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 apart. The pace of these tours was very deliberate. If the group went too fast, it would run into another group from some other brokerage office just around the next comer.

A top analyst sat in the office of Jim Williams, board chairman of Westec, during an interview: “We’re going to compound our earnings 100 per cent for the next five years,” Williams said. “Fifty per cent from acquisitions and 50 per cent from internal growth.”

It was an attractive lure, and several analysts swallowed it and were promptly reeled and creeled.

Williams and Ernie Hall, president of Westec, went to jail. Several brokerage firms and individual brokers paid stiff fines for their involvement in the Westec situation. Others made substantial but quiet out-of-court settlements.

That’s where lawyers who turn from cars and trucks to stocks and bonds will find the white meat, the willingness of brokerage firms to settle out of court. A firm that is spending a million dollars on a nationwide advertising campaign to show how reliable and trustworthy it is doesn’t want the local newspapers printing stories on how some widow was touted into unsuitable investments. If they win the case, they still lose.

“Why are they always widows and orphans?” a brokerage firm vice president remarked recently. “One time I’d like to see it be some disreputable businessman.”

Every experienced broker knows that he should follow both the letters and the intent of all the securities laws under which he operates. There’s only one thing incompatible with that: making a living. If a stockbroker rigidly adheres to all of the myriad restrictions of all the laws he’s subject to, he’ll have a hard time doing enough business to survive. If he makes a decent living, he’s violating some law. Either the Texas Securities Commission or the Securities Exchange Commission can lift a broker’s license for real violation without too much trouble.

“If we want you, we’re going to getcha.”

The threat is enough to keep most brokers close to the intent of the law, at least. But lawyers representing disgruntled customers can bring suit under laws that have their letter broken every day even though the intent may remain virginal.

And brokers will find themselves in the same boat as accused politicians when it comes down to a jury trial. Most jurors today have little patience with transgressing politicians and may have even less with stockholders. Every potential juror in the state has probably owned a stock that went down at one time or another.

So brokers must be wary. We may be under the curl of the killer wave. This could be the end of life as we now know it. Only the lawyers will benefit. But suppose we could get a bunch of these lawyers together in one firm and take it public. Think what their earnings will be like. We’ll call it prosecutions Unlimited. It’ll be a hot deal. All our customer will want to own it. Just think of the commissions. Hmmmm.