Chapter 3

He could not see it that way, and, pursuing his own method, he took $72,000 in two weeks out of the city of Chicago, from some of the best business men of that city. Now, perhaps he had a real mine. I have no right to doubt that he had; but the point of interest to the small investor is this: NEITHER HAVE I ANY RIGHT TO BELIEVE THAT HE HAD. The thing for me to do, had I wished to invest in this way, would have been to send an expert to see the property personally.

ENTER THE FINANCIAL AGENT

In this game of plucking the dollars of the poor and the ignorant, there has been a gradual improvement in methods. The constant aim has been, first, to increase the amount of the harvest; second, to reduce to a minimum the risk the reapers run of detection and punishment by the authorities. Experience in most lines of commercial activity has shown that the middlemen often gather in the largest profits and have the smallest losses. Many of those working the mining game--and by this is meant selling stocks on wind and water--have made use of this fact. To-day in the majority of cases we have, in place of the prospector or the company selling stock direct to the suckers, the financial or fiscal agent. He operates either under the name of a banking firm or as a security company, which is generally a registered trade-name intended as a cloak to cover the names of individuals not desirous of publicity.

The financial agent of this description is in reality the organizer and promoter of the mining company whose stock he sells. But should trouble come along, he is the first to assert that he has been deceived as well as his customers. He sells the shares of the mine on a commission basis so large that practically nothing is left for development. He takes out of the money secured large salaries and the entire expense of advertising and carrying on the exploitation. He prepares all the literature. One of the advantages he claims for his proposition is the wide distribution of the stock as a safeguard against assault by wicked Wall Street interests.

CULLED TWO MILLIONS IN FOUR YEARS

In this wide distribution, however, lies one of his own greatest safeguards against either criminal or civil prosecution. Scattered over the country are his investors--the mill hand, the poor seamstress, the humble artisan, whose total investments, comprising perhaps all their savings, seldom exceed one hundred dollars each; and, with their savings gone, there isn't money left to pay carfare to the office of the financial agent, let alone to undertake a civil suit or enlist the aid of the authorities. The poor seamstress has no way of knowing any of her fellow unfortunates. Hence the utter impossibility of cooperation in seeking to get back their savings.

As an example of the fiscal agent, there may be cited the concern of Douglas, Lacey & Company, already mentioned, a concern which in four years, through its operations in this country and in Canada, culled from the people of this country, according to its own statement, over $2,000,000 in exchange for stock certificates in more than forty varieties of mining companies. Here is a letter written to a woman by this concern four years after she had invested all her savings in the stock of one of these companies through this concern, showing the advantage of the fiscal agency plan:

DOUGLAS, LACEY & CO. Financial Agents 66 Broadway. New York Cable Address "Douglacey"--Anglo-American and Bedford McNeil Codes Telephone, 790 & 791 Rector

DEAR MADAM: June 2, 1908.

Replying to your favor of June 1st would say that we do not find in our files any recent letter from you, and your letter addressed care of 44 Wall Street has probably gone to the Dead Letter Office, from which you will in time receive it.

Now, in reply to your question, we think if you are at all familiar with business procedure, you will see that it would be impossible for the fiscal agents of any of the companies to return money which had been paid for shares and which had been turned over by the fiscal agents to the treasury of the various companies and expended in development work on the different properties.

It is true that we have sold stock for our customers at various times and we are glad to do so when it is possible. At the present time, however, as this company is in process of reorganization, there would be no market for its stock and for this reason we are unable to help you in the way you request.

Very truly yours Douglas, Lacey & Co.

In pursuing this method, few promoters have had the success of Dr. John Grant Lyman. He is credited with having gathered in a half million dollars in his International Zinc operations. This company was supposed to have valuable zinc properties in the Joplin district of Missouri. To unload its stock on the people of this country Lyman organized the firm of Joshua Brown & Company, Bankers, incorporated under the laws of West Virginia. Through them the stock was sold until the collapse of the scheme in 1901, when the investors found that what property it did own was heavily mortgaged. While the firm was taking in the money, Lyman maintained a racing stable, had a reputation as a daring automobilist, and even invaded the sacred precincts of the New York Stock Exchange.

LYMAN'S SCHEME TO GET STOCKING SAVINGS

Three years ago the papers throughout this country were filled with the advertisements of the Union Securities Company, selling the stock of the Boston Greenwater Copper Company. It was stated that the mine had cost $200,000 and that so much ore was in sight that an offer of $400,000 had been refused. The Union Securities Company, with offices in New York and in Goldfield, Nevada, started the stock at forty-five cents and lifted it to a dollar. It was merely another name for John Grant Lyman. Not only did the Union Securities company sell the stock to the public, but it also offered it to brokers at thirty-seven and a half cents, on their guarantee that it would not be sold by them at less than forty-five cents. The brokers began getting contracts for the stock and then were told that the Union Securities Company was all sold out.

Shortly thereafter, confederates of Lyman came to these brokers and offered stock to them at fifty cents a share; and the Union Securities Company at the same time telegraphed the brokers that it wanted all the shares it could get at sixty cents. That forced the brokers to buy of confederates; but when they shipped on the stock to the Union Securities Company, expecting to get sixty cents a share for it, Lyman was gone. It had not cost him much. He owed the newspapers of this country $150,000 for advertising, which went unpaid. He reaped $300,000 profits. Boston Greenwater Copper stock can still be found in many a stocking--of humble folk.

"SALTING" WITH A CIGARETTE

It is not, however, always the city promoter who furnishes all of the crookedness. He himself may be deceived by those who sell him the mine. Some of the most thrilling stories in literature might be written about salted mines. The sale of the Bear's Nest Mine, and the special train expedition to the salted Bear River placer field; the sale of the Mulatos Mine to a set of Chinamen, and scores of other instances in American mining history, have been regarded rather as big jokes than as great lessons. And as to such large jesting we advance in finesse. The old way of salting a placer or a quartz vein with a shotgun is now antiquated.

A little while ago a party of capitalists bought a Nevada placer on what they thought to be strictly a "cinch" basis. With their own hands they collected the specimen dirt from all over the claim, and they watched a Mexican miner pan the dirt at the creek. The pans showed up beautifully. They bought the claim. Later, it proved worthless. Afterward they remembered that the Mexican smoked cigarettes all the time he was panning, and that he was careless in expectorating, as well as in knocking the ashes off his cigarettes. The truth was that the highly intelligent Greaser was using the cigarette trick in salting the pan. There was much fine gold in his cigarette and under his lip!

THE MULATOS MINE SALTING SCHEME

All sorts of methods of salting mines, even to the injection, with a hypodermic needle, of strong solutions of mineral salts into a mining engineer's carefully sealed sample bags, have been worked. The most honest, careful, and expert mining engineers have been deceived time and again, and salted right under their own eyes. Even a bland Chinee may be fooled. Take the instance of the Mulatos Mine: The bunch of Chinamen who proposed to buy it insisted on a mill-run test on fresh-mined ore, taken out BY THEMSELVES, for a five-days' run. They were not taking any chances, in their own belief. The owners of the mine, however--so runs the story--had a platform of plank arranged above the timbers at the top of the drift where the Chinamen brought out their ore cars. On this planking a man lay face downward where he could see each ore car that passed. He had a rather hard life for five days on the sandwiches and water which he took up there with him, but he managed to drop a pinch or so of nice gold dust into every car of ore that came trundling under him. The mill-run was an entire success from the viewpoint of the sellers, although not from that of the buyers.

There is no working law, let us repeat, which actually protects the investor against this sort of thing, nor which always protects even the promoter, though he be honest. The game is risky all the way along the line, in spite of state laws against the heinous crime of salting, which latter hath as yet by no means lost its savor.

THE MAIL AND MINING THIEVES

As matters stand to-day, the man selling mining stock on a fraudulent basis fears the Post Office Department much more than he fears the District Attorney. That is the main protection which the public has against such schemes. But to depend upon it is like trying to stop Niagara with a dam of reeds. The man who induces you to take your money out of the savings bank in exchange for stock in a mine, through such operations as have been described, thrives by reason of his use of the United States mails. It is a mail-order business pure and simple.

Let us see what machinery the Government has to protect you and prevent the letter-carrier from bringing daily to your door the flamboyant literature intended to lure your money from the bank. There are five hundred Post-Office inspectors employed in watching Uncle Sam's mail wherever it is carried, in keeping the vast and complicated machinery of the Post Office Department oiled and working smoothly, in running down Post-Office robbers and mail thieves and, lastly, in keeping the mail free from frauds. Ninety per cent. of this force is required to do the routine work of the inspecting branch; that is to keep the machinery running smoothly and to prevent delays. That leaves just ten per cent. for actual detective work such as is necessary in running down thieves and in tracing frauds. In the New York district, which comprises the state of New York as well as New York City, there is a force of twenty-five men working under a chief inspector. Of the ten men assigned to work in New York City, by no means all have special detective ability, and the time of these is taken up almost entirely in catching actual thieves.

POST-OFFICE PROTECTION INADEQUATE

It is only the biggest and most barefaced scheme that under these conditions can receive any attention whatsoever from the department, and even then its force is hopelessly inadequate and incompetent for the work in hand, work requiring the highest-class detective ability.

About twelve years ago the Post Office Department ran down and convicted a swindler, Stephen Balliet, who was selling stock in a mine full of water in Oregon and was known as "the mining genius of the Northwest." He was tried three times, finally convicted, and sent to prison. That case cost the Post Office Department $18,000, took a man's entire time for two years, and required two trips across this continent. The Government has not tried since to get many such convictions.

Perhaps because of the pressure of other work, perhaps for other causes, investigations of this nature are allowed to languish. Some years ago, when the firm of Douglas, Lacey & Company was reaping its harvest, an inspector was assigned to investigate the concern's operations. He was one of the ablest inspectors of the service, a man with real detective ability and a knowledge of the devious ways of certain kinds of financing. He made a trip to Mexico and subsequently sent in a report to Washington recommending that a fraud order be issued against the concern and that its use of the mails be stopped. He waited a long time and then got word from Washington that more evidence was required. He made another investigation and sent in another report, recommending in even stronger language that the mails be barred and the public protected. While on this work he was constantly assigned also to other matters and finally was shifted to a station in the South. The concern collapsed some years later, leaving thousands of people in this country and in Canada bereft of their small savings. There was no fraud order ever issued against this firm, though shortly before it closed up it was informed that if it continued to sell stock its use of the mails would be stopped.

The burden of proof is on the buyer. If he turns to the District Attorney he finds perhaps a sympathetic official, without power to assist him. The man selling bogus mining stocks knows all this; therefore his harvest goes on. It is better than the green-goods game, better than the wire-tapping swindle, safer than selling any other form of gold bricks. A few years ago a reporter who was engaged in investigating the schemes of Cardenio F. King--now in Charlestown jail, but then posing as "the apostle of the golden rule in finance" and selling his stocks by the barrel in every mill town in New England--made a call on the late John B. Moran, then District Attorney in Boston and widely known as a reformer. He asked Mr. Moran's help in proving that King was a swindler.

"Young man," said Boston's reform District Attorney, "if King was selling corner lots in heaven and advertising them in the newspapers, I couldn't stop him, because I haven't anybody to send up there and prove that they are not there."

King wasn't selling corner lots in heaven, but he was selling stock in a Texas company that was the next thing to it, so far as tangibility is concerned. It was only when he actually took from investors money sent to him to buy real stocks, and pocketed it, that he was put in jail.

LAWS TO PROTECT INVESTORS

A plan for the protection of the investor by statute is embodied in a model law drafted by the American Mining Congress of Denver, and recommended for general passage:

AN ACT.

To Prohibit the Making or Publishing of False or Exaggerated Statements or Publications of or Concerning the Affairs, Pecuniary Condition or Property of Any Corporation, Joint Stock Association, Co-partnership or Individual, Which Said Statements or Publications Are Intended to Give, or Shall Have a Tendency to Give, a Less or Greater Apparent Value to the Shares, Bonds or Property, or Any Part Thereof of Said Corporation, Joint Stock Association, Co-partnership or Individual, Than the Said Shares, Bonds or Property Shall Really and in Fact Possess, and Providing a Penalty Therefor.

Section 1. Any person who knowingly makes or publishes in any way whatever, or permits to be so made or published, any book, prospectus, notice, report, statement, exhibit or other publication of or concerning the affairs, financial condition or property of any corporation, Joint-stock association, co-partnership or individual, which said book, prospectus, notice, report, statement, exhibit or other publication, shall contain any statement which is false or wilfully exaggerated or which is intended to give or which shall have a tendency to give, a less or greater apparent value to the shares, bonds or property of said corporation, joint-stock association, co-partnership or individual, or any part of said shares, bonds or property, than said shares, bonds or property or any part thereof, shall really and in fact possess, shall be deemed guilty of a felony, and upon conviction thereof shall be imprisoned for not more than ten years or fined not more than ten thousand dollars, or shall suffer both said fine and imprisonment.

This law has been enacted in six states and a campaign for its general enactment is under way. But let not the credulous investor suppose that even such a law would guarantee him against loss. The Secretary of the American Mining Congress, Mr. James F. Callbreath, offers the following comment:

CAMPAIGN OF THE AMERICAN MINING CONGRESS

"I do not believe that any one law can effect protection to mining investors, nor that the protection afforded through the Post Office Department forbidding the use of mails for fraudulent advertising matter can fully cover that ground. The greater part of mining frauds are perpetrated without the use of the mails.

"The proposed law, in our judgment, is the longest possible step toward preventing mining frauds. A second step has been taken in the form of a publicity law. My belief is that no system of laws, either state or national, will prevent men from gambling in mines more effectually than such laws now prevent gambling in its more common forms. These may restrict and furnish protection to those who are wise enough to open their eyes, but it will be impossible to protect all the fools all the time. It is the purpose of the American Mining Congress, after having secured the enactment of laws providing penalties for fraudulent representations and requiring publicity, to perfect an organization to SECURE EXECUTION of these laws, and also to carry on campaigns of education showing to investors, first, that mining is a legitimate business and not a gamble; second, that mines are found and not made; third, that investments in mining should be made with the same care and prudence exercised by business men when embarking in other business enterprises. . . . The next work of our organization will be along the line of developing some manner of control of corporations by which paid-up capital stock shall represent actual value."

Mr. Callbreath would seem to be one fore-doomed to his own troubles; yet it is clear that he and his organization stand for legitimate mining as opposed to prospect-selling. In strictly accurate phrase, it is the prospect which is found, and the mine which is made and investment cannot properly begin until a body of ore has been blocked out in a proved prospect. Add to the glamor of risk the haze of fraud, and the foregoing will show the nebulous condition of mining investments in relation to mining laws in America to-day.

What we really need is a Bureau of Mines at Washington. Nobody protects the mining investor. Nobody guards the widest open gate into the savings deposits of this country.

The American Mining Congress, it should be stated, had a quasi pre-inaugural pledge from President Taft in favor of a Federal Bureau of Mines. Toward this we have made a start. A bill establishing this Bureau has already passed both the House and the Senate, and bids fair to become a law. But the activities of this new department will be confined to safe-guarding mineworkers. The next step should be to enlarge the province of the Bureau so as to include the supervision of the mining industry for the protection of investors.

It seems quite likely that the states and the nation will need to unite if adequate protection to the investing public is to be expected. But when did state and nation unite to solve a great popular problem? When did section ever unite with section or even resident with nonresident? This is America.

THE ENGLISH WAY OF MINING--HONEST BUSINESS

Back of any movement of this kind there must be popular interest in popular education. Thus far, the greater publicity idea is of more value than anything at hand. We may perhaps. best do our own little part by offering some studies in the theory of mining, showing just WHY it is risky, and just HOW we ought to tabulate the risk. In addition to this, we can present, and should perhaps first present, some of the results of intelligent mining as pursued in other countries.

Take the Rand Mines of South Africa, operated on the English basis--mines which turned out more than $12,500,000 in one month not long since. The English method of operating on the Rand is this: A corps of experts is sent to examine a proposed property--that is to say, a proved prospect. If their report be favorable, an estimate is made of the cost of a five-or seven-compartment shaft, to be sunk, say, 3,500 feet. The cost of producing a year's supply of ore for the mill is then considered. The cost of the mill and the cyanide plant is also figured. The total cost is then cast up, and the company is ready to be formed for a half million to five millions of dollars, according to existing conditions. This money is paid in, and is ready to start operations. These men mine carefully, using all possible scientific knowledge and practical experience as guides. The operation may have risk, but it is perforce honest.

THE AMERICAN WAY--A GAMBLE

Now let us examine conditions not infrequent in the United States, by no means assigning wings to all English mining men, or hoofs to all Americans:

A prospector discovers mineralized rock. He locates one or more claims as controlled by the laws of the district where he is. Perhaps others also locate more ground. A little work is done, and then the claims are up for sale. A claim is perhaps sold for a few hundred to several thousand dollars; sometimes the seller receives in addition stock in the company to be formed. No attention is paid to the geology, but a company is formed ostensibly for the purpose of mining, with a capital of one million shares at one dollar par. Perhaps four hundred thousand shares are placed in the treasury to be sold for development purposes. Of course the whole thing is as yet on a wholly gambling basis. The property is still a prospect and not a mine, and hence it is not possible to put it on an investing basis. Comparatively few companies have ever used the services of a real expert, although very possibly the company furnishes a report made from a purchasable local "mining engineer," one of the cheapest commodities in any mining district, where the wide hat and the high-laced boot often take the place of a mining education and a reputable character. This is the stage at which, this is the basis on which, most of the mining "investments" of America are made.