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.