THE ULTIMATE POSSESSORS IN THE SCHOOL OF HARD KNOCKS

Crooks, scandals, and scalawags are good. Con artists of all forms offer us a sort of perverse education. They are a key ingredient to avoiding stagnation and achieving a constantly evolving Wall Street, for without them we would never learn the often-costly lessons of excessive greed and blind trust that prompt change and reform. In the way a child learns not to touch a red-hot stovetop, the stock market has learned—sometimes over and over again—to be skeptical of just-too-good-to-be-true investment opportunities and the people promoting them. Because the root of all swindles, greed, is inherent to human nature, Wall Street will never lack for its share of con artists and con games, regardless of what drastic measures Washington might think it’s taking. So, rather than condemn such swindlers, we can easily learn from their stories.

Initially, it is hard to see the good in a con. Just think of the victims—a widow swindled out of her retirement savings or hard-working parents who bet their kids’ college fund on a lost double-your-money sure-fire deal. Tear-jerkers? Well, maybe—but for most folks seeking to double their money overnight, all they suffer is a slight financial hit, a bruised ego, and a loss of faith in humanity.

A con just might teach them something about what they did wrong in the process of getting conned. Even more important, and more likely (since many folks can’t learn from their own mistakes), it might teach the victim’s relatives, friends, neighbors, peers and co-workers. For every victim, there are a good many observers learning lessons. And these folks are the beneficiaries of the con artists’ finesse. When they tuck their newfound experience and lessons under their belt and go on with their lives, they will have learned to be a lot more skeptical and, if they’re wise enough, a little less greedy—a lesson everyone can afford to learn.

Swindles and con games dot the entire time-span of stock market history. Looking back on the 1800s, you might view some of the Dinosaurs like John Jacob Astor, Daniel Drew, and Cornelius Vanderbilt as con men, but whether they actually were considered con men in their day is questionable. Each operated via deceptive methods that are today highly illegal and unethical. But then, their methods were widely accepted as the norm, simply because there were no securities laws. Their actions set the precedent for the most fundamental beginnings of modern stock market ethics. As Drew introduced the notion of “watering” stock by selling new shares in firms he controlled without disclosing that they were new shares, he took a first deceptive step toward teaching the masses to watch out for “insider” manipulation. While the lesson is never fully learned by everyone, look at all the standard practices that have been adopted in the last 150 years to keep the playing field level. Without the crooks and con artists, ethics would never become engrained in our capitalistic financial markets. But it does.

By the time the many scalawags featured in this section came to crime or near-crime from the 1920s to 1950s, there clearly was an ethical agenda to follow and one that was becoming irregularly more stringent as the years passed—it’s just that these hombres chose to ignore the rules. Charles Ponzi, Ivar Kreuger, Samuel Insull, Michael Meehan, Richard Whitney, Lowell Birrell, Walter Tellier, and Jerry and Gerald Re—they all either bypassed and evaded laws or discovered a niche, as the Dinosaurs did, where there were no distinct laws. And every one of these folks generated a backlash of ethical or legal reform.

For example, Charles Ponzi, whose name is now synonymous with illegal zero-sum pyramiding schemes, was the first to bring the con game to Wall Street in the late 1910s. He promised his victims a 90-day rate of return that was just too good to be true. Indeed, it was too good to be true, and while suckers placed their money and trust in him, Ponzi used some of the money to pay back phony interest payments to the investors while placing the rest of the money in his personal bank accounts! With the first fat interest payments made, he used his unaware victims as references to sell more suckers on his scheme. His method, not terribly complicated, became a role model for modern scams that is commonly repeated in some form or another to this day. Today we see a similar variation in the common chain letter. Yet today, most folks know that Ponzi schemes are a sucker’s game.

As Yogi Berra said, “Sometimes you can see a lot just by looking.” Yet many people, overcome by greed or fear, often choose not to look when it comes to their finances. Two men who became caught in scandals and en route gave us some permanent debt lessons, were Ivar Kreuger and Samuel Insull—who both built debt laden pyramid-style empires that toppled when they grew too top-heavy in the early 1930s after the Crash decimated assets. Both were blamed for the fall and the millions in losses it represented to investors. But as their empires toppled, they ripped off investors, and the scandals that ensued show the perverse power that forces men beyond their normal moral bounds when huge amounts of debt backfire on the borrower. We again see those lessons in many of the backfiring leveraged buy-outs of the 1980s. But the lessons were already there, for anyone to see who wanted to look.

Michael Meehan blatantly ignored the power of a young SEC in the mid- 1950s. So when he continued doing what he had been doing in the 1920s—manipulating stocks on a visible scale—he became the first to be nailed by the SEC. What an honor!

Richard Whitney’s con game was embezzlement in the mid-1930s. Nothing new or different about the crime, but its context—right within New York Stock Exchange walls—absolutely shocked Wall Street in what was its juiciest scandal ever. Suddenly folks realized that if as well-placed a broker as Whitney could be a crook, no position of power or prestige assured ethical conduct, and you could only insure that you wouldn’t be taken by swallowing a heavy dose of financial skepticism.

In the 1940s and 1950s, Wall Street was no stranger to scandal. Lowell Birrell unloaded worthless securities on insurance companies, where the SEC had no authority! Walter Tellier mass produced worthless penny stocks, promoted their irresistible price, and mercilessly flung them on the public via high-pressure sales tactics. Jerry and Gerard Re gave stock specialists a bad name that subtly exists to this day by selling illegal, unlisted stocks at their American Stock Exchange post.

In each case, immediately following exposure of the scandals, a wave of reform swept the market, eliminating more and more loopholes in the laws. The violators were either tried on various charges and jailed or acquitted. Others fled to Rio, another killed himself and some were never seen or heard from again. And the victims? Yes, they were stung, but people learn from situations like these. Were it not for this bunch and others that have followed in their footsteps, our greed and trust might otherwise go unchecked. And for this eye-opening service, they must be included in The 100 Minds That Made The Market.

CHARLES PONZI

THE PONZI SCHEME

I’m sure Charles Ponzi wasn’t the first ex-con on Wall Street, but he was the most successful. He succeeded in making his name synonymous with “swindle” after his great get-rich-quick scheme was exposed as a fraud! En route, he managed to rip off hundreds of investors of millions by juggling capital from investor to investor, creating a rip-off often replicated today—the “Ponzi Scheme.”

Born in Italy, Ponzi had the most atypical background of anyone in this book—guaranteed. Not only was he poorly educated, which so many had to overcome back then, but he worked as a laborer, clerk, fruit peddler, smuggler, and waiter until the age of 42, when he decided to try finance. A smug little man just over five feet, Ponzi was good-looking, slim, dapper, self-assured, and quick-witted—but it was his smooth talking that truly brought his character to life.

He began his scam in early 1920 with $150 in advertising, setting up Old Colony Foreign Exchange Company and claiming to pay 50 percent interest in 45 days and 100 percent in 90 days. Ponzi had great timing—it was the onset of the Roaring 20s, when people had a little spare cash to spend and were willing to take what looked like a good chance. With a super-salesman’s flair he talked up a storm, making his deal sound riskless.

Ponzi proposed to pay such horrendous premiums on people’s investments by purchasing International Postal Union reply coupons overseas. Then, by manipulating foreign currency quotations, he would redeem the coupons elsewhere, where the currency was inflated.

Everyone sent him money—stockbrokers, their clerks, widows, heiresses. The money flowed in, first in drops, then in buckets once the newspapers caught on and publicized this newly-discovered financial genius. At first the money was stuffed into desk drawers in Ponzi’s little Boston office, but then it started coming in at a rate of over $1 million per week! Bills flowed from the tops of wastepaper baskets, then covered the floor ankle-deep! There was an endless flow of cash—plenty with which to pay off eager investors.

An endless flow of cash was just what Ponzi needed to pull off his scheme, for the more money that came in, the more in debt he became. He wound up paying his first investors with money from later investors and later investors with money from even later investors, and so on. But as long as the money kept coming, he kept paying what he promised—and that perpetuated the cycle.

Realizing he had stumbled onto a good thing, Ponzi started planning for branch offices and talked of creating a string of banks and brokerage houses. He bought controlling interest in Hanover Trust Company, made himself president, then bought a large house and servants. He even gained control of his former employer’s firm and fired his former boss! He was great at spending money—but as his investors later found out, he wasn’t actually investing it. He was robbing Peter to pay Paul.

While crowds followed him, chanting, “You’re the greatest Italian of them all,” the Boston district attorney’s office and the Boston Post embarked on their own quiet investigations. Ponzi was just too good to be true. It was then, by mid-summer of 1920, just a few months after he’d gotten started, that it was discovered that only $75,000 in reply coupons were normally printed in any given year—and that in 1919, only some $56,000 in coupons had been printed. But Ponzi had taken in millions. He couldn’t possibly have spent the millions on reply coupons that hadn’t been printed. Yet few stopped to think that through. The next step in his demise was the Boston Post’s revelation that, under an alias, Ponzi had been involved in a remittance racket in Montreal 13 years earlier.

As rumors started to spread, which could have sparked a panic among his “investors,” Ponzi simply upped the ante—and his talk. He denied the charges and promised to double the interest payments! Through early August, the money continued to flow into Ponzi’s pockets, even though the Boston Post declared him insolvent. Two weeks later, Boston learned that Old Colony had no assets—and had liabilities of over $2 million! In only eight months, Ponzi had taken in some $10 million and issued notes for over $14 million, yet less than $200,000 was ever recovered from his accounts.

What did Ponzi do with the money he bilked from investors? Not much! He lived high, yes, but there is no evidence that he actually accumulated any hidden riches. A lot of it was simply sent back out to the early investors, who didn’t actually lose anything. Like a modern day chain-letter, it is the people putting up the money at the end who suffer. Ponzi probably didn’t figure that his money machine would break down as soon as it did, and being the first, may not have even fully understood that it would have to break down eventually. He may have believed he could go on reshuffling people’s money forever. In any case, one of the main victims in this scheme was Ponzi himself.

Ponzi pleaded guilty to charges of larceny and using the mail to defraud. Whatever his intentions, and whatever his level of financial sophistication or lack thereof, he was clearly a con man. While on bail pending appeal, he sold underwater lots in Florida, making another small fortune before going to prison for 12 years for the coupon scam. When he got out in 1934, he was immediately deported to Italy where he said, “I hope to open either a tourist agency or a hotel. My American connections make me particularly suitable for this sort of business.” He did neither. Instead, he joined up with the fascists, gained government clout and was made business manager for LATI Airlines in Rio De Janeiro. Presumably this attempt at an honest living didn’t go well. He ended up making a meager living teaching English in Rio. He died there in 1949, partially blind and paralyzed from a blood clot on the brain. To show how far the great swindler had fallen, note that he died in a Rio charity hospital ward with $75 he had managed to save from a small Brazilian government pension.

The Ponzi Scheme is a standard feature in modern mass fraud. Whether it is the infamous chain letter that almost everyone has received—promising great wealth for everyone—or various of the recent insurance frauds that have promised people high and safe annuity income when in fact there has been little or no business behind the promoters (a la ZZZZ Best, Baldwin United, or Equity Funding), the Ponzi Scheme is unlikely to fade from society as long as our strongest feature, basic freedom, endures. Foolish investors will always do themselves in by being too greedy and chasing returns which are unrealistically high. In some ways you could look at Ponzi as a slimeball form of greedy humanitarian—by fleecing the ignorant greedy, he and his kind regularly reteach society the old saw that bulls make money, and bears make money, but pigs get slaughtered.

SAMUEL INSULL

HE “INSULLTED” WALL STREET AND PAID THE PRICE

Many a picture has been painted of Sam Insull—swindler, simpleton and genius among them. But scapegoat seems the most probable. During the 1920s, Insull knew electricity, turned it into a convenient, profitable commodity, then got zapped by his own voltage after he tried to take on Wall Street. When his multibillion-dollar electricity pyramid toppled, resulting in millions of losses to investors, he was microscoped from top to bottom and blamed—basically because big figures were involved. Everything he had accomplished for the industry, and for that matter, for America, via his role in the evolution of electricity, was forgotten—and he was branded a crook who cheated an unassuming public.

Insull built a lot during his lifetime, but what he didn’t build—namely, Wall Street banking connections—cost him his empire. What he had going for him were a few basic good ideas, one of which was building a large consumer base for electrical power in order to naturally cut rates and increase profits. Eventually, his electricity firms, with $2.5 billion in assets, served 4.5 million customers—nearly 10 percent of America’s power in 1930! Rates were reasonable and profits, immense. So far, so good.

In building upon his idea, Insull needed constant funds to increase power generation. Thus, he formed his first holding company, Middle West Utilities, in 1912, raising money through stock sales and then using the money to expand operations—not line his pocket. Financing rarely posed problems for Insull—but here’s where he went wrong. Instead of appealing to first-line Wall Street investment banks like the House of Morgan and building strong relationships with them, he used local Chicago banks for loans and local, small-time investment bankers to underwrite security issues. Why go all the way to New York for money? The answer is simple. Staying local works fine when things are going your way, but not so well when times are tough, either because the economy is bad or because of a firm’s own internal problems. Top financing sources can sustain a firm in tough times and may do so if the firm has built a solid relationship with them. Schlocky financing sources do not have the capability to finance anyone in tough times.

Unfortunately, as Insull later learned, when his pyramid-based world got large enough, with enough debt, so that it was easier to topple in tough times, it was also a valuable target for the first-line financiers to attack. The same folks he should have built ally-like relationships with saw his weakness as an opportunity to exploit. J.P. Morgan Jr., long mad at Insull for not using his services, eventually got even.

Sober, hard-working, confident and born in 1859 to a poor minister, mustached Insull came to America from London at 21 to work with his idol, Thomas A. Edison, never having enough time to marry until he was 40. (Then he married an actress and had his son, Sam, Jr., who later came into business with him.) Though Insull’s thick cockney accent was barely understandable, he served as Edison’s personal secretary and business manager for years. At 30, Insull was picked to head Edison General Electric Company, but four years later, when J.P. Morgan took over the firm in organizing General Electric, Insull was left behind. Morgan factions claimed Insull borrowed too much—so you can see why the House of Morgan never came to mind when Insull sought funding!

Not easily dismayed, Insull bought into a small electric firm, vowing to make it the largest electrical power station in the country, which he did via expansion within two years. Middle West Utilities, his holding company, came next, multiplying Insull’s power in his adopted hometown, Chicago, where he loaned money to good customers and supported local senatorial candidates. He became one of Chicago’s most prominent citizens—until his empire began to slide.

Because of his holding-company structure, Insull owned minority interests in each holding company. So when Cleveland banker Cyrus Eaton on one side, and the House of Morgan on the other, began battling each other for large blocks of lucrative Insull securities, Insull got worried, puffed on his cigar double-time and figured the only way to defend his stocks from raiders was to build a pyramid which intertwined his assets! Though he knew little of stock operations, he believed that—through pyramiding—he and friends could control all of his companies by exchanging their utility holdings for stock in one major, all-encompassing holding company.

In 1928, he created Insull Utility Investments “to perpetuate existing management of the Insull group of public utilities.” Insull, who used to love staring out his office window watching the city lights come on, turned over his and his associates’ holdings to IUI, in return for controling interest in IUI. IUI stock was floated to the public at $12 per share and closed at $30 on its first day of trading—and within six months, $150, one of the original hot initial public offerings. Likewise, all the other Insull companies within his pyramid went berserk—one went from $202 to $450, and Middle West, from $169 to $529!

Insull didn’t like such an overly optimistic market, which sent his personal fortune—on paper—to $150 million. He figured the bubble had to burst. But, while waiting, like everyone else who hangs around a cookie jar, he couldn’t resist taking just a few. He took advantage of the speculative binge by refinancing Middle West Utilities, splitting its stock 10-for-1 and retiring its debt. Then he formed another top pyramid company intertwined with IUI, hoping again to put control of his empire out of reach of outsiders. But his pyramid was too big and was now a prime target for Wall Street.

Weakened by the 1929 Crash and forced to continuously defend his securities from raiders, draining cash and credit, Insull was forced to borrow some $48 million including some from the now not-so-friendly New York banks like Morgan—using his stock as collateral. So now he not only had reached his hand into the cookie jar, but he had it stuck in there. When the market collapsed again in 1931, while Morgan men intentionally sold short Insull securities, his stock finally gave way—and the bankers took their collateral. When further credit was denied by all, Insull’s top firms went into receivership and he was left holding the bag.

Insull was wanted for mail fraud and embezzlement, along with his son on some charges. But he had fled Chicago for Europe, supposedly for relaxation, according to his generous biographer Forrest McDonald. I doubt he ever relaxed. As he travelled throughout France and Greece, the government tried to extradite him. Romania offered him a cabinet level position as head of electricity, which he was lucky or smart enough to turn down. Ultimately, the Turkish government arrested him in Istanbul as he disembarked a cruise ship. Extradited to the U.S., he was tried and, though acquitted on all counts, his reputation was ruined, and he died a broken man—a scapegoat.

There are a great many lessons to be learned from Sam Insull’s life. First, note many folks assume that if they are major movers in industry, they can conquer Wall Street, too—as per Insull, few succeed. Main Street is straightforward, and Wall Street is tricky. Second, debt is always dangerous, but if you can’t master Wall Street it’s doubly dangerous. Third, if you’re going to borrow big money and sell stock, it really is worth it to pay the price and build relationships with the top financing firms—partly so they won’t turn on you later and eat you alive, particularly if you owe money. Debt is both Wall Street’s carrot and its stick.

And finally, there is one little irony from Insull’s life I relate to personally. Insull wanted to retire in the early 1920s. Had he done so, he would have quit a rich hero instead of ending up years later with a crook’s reputation. Why didn’t he quit? He finally decided to hang on long enough to turn his empire over to his son. That decision cost him his reputation. (I started in life working for my father and decided it was kinder to him and easier on me not to put him in that position.) If a son or daughter is good enough, he or she will rise to the top anyway, outside of the father’s firm, or after the father is gone, without being handed the reins in a privileged postion. The father should depart when it is natural to do so and hand the reins to the best manager possible, family or not. If the offspring does it on his or her own, he will feel better about himself and never doubt his capabilities in terms of rising to the top. But Insull took the often tried and unnatural approach of handing his world to his son, and en route, hung around too long. It cost both his son and him everything but their lives.

IVAR KREUGER

HE PLAYED WITH MATCHES AND GOT BURNED

Matches. They’re cheap, readily available, necessary—and the basis for one of the most intricate and profitable financial schemes of the 20th century. Swedish Match King Ivar Kreuger masterminded a world-wide scheme in which he essentially borrowed money from Americans to loan millions to European countries in exchange for their match franchises. At his pinnacle in the late 1920s, he controlled 75 percent of the world’s match manufacturing—a virtual world monopoly! Ultimately, a lack of liquidity, too many secrets and careless mistakes led to his demise, so in 1932 he shot himself in the chest to avoid public scrutiny. Once hailed as a financial genius, historians still wonder whether he was a pioneer, crazy, or just a crook.

Key to Kreuger’s plan was his appearance, his facade. From the beginning his goal was to gain the confidence of American lending sources on Wall Street. With gray-green eyes, pallid, porous skin, and a pursed mouth, he met Wall Street’s every expectation of a respectable businessman. He knew that if he looked and acted right, he would be granted credit. Kreuger appeared impeccably-dressed in expensive, yet uniform suits, accompanied by a cane and dark hat to cover his balding head. He was quiet but well-spoken, cultured, well mannered, and mildly forceful. He courted Wall Street, eventually winning over top investment bankers who forked over hundreds of millions to his supposedly solid firm—at a time when a hundred million mattered. But they didn’t know he was a phony, full of contradictions.

After his death, Wall Street’s vision of the reserved, respectable Match King was shattered. To start with, Kreuger was plagued by multiple black-mailings for reasons unknown. Probably at least some of them were his many mistresses—he had one in almost every major European city and kept over a dozen on regular allowances! And that wasn’t all. Kreuger, who had his first love affair at 15 with a woman twice his age (his mother’s friend), kept a little black book filled with women’s names—each had her own page detailing her personality, likes and dislikes, how much she cost—and whether she was worth it!

He kept drawers full of expensive brooches, cigarette cases, gold purses, watches, silks, and perfumes for his one-night stands. If he tired of one, he tossed her an envelope filled with stocks! Kreuger remained a bachelor, he said, because marriage and the honeymoon required “at least eight days, and I haven’t got time.”

His business practices, a later audit revealed, were equally shocking. He alone supplied the figures for his books, juggling numbers in his head even as his Stockholm-based holding company, Kreuger and Toll, went international. Kreuger conducted business through his own accounts to eliminate or create assets and liabilities and shift them from one firm to another.

Like his books, Kreuger made acquiring match factories and franchises an art form. Typically, to seize a factory, he would sell his own better-quality matches in the targeted factory’s locale at current prices, taking the market away from the local source without price-cutting. Then, once he had hurt the local source, he sent phony “independent” buyers to make ridiculously low offers on the factory, which would discourage the owners. Afterwards, when the offers had been rejected, he came in with his own better offers, which now seemed good to the owners. Once the factory was seized cheaply, he would again drop the quality of matches in the local market.

Franchises were secured by loaning countries like France and Germany millions at good rates for long periods, thereby securing long-term match franchises. An occasional bribe or two to the right official sometimes pushed agreements along. One of his greatest coups was loaning France $75 million at five percent after World War I, when American financiers like the House of Morgan were tightening their purse strings. He also bought hefty amounts of French bonds to stabilize the falling franc—and secure for himself a French match monopoly! After bribing necessary politicians, the deal was approved in 1927, and he got a 20-year franchise—which would last longer than he would.

To keep confidence in his firm secure, Kreuger made sure his securities always paid high dividends. Sometimes, he quietly bought shares in one of his match companies, then sold them for profit to another company within his trust, inflating their value, claiming a profit en route and enabling him to declare higher dividends. For fear of losing Wall Street’s confidence, high dividends were paid right until the very end, even when Kreuger could barely afford them. Each time he issued stock in his firms, the stocks’ worth was always based on exaggerated business volume. That is to say, he commonly cooked the books. He was said to have inflated earnings to the tune of $250 million between 1917 to 1932!

Born in 1880 and trained as an engineer, Kreuger worked as a bridge builder, a real estate agent and a steel salesman before realizing, “I cannot believe that I am intended to spend my life making money for second-rate people.” In 1908, he formed Kreuger and Toll, an architectural-real estate firm, and five years later its subsidiary, United Match Factories, taking over two match manufacturing factories his father and uncle owned. Within four years, Kreuger, who ate little, believing it made him lazy, swallowed Sweden’s largest match firms. He built a vertical trust whose securities were considered golden.

Throughout his career, Kreuger remained outwardly charming, but towards the end, his inner, eerie coldness began to seep from beneath his facade. He grew nervous. His smile weakened to the point of numbness. His handshake grew clammy. He spent money impulsively, collecting things like leather suitcases, canes, and cameras rather than art, as was customary among millionaires. And he spent money—lots of it—in desperate speculative deals that might right his desperate situation. That speculative trait is common among crooks in deep trouble.

The 1929 Crash was the beginning of the end for Kreuger. While his securities survived the crash relatively well, he had lent and borrowed too much—and the Crash caused a tight money flow. Instead of cutting back dividends or pulling in loans to conserve cash, which he felt would have sparked fatal rumors, he forged ahead on what auditors called “an orgy of financial ventures”—the most famous of which was his counterfeiting scheme. He had 42 Italian government bonds and five promissory notes printed, representing $142 million. As soon as he received them, he locked himself in his private top-floor Stockholm Match Palace and forged the names of Italian officials, spelling one official’s name three different ways to make the securities look “authentic.” Later, his accountants entered the phony bonds in the books.

By March, 1932, Kreuger had fallen apart at the seams. He had a nervous breakdown, couldn’t sleep, answered imaginary telephone calls and door knocks, fumbled for answers regarding nonexistent cash balances and finally, transferred money and securities into relatives’ names. He wrote a couple of notes, one of which said, “I have made such a mess of everything that I believe this is the best solution for all concerned.”

Then, in his business-like fashion, Kreuger lay down on his bed fully dressed, unbuttoned his pin-striped jacket and vest and with his left hand held a handgun, purchased the day before, to his silk monogrammed shirt. He pulled the trigger and died almost instantaneously.

The Match King swindled some $250 million from American investors before his kingdom toppled. Yet he managed to build and operate a highly-leveraged empire that lasted some 15 years. In many ways the 1929 Crash was only incidental to his story. As a basic crook and swindler he probably would have ended up in the same place before long anyway. You can’t keep a debt-driven phony house of cards standing forever. No one ever has. He is just one more of the many wild and extravagant, womanizing Wall Streeters who was doomed to failure by his greater love of fast money and the things it would buy, than of the actual processes of investing, owning and running businesses.

RICHARD WHITNEY

WALL STREET’S JUICIEST SCANDAL

It was October 24, 1929—Black Thursday—when the tall and arrogant Richard Whitney, Wall Street’s best-known broker, strode across the New York Stock Exchange floor to the U.S. Steel specialist’s post and uttered the most famous phrase in Stock Exchange history, “I bid 205 for 10,000 Steel.” Stock prices were imploding and Steel could be bought for under 200, but by bidding what the stock was last sold for, Whitney breathed much-needed confidence onto the floor that day. People figured if Steel wasn’t sliding, maybe others wouldn’t.

Equipped with millions from a Morgan consortium, Whitney continued buying other blue-chip stocks, always in huge amounts at the price of the previous sale. Within minutes he racked up some $20 million in orders, and then the market rallied—for a while. “Richard Whitney Halts Panic,” read the headlines.

Overnight, fame found Whitney, the acting president of the NYSE. The press reported his every move, the New York Stock Exchange post where he uttered his first famous bid was retired from the floor and ceremoniously presented to him, and then Whitney was elected president of the Stock Exchange. He literally became Wall Street’s voice and respected statesman. Whitney had a magnificent reputation to uphold.

He had a great time with his new role. All his life—at Groton, then at Harvard—he knew he was destined for something big. The son of a Boston bank president, Whitney was impeccably connected and a born leader. Handsome, broad-shouldered, and well-dressed, he inspired confidence.

A member of Manhattan’s most exclusive clubs, he lived expensively with a wife, at least one mistress, town house, country house, prize-winning livestock—lots of big bills. Once, on a whim, he gave his barber a trip to Florida for keeping quiet while shaving him. Spending $5,000 per month on living expenses during the Great Depression, Whitney was among the crowd everyone gossiped about—and he loved every minute of it!

But what the papers overlooked—until it was too late—was that Whitney couldn’t afford his lifestyle. While he came out of the Crash with “increased faith in this marvelous country of ours,” he also came out of it poor. Years later he said he lost $2 million in the Crash. But he never had any large personal fortune to fall back on. His firm, Richard Whitney & Co., had high overhead and serviced a small, elite clientele, mainly J.P. Morgan & Co. It grossed more prestige than money—annual profits amounted to only $60,000. (In the Morgan tradition, Whitney was an elitist and preferred not to have anything at all to do with the public—let alone handle its brokerage.)

So what does a big spender do when he’s shy cash? In Whitney’s case, he plunged into the market, hoping to recoup his position. There were several deals—all far-fetched. He invested in the Florida Humus Company, which experimented with peat humus as a commercial fertilizer—he would have done better to invest in real organic fertilizer. For a four-term NYSE president, he was surprisingly easy to sucker. To make matters worse, Whitney didn’t know to cut his losses—instead he let them run, buying further and further into big schemes that were going absolutely nowhere.

By 1931, his firm’s net worth was about $36,000, excluding over a million he had personally borrowed from his brother George, a Morgan partner. It continued downhill from here—he borrowed from J.P. Morgan & Co., again and again from his brother, and then he fell further, borrowing from lesser brokers, from floor specialists, and from anyone on the exchange floor who would lend money against his prior great reputation. But folks in general didn’t realize the extent of his borrowing.

Whitney remained optimistic, taking faith in applejack (a backwoods-style booze) of all things! No, he didn’t hit the bottle—instead he prepared for Prohibition’s repeal by taking over a chain of New Jersey distilleries. In 1933, he and a brokerage partner organized Distilled Liquors Corporation to make “New Jersey Lightning,” which they thought could become America’s next craze. While he waited for the craze to catch on, Whitney talked his creditors into extending his loans and borrowed still more from people he barely knew. Banks, at this point, were of no use, for he had no collateral.

When repeal became effective, Distilled Liquors, which he bought between 10 and 15, jumped to 45. Had Whitney sold out he could have paid off everyone but his brother and worried about George later. But he had gambler’s fever and bad judgment, and, thus, held on. Predictably, Whitney’s luck soured as Distilled Liquors lagged for a lack of buyers. The more it sagged, the more Whitney scrounged to support the stock price—just barely above $10.

He was desperate now—if the stock declined, his outstanding bank loans would be called in for deficient collateral—and a desperate man does desperate things. In 1936, having run out of suckers to borrow from, and as word of his finances spread, Whitney became a swindler. Still treasurer of the New York Yacht Club, he took over $150,000 in Yacht Club bonds to fraudulently use as collateral against a $200,000 bank loan. He had gotten away with a similar scheme in 1926 when he “borrowed” bonds from his father-in-law’s estate and replaced them three years later, with no one the wiser.

All rationality gone, Whitney embezzled the New York Stock Exchange Gratuity Fund (a multimillion dollar mutual-benefit arrangement for the families of deceased members). It was easy. He was one of its six trustees and its broker. So when the Fund decided to sell $350,000 in bonds and buy a like amount of another bond issue, Whitney sold the bonds, placed the orders on the new ones, bought them, but then instead of delivering the new bonds to the Gratuity Fund, he took the bonds to a bank as collateral for a personal loan! He repeated this scam over and over again, and within nine months, the fund was missing over $1 million in cash and bonds!

By 1937, the missing securities were discovered by the Gratuity Fund trustees. They asked for their property, and after a few days and a cockamamie story about paperwork delaying delivery, Whitney returned the loot by the seat of his pants. The seat of his pants, meanwhile, was actually his brother George, who himself had to borrow the money from fellow Morgan partner Thomas Lamont. During a later investigation, George Whitney said, “I asked him how he could have done it . . . and he said he had no explanation to offer.”

Finally, the Exchange got wise to Whitney, dug into his books, and discovered his shady deals. But even then, he had hope. He reasoned with the Exchange and promised to sell his NYSE seat in return for dropped charges. “After all, I’m Richard Whitney. I mean the Stock Exchange to millions of people.” In the end, completely oblivious to what was right and wrong, Whitney withdrew over $800,000 in customers’ securities from his firm’s account and within four months, gathered some $27 million via 111 loans. He literally approached strangers on the Exchange floor, even prior enemies, holding out his hand and asking for money!

The Nation summed it up when it said, “Wall Street could hardly have been more embarrassed if J.P. Morgan had been caught helping himself from the collection plate at the Cathedral of St. John the Divine.” Whitney got five to ten years at Sing Sing and an injunction banning him from the securities industry forever. During sentencing, he looked haggard, his hands twitched, and he blushed when he was called a “public betrayer.”

The aftermath of Whitney was even more pathetic. During his prison sentence, Distilled Liquors went bankrupt and his prestigious U.S. Steel specialist’s post, where he made his famous bid, was auctioned off for five bucks. Fellow inmates called him Mr. Whitney and sought his autograph—Whitney always obliged. A model prisoner, he was paroled in 1941, then stayed with relatives. For a while, he managed a family dairy farm in Barnstable, Massachusetts, then dropped out of sight permanently, and died at 86 in 1974 at his daughter’s home. His brother repaid all his debts.

As Stock Exchange president, Whitney not surprisingly fought against government-guided stock market reform, calling the Exchange a “perfect institution.” He said members had the “courage to do those things which are right, regardless of how unpopular they may be for the time being,” and thus, were capable of policing themselves. This was obviously quite untrue and ironically, we have Whitney to attest to the fact. It kind of reminds me of an old carpenter who once told me, “A good gate keeps ‘em honest.”

MICHAEL J. MEEHAN

THE FIRST GUY NAILED BY THE SEC

Mike Meehan wasn’t unusual, but he helped create a crazy time in the 1920s, and afterwards he helped introduce a new form of fear into Wall Street—fear of the SEC. Crafty and high-strung, the redhead manipulated stocks so skillfully that flappers, secretaries, and shoe shine boys, eager to make a quick buck, clamored to buy his high-climbing stocks. Once they bought in, Meehan sold out—and almost overnight the stock deflated back to its original value. Meehan made between $5 and $20 million in deals like this, yet ultimately, like the Roaring 20s, he fizzled out—after 1930s anti-stock manipulation laws outlawed his flagrant methods. Lacking the foresight and flexibility to change with the times, Meehan was the first, and one of the biggest traders ever to be expelled from the New York Stock Exchange by the SEC and died with hardly a notice from Wall Street.

Born in England in 1892, Meehan grew up in Manhattan, attended public schools and became a messenger boy. A real go-getter, he next worked selling theater tickets in a tiny, Wall Street-based ticket office. By age 19, chubby Meehan was scrambling to get the best seats on Broadway for powerful Morgan, Lehman, and Goldman Sachs partners, guaranteeing his future with every ticket he sold. Six years later, in 1917, his influential clients helped him get a seat on the Curb Exchange—and from there his success was rapid. By 1920, he’d saved the $90,000 needed to buy a NYSE seat, quit the ticket agency, and launched M.J. Meehan and Company.

Meehan’s timing couldn’t have been better, and his firm took off with the 1920s’ bull market. He quickly became the darling of the financial community, specializing in Radio Corporation of America stock (RCA) when it was first listed on the exchange in 1924. A super-salesman, respected Meehan made RCA one of the market’s hottest issues, manipulating and promoting it among the common public. High-strung, hard-working, and all smiles, he forked out over $2 million for eight Stock Exchange seats—more than any other firm at the time—and dealt in such a large volume of stock that he was able to take in $15,000 per day in RCA stock commissions alone.

As RCA’s specialist, Meehan was hired to oversee speculative pools, which were responsible for driving the non-dividend paying stock from about 85 in 1925 to its peak, 549, in 1929. One pool, which included such industrial heavy-weights as John Raskob and Charles Schwab (the “steel” Schwab, not the modern-day discount broker), traded a million RCA shares, which then stood at 90. Meehan manipulated RCA in his usual way—trading heavily to create the illusion of activity, driving the price to 109. The pool sold out and left the stock to deflate to 87. For his part in the coup—which took little over a week—Meehan pocketed half a million, and the pool, $5 million.

Meehan enjoyed the good life right through the 1929 Crash—for him, very little changed during the ensuing Depression. Before the Crash, he took up residence at Manhattan’s posh Sherry-Netherland Hotel, lined his office walls with calfskin-bound Shakespeare and opened nine branch brokerage offices, including one in uptown Manhattan and others aboard Cunard luxury liners! Generous with his money, he gave each of his 400 employees a full year’s salary as a 1927 Christmas bonus. After the Crash, Meehan closed a few branch doors, but later managed to buy his son a $130,000 NYSE seat for his 21st birthday. Rumors that he had lost his shirt in the Crash were not true.

But if Meehan learned nothing from the 1929 Crash, Uncle Sam did—and the government did something about it. A Senate banking committee was launched to look into pre-Crash stock-rigging practices—and soon the word “pool” became a dirty word that no Wall Streeter dared utter. The Securities and Exchange Act of 1934 was passed, outlawing pools and stock manipulation practices—the very things Meehan had built his reputation on! But whether he was still too busy having a good time or just unconvinced that Uncle Sam meant business that Wall Street really had changed, Meehan completely ignored the new laws and jumped back into the market, using his trademark, flamboyant trading methods.

In 1935, Meehan set out to manipulate Bellanca Aircraft via what was known as “matched orders”—actively buying and selling the stock to give the appearance of a rising stock on high volume. This creates the illusion of heavy trading, when in fact one small group is trading the stock among themselves in order to sucker in the public, who in their own greedy way, believes they’ve found a hot number. The public buys the stock en masse, pushes the stock up further, then the pool quietly sells out its position. Meehan got his usual spectacular results—within a few months, he was able to move Bellanca from $1.75 to $5.50 and hold it there while he and his colleagues dumped hundreds of thousands of shares on the public. Once he concluded his pool operations, the stock fell back to its original price—and only then did he discover that Uncle Sam meant business.

After a long series of ballyhooed hearings (Meehan, after all, wasn’t considered a criminal by anyone except the government), the SEC decided to make an example of Meehan and expelled him from every exchange he belonged to—the New York Stock Exchange, the Curb Exchange, and the Chicago Board of Trade. It was the first action taken under the anti-stock manipulation section of the Securities Exchange Act, and it profoundly changed an awed Wall Street. Meehan, too, was shocked—so shocked that he checked into a sanatorium, some say to gather his nerves together, others say to avoid the law. Meehan died suddenly in 1948 at 56, leaving his wife and four kids moderately wealthy—despite his failure on Wall Street.

Prior to the Securities Exchange Act, stock-rigging and pool operations were legal and rather old-hat for Wall Streeters; it was hard for anyone—especially Meehan—to think of them as being illegal. Meehan’s friends, in fact, defended him, saying his actions were “the kind that made him the toast of trading circles in the Coolidge era.” But times change, and so do laws, and you must obey the laws. Governments tend to implement harsh new laws by making harsh examples of a few offenders to deter the broader masses—and Meehan was one of those examples.

As a 1920s speculator, Meehan was successful, but not so noteworthy as to be included in this book. Putting brokerage offices in ocean liners is hardly innovative finance. He did nothing in a positive sense to further the evolution of Wall Street or finance as a whole. But he did get busted. And he was the first of a breed in that respect, and he gave us all, even those of us in the profession who aren’t even close to breaking a law, a very healthy respect for the SEC’s power. Times change, and being flexible on Wall Street, whether to market trends, new industries—or as in Meehan’s case—to social demands and evolving laws, is a necessity.

LOWELL M. BIRRELL

THE LAST OF THE GREAT MODERN MANIPULATORS

How the son of a smalltown Presbyterian minister and Methodist missionary grew up to become one of Wall Street’s most ruthless, devious and colorful manipulators is anything but a mystery. Birrell was a clever, money-hungry and exceedingly charming young lawyer when he stumbled upon an irresistible “fool-proof ” way to beat the market. With an impeccable memory that recalled every clause and comma in the SEC provisions, Birrell began illegally dumping unregistered stock on the market at exaggerated prices via an elaborate network in exchange for legitimate stock and cash. When the SEC finally caught on to him almost 20 years later, Birrell was said to have “wrecked more corporations, duped more investors and engineered the theft of more money than any other American of this century.” The SEC conceded he was “the most brilliant manipulator of corporations in modern times,” which certainly should be enough to make him among the masterful minds that made the market what it is today.

Birrell maneuvered his first crooked deal in 1938 at 31. He borrowed money from a millionaire cigar manufacturer’s widow to buy control of a Brooklyn brewery that made Fidelio beer—but it wasn’t the beer that interested him. Birrell converted the brewery into a holding firm that he used in later deals by merging it with other firms. And that wasn’t illegal. But then, to finance acquisitions, he issued a stream of richly-priced stock never registered for public sale; and to get around legislation, Birrell and his buddies held the stock as a “long-term investment,” but actually dumped it on the market for cash.

Six years later, Birrell maneuvered a complicated insurance scam in which he loaded a group of his own insurance firms with overvalued securities . . . just like Jay Gould and Jim Fisk. The scam got underway in 1944 when he used watered brewery stock to buy Claude Neon, Inc., a neon lights maker listed on the Curb Exchange (which preceded the American Stock Exchange). Again, he wasn’t at all interested in the firm’s products; he was after its prestigious Curb listing which made its stock easy to water and then market with few questions asked. Right away, Birrell had Claude Neon issue hordes of stock with which he bought control of several small insurance firms, an industry in which the SEC was without jurisdiction.

A shady insurance veteran helped him set up a firm that “selected” investments for his group of insurance companies. For this service, the firm took 25 percent of all the companies’ net income. That is, he was siphoning money away from the firms he controlled. But the real scam was this: Birrell bought heaps of cheap securities at market prices, sold them to Claude Neon at inflated prices, then had the insurance group buy them from Claude Neon for the portfolios he controlled. As the portfolios appeared to skyrocket in value, the insurance firms took on more business—and Birrell’s cut ballooned. If that is in the slightest confusing to you, note that really top-notch swindles have always been confusing—that’s what makes them work. Birrell was a master at swindles confusing enough to fool everyone.

Birrell got away with this for about five years until his board of directors questioned the value of the stocks they’d been sold. By 1949, Birrell was found out and forced to relinquish control of the insurance portfolio. But he wasn’t prosecuted, presumably because his board wanted it kept quiet. While Birrell was no longer in formal control, the companies themselves were good for one more scam. In 1953, he initiated a similar insurance scam via his newly acquired United Dye and Chemical Corporation, a maker of logwood dyes listed on the New York Stock Exchange. He watered United’s assets, bilked the firm of some $2 million in the process and within two years sold out.

Birrell was like a virus that feeds off its host’s blood. By sucking the lifeblood from the companies he controlled, he maintained a decadent lifestyle. He had a Manhattan suite, an apartment in Havana, and his ultimate party headquarters—a 1,200-acre estate in Bucks County, Pennsylvania, complete with slot machines that rarely paid off, a baby elephant he fed Scotch, and a shiny red fire engine he’d bought for one of his three wives. There, beside a seven-acre manmade lake built to house his yacht, he’d host two- and three-day orgies based on booze, and the most expensive call girls. He was used to having his way—and he’d happily pay whatever his way cost. After all, money came to him easily. Only once was he let down when a model refused his $1,000 offer to strip in front of a pack of reporters and shower in oil gushing from a Birrell well.

When he wasn’t partying in Pennsylvania, Birrell usually kicked up his heels with Manhattan society. Standing 5 foot 8 and weighing some 200 pounds with a puffy face, Birrell was not handsome, but his roguish qualities bedazzled friends and lovers alike. He dressed in expensive, custom-made blue suits and talked up a storm. He slept no more than three hours a night, and was famous for catnapping in telephone booths and on nightclub tables! He’d drink ‘til the wee hours, but was always alert and ready for business by 9 a.m. the next morning. You could say he was born ready.

Born in Whiteland, Indiana in 1907, Birrell graduated from Syracuse University at age 18, then from University of Michigan law school at just 21. He worked for a prestigious New York law firm for five years, then went out on his own to discover Wall Street after helping reorganize and refinance some local firms. Instead of following the same respectable route, where he may have ended up a legend in his own right due to his tremendous intellect, Birrell shot for the stars and wound up swindling anyone he could. Some of his more wretched endeavors include swindling land from his elderly, widowed next-door-neighbor, and deviously gaining control of his wealthy dying friend’s fortune. Nice guy.

But by far his grandest scam was the Swan Finch Oil-Doeskin swindle, for which he was indicted on 69 counts of grand larceny, income tax evasion and stock fraud and accused of stealing $14 million in stock from two firms. Like all Birrell deals, this one was confusing. It featured interlocking directorates, dummy accounts, overvalued stock and a host of other devious deceptions meant to circumvent SEC laws. As early as 1947, Birrell had acquired Doeskin Products, a listed corporation, by selling it $2 million in overvalued securities, then using the proceeds to buy out the controlling stockholders. In essence, he bought it with its own money! When other stockholders complained of the dubious debentures, issued for a company called Beverly Hills Cemetery—of Peekskill, New York—and sued, Birrell was forced to pay back a measly $200,000. Compared to $2 million, that was peanuts.

In 1954, he took control of Swan Finch Oil Corporation for a song—and with it, gained trading privileges on the Amex. This way Birrell could trade through Swan Finch stock without disclosing financial information. With his dummy companies in place, Birrell floated about two million shares of newly created but unregistered “watered” stock to build the firms up (see Daniel Drew for the original deployment of this technique). Swan Finch, which was at the time a maker of industrial oil and grease, then acquired gas fields, uranium mining leases, a grain storage terminal, and finally stock of Doeskin Products, which Birrell already controlled. Then he promoted the conglomerate to the public through a series of five sensationally successful ads in the New York Times. Ultimately, what started as an obscure concern with 35,000 shares of common stock barely worth $1 million became a popular firm, with over two million shares worth over $10 million.

Swan Finch became one of the success stories of the 1950s bull market, or so people were led to believe. Once the stock caught on, Birrell found all sorts of devious ways to indirectly unload his stock on the public, such as selling the stock to various brokers who in turn sold it on the market. He also sold shares via dummy Canadian accounts and hired the notorious Amex stock specialists, Jerry and his son, Gerard Re, to unload stock on the Amex trading floor. His most ingenious route was putting stock up as collateral for $1.5 million in loans. When he defaulted on the loans, as was planned all along, the moneylenders then sold the shares to the public.

In early 1957, Swan Finch’s tremendous stock activity finally caught the attention of SEC investigators, and almost immediately the courts ordered an injunction preventing the illegal stock distribution. When he was subpoenaed in October, Birrell did a disappearing act, leaving his third wife behind for a Havana-bound airplane. He remained in Cuba until Fidel Castro took over and at that time, flew to Rio de Janeiro, Brazil, which had no extradition treaty with Uncle Sam. Rio police, however, thought they had a famous American criminal on their hands and held Birrell in jail for 89 days for traveling with a falsified passport. Police ultimately let Birrell free to live as he always had—ostentatiously, after discovering just how much cash he had to spend!

Birrell chain-drank vodka-sodas and danced the samba. He spent his nights in Rio’s top nightclubs, spending $200 a night on food, drink, and women. One night he even entertained the warden of Central Prison while officials prepared a futile deportation case against him. Somewhat paranoid, Birrell hired off-duty police officers as his bodyguards, carried little cash, and conducted business from public telephones. After all, Brazil wasn’t just his vacation hideaway; it was a land full of opportunity. “It’s like being a hungry kid in a candy store; you don’t know which box to pick from.” He dabbled in tourism, as he grew nostalgic for America, exported gemstones and castor oil, imported cattle semen, and patented a wooden balancing toy.

In 1964, Birrell returned to America as he always said he would. He was kept in prison for 18 months while Uncle Sam prepared its case, using the hordes of files they’d seized from his abandoned office back in 1959. Ultimately the case fizzled when a judge ruled that the evidence—Birrell’s files—was seized illegally, without a specific warrant, and Birrell escaped further prosecution—and headlines. It was not the finest moment for the SEC, securities regulators, or for that matter, the general public. After that, Birrell dropped out of sight.

In the 19th century none of Birrell’s tricks would have amounted to much. He would have been just another manipulator and would have had to slug it out with peers who knew how to play rough. But in the 1950s, he was the last of a vanishing breed. The last of the big-time manipulators. With luck we will never see his kind again. Yet, whether it’s Robert Vesco, Barry Minkow or a host of other, lesser con men, Lowell Birrell stands as the biggest and the best modern example to remind us to always be looking over our shoulders for crooks.

WALTER F. TELLIER

THE KING OF THE PENNY STOCK SWINDLES

Unsophisticated investors didn’t stand a chance against Walter Tellier and his band of boiler room bandits. High-pressure sales tactics and grade-A sucker lists fueled Tellier’s well-oiled machine, which churned out millions of worthless, irresistibly cheap “penny stocks” in exciting, “surefire” opportunities like uranium mines and Alaskan telephone circuits. When Tellier was finally caught and the gig was up, investors were left about a million in the hole and rocked by yet another Wall Street scandal.

Originally a cosmetics salesman from Hartford, Connecticut and born about 1900, Tellier peddled securities in the middle of the great 1920s bull market. When the 1929 Crash hit, he relied on the buy-now, pay-later plan to attract salaried workers with meager savings and big dreams. By 1931, his outstanding salesmanship paid off—Tellier was able to start his own firm with a couple of thousand bucks distributing various issues for Wall Street brokerage houses. Two years later, one of the houses he worked for suggested he open a New York branch. He did, and business boomed, so he closed down the Hartford office and moved to the Big Apple to specialize in wholesaling securities to brokers. No sooner was he settled in his new office, than he was indicted on conspiracy charges and mail fraud—but this case was later dismissed.

Soft-spoken yet aggressive, Tellier laid low, selling securities legally (presumably), making moderate money until the 1950s bull market—of which he took full advantage. He began pumping out penny stocks to freshman investors, a new market recently rediscovered by Wall Street and loved for its wide-eyed enthusiasm, gullibility, no-questions-asked loyalty, and hope for miracles. Guys like Charles Merrill, and much of Wall Street, loved these investors for the commission-based opportunity they represented—and served them well. But Tellier touted miracles by the dozen—miracles for only fifteen cents to a half-dollar per share! Tellier served these guys too, like a baked pig with an apple in its mouth.

The validity of his “miracles” is one story—one that you can read about in any of the sources listed below—but his method of dumping them on the public is a much better story. Tellier didn’t invent boiler rooms, but he made fine use of them, as described in the book, The Watchdogs of Wall Street. Boiler rooms were no different from any con game, except they were out to swindle in the name of Wall Street! Typically found in dingy lofts, several flights of stairs from any outsider’s view, the rooms themselves were furnished in a makeshift fashion with boxes for benches, propped-up plywood as conference tables, cramped cubicles with telephones for the con men, harsh bare bulbs, and cardboarded windows. The victims on the other end of the phone line assumed they were talking to one of America’s top financial leaders from one of those plush Wall Street offices.

The men who made the boiler rooms boil were often hardened criminals who’d served time for serious crimes; entry-level positions were filled by college kids looking to pay for tuition. Ties and shirts tossed aside in the sweltering heat, the “coxeys” or entry-level swindlers, made first contact with customers, calling from lists of potential suckers. Some had already received Tellier’s direct mailings so they were familiar with Tellier’s name when they received the call. To make the initial good impression, the coxey would say he was calling “from Wall Street,” then proceed to make wild claims about the penny stocks. “Mr. So and So, just make a small purchase and you’ll see what we can do for you.” This call might bring in between $50 and $100.

The lists would then be forked over to the “loaders,” the more experienced cons. It was their job to find out how much their target was really worth—that is, if he mortgaged his house and borrowed from every friend and family member. If the person held blue-chip stocks, the loader talked him into selling them for a Tellier issue. Finally, “superloaders” or “dynamiters,” the highest-paid and most persuasive in the scam, could convince their target to steal if necessary to buy a hot stock! They’d slyly confide “hot” tips they “just learned from the floor” or “picked up in the board room.”

Amidst the cigar smoke and cigarette butts, boiler rooms in 1956 alone parted tens of thousands of suckers from some $150 million. And the cons were well taken care of for their efforts: A sales manager might take $150,000 from managing one boiler room, and one loader once made $75,000 in six months. While the boiler rooms pumped out the goods, Tellier was busy twisting securities laws to protect himself and not his victims, as in the case of the full disclosure provision of the Truth in Securities Act of 1933. In this case, the law allowed an issue to be exempt from full registration if it sold for under $300,000, which ironically was ideal for penny stock scams. So, of course, his issues typically totaled $295,000.

He also plunged into advertising, promoting his issues on radio stations and in major dailies, like the New York Times. His print ads featured a coupon to clip and send for more information—a seemingly innocent promotion that in reality supplied his boiler room staff with names and addresses. Later, it was said Tellier sold his infamous sucker-lists to an investment advisory firm after the government nabbed him.

But until he was nabbed, Tellier walked with his head held high and projected the utmost respectability. At North American Securities Administrators conventions—filled with the very officials who were supposed to police Tellier-type activities—he threw lavish cocktail parties that became the highlight of the conventions. He became a respectable family man living in lush Englewood, New Jersey—home of Morgan partners for years. He joined the Westchester Country Club (where he sold some stocks to clubhouse employees), lavishly furnished his office and drove a Cadillac. Slightly balding, Tellier was very conscious of appearances and dressed to impress.

By 1956, he was impressing a federal grand jury with his utter disregard for SEC regulation. Despite his claim that he was “the most investigated person in the world” because of his prominence in the penny stock industry, the next year, Tellier & Company was closed down, and Tellier was barred from trading in stocks in New York and New Jersey, where most of his victims lived. He was charged with fraudulent stock promotion practices in the sale of uranium and Alaskan telephone securities that swindled investors out of about $1 million. During his trial, he tried to bribe a government witness with $250,000 but was unsuccessful. In 1958, he received a four-and-a-half-year prison term and an $18,000 fine. After that, the king of penny stocks was never heard from again.

In most penny stock scams there is a consistent phenomenon: The brokerage firm carrying the issue is the only place where you can buy or sell the stock. This lets the firm control the market. For example, in a usual securities deal, there is a syndicate put together by the lead underwriter, and the syndicate members each carry a piece of the overall deal. Then, various syndicate members agree to “make a market” in the stock after the deal is complete by competing against each other to buy and sell the stock. In this and every other market, it is competition which insures honesty. In a regular market you can buy a stock from dealer X and sell it through dealer Y. And if you don’t like X or Y, there are also dealers U, W, and Z. But in a penny stock scam there is no other market. There is no syndicate on the original deal, and there is no after-market of competitive brokerage firms—only the guy who stuck you with the stock in the first place. So when he sells it to you at $1.50 one month, you may find you can only sell it back—to him—for a quarter the next month. There is no place else to go, no competition for your stock.

Another trick of penny stock guys is to break up the country, or even a state, into geographies. In some of the areas, they start selling the issue. A few months later, they start buying it back at a fraction of the price, while at the same time, selling it in another geography to a new set of suckers at a much higher price, often even higher than the original offering price. They tell this new second set of suckers that the stock has been going up since it was issued—because it is so hot. Tellier pioneered all of these methods via the boiler room.

Tellier led the penny stock scam phenomenon, and it has replayed almost nonstop ever since, and largely in the same form as when Tellier did it. The main difference recently has been that the boiler rooms look just like standard brokerage offices and the crooks have learned how to dress. Dressing like a businessman and being able to scam face-to-face increases the image of respectability and lets you get away with bigger swindles. Tellier should have been smart enough to see this, but he was the pioneer, and every industry gets better with practice.

Whether it is Robert Brennan advertising his New Jersey-based First Jersey Securities scams on national television, any of a host of penny ante Colorado-based scam masters, or the new “king,” Meyer Blinder, and his devoted army of arm twisters (also in Colorado, and now, having been driven out of America, pulling the same scams overseas), the penny stock arena has evolved into one of the prime places where out-and-out crooks work their magic in the modern securities world. Tellier would be proud.

JERRY AND GERALD RE

A FEW BAD APPLES CAN RUIN THE WHOLE BARREL

Stock specialists “make the market” for the stocks they represent: They bring buyer and seller together and supervise trading on the harried trading floor. Forbidden from selling to the public, they keep the market stable and liquid—balancing supply and demand—by buying securities for their own account if buyers are scarce, and selling their own shares when sellers are few. In essence, they not only orchestrate the “auction” that is a stock exchange, but from time to time participate in it as buyers, and seller, to keep it moving along when it hasn’t enough active participants naturally. It’s a prestigious position, fundamental to running the stock exchange. What’s required of specialists is detailed technical knowledge and a keen ability to judge the value of securities and pick up on pricing trends. But most importantly they must have respect for and maintain silence regarding their insider knowledge.

They must have integrity.

The father-and-son stock specialist team, Jerry and Gerald Re, lacked integrity. For years, between 1954 and 1960, they unloaded illegal stocks on the market, paid kickbacks to brokers who helped them, bribed reporters who played up their stocks, acted on inside information, operated via dummy accounts and bilked unsuspecting investors—including the American Stock Exchange (AMEX) president!—in the biggest stock swindle in decades. And all this almost as if the SEC had never been born.

The Res dumped over a million illegal shares on the market by taking advantage of their prestigious roles. They rigged markets, took over $3 million for themselves while selling investors some $10 million of illegal securities, and according to formal charges, defrauded investors in transactions totaling $13 million. “Everybody knew there was something smelly in Jerry Re’s corner of the floor, but only in general,” said one specialist. When the SEC finally cracked down on the Res in 1961, it marked the first time in the Commission’s near 30-year life that it took action against a stock specialist. When I was first in the investment industry, folks used to wisecrack that the main requirement to be an AMEX specialist was a criminal background. They were joking, whether they knew it or not, about the Res.

The son of Italian immigrants and born in 1897, Jerry grew up with street smarts and little formal education in Manhattan. In the streets, he discovered the Curb Market—then operated on financial district sidewalks rain or shine, snow or sleet, summer or winter. In 1920 he bought a Curb membership and, 20 years later, he was a prospering specialist, husband and father with solid social connections. Short, stocky and bug-eyed, with a large nose, booming voice and jolly laugh, Jerry was an amiable guy who liked schmoozing (and swindling) with anyone who mattered in the Big Apple—city politicos, baseball stars, senators, judges and restaurant owners. He grew rich and prominent, wintered in Boca Raton with influential friends, bought a summer farm in upstate New York and maintained an apartment in Greenwich Village.

Jerry had become something of an institution on the trading floor by the time the Curb became the American Stock Exchange in 1953. So, automatically, he became the premier AMEX stock specialist, specializing in some 17 stocks. His son Gerald, born in 1923, joined the Curb Exchange in 1944 and, over the years, had become a major part of their specialist firm, Re, Re & Sagarese. The junior Re, who looked like his dad, wasn’t as bold as his father, who thought they should be given a medal for what they’d been doing. More soft spoken, Gerald once said, “My Dad and I are very proud of our reputation down there as good specialists and maybe we carry it to the nth degree, but we try to stay on top of all our situations and do whatever we can.”

The mastermind behind their illegal activities was seemingly Re Senior, who probably remembered such far-fetched schemes from his younger, pre-SEC years. In fact, Jerry never acknowledged the reformed marketplace and his duty to adhere to the new rules. For instance, he illegally supported price declines and once told the SEC, “Our success has been where people come to us and want to give us stock because they know we will support their stock. We will buy twenty, thirty, forty, fifty thousand shares of stock. We are not afraid of doing it.”

Indeed, the Res often bought large blocks of stock from top corporate officials or major stockholders who wanted to sell but didn’t want to depress the stock price in the market. So, insiders sold stock to them at discounted prices, then the Res had the task of unloading the stock on the public at much greater prices and in smaller increments. Sometimes, they did this via “long-term” investors to avoid registering the sale with the SEC, or they gave the stock to a dozen or so different brokers to disguise their interest in the stock. Sometimes the senior Re even offered brokers “ten cents a share under the table” to push a stock (in very large volume of course); then they’d meet uptown, where’d he’d make payments in cash. A specialist had never been busted by the SEC, so the Res probably thought they would never be accosted.

Their list of violations was a long one. They ignored what became standard bookkeeping procedures and practiced “painting the tape.” Painting the tape is an outlawed practice whereby stocks are shorted on the books at the exchange by borrowing shares and at the same time putting them up for sale. “Dummy” accounts then buy up the stock (thereby avoiding the risk involved in covering the shorts), making the stock appear to be active—when the transaction was really entirely fictitious. The trades had never actually happened but were just paper shuffling within the specialist’s books. The Res also accepted discretionary orders, key to manipulating a stock price. With these orders in place for “friends and relatives”—obviously fronts for the Re themselves—they could make purchases at crucial moments to give the stock a lift, again making the stock appear more active than it really was. Stuff straight out of the 1920s.

When they were finally found out, the SEC expelled them from the AMEX and revoked their brokerage licenses. They were brought to trial on charges of manipulating the market to expedite the sale of $10 million in Swan Finch Oil stock between 1954 and 1957. Their own lawyer said that defending them would be a waste of time (implying that there was no way they could get off). During the ensuing trial in 1963, through which the SEC tried to regain the public’s shattered trust in the securities industry, the prosecutor paraded 76 witnesses and used a series of 3.5 × 6-foot charts to tell of the intricate, round-about routes used to pump illegal stocks onto the market. When the Res, ages 66 and 40, were touted as swindlers and labeled as mere puppets of Swan Finch Oil king Lowell Birrell, Birrell responded from his Brazilian exile, “That is ridiculous. They were no small fries. They handled a great deal of stock.” I’m sure the Res were ecstatic to get the incriminating endorsement.

Ever since the Res scandal, there has been suspicion of the specialist function. There has also been suspicion of the AMEX. The AMEX has never regained the prestige and position it once had, suffering continual pressure and competition from both over-the-counter markets (which as dealer markets have no specialists) and the more prestigious NYSE. Condemnations of specialists ran rampant for a while, culminating in the claims best articulated by author Richard Ney that Wall Street was a game rigged for the benefit of specialists.

Jerry Re was an exception. There has been little else to buttress the arguments of the specialist-bashers. Yet folks like the Res and their more recent counterparts involved with violations of insider trading rules form the continuing basis of why the SEC can’t turn regulation of securities markets over to the industry itself. And in that way, by their singular bad example, the Res helped make the market what it is and will be. One bad apple can ruin the whole barrel.