brokers to fill its customer orders. It tried to cancel the orders but most of the brokers refused to allow cancellation and American Diversified was stuck. Customers clamored for payment on the stock they had sold or stock certificates for the shares they had bought. American Diversified had neither enough money nor stock to satisfy its customers. At that point, the company was so far in the hole that it had clearly violated the SEC rules forbidding a securities dealer from owing 20 times more than his net capital. On April 6, a District court judge, at the request of the SEC, granted a temporary restraining order to halt American Diversified from transacting business until it could comply with the net capital rule. An SEC affidavit filed in court at that time reported that the company's deficiency in capital amounted to $217,804.47 and aggregate indebtedness to all others amounted to $1,064,416.91. Among these others were the customers who had been pressed to buy the "hot" stock-which is now selling at around 50 cents. VICTIMS ARE MANY They weren't the only victims. The letters sent to the trustee in bankruptcy reflect the disappointment, despair, and heartache of many others who never received the stock they bought nor were paid for the stock they sold. One man wrote that he had put money into American Telephone & Telegraph stock over many years while he was saving to buy a home. When he thought he had enough, he turned over his 60 shares of A.T. & T. to American Diversified to sell for him. He should have gotten a check within 5 days. When it didn't come in 2 weeks, he asked questions and was told the check had been sent to the wrong address. He couldn't understand that because the confirmation of the sale had reached him all right. By the time the check finally arrived, the company was in receivership and payment had been stopped. A Florida mother said she went into the stock market early last year to make a quick profit to help finance her daughter's operation. When the time came to sell the stock and take her profit, she still hadn't received the stock certificates. So she couldn't sell. She is still waiting for $2,795 in stock certificates or cash. CERTIFICATE STATUS UNCERTAIN The stock certificates of some of the customers have been located, but it hasn't been decided yet whether they're entitled to the stock they bought or whether they must join the other customers in participating in whatever can be salvaged from the collapse. Some of the stock certificates won't help the customers much now, in any case. If they had received the certificates when they were supposed to they could have sold at a profit or at least broken even. Now, several of the issues touted by American Diversified salesmen have fallen more sharply than they rose and today are only worth a fraction of what they cost. Last June, after the court-appointed accountant went over the books of American Diversified and attempted to trace the transactions, he reported to the receiver: "There are many peculiar, strange, and mystifying transactions which have created a substantial feeling of uncertainty on our part. * * * We recommend further investigation." How To PICK A BROKER There are many reliable, established investment firms in Washington with whom you can invest with confidence. To would-be investors, they give this advice: (1) Know the investment firm. Check with your banker or other financial adviser on the firm's background and reputation. (2) Insist on reading the prospectus or circular before you invest in a new stock to understand just how much risk is involved. (3) Never buy stocks on the basis of unsolicited telephone calls. This is the high-pressure approach that can lure you into losing money. (4) If a salesman makes extravagant promises about a new or recently issued stock but declines to put his statements in writing, watch out-and report to the Securities and Exchange Commission or the National Association of Securities Dealers. [From the Washington (D.C.) Star, Feb. 7, 1962] INVESTORS BEWARE: LAW IS NEEDED HERE TO PROTECT BUYERS (By Miriam Ottenberg) Investors in 48 States are better protected against unscrupulous or financially unfit investment firms than are the investors in the Nation's Capital. Everywhere in the country but Delaware, Nevada, and the District of Columbia, some form of "blue sky" law regulates securities dealers and the stocks they trade. Most of these State laws would prevent one-third of Washington's investment firms from operating. That's the conservative estimate of the proportion of marginal firms here. State enforcement of "blue sky" laws is part of a three-pronged defense against unqualified investment firms and questionable stocks. The other two prongs are the Securities and Exchange Commission and the National Association of Securities Dealers. Washington lacks the first prong-a local law to keep out undercapitalized, underexperienced, and unethical firms peddling questionable stocks. As a result, the other two prongs-the SEC and the dealers' association regional offices-report more complaints and more violations of securities rules here than anywhere else in their regions. To cope with the local problem, the SEC has sent a task force of investigators into Washington on a cleanup drive. The National Association of Securities Dealers has stiffened its examination requirements for those selling stock, but the dealers' association's self-policing efforts cover only its own members. At least seven of the recently established firms here are not members. Many of the States have recently tightened their securities laws. A number of them have amended their laws to conform to the tough Uniform Securities Act, a model State law drafted by a board of experts. These actions have prompted more out of towners to come to Washington where they can operate free from local controls. Maryland has a "blue sky" law but proposes to tighten it. A committee appointed by Governor Tawes has come up with a draft of legislation closely paralleling the Uniform Securities Act. Governor Tawes has already tagged it as a priority measure for the new session of the Maryland General Assembly. If Maryland succeeds in tightening its law, some of its ousted promoters can be expected to cross the line into Washington. Virginia has a strict law patterned after the uniform act. The Virginia law, regulations drafted under it, and its forthright enforcement are widely regarded :as successful in keeping questionable operators out of the State. THREE CONTROLS Generally, the State laws provide these three types of regulations: 1. Antifraud provisions which enable "blue sky" administrators to issue public warnings, investigate suspected fraud, move in fast to stop fraudulent activities, and punish malefactors. 2. Registration or licensing of broker-dealers and their salesmen, which is aimed at keeping out the unqualified or unethical, assuring supervision of their activities, and putting them out of business if they fall below required standards. 3. Registration of the securities to be sold in a State, which assures that the investors can learn about what they are buying and that stocks violating either State or Federal laws are not circulating. PROTECTION SLIGHT In Washington, a survey by the Star disclosed, customers have been hurt most by the lack of any requirement that investment firms must have any cash of their own to do business. The only protection offered to Washington investors is the SEC rule that forbids a securities firm from owing more than 20 times its net capital. However, by the time investigators discover this rule has been violated, the firm often has used up the customer's money on rent and promotion. The firm's doors are shut, but that doesn't help the customer who got hurt. The Star's survey showed that more than half the investment firms going into business here since January 1960, started with less than $5,000 and one only had $100. Virginia authorizes its State corporation commission to require a $25,000 surety bond to protect investors. The proposed Maryland act requires the brokerdealer to maintain a net capital of at least $15,000 and makes him subject to posting a surety bond up to $10,000. Among other States, Michigan can require the broker-dealer to show up to $100,000 in capital. New Hampshire sets the figure at $25,000, and Pennsylvania recently raised its required capital from $10,000 to $25,000. TRAINING IS LACKING In Washington, lack of experience has proved the downfall of some investment firms which traded themselves into bankruptcy and took their customers' money with them. No training or experience is required here of either the broker-dealers or their salesmen. If the firms stay out of the National Association of Securities Dealers, even the protection of an examination is lost. The lack of experience was clearly revealed in the Star's survey of newcomer firms where some of them had no experience, some had less than a year and less than a third of them could report that all members of the firm were experienced. In contrast, half the State laws refer to lack of training or inexperience as sufficient grounds to keep a broker-dealer out of business. Virginia requires a broker-dealer to have 3 consecutive years of experience in the securities business before he can register. If the firm is a partnership, the majority of the firm's members must have 3 years' experience and if it's a corporation, at least two officers must meet the experience qualification. Maryland's proposed law allows the commissioner administering the "blue sky" law to deny registration to a broker-dealer lacking training, experience, or knowledge of the securities business. It also allows him to require an examination of both broker-dealers and salesmen. SITUATION ON FRAUD In Washington, no local law deals specifically with fraudulent practices in securities. The city is protected by Federal law more fully than the States since all but a few securities here are considered interstate and subject to SEC rules. Virginia's law and Maryland's proposed law, however, offer the kind of broad coverage that would give the U.S. attorney here some clear-cut law to use against fraud artists in the securities field if Washington had a local law. Virginia's law, paralleled by the Maryland proposal, makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any security, directly or indirectly. It also makes it a crime to obtain money or property by untruth or omission of a material fact or to engage in any practice which defrauds or could defraud or deceive the stock purchaser. RULES ON CRIMINALS In Washington, a man with a criminal record can go into the business of dealing with other people's money as long as his record doesn't involve securities. The SEC rules bar the registration of anyone convicted in the past 10 years of a crime involving securities or the conduct of the broker-dealer's business. The SEC also bars those previously enjoined in connection with securities transactions or cited by the SEC for violating its laws or regulations. Virginia's law requires that the broker-dealer be of good character and reputation. Virginia's commission can revoke or refuse to renew a registration in the public interest or if the broker-dealer has engaged in a fraudulent transaction, become insolvent, faces insolvency, or has been convicted of a misdemeanor involving securities or any felony. Maryland's proposed law allows the commissioner to deny or revoke a license for any felony conviction, any false or misleading statements on the registration, any dishonest or unethical practice in the securities business, or insolvency. FAST FRAUD ACTION Virginia's law and Maryland's proposed law allow the administrator to move fast against the unethical or fraudulent stock dealer-faster than the authorities can move in Washington. Both the SEC and the National Association of Securities Dealers acknowledge that they can rarely go after the unqualified, financially unfit and unscrupulous firms in Washington until some customers have already been hurt. "The reason they're selling junk stocks here," one securities official summed it up, "is because the people coming in are promoters. They don't have the capital or the experience to deal in good stocks even if they wanted to." Experts in the field, from official investigators to reputable investment execu tives, are convinced the promoters will continue to prey on Washington investors as long as there's no local law on the books to discourage them. AFTERMATH Reaction to the foregoing series came swiftly. There were these developments: The day after the last of the series appeared, a special committee of Washington investment dealers voted to recommend a local law to insure more protection for the city's investors. The committee was appointed by the Bond Club of Washington, whose 300 members represent a substantial segment of the city's investment community. The following day, the executive director of the National Association of Securities Dealers and the regional director of the Securities and Exchange Commission covering the Washington area both publicly urged a local law to protect the public from unscrupulous or financially shaky investment firms. The House Commerce Subcommittee chairman in charge of SEC legislation requested the SEC to comment on the accuracy of the series, and the adequacy of SEC regulation of the securities business in Washington. The SEC promptly replied: "We, of course, are familiar with Miss Ottenberg's articles. Indeed, she substantiated many of the facts by consultation with members of our staff. While we have not checked every detail, we are satisfied with the essential accuracy of her articles and we believe Miss Ottenberg has rendered a valuable public service. "We have been aware for some time of a substantial increase in the questionable activities of a class of securities dealers in the Washington area, many of whom have been newcomers here." The SEC went on to report that it had assigned a task force to Washington to step up its enforcement activities against the new crop of questionable dealers but warned that "this shifting of personnel does not meet the problem fully, is made at the expense of other responsibilities, and can only be temporary because the District of Columbia is by no means our only trouble spot." Further confirmation of the problems pinpointed in the series came when the Star learned that a broker barred in New York had opened for business here. In the following days, the SEC started proceedings to revoke his license and ordered proceedings to determine whether four other Washington investment firms and two New York Stock Exchange firms with Washington branch offices should be stopped from doing business. As the demand for regulation became stronger, the President of the Board of District Commissioners, ordered the Corporation Counsel to draft rules to license dealers and their salesmen. The city's attorney promptly called a meeting of local and national experts in the field and found general agreement that new controls were needed to protect Washington investors. The U.S. attorney for the District of Columbia called on the authorities to provide him with existing complaints with an eye toward criminal prosecution. The SEC promptly turned over four cases. As for the investors themselves, brokers reported that their customers, for the first time, were asking detailed questions about the securities being sold and the background and reputation of the investment firms with which they were doing business. MIRIAM OTTEN BERG Author of "Investors Beware," won the Pulitzer Prize for 1960 for her series exposing a used-car racket in the Nation's Capital. She has delved into many phases of crime, communism, and corruption. She covered the Senate investigations of the dope traffic and campaigned for strengthened narcotic laws. She covered and interpreted the findings of the Kefauver committee in its exposé of crime syndicates and dug into the activities of the 5 percenters. Her investigations in the Nation's Capital have led to more law enforcement tools against violators as well as pioneering laws in the fields of mental illness, sexual psychopaths, narcotics addiction, and mandatory commitment of the criminally insane. Her exposés of unethical practices in the used-car and homeimprovement fields have led to public awareness of consumer pitfalls as well as corrective legislation. In an unprecedented tribute to a newspaper reporter, the law enforcement community and civic leaders gave a reception in her honor in 1958, where she was presented with a plaque signed by the Attorney General of the United States, congressional leaders, judges, prosecutors, and the Chief of Police. Mr. ABERNETHY. Mr. William H. Press. STATEMENT OF WILLIAM H. PRESS, EXECUTIVE VICE PRESIDENT, METROPOLITAN WASHINGTON BOARD OF TRADE Mr. PRESS. I am William H. Press, executive vice president of the Metropolitan Washington Board of Trade. I would like to advise the committee that H.R. 4200 was studied by the appropriate committee of the Metropolitan Washington Board of Trade, and a favorable recommendation was transmitted to our board of directors, which reviewed it the first Monday in April and recommends the passage of the bill, believing that it is desirable and necessary in this District. There are two changes which our board of directors recommends. One is with respect to section 5-D, which requires $15,000 capital and it is the opinion of our board that it would be preferable if that were raised to $25,000. Secondly, with respect to section 5 (e), which requires a bond of up to $50,000, in the opinion of our board, it would seem unnecessary to require a bond of a broker-dealer who has $50,000 of net capital or more. Those are our only comments with respect to it, Mr. Chairman. Mr. Springer? Mr. SPRINGER. Mr. Press, I am delighted that the board of trade has seen fit to go on record in favor of the bill. As to these two qualifications which they have made to their approval, if you raise the $15,000 minimum capital to $50,000, I can very well understand that there would be no reason for a bond. I can well understand that and I think it is logical and I am sure you do, too. Mr. PRESS. Yes. Mr. SPRINGER. However, there still might be, might there not, people in the District who would be reliable with less than a $50,000 property? Mr. PRESS. Mr. Springer, our board recommends that the minimum. net capital be $25,000. Mr. SPRINGER. I beg your pardon; $25,000 instead of Mr. PRESS. Instead of $15,000. Mr. SPRINGER. I don't think I have any further questions; thank Mr. ABERNETHY. Thank you very much, Mr. Press. |