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Wall Street - Blue Sky Laws And Fraud

( Originally Published 1939 )

MANY States have what is commonly known as Blue Sky Laws, under which corporations chartered in another State, must qualify before they are given permission to sell securities. Such laws are enacted to prevent fraud, but unfortunately they often fail to serve their purpose. While the laws themselves are rigid and corporations qualifying under them can usually be regarded as meritorious, nevertheless, such laws cannot prohibit the selling of securities by mail or telephone from some office located outside of the state.

Those two avenues of selling defy Blue Sky laws and once an account has been opened, the client often receives a personal visit from someone, who in stock parlance, is known as an outside man. This man representing the house which opened the account, seldom attracts attention to himself and unless he is actually caught making a sale, he escapes detection. Every State in the Union is penetrated by telephone houses, using large cities in the East and West as a base of operations.

New York State does not have Blue Sky laws, but all corporations selling or offering their securities for sale in the state, must register under what is known as the Martin Act. This registration, which is published in the official bulletin issued at Albany, re-quires such pertinent information as to the State under which the Corporation is chartered, its home office, the name and addresses of its officials, and also the name and address of the firm or firms who intend offering the stock.

The administration of this Act is vested with the Attorney Generals office, who has the power to issue forthwith subpoenas for all books, records and personnel, when in their opinion, a fraud is being perpetrated.

In New York City, the division of the Attorney Generals office, which handles such matters, is known as the Bureau of Securities. This Bureau has piled up an enviable record for itself in enjoining and prosecuting fraudlent brokerage and security houses, as well as stock salesmen and confidence men. It may truly be said that this Bureau bears living testimony to the excellence of the Martin Act over the Blue Sky law of the average state. You gather a greater significance of this, when you consider that thousands of companies, both good and bad, incorporated in other states, attempt to raise money for their endeavours, through the channels of the New York financial district.

The gold prospects in California, Canada or South America, or the potential oil wells in Texas, the iron mines of Minnesota, the coal mines of Pennsylvania, or even some strange innovation from the South Seas, find their sponsors or promotors trying to raise money in New York for their often far flung ventures.

One advantage the New York or even the out of town investor enjoys under the Martin Act, is the assurance of receiving action on his complaint. If he is defrauded he need only notify the Bureau of Securities and they in turn can often, very often, apprehend the guilty parties. After the victim has been defrauded, it is usually too late to get his money back, nevertheless, his complaint will serve to promptly prevent the victimizing of others.

It seems so inconsistent that people who have had sense enough to accumulate a little money will permit themselves to be talked into some of the most wild-cattish schemes in existence. One snickers when they are told that stock has been sold in the Brooklyn Bridge, but this is by no means far fetched. Some of the schemes uncovered in the past year by the Attorney Generals office would make stock in the Brooklyn Bridge seem like a gilt edge investment.

One beautiful gadget which Attorney General Bennett demonstrated a few months ago, was an electric ouija board. Believe it or not, this beautiful, complicated machine, which reminds you of a modern radio set, has a graph tracing mechanism, and it duplicates all of the intricate zig zags of market curves. You need merely press a button and then a buzzer sounds, a series of colored lights begin to flash and the needle starts tracing a graph. You will find your answer where-ever it stops. It tells you whether you should sell your stock or to buy more. It fails to tell you, however, that the salesman who is demonstrating the machine will take your stocks if you desire to sell, or conversely will load you up with some bogus ones if you decide to buy. In either event you lose your money. As absurd as this may sound, I assure you such ouija machines are in existence and several have been confiscated by the Attorney Generals office.

Then there was another gadget recently exposed. This one was a refrigerator which would run on perpetual motion. Gas and electric light bills were to be forever elimated. Those buying stocks in this company were sure to become wealthy. None of them could be more absurd, however, than the company which was organized around a spirit medium. This medium claimed to be in communication with Sudah, the son of the last Emperor, who ruled over Atlantis, the lost continent. Salesmen actually sold some of this worthless stock to gullible people.

Attorney General Bennett stated, while they are all caught sooner or later, nevertheless, it was hard for him to believe anybody would invest on the word of a fake medium or a phoney stock-tipping machine. People go further than that he added; "They not only put their money into the so-called money making machines, but they invest in the stock of companies reputed to manufacture such devices. Naturally, they never see their investments again."

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