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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:
[The remainder of this article reviewed an extensive list of mining and oil
frauds] May, 1907:
Fools and Their Money
EDITORIAL ANNOUNCEMENT
By Frank Fayant
The story of the Wireless Telegraph bubble has grown while I have been writing
it. I had intended to tell the story in this number of SUCCESS MAGAZINE, but it
must be held over until the June Number. It is too big a story to put into print
half told.
Within the past few days, while digging around some obscure corners of the
underworld of finance, I have unearthed such an illuminating record of financial
jugglery in the promotion of wireless telegraph companies that all the "Fools
and Their Money" articles that have gone before seem very dull reading.
The chief figure in the story--could I paint him with the art of Mark
Twain--would outrival Colonel Sellers. The colonel was only a creature of the
novelist's imagination, but I have found a Colonel Sellers in flesh and blood.
Many thousands of investors have put millions of dollars into wireless telegraph
companies. A large part of this money is lost. In my story, I will tell what has
become of it, and who is responsible for the loss.
pic of stock ticker and bags of gold
June, 1907, pages 387-389+:
The Wireless Telegraph Bubble, By Frank Fayant, First Article, including image
of magnet removing coins from pockets
This Is the First Article In the Second Series of "Fools and Their Money"
Wireless telegraphy is one of the most remarkable scientific achievements of
modern times. That it will forever be of inestimable benefit to mankind is
beyond question.
The world owes a great debt to the many men of science in Europe and America
who, through years of patient research, have made it possible to send electric
messages many miles over the sea, from shore to ship, and from ship to shore.
Nearly all the great ocean steamships that sail from New York are equipped with
wireless apparatus, and they are in wireless touch with land stations or with
other ships during the greater part of their voyage. With the advance of
science, the time will come when every ship that sails the seas will be in daily
communication with the land. But the prostitution of this great scientific
discovery by parasite promoters with "millions-in-it" schemes of enriching
themselves is a story of shame.
Just as a good mine may be a bad investment, as I have shown in the "Fools and
Their Money" articles that have gone before, so may a great invention be a bad
investment. Wireless telegraphy has been a bad investment. Many millions of
dollars of wireless stock have been printed by promoters, and this stock has
been sold to investors by flagrantly dishonest methods. Millions of dollars of
wireless stock manufactured in the past eight years is to-day worth no more than
the paper on which it is printed. Over capitalization, mismanagement, and fraud
have wasted millions of money.
The most shameful chapter in the record of the prostitution of this great
invention deals with the network of the De Forest companies promoted by Abraham
White, a modern Colonel Sellers. This is the story I will tell in this article
and the one that will follow. FRANK FAYANT.
Abraham White EIGHT years ago this June, when all the world was talking about
the remarkable achievement of the Italian boy, Guglielmo Marconi, in sending
electric messages without wires, a boy from Iowa took his Ph. D. degree at Yale
for special research in the phenomena of the Hertzian waves. His name was Lee De
Forest. Marconi was then twenty-four; De Forest was two years older. Only by
rigorous economy and self-sacrifice had the young American gained his university
education, and, as soon as he won his coveted Ph. D., he went to Chicago to earn
a living and a name for himself.
In Chicago he found a position as a ten-dollar-a-week laboratory assistant, with
Edwin H. Smythe, in the engineering department of the Western Electric Company.
This company manufactures the apparatus for the Bell Telephone companies, and
does a gross business of $70, 000, 000 a year. Smythe had been experimenting in
wireless telegraphy, and the young Yale graduate entered eagerly into the work.
Associated with Smythe in his investigation was Clarence F. Freeman, of the
Armour Institute of Technology. Two years after De Forest went to Chicago the
experimental apparatus worked so well that the inventors decided to take out
patents and interest capital in the commercial exploitation of the invention. In
July, 1901, seven weeks after the young Italian inventor had taken out his first
American patents, there appeared in the "Western Electrician, " the journal of
the Western Electric Company, a long illustrated article making public
announcement of the result of the Chicago experiments. The Freeman "sending
apparatus" and the De Forest-Smythe "responder" were pictured, and credit for
the invention was given in the article in this manner:
The receiver of the new system is the joint invention of Lee De Forest, a
graduate of Yale University, of the class of '96, Sheffield, and Edwin H. Smythe,
of the engineering department of the Western Electric Company of Chicago. Mr.
Smythe's ten years' work in the field of telephony has given him an experience
that has proved especially valuable in dealing with the problem in hand, while,
during his three years of graduate work at Yale, Mr. De Forest made a specialty
of the subject of Hertzian waves, taking the degree of Ph. D. for work along
that line. Readers of the Western Electrician will also be interested in knowing
that for a time Mr. De Forest was connected with the editorial staff of this
journal, resigning to prosecute work on this invention. The sending apparatus
has been developed by Prof. Clarence E. Freeman, E.E., Associate Professor in
Electrical Engineering at the Armour Institute of Technology.
The three inventors, who had sent messages from the Chicago lake front to a
yacht five miles off shore, and who were convinced that, with powerful
apparatus, they would be able to transmit signals many times as far, saw the
great commercial possibilities of the invention. Young Marconi had already made
very successful experiments in wireless telegraphy in England, and was at that
time in America continuing his work. Marconi had obtained strong financial
backing in England, and was having no trouble in interesting American financiers
in the commercial possibilities of wireless telegraphy. The Chicago inventors
believed that if Marconi could raise capital they could do the same. So De
Forest was sent to New York to raise capital and form a company. De Forest fell
in with Henry B. Snyder, a promoter, who immediately saw "millions in it." He
assured De Forest that he could raise all the money needed to float a company.
He had no funds of his own, as De Forest soon discovered, but he could find some
of his friends who would subscribe a few thousand dollars to get the company
started. Snyder got five men to subscribe $500 each to the venture. One of these
men was John Firth; another was William Newmarch Harte; a third was John
Bergessen. When De Forest left his friends in Chicago, the idea had been to name
the company the "Freeman-Smythe-De Forest Wireless Telegraph Company, " and the
three inventors were to be partners in the enterprise. But Snyder thought this
name was too cumbersome. He proposed the name "Imperial." A compromise was made
on the "Wireless Telegraph Company of America." This company was incorporated in
New Jersey, with a nominal capital of $3, 000, and the stock was divided among
the promoters. This was the nucleus of the present $30, 000, 000 capital of De
Forest companies, with which $25, 000, 000 of other companies have been merged,
and many million dollars more have been planned. The $3, 000 company took out the
patents on the Freeman "sending apparatus" and the De Forest-Smythe
"responders."
A Flight to Fame on Forty-four Cents
The Marconi people were making rapid progress with their American promotion, and
the De Forest promoters saw that they must make hay while the sun was shining.
None of the five organizers of the Wireless Telegraph Company of America was
rich, and so they set about to find a man with capital. Firth found the man.
This was Abraham White, a young man who had come to New York from Texas, a few
years before, and had risen to fame over night by cleaning up $100, 000 on an
investment of forty-four cents. White's family name was Schwartz. His brothers
down in Texas still use the name, but when he started out in the world to make
his own living he changed his name from Black to White. From the day he first
set foot in New York, White's one ambition was to make a fortune. He had the
money-making instinct. In his first years in New York he speculated in real
estate. One of the stories he likes to tell of his early days in New York is how
he became known as the "rock buyer, " because of his propensity for trading in
up-town building lots from which the rock had not been blasted away.
When the Cleveland popular bond issue was made, in 1896, to replenish the
Treasury gold reserve, White, who had lost in the panic years of 1893 and 1894
most of the money he had made in real estate, conceived the bold scheme of
bidding for a big block of bonds, on the chance that they would sell at a
premium as soon as the awards were made. The Government's call for bids did not
ask for any money with the bids. White made several bids, amounting in all to
$7, 000, 000, and sent them on to Washington by registered mail. His total outlay
was forty-four cents. When the allotments were made, $1, 500, 000 bonds were set
down to Abraham White, New York. The bonds were immediately quoted at a premium
in the open market, and young White scurried around to find the money to pay the
Government for his bonds. He went to Russell Sage, who was always ready to put
his money into a sure thing, and had no trouble in getting the money lender to
finance his bid. Sage paid the Government for the bonds, resold them in the
market and turned over to White $100, 000 profit. Ever since then White has
thought in millions, and has been a gambler for big stakes.
No sooner had White been told the story of the Chicago experiments, and the
success that De Forest and his fellow inventors had had in sending messages
without wires, than he began to build air castles for young De Forest. They
would make fortunes out of wireless telegraphy, and the name of De Forest would
go down in history among the great names of science.
The Air Castles of Wireless Telegraphy
De Forest Stock Certificate
They--White and De Forest--would form companies all over the world, and issue
millions of dollars of stock to sell to investors, and they, the promoters, with
a big slice of these millions as their share in the venture, would exchange
their paper stock certificates for the green and white paper hearing the
Government's stamp. Their companies would erect wireless stations along the
whole American seaboard, and every ship on the seas would pay them tribute. They
would erect a string of land stations from coast to coast, and from the Isthmus
of Panama to the snowcapped mountains of Alaska, and they would compete with the
telegraph and telephone companies. They would form a parent American company,
that would be a nucleus for a string of wireless companies around the world.
Companies would be formed in Canada and England, on the Continent, in Africa,
the Orient--in every corner of the earth, and all these subsidiary companies
would pay tribute to the parent company. Investors would tumble over each other
in their haste to put their funds into the venture. White built these air
castles day and night before the dazzled eyes of young De Forest, and it is
little wonder that the inventor, just out of college, soon forgot the friends he
had left behind in Chicago.
Other Rivals That Entered the Field
He let White style the first company the De Forest Wireless Telegraph Company.
This was a $1, 000, 000 concern, incorporated in New Jersey late in the summer of
1901. Smythe and Freeman were neither directors nor shareholders in the company.
De Forest threw them over. Freeman's "sending apparatus" did n't amount to much,
anyway, said De Forest, and, as for Smythe, the "responder" was De Forest's
invention more than his. And so the laboratory assistant of the Chicago
engineers became the "scientific director" of the De Forest Wireless, and took
all the inventors stock. The million dollars' worth of stock was divided among
White, De Forest, and the other promoters who had contributed to the $3, 000
Wireless Telegraph Company of America. How much of this stock was turned back
into the treasury, to be sold for the benefit of the company, is a story that
will never be told, but every now and then, in the record of the promotion of
the De Forest companies since that time, I have found indisputable evidence that
the promoters always had the big end of the game, while the company treasuries
were starved along with only enough stock to keep up the appearance of things.
One De Forest company after another offered its stock to investors, but the
promoters were always in the market getting rid of all their promotion stock
that they could exchange for the coin of the realm.
Another rival to the Marconi company came into the field soon after White formed
the De Forest company. A crowd of Philadelphia promoters, taking their cue from
Marconi and De Forest, began putting out a string of wireless companies based on
the almost forgotten patents of Professor Dolbear, of Tufts College. The parent
company of the Philadelphia crowd was the American Wireless Telephone and
Telegraph Company, of which Dr. Gustav Gehring was president. The Philadelphians
organized a string of companies across the country, with a capital of
$55, 000, 000, and one of these companies, the Federal, falling into the hands of
the notorious promoter, Lafayette E. Pike, became the most widely advertised
bonanza in the great promotion boom of 1901-02. I told in the January number of
SUCCESS MAGAZINE the shameful story of the promotion of these wild-cat
companies. Millions of dollars of their stock were sold by flagrantly dishonest
methods. The Dolbear companies actually sent wireless messages, just as did the
Marconi and De Forest companies, but they held out to investors the fraudulent
promise that the stocks of their grossly over-capitalized ventures would
multiply in value two thousand fold. The De Forest promoters, as well as the
brokers engaged to sell the Marconi securities, painted the same alluring
picture for their companies, and every wireless advertisement that appeared in
the newspapers told how $100 invested in Bell Telephone stock had rolled into
$200, 000--and wireless stock was going to do the same.
Forcing Out the Original Promoters
Wireless telegraphy was widely advertised in the yacht races for the "Americas"
Cup that autumn. The Marconi instruments were installed on the Associated Press
tug, while the Publishers' Press made use of the De Forest system. The Gehring
crowd unsuccessfully tried to make a contract with one of the press
associations, and then threatened to make both systems useless by setting up
their own instruments. But the threat was not made good. Two years later, as I
will relate, it was another story. The success of the Gehring crowd in selling
reams of their wireless stock showed White that a $1, 000, 000 company was much
too small. So in February, 1902, the $1, 000, 000 De Forest Wireless of New Jersey
was taken over by the $3, 000, 000 De Forest Wireless of Maine. The Maine charter
was probably taken out because it was cheaper. From that time on, the name of
Abraham White--it was "A. White" in the prospectuses then--loomed larger and
larger in the De Forest companies, and the original promoters of the little
$3, 000 company were forced out one after the other. The officers of the
$3, 000, 000 company, were A. White, president; Lee De Forest, vice president and
scientific director; H. E. Wise, treasurer; and Francis X. Butler, secretary.
The other directors were Henry Doscher, a sugar refiner; John Firth, one of the
original five; S. S. Bogart, an old Western Union man, and James Stewart.
Bogart, Galbraith, and Butler are the only members of the old board still with
White. With the cheerful optimism of Colonel Sellers, White began planning more
companies. White's whole idea in forming new wireless companies was not to raise
capital for the extension of wireless telegraphy, but to manufacture stock that
he could sell to the public. Every additional million dollars' worth of wireless
stock put out under the name of De Forest meant another fortune for White, if he
could find enough credulous investors to buy his share of the promotion stock.
White's Achievements as Promoter and Press Agent
The $3, 000, 000 De Forest Wireless had been in existence only nine months, when
White took out a Maine charter for the $5, 000, 000 American De Forest Wireless
Telegraph Company. White's scheme at that time was to make the De Forest
Wireless the parent company, that would own stock in all subsequent De Forest
companies, and receive big dividends (on paper) from these holdings. The
relations of these two companies were described by White in this way:
"The De Forest Wireless Telegraph Company is incorporated with a capital stock
of $3, 000, 000, divided into 300, 000 shares of $10 par value. The company owns
the patents of the De Forest system of wireless telegraphy. Under it the
American De Forest Wireless Telegraph Company ($5, 000, 000 capital, $10 shares)
has been organized as a sub-company, to conduct the commercial work in United
States territory. A Canadian company ($2, 500, 000) has been organized similarly
for that territory, and English, Russian, Spanish, and South American companies
are in process of organization. In a reasonable time, fifty subsidiary companies
throughout the world will be tributary to the parent company. The De Forest
Wireless Telegraph Company owns $1, 500, 000 of the stock of the American De
Forest Wireless Telegraph Company. The revenue of the company will consist of
dividends on holdings in the subsidiary companies, yearly royalties on the
patents, and profits on the sale of the wireless apparatus."
A publicity campaign worthy of "Tody" Hamilton was engineered by White. He
spared no effort and no expense to keep the newspapers talking about the De
Forest system. The De Forest instruments did their work, and did it well, as was
shown in the competitive tests with the Marconi instruments, when the Navy
Department bought De Forest apparatus in preference to the Marconi. [See
correction] White immediately heralded this news broadcast, and advertised the
De Forest system as "the system adopted by the United States Government." The
Marconi people, seeing that White was getting the best of them, brought suit for
infringement of patents. For technical reasons, the Marconi people could not get
a permanent injunction until three years later, and by that time the De Forest
companies had devised apparatus more efficient than that brought on from Chicago
by De Forest. White hired a press agent, and it was on the suggestion of the
press agent that a suit for $1, 000, 000 damages was brought against the Marconi
company. The suit was only brought to give the newspapers something to talk
about. It was soon forgotten. The De Forest prospectuses, written under the
direction of the imaginative White, were wonders to behold. Here is a table of
estimated yearly earnings for the $3, 000, 000 De Forest Wireless:
The Bell Telephone Record an Effective Bait
"Telegraphing from ships, minimum of fifty ships equipped with De Forest
instruments, at $5, 000 a year each, $250, 000; messages from ship to shore and
reverse, $250, 000; transatlantic and transpacific messages, $4, 000, 000;
interinsular communication, $500, 000; total $5, 000, 000."
But this was only part of the estimated income. "The successful tests of the De
Forest system overland between the Naval Academy, Annapolis, Maryland, and the
Navy Yard, at Washington, D. C., has demonstrated the feasibility of a general
overland service, and it has been determined to erect stations throughout the
country to provide the same class of service as that in which the two large
telegraph companies are now engaged." The wireless mathematician estimated this
business roughly at "several millions of dollars." Then he took up the cables.
There were 1, 769 cables with a total length of 189, 000 miles, costing more than
$300, 000, 000. The De Forest system would put them all out of business.
No wonder that White recommended the De Forest stock to investors, as "the
greatest investment of the age." "No stocks, " said he, "will advance like the
stock of the De Forest Wireless. It is as certain as arithmetic that great
fortunes will be made out of this stock. It should now be purchased in just as
large blocks as can possibly be handled, as there is no question whatever but
that this stock, purchased at the present price, and held for a reasonable time,
will make advances out of all proportion to its present selling price." Later on
I will tell how it "advanced." That there might be no mistake on the part of
investors as to the wonderful possibilities for De Forest Wireless, White dug
down into the history of Bell Telephone stock. "When it is remembered, " said he,
"that the stock of the Bell Telephone originally sold for a dollar a share, and
advanced to five thousand dollars a share, it is well to consider the facts as
here related." The advance in Bell Telephone from a dollar to five thousand
dollars has been told and retold over and over again by White. It was the
favorite bait for the "suckers" in the literature of the notorious Pike. The
Pike wireless stock was going to advance "by leaps and bounds." But the Pike
stock turned a somersault, and so has White's.
Courtesy:
http://earlyradiohistory.us/1907fool.htm
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