set forth in the promissory note which the borrower signed that the privilege of using the stock was granted to the lender.

This practice is so common and the rule so generally understood by mining-stock traders that objection was rarely made by customers.

To test the general custom, a friend at my suggestion not long ago sent certificates of stock to 17 stockbrokers now doing business on Wall Street. Three of these were members of the New York Stock Exchange and 14 were members of the New York Curb, Boston Curb, or of a mining exchange. A letter substantially as follows was sent to each of the 17:

Enclosed please find ...... shares of ...... stock to be used as collateral margin for the purchase of an additional block of ...... shares. Please buy at the market and report promptly.

The 17 orders were executed by the 17 individual houses. A month later when the stock ordered purchased had advanced in the market, the following letter was sent to each of the 17:

Please sell the ...... shares of ...... stock which you purchased for me a month ago at the market and return to me the certificate of stock which I sent you as collateral with check for my profits.

It took nearly two months for all of the 17 to make delivery. When they did, not one of them returned the same certificate that had been put up as collateral.

Don't be shocked, dear reader, at this disclosure. It is the custom.

And don't, please, think mining-stock brokers are alone given to the general practice. If you order the purchase of a block of stock on cash margin from any New York Stock Exchange house or send a certificate of stock as collateral in lieu of cash to one of them for the purchase of more stock, you will receive a confirmation slip of the trade which will generally read something like this:

We reserve the right to mix this stock in our general loans, etc.

That is, the right is reserved, and actually exercised, of immediately transferring ownership of the certificates to the broker.

Unless a certificate stands in a customer's name and is unendorsed by him, he has no control over it. According to law, a broker has a right to hypothecate or loan securities or commodities pledged with him, for the purpose of raising the moneys necessary to make up the purchase price, and such stocks have no earmarks. In other words, the customer is not entitled to specific shares of stock, so that stocks bought with one customer's money may be delivered to another customer.

As for the Scheftels company laying itself open to the charge of bucketshopping in "shorting" stocks, such a possibility was never dreamed of. The penal law of the State of New York, sections 390 to 394, inclusive, is the only criminal statute covering market operations commonly known as bucketing and bucketshops. In each section and subdivision it is provided that where both parties intend that there shall be no actual purchase or sale, but that settlement shall be made on quotations, a crime has been committed, the language of the statute being, "wherein both parties thereto intend, etc.," or "where both parties do not intend, etc." The Scheftels company was never a party to any such arrangement. And it always made it a practice to make delivery of stocks ordered purchased within a reasonable period after the customer had paid the amount due in full.

Now, neither myself nor the Scheftels corporation is responsible for brokerage conditions as they exist, nor for the laws as written. Custom and practice are responsible. The purpose here is to communicate the exact nature of the business methods of the Street as I found them and to lay particular stress on those that are open to criticism.