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Frank Fayant wrote a
series of exposés about stock market fraud. But this recounting of stock frauds
connected with the radio industry, while extensive, made up only a small
percentage of his work -- there were much longer articles about other topics,
especially mining and oil frauds. The review of the radio industry began as a
section within one of Fayant's "Fools and Their Money" articles, and was
expanded in a separate, two-part series, "The Wireless Telegraph Bubble".
Success Magazine, January, 1907, pages 9-11, 49-52:
Fools and Their Money
By Frank Fayant
Fourth Article. How Mining Fakes Are Advertised
THE promotion boom is here.
It would warm the cockles of Colonel Mulberry Sellers's heart to read the Sunday
newspapers these days, for they carry page after page of advertisements of
"millions-in-it" schemes, such as the Colonel never dreamed of. This promotion
boom already exceeds in proportions the memorable one of the two years following
the flotation of the United States Steel Corporation. The man who has money to
invest, and who rightly demands that it shall bring him a larger return than is
made to him by the savings banks, wants to know what return he is likely to
receive from investments in the stocks of all these companies now offering their
shares through the newspapers all over the land.
The investor wants to know whether he will have a fair "run for his money"--to
use the vernacular of the promoter--in the Chicago New York Electric Air Line
Railroad, the "grandest opportunity the people have ever had to invest in a
gigantic commercial undertaking of national reputation;" the Electric Signagraph
and Semaphore Company, "an opportunity for another such financial whirlwind as
was the Bell Telephone;" the Union Brake and Shoe Company, having the "strongest
possibilities of any company that has sold its stock to the public in recent
years--pays millions in dividends;" the Mines Development Company, based on the
"greatest gold and silver discovery ever made in America;" the Montezuma Mining
and Smelting Company, an investment which "will net twenty-four per cent. or
more at the start;" the Guanajuato Amalgamated Gold Mines Company, "one of the
greatest mining enterprises of the age;" the Leffler Electric System, "something
so much better and so much farther in advance of anything else ever heard of
that it is bound to make millions for its stockholders;" the San Domingo Mining
Company, the "greatest mining proposition of Mexico--five thousand per cent.
profit in eighteen months;" the Copper Belt Mines Company, which "should earn
fifteen hundred per cent.;" the Nevada-Commonwealth Mining and Milling Company,
which has the "largest body of ore in the West;" the Friede Globe Tower Company,
the "greatest investment chance of a lifetime;" the Marconi Wireless Telegraph
Company of America, the "best investment in the world;" or the American De
Forest Wireless Telegraph Company, in which "a few hundred dollars invested now
and given to your children should make them independent."
Harvest Days for the Promoters
Then witness the alluring prospect offered an appreciative public in the
Geyserite Manufacturing Company, "an exceptional opportunity to invest your
savings where they will be absolutely safe and secure;" the Central Mining and
Development Company, the "greatest money maker Arizona has ever known;" the
International Gold Mines Company, the "most genuine mining proposition ever
offered to the American people;" the Central Mining and Development Company, the
"greatest gold property Arizona has ever known;" and hundreds of other new
companies for which equally extravagant claims are made.
How many of these companies, in the advertising of which the English language is
drained of superlatives, are going to live and pay dividends? The same question
was asked five years ago about a mass of new companies advertised with the same
reckless use of superlatives. During the winter of 1900-01, the investors of the
country went mad over stock speculation. The country was in the full swing of an
unprecedented era of commercial prosperity. Great industrial and railroad
mergers, creating hundreds of millions of new securities, inflamed the popular
mind. The public invaded Wall Street, and went on a speculative debauch,
culminating for the time in the Northern Pacific panic when the stock of a
railroad only a little while before almost worthless sold at $1, 000 a share. The
mania for getting rich quickly through speculation in stocks affected the whole
country. The shame of it was that the debauch was led by men of standing in the
community, who were intoxicated by their greed for gold. Investors were
credulous as they had not been since the days of the South Sea Bubble, and the
promoters--good, bad and indifferent--reaped a harvest. What has become of the
hundreds of companies brought out then?
Either Fakes or Mistakes
To answer this question I have investigated every company that advertised its
shares in the Sunday edition of the New York "Herald" in 1901, and in two months
of the autumn of 1902. I use the "Herald, " because its Sunday financial section
carries more new company advertising than any other newspaper in the world--and
it charges the highest rate for it. During the fourteen months under review, the
"Herald's" income from this advertising was in the neighborhood of $175, 000. It
reached $5, 000 a Sunday in the autumn of 1901.
In the opening article of this series, this assertion was made: "The bulk of the
financial advertising in the leading newspapers of the country is intended for
the fools." The investigation I have made of the one hundred and fifty companies
advertising their stock in the Sunday "Herald" in fourteen months of the last
promotion boom will prove whether this assertion, which has been so violently
criticised, is true. Horace J. Stevens, of Houghton, Michigan, whose "Copper
Handbook" is the standard authority on the copper mining industry, writes me:
"Most of the mining companies advertised in the newspapers are either fakes or
mistakes." John Hill, Jr., of the Chicago Board of Trade, who has done such
valuable work in driving swindlers out of Chicago, writes me in similar vein.
The Denver "Daily Mining Record, " a militant champion of corporation publicity,
carries in its columns daily a list of twelve hundred mining companies "not
entitled to public confidence." "The trouble with many companies, " the editor
tells me, "is that those who want to sell stock are too enthusiastic." Yes,
enthusiasm runs riot when the promoter discovers he can convert his reams of
stock certificates into real money by spreading his enthusiasm over the
advertising pages of the newspapers.
A Graveyard of Buried Hopes
How many of all these one hundred and fifty companies of 1901-02 are making
money to-day and paying dividends to their stockholders? One--just one! Just one
of these one hundred and fifty companies that sold many millions of dollars of
stock to the public is to-day paying dividends. It has paid two dividends of one
per cent. each this year, and its stock is selling in the market at less than
half what investors paid for it five years ago, although its promoters asserted
then that "it is doubtful whether anything has ever been offered to the public
for subscription which gives so much promise from so small an outlay."
In all this brave array of wonderful ventures that were to make fortunes for the
credulous, one company is paying a dividend--and a dividend smaller than that
paid by the savings banks. One other is a going manufacturing concern, that
ignores my request for information; a third is a going real estate company, that
repurchased from investors the stock sold to them; a fourth is a plantation
company waiting for its rubber trees to grow up; two are struggling oil
companies in need of money; eighteen are gold mines, still hoping to strike it
rich, and nearly all are in need of money. Of the one hundred and twenty-six
other ventures, twenty-two may be classed as moribund, while the remaining one
hundred and four are dead and gone, forgotten by all but the investors who
bravely put their money into them.
And now to look behind these cold figures of buried hopes!
The man who set the pace for the wildcat promoters of 1901 was L. E. Pike, of
Hartford, Conn., dubbed by Mr. Stevens "the notorious Pike." Pike spent in 1901
and 1902 not far from $150, 000 in advertising--profitable advertising. His
flamboyant poster broadsides in the newspapers made all the little promoters
gasp in envy. Recklessly, ridiculously extravagant in their promises and
prophecies, these big, black-type, circus-bill appeals to small investors reaped
a rich harvest. The whole problem with Pike was how to sell a maximum amount of
stock at a minimum advertising outlay. To sell $100 worth of stock at an
advertising cost of $80 was poor business; to sell it at a cost of $40 was good
business. He cared little about the intrinsic worth of properties he exploited.
A hole in the ground was, in his mind, a gold mine, and, after Pike had turned
the English language loose on it, it became one of the richest properties on the
face of the earth. His Washington Copper and Milling Company, claimed to be "the
richest property in the United States, " had nothing more than a fifty-foot hole
in a gravel bed.
Around the World in an Hour
I am using the past tense in telling the story of Pike. But Pike is not a
memory, like his companies. He is in Hartford to-day, and even now may be poring
over his dictionary for new adjectives with which to decorate more circus-bill
tales of fortune making in oil or gold or marvelous inventions. I wonder that
the new craze for mining stocks, rapidly growing into the proportions of the
South Sea Bubble, does not bring Pike out of his hiding place. He has a fortune
salted away, and it may be that he is not avaricious. But, earlier in the year,
before the Sunday newspapers began to carry pages of company advertisements,
Pike did venture for a little while into the market place. His bait for fools
this time was Martin's Giant Revolving Globe and Panoramic Trip Around the
World. Pike described it in this wise:
"A wonderful architectural structure, a realistic representation of the whole
world on a gigantic globe. The interior of this revolving world is entered by
thousands of visitors daily, who make the entire grand tour of the world,
visiting all countries and all climates, seeing all nations and the inhabitants
thereof . . . . most stupendous and overpowering attraction . . . . grand and
gorgeous spectacle . . . . ever presented."
This "grand, gorgeous, stupendous, overpowering attraction, " reduced to cold
figures by Pike's "grand, gorgeous, stupendous, overpowering" mathematics, might
be visited in a summer by 25, 000, 000 people. "At twenty-five cents each, "
figured Pike, "that makes $6, 250, 000. But let us be conservative. Suppose only
2, 500, 000 visit our attraction. That would mean $625, 000 annually. This would
mean that you would receive the first year, and every year thereafter, nearly
three times your original investment in dividends alone. These are
facts--undeniable facts--which guarantee a brilliant success." Pikes' trip to
New York must have been a failure, for he soon closed his office and returned to
Hartford. A letter sent to his Broadway office was returned by the post office
bearing the stamp, "Not found." Poor Pike! Not found! And only a little while
ago you were the "grand, gorgeous, stupendous, overpowering attraction" in the
wildcat menagerie!
The Wireless Telegraph Scheme
Pike's fame as a promoter must rest on his wireless telegraph exploit, toward
the end of 1901. Early in that year, a clique of promoters in Philadelphia,
headed by a real estate and gold mine boomer, Dr. G. P. Gehring, got hold of
some old wireless patents taken out fifteen years before by Professor Dolbear of
Tufts College. These patents had been almost forgotten. Their existence was
recalled by the sudden rise to fame of young Marconi, and the incorporation of
the American Wireless Telephone and Telegraph Company, capital $5, 000, 000 was
the result, with Dr. Gehring president.
The promoters lacked the courage and funds to buy whole pages of advertising,
and for weeks and months the Sunday newspapers carried only a short announcement
of the company's plans. The $10 stock was offered first at $1.50 a share, but
gradually the price was raised to $8. Meanwhile, sub-companies were formed. The
American was not an operating company. It owned the patents, and divided the
country from coast to coast into fields in which the sub-companies were to
operate. The sub-companies were the New England, Federal, Northwestern,
Atlantic, Commercial, Central Western, Gulf, Continental and Pacific. Each
sub-company turned a large proportion of its stock over to the parent company.
The capital of the whole wireless outfit was $55, 000, 000. It was a bold scheme
on paper, but it needed some one with courage and funds to develop it.
The man for the New England Wireless Telephone and Telegraph Company was found
in Thomas B. Bishop, who, as T. Brigham Bishop, was well known some years ago as
the author of "Shoo Fly! Don't Bother Me!" But it was not as a song writer that
T. Brigham Bishop became a leader in the world of finance. Bishop has the
distinction of having opened the first bucket shop in New York for women
gamblers. At the time of the collapse of the Dean "discretionary pool" swindle,
Bishop was running a little "discretionary pool" of his own, and the post-office
authorities did not overlook him while issuing fraud orders. Bishop got a
figurehead president for the New England Wireless, the Hon. James N. Huston,
former Treasurer of the United States. General Huston was already the head of
another $5, 000, 000 company, one of the Beaumont oil boom wildcats. General
Huston suffered financial reverses in the hard times of '93 to '96, and became
the tool of parasite promoters. Bishop hawked his wireless stock through New
England at bargain prices, selling it, at first, at ten cents a share. But
nobody paid much attention to the new wireless companies until the autumn, when
Pike, in the heyday of his oil company career, took hold of the Federal Wireless
Telephone and Telegraph Company, a sub-company covering eleven Eastern States,
and opened such an advertising campaign as had never before been seen in Wall
Street. His figurehead president was the Hon. Ernest Cady, former
Lieutenant-Governor of Connecticut, already vice-president of Pike's Eastern
Consolidated Oil Company, and president, besides, of a wildcat gold mining
company. Pike spread his circus-bill advertisements of the Federal Wireless
through the Sunday newspapers, offering the stock first at forty cents, then at
sixty cents, and finally at a dollar. He took whole pages in the New York
newspapers, spending thousands of dollars a week, for many weeks. He set the
pace for all the wireless telegraph company advertising since that time. Here
are some of his best things:
Bait That Attracted the Fish
"The most marvelous invention of the century."
"Bell Telephone stock, when first offered, went begging at fifty cents a share,
and those same shares to-day are worth $4, 000."
"Many predict that the stock will soon be selling for as many dollars as cents
at the present time."
"More remarkable than the late achievements of wireless telegraphy on the sea is
the fact that the Federal Wireless Company has instruments nearing completion
for operation between New York and Philadelphia, when it will receive messages
at any hour of the day or night, at the rate of ten cents for ten words."
"With the Bell Telephone stock in memory, which went from a few cents to
thousands of dollars a share, thoughtful persons are buying up wireless stocks
with avidity."
"The career of the company controlling the basic patent in the richest field in
America starts with a thousand times more flattering prospects than did the Bell
Telephone."
"Stock will soon advance in price by leaps and bounds."
One feature of the Pike wireless advertising was that there was no promise of
dividends. Much of the company advertising of the day was of the
guaranteed-dividend variety--Pike, himself, had been the chief exponent of the
monthly dividend scheme in his oil promotions. Pike, of course, saw that there
was no possibility of earning dividends on his $5, 000, 000 capital, and that it
was impossible to pay unearned dividends without getting caught. Pike made his
whole play, therefore, on the similarity between the wireless telegraph and the
telephone as an investment; and, instead of promising dividends, he talked only
of the marvelous future of the company and the expected rise in the price of the
stock. Extravagant as were his page advertisements in every line, still he was
clever enough not to tie himself down to many positive predictions. As Sam
Keller said, in testifying against his confederates in the Dean swindle, and
speaking of Kellogg's get-rich-quick circulars, "no one would 'fall' to them as
not being straight, but any one would 'fall' to them by sending along cash."
Pike had elaborately furnished offices in the same luxurious office building in
Broadway that housed the offices of the Steel Corporation, and there any
doubting investor might see the Dolbear instruments at work. The cash flowed
into Pike's offices in a steady stream. But the buyers of Pike's stock waited in
vain for the opening of the commercial wireless line from New York to
Philadelphia. Pike was too busy selling stock to bother about setting up
instruments.
A Feat of Financial Juggling
And now five years have gone by. Is the Federal Wireless receiving messages "at
any hour of the day or night" for transmission through its territory? Has the
stock "advanced by leaps and bounds?" What has been the experience of the
"thoughtful persons" who bought Pike's stock and all the other wireless stocks,
believing them to be a second Bell Telephone? For five years the wireless
promoters have been juggling with the Dolbear stocks. The first stock
certificates were scarcely dry, when the Consolidated Wireless Company, capital
$25, 000, 000, was formed to take over the American, New England, Federal,
Atlantic and Northwestern companies. The exchange was on a dollar-for-dollar
basis, that is, an investor who had paid Pike from $40 to $100 for a hundred
shares on Federal, received one hundred shares of dollar Consolidated stock in
exchange. A few months later the Consolidated reduced its extravagantly inflated
capital to $7, 500, 000, and the investor who had turned in $100 worth of Pike's
Federal received $20 worth of new Consolidated. But the new Consolidated was
only a transition. It was soon absorbed by the International Wireless Company,
the holder of twenty one-dollar shares in the Consolidated getting two
ten-dollar shares in the International. But this company, too, was only a
transition. A little while later the American De Forest Wireless Telegraph
Company came along and swallowed the whole Dolbear outfit, and this company, in
consequence, has been in the throes of financial indigestion ever since. The De
Forest Company gave its ten-dollar stock in exchange for the ten-dollar
International stock, which had been metamorphosed from the $100 Pike wireless
stock.
Pike's "Grand, Gorgeous" Mathematics
Just what these De Forest shares are now worth is somewhat of a mystery. The De
Forest home office is in St. Louis, and from this office notice was recently
sent me that the price of the common stock had been advanced to $7.50. The
manager of the New York office two weeks later denied that any De Forest stock
was for sale at this price, and continued to offer it at $6. Meanwhile several
brokers in New York and Philadelphia have been offering De Forest stock around
eighty-five cents a share. When asked for an explanation of the astounding
variation in the price of the stock, the company's New York office informed me:
"We have never paid any attention to what the enemy or the cut-rate brokers may
do with the few shares they may obtain from weak stockholders."
Pity the poor, "weak stockholders!" By Pike's "grand, gorgeous, stupendous,
overpowering" financial mathematics, we find that Federal Wireless (and all the
other Dolbear stocks) "advanced by leaps and bounds" in this startling manner:
$50 (real money) bought $50 worth of Pike's wireless, January, 1902;
= $50 (certificate) watered Consolidated, February, 1902;
= $10 (certificate) unwatered Consolidated, October, 1902;
= $10 (certificate) International, February, 1903;
= $10 (certificate) American De Forest, January, 1904;
= $7.50 (company's money) subscription price of De Forest, St. Louis office,
October, 1906;
= $6 (company's money) subscription price of De Forest, New York office,
October, 1906;
= $0.85 (real money) cash market value.
Meanwhile, I am in receipt of this appeal from the American De Forest promoters:
"There is not enough stock to go around. Consider the matter carefully. You have
the opportunity. Will you grasp it 'at the flood tide' (now) and ride on to the
shore of plenty, high and dry above the adversities which often beset old age,
to the land of our dreams, where wealth is unbounded and every wish gratified,
where comforts admit of enjoyment and wealth admits of opportunities for
yourself and those you love? Or will you hesitate and doubt, and let the chance
go by, to remain in senile dependency upon the bounty of others? Think! It is
for you to decide! Think well! Buy! Do it now!"
Courtesy:
http://earlyradiohistory.us/1907fool.htm
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