later, that his share of a pool profit is $15. At this point he is usually advised to send $100 more on account of some extraordinary opportunity which has just arisen. If this money is sent, he is told that profits have accrued and still more money is called for. Persons who call for some of their profits are occasionally given money in order that the receiver may induce others to join the list of future victims.

The end, however, is almost, if not quite invariably, a communication stating that by some adverse and utterly unexpected fatality operations have been unsuccessful and the money invested has been lost. It is usually thought wise to make the victims appear somewhat in debt in order to induce them by not having to pay the alleged debt to accept as a mysterious dispensation of Providence the loss of their capital and previous alleged profits.

Speculation is not at its best a simple and easy road to wealth, but speculation through people who advertise guaranteed profits and who call for participation in blind pools is as certain a method of loss as could possibly be discovered. The mere fact that a man openly asks for such accounts is the most ample and exhaustive reason possible for declining to give them.

CHAPTER XVIII.

*THE LIABILITY FOR Loss.

f a number of inquiries lately the following is a sampie: "I was long of stocks May 9, 1901, and was sold ont. The broker now asks me to pay a loss in excess of my margin. Am I liable therefor ?"

This question has never been definitely settled as a matter of law. There have been a good many decisions in cases of this kind but they have generally been sufficiently dissimilar to make each decision rest upon that particular case, and not as establishing a principle of law, bearing thereon. The courts have shown a disposition to rule that in such cases trade customs must be considered and that such customs while not making the law, affect the bearing of the law thereon.

Cases of this kind generally fall under one of two general divisions. Either the broker notifies his customer that his margin is nearly exhausted, or he does not. It is probably good law to assume that where a stock is bought on margin and, on a fall in the price, the broker calls on the customer for more margin and there is no response within a reasonable time, the broker is justified. in selling the stock without a positive order to do so from the customer. The courts have held in such cases that the broker gave ample notice and the customer should have

*Dow's Theory.

responded in time to protect his interests. The broker could not be expected to wait more than a reasonable time.

In cases of this class it sometimes happens that the customer does not think it wise to put up more margin and orders the stock sold. It may be sold at a loss on account of a rapid decline in prices. In this case, there seems to be little doubt of the liability of the customer, because the broker is executing an order to sell for the account and risk of that customer. Here, however, might enter special questions as to whether the broker was or was not negligent in notifying the customer that margin was needed, or in the execution of the order when it was received, or in some other respect whereby the interest of the customer was allowed to suffer.

The other general class of cases is where margin on accounts is swept away by a sudden decline and the broker faces the question whether it is better to sell his customer's stock without an order or to endeavor to carry the customer through the decline with the expectation that the loss, if there is a loss, will be made good by the customer.

The tendency of decisions in these cases is toward holding the broker to rather close accountability for his actions. The point has been made that the broker in such a case is acting in a double capacity. First, as a broker executing an order for a customer for a commission. Second, as a banker in making a loan to this customer, being protected therein by the security of money deposited and the possession of the stock purchased. As a broker, the equity might be one way, while as a banker it might be exactly opposite.

Generally speaking, a banker has no right to sell out a loan without notifying the borrower, except where there has been a special agreement permitting such action. This fact leads banks and institutions in nearly all cases to make loans with a formal agreement authorizing them to sell the collateral at their option in case the loan ceases to be satisfactory. As a matter of practice, banks call for more collateral when prices decline. But in cases of panic, or the inability of brokers to furnish more collateral, loans are frequently sold out, under the special agreement to that effect.

Some commission houses protect themselves by a formal agreement with customers similar to that required by banks. When a customer opens an account, he signs an agreement authorizing the broker to sell the stock bought at his discretion in case the margin runs down to the danger line.

This is undoubtedly a wise method, as it removes all doubt as to the position of each party in the premises. Such agreements are not invariably made because in the competition for business brokers do not like to impose restrictions which are not universal and which may have a tendency to drive away custom. Nevertheless, experiences like those of the 9th of May, have a decided tendency toward defining the relations between broker and customer.

The action of the market May 9 was so rapid as to make it impossible for a broker to notify a customer of the need of more margin and get a response in time to be of any use. A 10-point margin was of no use at a time.

when stocks were falling 10 points in five minutes. There were many cases that day in which wealthy commission houses saw a large percentage of their capital disappear in customers' accounts between 11 and 11.30. The rapidity of the recovery was all that saved multitudes of customers and many commission houses. Loans, small and large, were unsound and sound again before lenders had time to sell even if they had been disposed to do so.

There were, however, many cases where stocks were sold entailing large losses and the location of these losses is in a number of cases still in legal controversy, with the probability that the decision will turn more or less upon the circumstances peculiar to each case. The 9th of May was a very extraordinary day and allowance must be made for its unusual character. Stock Exchange rules based on the occurrences of the 9th of May would prohibit doing business under ordinary conditions, but such days come and on this account brokers and customers should make provision for the unexpected by a clear understanding as to what shall be done in emergencies.

It is often difficult to say what shall be done when a loss has occurred through unusual conditions and under circumstances which made the action taken largely discretionary. This fact in its application to the May panic has led brokers and customers in cases to adopt a policy of trying to divide the loss equitably and with due reference to the facts involved in that particular case. A jury familiar with Stock Exchange business would be very likely to render a decision along somewhat similar lines.