Saga of Smart

In Chicago last week a Federal grand jury indicted the publisher of one of the half-dozen biggest U.S. magazine-publishing companies for rigging the market in his company's shares. The charge was conspiracy to violate the Securities & Exchange Act by artificially raising the price of the stock since May 1938. The publisher was smart David Smart of Esquire-Coronet, Inc.--indicted along with his secretary-treasurer-brother Alfred and ten others. They promptly denied any wrongdoing, but the indictment climaxed one of the most extraordinary publishing sagas of the 1930s.

Ten years ago Dave Smart, onetime stenographer and merchandising counsel, had virtually no publishing experience except as part owner with William Hobart Weintraub of a little clothing-trade journal modeled after Printers' Ink. But in 1931 they named it Apparel Arts and revamped it in a slick imitation of the new magazine FORTUNE. Their success was striking--so striking that within six years Publisher Smart, on the crest of the wave, was asking, "Why didn't somebody tell me about this publishing game before? It's a cinch!"

A cinch it had been. His Esquire, launched in 1933--modeled on Apparel Arts with the addition of sexy cartoons and articles by big literary names such as Ernest Hemingway--was on the newsstands in December 1937 with its fattest issue ever--including 155 pages of ads. His Coronet, launched a year before (1936), was set to invade the profitable field occupied by Reader's Digest, and he was about to launch a newsmagazine to cut himself in on another field. Esquire, his big moneymaker, had become the darling of the barbershops and just hit a peak circulation of 677,000. In that happy moment Publisher Smart modestly guaranteed Esquire's advertisers 625,000.

But when June 1938 came, Esquire had just over 450,000 circulation. Many things had gone wrong. One was the short, sharp depression of 1937-38. Another was the launching of Ken, the "inside story of world events," which, instead of competing as a newsmagazine, apparently appealed to the public more as a cheaper competitor of Esquire. A third was a drive by the Legion of Decency which forced Publisher Smart to dilute Esquire's sex appeal. Esquire circulation slumped badly and for the first time Smart took full advantage of the device which permits a publisher to count subscriptions as circulation by sending subscribers free copies for three months after expiration. Yet Esquire had to make large refunds to advertisers because its circulation fell far short of guarantee.

All this was doubly unfortunate because in July 1937 Publisher Smart and his brother had begun trying to sell the public 75,000 (later increased to 200,000) of the 500,000 shares of Esquire-Coronet, Inc. Offered at $16 a share, the stock fell to $7 in May 1938. According to the indictment last week, the Smarts disposed of the bulk of 153,000 shares between May and September 1938--a sale on which the Smarts realized $1,075,000. During that time the stock rose from 7 to 12 1/4 (last week's pre-indictment low: 2 5/8). Among the public who got burned was President Roosevelt's son James, who bought 500 shares.

In its fiscal year ending March 31, 1938. Esquire-Coronet. Inc. had an $807,000 profit. In the following twelve months (during which much of the stock distribution took place) profits were listed at $306,000. Part of the reduction was due to the failure of Ken to catch on. That cost $197,000. But profits would have been only $101,000 if $205,000 of circulation-promotion expense had not been capitalized as an asset instead of charging it off as expense. This did not include all rebates made on the year's issues. If these, subsequently paid, had been provided for that year, the company would have shown a loss of $43,000. Yet in that fiscal year Esquire-Coronet paid out $450,.000 in dividends.

In the following August. Publisher Smart finally discontinued unsuccessful Ken at a total loss of $404,000.

Not yet has Esquire-Coronet revealed its 1940-41 earnings, but five weeks ago Publisher Smart, intimating that they would be about $300,000. announced a $150,000 semiannual dividend. Of the indictment which descended on them last week the Brothers Smart declared that they had been advised that their stock-selling activities did not involve even a technical violation of the Securities & Exchange Act.

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