Chapter 10 No.10

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 in six cities with New York 25,000

Telephones 5,000

Telegraph tolls 100,000

Salaries (all offices) 200,000

Daily and Weekly Market Letter (printing and postage) 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.

MORE TRUTH ON THE "MINING FINANCIAL NEWS"

WHEN the Mining Financial News removed to New York Mr. Scheftels used much persuasion to get the owners to transfer title to the Scheftels company. Admittedly, if the Scheftels company could boast ownership of the newspaper at the head of its editorial page, it would be a great feather in the Scheftels cap and might lead investors to think that an organization which could own and publish a first-class, metropolitan newspaper of the Mining Financial News variety must for that reason alone be worthy of financial credit.

Thompson, Towle & Company, members of the New York Stock Exchange, print a small sized pattern of such a newspaper, called the News Letter. Hayden, Stone & Company, and Paine, Webber & Company, of Boston and New York, are said to have much influence with the Boston News Bureau, a newspaper which features news of mines and mining share markets. The Boston News Bureau at times has printed no display advertisements and at other times has. It is considered by Boston mining-stock brokers who handle the Michigan and Arizona copper securities as a necessary complement to their market literature. Walker's Copper Letter and the Boston Commercial are other examples. Walker's Copper Letter, which carries no advertising, for years has said the very nicest things about copper securities promoted and fathered by important Boston and New York interests. Needless to state, what Walker's Copper Letter, the Boston Commercial and the Boston News Bureau say about the mining propositions of their friends is as a rule based on fact. The point is that promoters find it necessary that news happenings regarding the markets, the securities and the mines in which they are interested be given broad publicity.

It was the idea of the owners of the Mining Financial News, of which B. H. Scheftels, president and 25 per cent. owner of the capital stock of B. H. Scheftels & Company, was not one, that anybody who would supply the sinews while the paper was getting on its feet and was establishing itself, was entitled to all the publicity which the paper could consistently and honestly give it. With this understanding the Scheftels company assumed to take all of the income of the Mining Financial News and pay all of the running expenses until such period as the newspaper might become self-sustaining.

In doing so it performed a stupendous service to the entire mining industry in that the space devoted to the Scheftels enterprises therein did not average more than one-eighth of the whole, and it spent dollars to supply the news of all stocks where other mining financial publications in its field spent pennies.

To make sure that the public understood the Mining Financial News was the quasi house-organ of the Scheftels company many precautions were taken. No application was made for admission to the mails as second-class matter, and the paper was mailed under one and two-cent postage. The name of Harry Hedrick was lifted to the top of the page as vice-president of the corporation owning the Mining Financial News, Mr. Hedrick being openly employed by the Scheftels company as head of its correspondence department. My own name was later placed at the head of the editorial page as editor, the Scheftels company making no bones about my position as absolute head of its publicity department, its promotion enterprises, and of all markets for the Scheftels promotion stocks. The connection had before been established even closer than this. I had formerly been advertised as vice-president of Nat. C. Goodwin & Company of Reno and vice-president of the Rawhide Coalition Mines Company; and the Scheftels company had advertised that Nat. C. Goodwin was its own vice-president.

Further, the Scheftels company announced in its market literature that it had selfish interests in protecting the market for the stock because of the Nat. C. Goodwin affiliation. Occasionally market articles under the signature of B. H. Scheftels were published on the front page of the Mining Financial News. Whenever anybody made a request for the Scheftels Market Letter a copy of the Mining Financial News was quite regularly mailed to him without cost. Articles under the signature of other officers and employees, formerly of Nat. C. Goodwin & Company of Reno and later of B. H. Scheftels & Company of New York, were very frequently printed in the Mining Financial News.

Probably the most important reason why the Scheftels company made this sort of arrangement with the Mining Financial News was that it could do so with only a very small additional outlay. The Scheftels company found it necessary to employ correspondents in all mining and market centers, and the same correspondents could work for both enterprises. Another economic argument was that an enormous saving could be made in telegraph tolls, all dispatches addressed to the newspaper being sent at press rates. These dispatches were always available to the Scheftels corporation and its clientele.

It was the idea of the Scheftels organization that the mining-stock investing public sorely needed right direction and that any brokerage house which led it right would soon be unable to transact all the business that would be offered to it.

And that is just what happened. Before the Scheftels company was six months old the fifteen men in its accounting department were compelled to work day and night-time and again throughout the night until 6 A.M.-to catch up with their work.

If the Scheftels news service was as nearly perfect as money and brains could make it, its facilities for the execution of orders on the New York Curb, the Boston Curb, San Francisco Stock Exchange, Salt Lake Stock Exchange, Toronto Stock Exchange, and other mining markets were unsurpassed. Its New York and Boston offices were connected with branch offices in Philadelphia, Chicago, Detroit, Milwaukee and Providence by exclusive private wires, and the service to out-of-town offices was almost instantaneous.

The New York offices were located right in front of the Curb market on Broad Street on the ground floor of the big Wall Street Journal building, 50 feet by 200 feet deep-occupying about 10,000 square feet of floor space. The Boston office, occupying two floors, was located within 100 feet of the Curb market in that city. The public wires of the telegraph companies gave quick service between San Francisco, Salt Lake and Toronto, where business was transacted through members of the mining-stock exchanges of those cities. The private wires of the Scheftels company were constantly flooded with rapid quotations and market, mine and company news during every trading hour. In New York the Curb brokers in the Scheftels employ, some on salary and some on commission, rarely numbered less than ten and at one period exceeded twenty.

The correspondence department was presided over for a long period by two of the best posted mining-market men that could be employed for money. From this department were usually graduated the managers of out-of-town offices. In the cashier's cage six men were engaged at an average salary of above $100 a week, registering stocks, receiving stocks, paying money and drawing checks. The payroll of the mailing department, which was operated in conjunction with the Mining Financial News, was comparatively small. Money-saving machinery for the handling of the large output of market letters and newspapers gave excellent and economic service. About ten stenographers were regularly employed in the correspondence department. Occasionally, when a special effort was being made to interest the public in some security in which the corporation was particularly concerned, a force of forty additional typists was pressed into service for short periods.

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 p?an 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.

THE SCHEFTELS COMPANY AGAINST MARGIN TRADING

The Scheftels company did not encourage margin trading by its customers. In fact, it railed against the practice. Time and again the Mining Financial News, editorially, denounced the business of margin trading. The Weekly Market Letter of the corporation sounded the same note. On several occasions, in large display advertisements published in the newspapers, the Scheftels company decried the practice and urged the public to discontinue trading of this character.

There were selfish reasons for this. In the marketing of its promotions the Scheftels company found that not more than 20 per cent. of the public's orders for these stocks given to other brokers were being executed, or, if executed, that the stocks were at once sold back on the market, the brokers or their allies "standing" on the trade.

Had the Scheftels company been able to destroy the practice by its campaign of publicity, it would undoubtedly have been able, during the nineteen months of its existence, successfully to promote three or four times as many mining companies as it did, and its profits would have been fourfold.

It, however, appealed to the public in vain. Loud, frequent calls to margin traders to pay up their debit balances and demand delivery of their certificates, which would compel every broker to go out in the market and buy the stocks he was short to customers, failed miserably.

The lesson of this experience was that the speculating public did not "give a rap" whether their brokers were short of stocks to them or not. All they wanted, apparently, was to be assured that when they were ready to close their accounts, their stocks, their profits or their credit balances would be forthcoming.

What is the evil of short selling of the kind described herein? The only evil that I could ever discover was that the market is denied the support which the actual carrying of the stock is calculated to afford. This hardship weighs heaviest on the promoter. There appears to be no cure. Even if a broker does buy the stock and does not himself sell it out again, there is no law that denies him the right to borrow on it or loan it to somebody else. And it is to the interest of the broker, because he gets the use of the money, to loan the stock always. Stocks are rarely borrowed by anybody except to make deliveries on short sales.

What about the broker who doesn't execute his order at all but "stands" on the trade from the beginning and sells the stock "short" to his own customer, delaying actual purchase until delivery is demanded? This practice is even less damaging to the customer than the one of actually executing the buying order for the customer at the time the order is given and then selling the stock right back on the market again for the account of the broker or his pal-the usual practice when the object of going short is sought. When a broker buys stocks in the market he must bid for them, and actual purchase generally means a higher cost price to the customer than that at standing quotations.

The rule of the Street is to charge the customer interest on all debit balances. When a broker lends to a "short" seller a stock which he is carrying for his customer, he is paid the full market value, as security for its return. In that case the broker ceases to incur interest charges for the customer, and is actually able, in addition, to lend out at interest the cash marginal deposit put up by the customer.

Maybe you think, dear reader, that a broker who charges his customer interest at the rate of six per cent. per annum on money which he has ceased to advance is crooked. Very well. If that be so, then all members of the New York Stock Exchange must be labelled "crooks." Here is how it works, even among the highest class and most conservative members of that great securities emporium:

John Jones orders the purchase by his broker of 1,000 shares of Steel on margin. He pays down 10 per cent. of the purchase price. Mr. Jones receives a statement at the end of the month charging him with interest at the rate of six per cent. per annum, or more if the call-money market is higher, on the 90 per cent. of the purchase price advanced by the house.

On the same day that the order of John Jones is received, William Smith orders the same house to sell short 1,000 shares of Steel at the market. This order is also promptly filled. Thereupon the broker uses the 1,000 shares of Steel, which he bought for the account of John Jones to make delivery through the Clearing House for the account of William Smith. Sometimes a fictitious William Smith is created, known as "Account No. 1," "A. & S. Account," "E. Account," etc. This is usually done when a broker wants to hide from his bookkeepers that he or an associate is taking the other end of the customer's trade.

The broker is out no money, yet he charges Mr. Jones the regular rate of interest on his debit balance. As a matter of fact, too, the stock bought for Mr. Jones is never even delivered to his broker. The Clearing House, because of the "short" sale, steps in and delivers it to the broker to whom it is due "on balance."

Custom and practice cover a multitude of remarkable transactions-don't they?

You have the framework of the Scheftels structure and of its Wall Street environment outlined in this chapter. Some of the narrative is undoubtedly "dry-as-dust," but its recital has appeared to be necessary to enable the lay reader properly to interpret the chronology of stirring events which forms the concluding installment.

In the foregoing I have endeavored to lay bare many practices that are common to Wall Street. Wherever I have laid them at the door of B. H. Scheftels & Company, I have given that corporation much the worst of it, because in the recital I have omitted to mention a multitude of happenings that were creditable to an extreme to the Scheftels company. Most of these had to do with the experiences of the Scheftels company as publicity agents and promoters. Its wide-open publicity and promotion policy called forth the ire of influential Wall Street pirates and caused the "pressure" at Washington which resulted in the Federal raid of the Scheftels offices.

I have reserved this dramatic series of events for my last chapter.