The New York Stock Exchange has always waged war against "fictitious" transactions. Section 8, of Article XXIII of the Constitution, By-Laws and Rules of the New York Stock Exchange holds that: "Fictitious transactions are forbidden. Any member violating this rule shall be liable to suspension for a period not exceeding twelve months." On February 5, 1913, the following rule on sales with no change of ownership was adopted: "that no Stock Exchange member or member of a Stock Exchange firm, shall give, or with lillowledge execute, orders for the pur chase or sale of securities which would involve no change in ownership." Violation of this provision makes the offender "liable to suspension for a period not exceeding twelve months." Eight days later fur ther restrictions were enacted to this effect : "that reck less or unbusinesslike dealing is contrary to just and equitable principles of trade and the offender shall be subject to the penalties, etc." In addition it has been a standing rule of the Stock List Committee to decline the listing of securities, a reasonable volume of which was not in the hands of the public. By this means it was intended that new issues might not become the subject of manipulation en bloc. There is no doubt that the Exchange authorities can and have prevented extreme and continuous cases of manipula tion.
13. Some celebrated plungers; James R. Keene.— It is no simple matter to present typical cases of manipulation, because the critics and defenders of the exchanges rarely agree as to whether a given case is manipulation or not. It may be said in a general way that the machinations of the pools and plungers who attempt to "rig" markets usually ruin the promoters in the long run.
James R. Keene, the greatest manipulator of all time, died a relatively poor man and the last venture of this kind in which he engaged, the Columbus and Hocking Pool, was a complete failure. Keene made and lost many millions in his deals. In 1880, he tried to corner wheat. But the farmers sold more than he had expected and he lost $5,000,000. It took him years to sell all his wheat and he was obliged to ship some of it to foreign countries. In his next venture in 1895 and 1896, he netted nearly $5,000,000 by manipulating American Sugar stock. The next year Keene joined with another operator to put up Ameri can Tobacco. Each man became suspicious of the other and tried to sell out first. Keene bought his stock below par, and became distrustful of his confed erate when it reached 150. He sold out at an average of 136. In 1903, Keene drove up the price of South ern Pacific. The deal would have netted him a huge fortune had the directors voted to pay dividends, as he believed they would do, but President E. H. Har riman would take no such step and the manipulators were confounded.
14. A. 0. Brown Co.—One of the most remark able instances of an attempted speculative feat was the effort of a tottering firm, A. 0. Brown and Company to regain its lost fortunes. This house was at one time heavily engaged in stock operations, but had lost a considerable sum through its investment in an outside water power project. To recover this loss the senior partner sold stock heavily short and to his dismay the market advanced. He helplessly awaited imminent ruin but another partner, not so easily daunted, de vised a scheme of buying and selling an enormous quantity of stocks in a single session of the market and by thus preventing a further movement, either up or down, he thought that the firm would be able to cover its shorts. Therefore this single firm dealt in nearly one and a half million shares in the Saturday two-hour session. But the firm failed at once for two reasons : (1) the commissions were so enormous that they offset any possible gain in covering shorts and (2) the banks became suspicious and called in all the firm's loans.
15. Matched orders, American Ice.—This chapter will be concluded with three well known instances of matched orders. In the case of the American Ice Company, a prominent plunger and manipulator, thru his connection with various banks, was able to send matched orders to the Stock Exchange during the first months of 1906, from January to May, which are shown on the page following.
16. The Hocking pool.—One of the most disastrous efforts to control the price of a stock by means of matched orders was the notorious Columbus and Hocking Coal and Iron pool conducted in 1909 by James R. Keene, together with the firm of Lathrop, Haskins and Company. In reality two pools were formed,. each to buy 20,000 shares of stock. At least a dozen firms were involved. By means of matched orders an active market was made in the stock and from a very low price it was pushed up 921/2. It re mained around that price for a short time and then un expectedly one day a large amount of stock was thrown on the market and the price fell in a few hours from 88 to 25, resulting in the failure of three firms and the disciplining of several others. Subsequently the stock fell to 2 and then disappeared from the trad ing list.
The remarkable feature of this case was the fact that few people outside the pool ever thought the stock had any value. Most brokers refused to buy it at all. Finally the astute Keene, altho the manager of the pool, unloaded his stock at the high price and then smashed the pool of which he was manager by selling short. This was a case where the usual selling from outside was lacking. Collapse was due to the bad faith, bad judgment, lack of unanimity and lack of resources of the members of the pool. The testimony of Mr. Criss, specialist in the stock, is most enlighten ing: 17. California petroleum case.—The Pujo Com mittee 1 revealed an interesting episode in the history of manipulation, as illustrated by the case of the California Petroleum Co. In this case the efforts of certain brokerage houses were seen to have been de voted to stimulating speculation in the new security when it was introduced on the New York Stock Ex change. The account of the operation after the list ing privilege was secured is described in the report as follows: Thereafter an operation in the stock was conducted (prin cipally in the common) on the New York Stock Exchange by Lewisohn Bros. for the joint account of the bankers, for the purpose, as described, of "making a market." Un der the general direction of Salomon & Co., Lewisohn Bros. would put in separate orders to different brokers on the morning of every day to sell on a scale up and to buy on a scale down, so adjusted that at the end of the day they would have bought and sold, so far as market conditions per mitted, substantially the same number of shares. There is in the record a table showing the purchases and sales by Lewisohn Bros. and the prices day by day from October 5, when the stock was listed, through the end of that month, from which it appears that during that period of about 21 business days 163,000 shares were purchased and 172,000 sold by Lewisohn Bros. for account of themselves and asso ciates.
Under the influence of this operation the price of the com mon stock, starting at about quickly rose to 72. The total purchases and sales on the Exchange during these 21 days were 362,270 shares, which was equal to over three and one-half times the total outstanding common stock.
In order to make the explanation clearer the follow ing statement of matched orders in California Pe troleum during October, 1912, is given: