Omaha daily bee., 1899-09-28
FRAUDS OF PROMOTERS.
How the BuiIders OF Trusts Sugar
Number One.

III Oht
Chicago Tribune
A New York corporation lawyer tells who
the proft-sharers Of overcapitalization are
and how they manage matters. 1t occurs
TO some promoter that the consolidation of
the plants doing a certain kind OF manufac-
turing can be made a source Of profit for
him. He gets options on those plants which
are worth, say, $4,000, 900. But while he
has sharp wits he has little capital. The
services OF a bank or trust company are
needed to finance the affair. The promoter
submits his scheme to the men of capital,
and asks as his share in the undertaking
$4,000 and half the profits. II a bargain
is struck the promoter informs the owners
of the plants that he will pay them one
quarter in cash and the remainder in pre-
fsrred stock, with a like amount OF common
stock thrown in. This arrangement neces-
states doubling the capitalization, which be-
comes $40, 900, 900.
But the bank or trust company which is to
underwrite the new enterprise must be paid
for its services-the use of its money and
its respectable name. Therefore the capital
ization is doubled again and becomes $780,
900, 900. 1t Is understood that with such q
capitalization the common stock will sell
below par. On the assumption that a little
more watering of the stock will not reduce
Its market value proportionately, $40, 000, 00C
more is added to the capitalization, which
becomes $50, 900, 900. Then the promoter and
the underwriters unload quickly and quietly,
and withdraw with their profits. They have
proved themselves able inanciers and Wall
street respects them.
The stockholders in the new enterprise
find themselves on a stormy sea in a leaky
craft. To pay even infinitesimal dividends
1t Is necessary to raise prices, which de-
creases consumption, or begets competition
or to reduce the cost of production by cut
ting wages, which means a fight. In either
event bankruptcy ensues. An expensive re.
organization follows, In the end the hold
ers of common stock lose all and the holders
of preferred stock a good deal.
The capitalization Of good will should be
forbidden by law, but in a case like the
above the securities issued do not represent
even that intangible, uncertain element oil
success. FINANCING in this instance. Is
simply selling goods under false pretenses
though the laws do not reach the men who
are guilty Of such acts. Nor do their con.
sciences reproach them. Their business as.
s~ociates do not condemn them. They are
spoken of as Smart men,"
The New York lawyer referred to has q
remedy for what he calls fraudulent pro.
notion" 1t is the enactment of a Law
making 1t a fraud for a promoter or a CON-
pany to advertise for sale the capital stock
of a company without stating the amount
of actual value invested, in money or prop.
erty. There is such a law in England, ant
this lawyer says it largely prevents the
formations Of great corporations there witt
watered capital stock. Nevertheless Eng
land abounds in overcapitalized corporations
This remedy 10 not adequate, therefore
What is needed is a law such as has beer
advocated by the Tribune, prohibiting the
issue of stock which does not represent
tangible assets. Such a law, faithfully en-
forced, would put the ak to the roots O.
overcapitalization and promoters ewindles