Gyps That Pass in the Night

I have been in business a long time, and I've seen a sizable chunk of the business world. It has been my experience that the majority of businessmen are honest, and that they conduct their business affairs honestly, adhering to the spirit as well as the letter of the law.

Nonetheless, one is liable to encounter cheats and frauds in the business world just as he is liable to encounter them anywhere. There are always some individuals in every sector of commerce and industry who cut corners, seek out the loopholes in the laws and engage in unethical or even illegal practices. They are, however, in the minority—and the great mass of legitimate businessmen would dearly love to be rid of them.

But obviously, the world in which we live is hardly utopian. Everyone—be he taxi driver or tycoon—has to be on his guard to avoid being cheated in the market place by the small but ubiquitous percentage of unethical or dishonest businessmen.

I received my introduction to these more dismal facts of business life early in my career. when I began wildcatting for oil in Oklahoma. The great Oklahoma oil rush was a magnet that drew highhinders, swindlers and plain ordinary crooks as well as honest, hard-working men to the drilling sites and boom towns. Land pirates, credit sharks, confidence men and manipulators of all kinds were among those who flocked to the oil fields. Fraudulent leases, bogus deeds, worthless stocks—these were only a few of the devices the swindlers employed to mulct money from the unwary and gullible. Countless people were fleeced in one way or another by the sharpsters.

Among the most vicious forms of fraud was the fatal credit trap that crooked "grubstakers" and unscrupulous equipment dealers set for wildcatting operators who held leases on promising properties.

"Take all the equipment and gear you need. Just sign this paper," was the siren song chanted by the credit sharks. "We trust you. The paper is a mere formality."

The wildcatter who signed received all the credit he needed—until he brought in a producing well. Then the vultures who held his notes would descend and take over his lease and equipment, leaving him little but the clothes he wore.

One of my acquaintances fell into such a trap. Holding the lease on a property he felt certain would prove to bear oil, he went to a credit shark. Signing the agreements that were thrust under his nose, he purchased everything he needed to drill a test well—on credit. He spudded his well and a few weeks later struck oil. The man who held his notes immediately called them in and seized the wildcatter's lease and rig. To his sorrow, the wildcatter learned he had no recourse; the fine-print clauses in the agreements he had signed gave his creditor the right to do as he pleased. The gyp eventually netted a $250,000 profit on the lease he literally stole.

The most regrettable aspect of such incidents was that there was absolutely no need for them to happen. For every credit shark operating in the oil fields, there were two legitimate machinery-and-equipment firms who would grubstake and extend credit to independent operators. 1, myself, occasionally found that I was short of capital and had to buy machinery and equipment on credit. I never encountered any undue difficulty in obtaining what I needed on fair terms from reputable dealers. I. like many other successful oilmen, willingly concede that I owe at least part of my success to the help I received front legitimate machinery-and-equipment dealers who grubstaked me at various times during the early stages of my career.

There were also other avenues open to the wildcatter who was short of cash. Banks, and individuals with capital to spare, would finance exploration and drilling operations at fair rates of interest or in return for reasonable shares in a venture.

Why, then, didn't all independent operators obtain their financing from legitimate sources? The reasons are many, varied—and familiar. In the first place, the credit sharks talked fast and made everything seem ever so easy and attractive. They seldom mentioned such sordid details as interest rates or the method of repayment. On the other hand, reputable dealers clearly stated the terms on which they would grant credit; they made no pretense of giving anything away free. They also took a bit more time to think things over than did the sharks, who grabbed eagerly at any proposition, for they knew they could afford almost any risks on their immense profit margins.

Then, some wildcatters had an instinctive distrust of banks and bankers. Their concept of a banker was of a gimleteyed, rapacious plunderer of widows and orphans—a totally erroneous idea but one unfortunately still held by many.

The cruelhearted, cold-blooded banker is a good "heavy" (continued on page 116)Gyps That Pass(continued from page 101) character for cheap cowboy films, but that's about all. The average banker is a man who is in business to help his clients—be they depositors or borrowers. He must safeguard the interests of the former and supply the needs of the latter. That's the only way he can stay in the banking business.

Still other independents were reluctant to surrender any share of their anticipated profits in return for the financing of their operations. Instead of agreeing to part with a 25- or 30-percent share, they went to the credit cheats who said they wanted nothing—but in the end took everything.

The credit sharks are still with us to-clay. They victimize the general public as well as the small businessman—and sometimes businessmen who are not so small. A while back, a Senate banking subcommittee heard evidence of how these gyps operate. The subcommittee members listened to a dismal recital of sharp, usurious and unethical loan and credit practices. There was testimony that some so-called "small-loan" companies, automobile and appliance dealers, home-improvement contractors and merchants of various kinds charged interest rates ranging anywhere from 25 to 75 percent and even more per annum.

The Senators examined sample loan or "conditional-sale" contracts printed in microscopic type that loaded staggering extra fees, charges, costs and penalties on top of regular interest charges.

But credit cheats do not limit their activities to consumers. There is a type of gyp that preys primarily on small and medium-sized businessmen who find themselves suddenly in need of cash. Members of this breed advance needed sums on short notice—and at astronomical rates of interest—taking the businessman's stock, accounts receivable or capital assets as collateral. If the borrower fails to meet his payments on the dot, so much the better. The sharpsters are eager to seize the collateral—invariably worth far more than the amount of the loan.

Bad as all this might seem, it is only one side of the story. Actually, there are very few people who really need to borrow or buy from credit sharks. Banks and legitimate lending institutions will lend money or finance purchases and charge only the legal rates of interest, adding no extras. Reputable dealers and merchants sell on credit and charge reasonable interest for this service.

Truly astute businessmen never try to make money on the interest they charge for making sales on credit or time-payment plans. They want to sell their goods or products and make their profits on the sales price, not on the interest charges, which they peg only as high as is necessary to meet the costs of handling a credit account.

After World War Two, the Spartan Aircraft Corporation—which I control—reconverted to the peacetime production of mobile homes. I insisted that the interest rate on all time-payment purchases be held down to five percent, even though other firms were charging twice that. Spartan's sales boomed; the five-percent rate was ample to meet all the costs of credit selling. Soon other companies lowered their interest rates.

Many people do not take the time and effort necessary to shop around, to investigate carefully before they borrow or buy on credit—and, all too often, they fail to read what they sign. Many are still afraid of banks. Others are impatient; they want their shiny new automobile or the money they intend to borrow right now. They don't want to wait until the formalities attendant upon, say, a bank loan, are completed. And, like some of the old-time wildcatters, they listen to the blandishments of the fast-talking credit gyps—who promise everything and deliver very little of what they promise.

Yes, there were many forms of frauds and swindles in the oil fields of Oklahoma. Not even experienced, cautious men were always able to avoid being cheated—and sometimes the situations that arose had their amusing aspects. I recall how one of the smartest and most successful among all independent oil operators once fell victim to a swindler's trick—and how he obtained his revenge.

The oilman is now dead and his name, though it was long a household word, doesn't really matter. I'll call him Fred Johnson, which is close enough.

Johnson was bilked in Oklahoma by a crook who sold him an oil lease at a sky-high price. There was a well on the property covered by the lease and when Johnson inspected it before the deal was closed, the well gave every sign of being a producer. It was only after he'd paid over his money that he discovered he'd bought a dry hole that had been soldered up and filled with crude oil the swindler had trucked to the site.

The crook vanished, but Fred Johnson swore he'd even the score, if it took him the rest of his life. Ten years later, in Texas, Johnson accidentally ran across the man who had cheated him. The gyp did not recognize his onetime victim, for Fred had gained weight and looked much different than he had the last time they had met.

Fred Johnson saw an opportunity to obtain his long-deferred revenge. As it happened, he'd brought in a dry hole on a property only a few weeks earlier. He now had his crew rig a hidden pipeline from an oil storage tank to the dry well. After arranging to have himself "introduced" to the man who had swindled him, Johnson talked his way around to offering the crook the lease on the property in question. He said he'd sell it for $60,000—a low price, considering there was a "big producer" on the land. The swindler was interested, particularly since Johnson gave some plausible reason for wanting to sell out so cheaply.

Fred took the prospective buyer out to the site. Sure enough, the well was bringing up a steady flow of sweet, high-gravity crude—and the deal was closed on the spot. Fred Johnson collected the $60,000 he'd asked for and signed the necessary papers. That same day his men quietly dismantled the pipeline that had been feeding the crude oil to the dry well. The sharpster who had cheated Johnson ten years before now discovered that he had been repaid in full—and in kind.

By no means can it be said that all oil swindles have involved only individuals who were actually in the oil industry. Through the years, uncounted tens of thousands of people have lost their life savings in swindles that were based on the sale of bogus stocks or shares in worthless or even nonexistent oil leases. A prime example was the notorious C. C. Julian scandal, in which a corporation, authorized to issue 5,000,000 shares of stock, actually issued 15,000,000 shares. A collapse was inevitable—and when it came, thousands of small investors suffered heavy losses.

Despite the clear warnings provided by such swindles, many people still persist in buying fake stocks and worthless leases. These are most generally sold by high-pressure promoters and gyps—almost all of whom have never even seen an oil well at close hand. They capitalize on the glamor of the oil industry and on the facts and legends of the fortunes that have been made in it. They sell their beautifully engraved—but virtually meaningless—"certificates" through the mail or by using boiler-room telephone sales techniques. Some individuals are unable to resist the glowing promises of huge profits and throw their money away under the mistaken impression that they are investing it.

Of course, stock swindles are not limited to oil stocks. Worthless shares of all kinds are peddled by opportunists and cheats. Highly dubious shares are touted by some individuals and firms who blandly designate themselves "investment advisors," but who are apparently in business for the sole purpose of encouraging the wildest and most dangerous forms of stock speculation.

"If you had followed our advice, you would have made $10,000 on a $2500 investment in the last 120 days ..."

"We will give you the names of 15 stocks that we expect to double in value during the coming month ..."

"Let me tell you how you can make $50,000 on the stock market in only six weeks ..."

(continued on page 164)Gyps That Pass(continued from page 116)

Such are the advertisements and claims of these "investment advisors." These claims are at best misleading—for they are most often based on nothing more than beliefs or hunches, and the "advisors" never mention their wrong guesses. At worst, they are intended to set off frantic buying waves to line the pockets of the "advisors," who have bought the issues they recommend at rock-bottom prices for the express purpose of running up the prices and then selling out.

Even some mutual funds will take great pains to obscure the facts about their operations and financial condition. Not long ago, one such mutual fund went so far as to send out an annual report that conveniently made absolutely no mention of the fact that its assets had dwindled by no less than $49,000,000 during the previous 12 months.

Instead of reading brochures and advertisements dreamed up by high-pressure promoters and gyps, prospective investors would be much better off if they memorized and heeded this warning from Keith Funston, president of the New York Stock Exchange: "Some would-be investors are attempting to purchase shares of companies they cannot identify, whose products are unknown to them, and whose prospects, at best, are uncertain. Some people have not yet discovered that it is impossible to get something for nothing."

There is no real reason why anyone should allow himself to be cheated when he buys stocks or invests money. Any individual can easily protect himself against fraud and chicanery—if he will only take the effort to do so.

The Federal Securities and Exchange Commission and various other Federal and state regulatory agencies exist for the sole purpose of safeguarding the investor's interests. Reputable stock-brokerage firms and investment counselors will cheerfully provide prospective investors with complete and unbiased information about stocks and the companies that issue them. The Better Business Bureau, trade groups and other agencies and organizations stand ready to inform and advise the public and to protect it from gyps and cheats. Whether he has $10 or $10,000,000 to invest in stocks, an individual needs only to follow the dictum: "Before you invest—investigate."

The same holds true for those who would avoid being tricked or cheated in other ways. Take, for example, the perennial rackets employed by the gyps who prey on the nation's homeowners. Door-to-door sharpsters solicit "home-improvement," "landscaping," "exterminating," "weatherproofing" and similar contracts. They offer what appear to be irresistible bargains in everything from house painting to lawn seeding to interior decorating. They produce cleverly worded and entirely deceptive contracts for the homeowner to sign. If he does sign, he eventually finds that he has obligated himself to pay staggering prices for shoddy materials and grossly substandard workmanship.

Each year, the victims of these rackets are counted in the tens of thousands; estimates of their losses run into the tens of millions. Yet, it is totally unnecessary for even one person to be bilked by these racketeers. The preventive measures are almost childishly simple. The homeowner should deal only with established, reputable merchants and contractors who, being part of the community, have a reputation to maintain. Then, of course, the homeowner needs only to contact the nearest office of the Better Business Bureau—or his own chamber of commerce. These agencies will quickly provide him with all the information he needs about the glib salesmen who come to his door. Lastly, of course, no one should ever sign any contract or agreement unless he reads and understands it thoroughly beforehand.

Paradoxically, it's often more difficult for the businessman to protect himself against gyps than it is for the average individual. True, the businessman can also use the Better Business Bureau's services and there are credit associations that will provide him with information about the financial integrity and credit rating of firms and individuals. But there are highbinders who specialize in bilking businessmen. They're almost always experts at the fine art of financial juggling and chicanery. Because they're usually out to obtain large sums, they devise elaborate and convincing schemes to separate the businessman from his money.

A number of years ago, a wealthy industrialist I know was approached by two men who said they owned a valuable mining concession in South America. They produced deeds, documents and assay reports to substantiate their statements. Declaring they were in desperate need of funds to finance the exploitation of the property, they offered to sell him a 49-percent interest in the concession for $100,000—of which $25,000 had to be paid immediately.

All in all, the proposal seemed plausible and legitimate. The claims made by the men were believable and supported by apparently authentic documents. The references they gave checked out, and a telephone call to the South American bank they gave as reference verified their story.

The industrialist was about to agree and pay over $25,000 to bind the transaction. Then, at the last minute, he decided to hold off for a day or two while he made an independent investigation. It was fortunate for him that he did. The men were impostors; they had stolen or forged all their documents, including those that identified them as being who they represented themselves to be. The actual owners of the concession were in the Middle East on a business trip.

Many other types of swindles are highly favored by crooks who specialize in mulcting businessmen. One popular form is the so-called "nuisance suit." Nuisance suits are simply lawsuits filed on little or no grounds by individuals in hopes that the person or firm they are suing will settle out of court rather than spend the time and money and be exposed to the publicity attendant upon fighting the case in court. Trumped-up patent- or copyright-infringement suits, fake personal-injury claims and actions that dispute title to a property are typical examples of nuisance suits. The astute, experienced businessman knows better than to settle any such action out of court. He is well aware that it is nothing more than a form of blackmail. He always chooses to fight the suit; in the vast majority of instances, the plaintiff either drops the action or loses, because his case will seldom stand up in a court of law.

Bogus charity appeals are another favorite device used by swindlers. Every businessman and business firm receives hundreds of appeals from various charities each year. The requests for contributions are often made on expensive, embossed letterheads bearing the names of dozens of prominent persons who are listed as "patrons," "sponsors" or "committee members"—the implication, of course, being that if their names appear, the charity must be a deserving one.

Until comparatively recently, it was the custom of many firms to send contributions to all charities that appealed to them for funds. Then, as the number of appeals multiplied, it became impossible for even the largest companies to follow this policy. It also became apparent that some charitable organizations were badly administered—and that some were even out-and-out frauds. In certain cases, the names of those shown as supporting or sponsoring the charity were used without permission or knowledge of the persons concerned.

Thus, most businessmen today investigate all charity appeals with great care. They and their firms make contributions only to those that are known to be legitimate and that have been cleared by the Better Business Bureau or similar organizations.

By the same token, a businessman must exercise great care and caution before lending his name to groups or organizations that solicit him to serve on committees or to endorse them in any way. No matter how flattering such requests are to one's vanity, they must be investigated thoroughly. It is not unknown for an individual to endorse what he has been led to believe is a legitimate charitable, social, fraternal or service group only to learn too late that his name was being used by a fraudulent or even subversive organization. Needless to say, such errors—no matter how inadvertent and innocent—are liable to damage a businessman's reputation as well as his wallet.

It would be impossible for me to list all the unethical and illegal practices, tricks and swindles that either members of the public in general or businessmen in particular are liable to encounter. I have purposely omitted the categories of gyps sometimes found within business firms. Embezzlers, pilferers, expense-account cheats and the like are types against which any well-organized firm has built-in safeguards and which alert management automatically takes all necessary precautions to prevent.

Withal, neither the average individual nor the businessman has to worry much about gyps and swindles if he will only follow four simple rules.

1. No one should ever expect or try to get something for nothing. The mouths of gift horses should always be examined with meticulous care. There is generally something unsound or unsavory about any business proposition that promises tremendous profits overnight. By the same token, although everyone loves a bargain, bargains are not always what they appear to be. Before buying, borrowing or investing—investigate thoroughly.

2. Deal only with established, reputable firms and individuals.

3. Never sign any contract, agreement or other document until you have read it carefully and are certain that you understand every word of it. If you have even the slightest doubt about what the paper you're signing says and implies, consult an attorney. You may be saving yourself a great deal of trouble—and a great deal of money.

4. Lastly—and perhaps most importantly—be scrupulously honest yourself. It has been said that it's impossible to cheat an honest man by any form of swindle—that the swindler invariably appeals to the real or latent larcenous instincts of his victims. This is, of course, an overstatement; but it is certainly true that an honest man will scorn any dubious scheme, no matter how great the promised profits.

In short, the person who is himself open and honest and takes the time to examine all proposals made to him in the bright light of day will never fall prey to the gyps that pass in the night.