STOCKHOLDERS BEWARE! LURKING BEHIND YON bend in the road is a highwayman, lying in wait, ready to halt our stagecoach to success. His shout, "Stand and Deliver," threatens our Cadillacs, our margin accounts, yea, even our land syndications.
Is this the Scarlet Pimpernel? No, it's the notorious No Fault Insurance, cousin, no doubt, to the infamous Equity Funding Life Insurance. Many of those sons of insurance are not to be trusted.
Stockholders must fear no fault insurance with the same dread they face an unsecured debit balance. How many attorneys currently make their livelihoods prosecuting claims evolving from automobile accidents? Benjamin Woodson, president of American General, estimates that about one-third of all dollars paid in settlement of automobile insurance claims goes to legal counsel. That's a lot of income, and much of it will disappear with the advent of no fault insurance.
Where will these learned barristers turn in their desperate effort to avoid the rigors of penury? Listen, stockbrokers, they're going to read up on the Texas Securities Law and the federal securities acts, and, boy, are we in trouble!
You say you sold a widow some American Telephone and Telegraph 3 7/8's of 1990 on the offering because they were so safe and now they're 67; you say you recommended General Motors to your miser uncle at 112 because it's the best-managed company in America and now it's 75 and he won't return your calls; you say you found this guy who had all his money in Exxon so you got him to sell half of it and put it into Pilot Fund for diversification; is that what's bothering you, Booby?
It should. When those lawyers can't try accident cases anymore, they will go after real or imagined abuses in dealings between brokers and their customers. And they'll have no greater friend than the Texas Securities Law.
Strange as it seems in light of Texas being the wonderful state that brought you Ben Jack Cage, Frank Sharp, and Ernie Allen, the Texas .'blue-sky" law is among the toughest of all the states. The teeth in the Texas law are incisor sharp. Violation of the federal statutes can earn transgressors a maximum penalty of two years. But convictions for fraud under the Texas law, however, can get 10 years in the big pokey in Huntsville.
Consider these recent decisions under the law:
January 28, 1972: Feodor Rurie Gentry of Burnet was sentenced to 10 years for bilking investors out of some $360, 000 in various securities schemes.
February 6, 1973: Donald Gary Norton of Houston was found guilty of defrauding a widow of some $5,000 in a dodge involving bonds and was sentenced to 10 years.
February 27, 1973 : William Osborne pleaded guilty to a charge of selling securities illegally and was sentenced to five years by District Judge David H. Brown of Sherman.
It's interesting to note that none of these malefactors were stockbrokers. In fact, a perusal of several issues of the Texas Monthly Securities Bulletin published by the State Securities Commission turns up surprisingly few violations involving registered representatives, which may indicate propensity on the part of brokerage firms for settling out of court. Most of the violations catalogued in this publication involve the sale of "unregistered" securities in the state by "unregistered" salesmen.
Texas is not only the last bastion of free enterprise, it ranks high as the frontier of caveat emptor. Until the Texas Securities Law caught up with them in the last year, enterprising "unregistered" salesmen were selling gullible Texans securities in a fictitious real estate syndication, a defunct car wash chain, a bogus Peruvian sulphur mine and an insolvent Baptist Church.
As tough as the Texas law is on those found guilty, it's even tougher on those who try to understand it.
"This law must have been written by a bunch of drunken Philadelphia lawyers"' one aspiring stockholder remarked while studying for his state test.
Every licensed broker doing business in the state must pass not only the New York Stock Exchange and National Association of Securities Dealers exams, but a separate test for a Texas license, as well. Low scores on the Texas exam are common.
Critics of the Texas Securities Law sometimes wonder how it can be justified in light of the state's insurance laws. The latter shelters more insurance companies than in any two other states combined. Prudential has the rock. Texas companies have a trailer house parked in Denton.
From Ben Jack Cage through National Bankers Life, the insurance scandals keep popping up. Insurance salesmen roam the state selling protection and common stock in the same pack- age. One lady called her accountant after being approached to buy one of these packages. "If I'll buy $50,000 worth of insurance and stock, they'll put me on the board of directors. Should I do it?" she asked.
"Not unless you want to invest in a company with directors who know as little about the business as you do," the accountant advised.
Insurance fraud isn't the only securities violation to make the front pages, however. Until Equity Funding supplanted it, Westec carried the stigma of the most notorious fraud involving a listed security, and Westec was born, raised and buried in Texas.
The promoters of Westec were very friendly with stockbrokers and you could depend on what they told you.
"We're going to announce a big acquisition at 10 a.m.," an officer of the firm would tell you, and precisely at ten o'clock the news would come clattering across the Dow-Jones broad tape.
"Earnings will be up 70 per cent for the quarter, and we'll announce them at 11 :45," he'd say, confidentially.
"What color suit will the president wear when he makes the announcement?" someone would ask as a rest.
"Grey pin stripe with a yellow boutonniere."
All the brokers in a particular Houston office would be invited out as a group to tour the company's facilities and talk to a top officer .The invitations came about six weeks