Evening star. [volume] (Washington, D.C.) 1854-1972, 1882-06-24

How Honest Directors Play Dishonest
Games


Stock watering, says North American Re
rsetcer, has an evil sound In the public ear, and
Justly so by reason of its associations. But
stock watering per Sc is not fraud. 1t is no
thing more, when legitimately done. than real
izing the enhanced value of a property. 1t is
Just as proper proceeding as that of mer-
chant who marks up the price of the stock of
goods he has on hand. Nevertheless. It has an
evil odor clinging to it. for the operation pre-
sents such temptations to fraud on the part of
those in control OF the property that it is rare
for the thing to be done without fraud at some
stage. Sometimes ii Is series of frauds from
FIRST to last enrching the few men who planned
and executed it. infcting severe losses on
hundreds of innocent investors, while the prop
eTty Itself is irretrievaby injured. All this will
be called Wall street trick or stock jObbery;
but in fact 1T Is simply corporate dishonesty. Let
Us take one glaring example. Suppose that
there exists a large corporation, having heavy
capital, and performing highly important func-
tons in relation to the public. Its board of di-
reetors is composed Of the leading men of the
financial world and a large proportion Of the
stock of the corporation is held as q permanent
investment. Another company is started as a
rival to the former. 1t can pay no dividends,
and is not likely to, for it's promoters repaid
themselves double their original outlay through
the medium of construction company. and they
propose to make more by selling out. But this
concern can and does inure the dividend-pa
company though not much. In course of time the
leading spirits in each corporation come together
secretly, and arrange what, in term Dor
rowed from the gambling-table, is called a
deal" The dividend-paying company is to
absorb the other, and to double its own stock.
An elaborate program Is laid out. extending
over many months. As the first step i'm If.
holders OF the dividend-paying stock must be
induced TO sell Out-''shaken OUT the streets
call it. The corporate dishonesty begins at this
point. The board of directors meet and in
their official capacity they issue quarterly
statement OF the company's affairs, which is a
carefully concOcted falsehood from beginning to
end. In 1t they represent that business has
fallen Off to the most serious extent; that the
revenues have so greatly sIirunk that it would
be highly impOltic to declare the usual quarter
ly dividend;that reduced dividend must be de.
clared, which. it is true, will require most of the
surplus in the company's treasury to pay, but,
by careful economy, they hope it may be fully
earned in the future. The issuance Of this
official falsehOOd has been prepared for by the
| Industrious propagation of rumors that the
affairs of the company are in a truly deplorable
condition. The board votes the reduced diyi-
dend; the men who are in the secret have pre-
viOusiy sold their stock and they set to work to
break down the market by short sales. The
price begins to sink rapidly; innocent investors
make haste to SELL and the price goes on sink
ing with every lot offered. At last it reaches
a level where the c0nspiratOrs decide it is time
TO BUY. They have covered their short con-
tracts and make their profit that way; and,
under their buying, the price rises as rapidly
as it went down, which catches the swarm OF
wall street stock operators who had been SELL
ing the stock short. and were not in the secret
when the men who are conducting the deal
get all the stock they want, official announce
ment is ma, e that the rival companies have
agreed to combine. and the stock of the CONSOLE
hoi IN
done, the conspirators desire to sell their
enormous holdings of the watered stock They
therefore meet again in their official capacity as
directors and issue another official quarterly
statement, in which everything said in the last
is unsaid. The revenues are declared to have
increased in most unexpected way great econ
Omles have been effected, and the profits of the
quarter are large enough to allow dividend to
be declared at the full rate on the whole doubled
capital stock. while the outlook for the future is
such as to give assurance that it will be con-
tlnued and possibly increased. This official
statement is just as much falsehOod as the last
was.
Here was one of the most scandalous exam
pies of stock jObbing which ever disgraced the
financial history Oftbe country; but stock Job
Ding in this case was only another name for cor
porate rascality. 1t was fraud against which
the investor had no possible chance to protect
himself, for it was by the official action of the
| legal custOdians of his property that he was
frightened into throwing it over When toe
late, he discovered he had been the victim of a
plot which these directors had concocted against
MIN Tor their own enrichment