- July 10, 1907 New York Sun; courtesy Library of Congress
The first major American securities law had its genesis not in a single large swindle but in a swarm of smaller scandals. From the Progressive movement of the early 20th century, agents of reform appeared, touching off the first major wave of securities legislation in the United States: the so-called “Blue Sky Laws.” (1)
The Burr brothers made their money with what would now be called “penny stocks.” Though the major exchanges regulated listed securities, penny stocks were sold with no oversight at all. Tales of mother lodes and gushers raised tantalized investors; mailings from pitchmen promised “can’t fail” opportunities to strike it rich. Unsavory traveling salesmen swapped worthless stock certificates for legal tender. For example, it was estimated that more than 90 percent of the mining stocks peddled to the public were “rank frauds.” (2)
The Burr brothers were more sophisticated than the average fly-by-night salesman. They incorporated front companies purporting to develop railroads, mines and oil fields, then acquired large holdings in these companies with their corporate entity, Burr Brothers, Inc., as fiscal agent. This allowed them to garner commissions in addition to profits from stock sales. They also marketed aggressively, employing a massive mailing list to dispatch flyers and articles nationwide. One advertisement promoted a “gilt edge security’ that would turn $50 into $1,500. (3)
The Burrs’ business thrived from 1907 to 1910, even though its individual promotions collapsed no fewer than 32 times. In 1910, the U.S. Post Office investigated an offering in the Peoples’ Associated Oil Company, purportedly situated in “the choicest lands” of California’s Coalinga petroleum fields. The California state mineralogist declared the property “outside the boundaries of proved territory,” and pronounced the stock “a rank outrage on the investing public,” but the Burrs peddled Coalinga stock into the fall of 1910. (4)
On November 21, 1910, as part of a broader crackdown, U.S. Postal inspectors and New York City detectives arrested the Burrs and charged them with mail fraud. Postmaster General Frank Harris Hitchcock stated: “These fraudulent operations have not only swindled thousands of innocent investors, but have created a lack of confidence in legitimate business enterprises.” By the time of their arrest, the Burr brothers had established at least 33 companies to promote their stocks. Investors lost some $15 million, about $500,000 of which came from Kansas. The Burr Brothers had proclaimed that their “thirst for the savings of the public yet in the savings banks has been such that the banks themselves must be getting scared.” (5) Not only were they swindling customers; they were draining savings away from legitimate institutions. Joseph Norman Dolley, Kansas Banking Commissioner, was not scared; he was infuriated. (6)
(1) The origin of the phrase “Blue Sky Law” is much debated. It indicates shares being sold in something with no more value than “the blue sky,” and seems to have been commonly known at the time, though its roots are obscure. See Macey, Jonathan R. and Miller, Geoffrey P. “Origin of the Blue Sky Laws” 70 Texas Law Review 347 (1991).
(2) Cedric B. Cowing. Populists, Plungers, and Progressives: A Social History of Stock and Commodity Speculation, 1890-1936 (Princeton, NJ: Princeton University Press, 1965), 67. Current Literature. “Chasing the Wild Cats of Finance,” Vol. LII No. 2, February 1912.
(3) New York Sun, “Savings Banks Get Too Much,” July 10, 1907. This article is appropriately subheaded: “Burr Bros. Want Some of Your Money, If You Please.”
(4) New York Sun, “Burrs Still Using the Mails,” February 13, 1909. Los Angeles Herald, “State Mineralogist Aubury Attacks Burr Brothers’ Workings,” August 29, 1910.
(5) Washington Post, “Charge Frauds of $40,000,000,” November 22, 1910. The Engineering and Mining Journal, “The Campaign Against Fraud,” November 26, 1910. New York Sun, “Did Burr Bros. Get Your Cash?,” July 14, 1907.
(6) New York Times,“Postal Raids Show Vast Stock Frauds,” November 22, 1910. Technical World, “The Blue Sky Law,” March 1912, 45.
