Taking Stock

It was the most sweeping investigation of the stock market in 25 years, and Wall Street was plainly apprehensive. Despite all the evidence of better business condi tions, the market had been stalled for nine weeks (though at a comfortably high level), and many put down its sluggishness to fear of a tough report from the Securities and Exchange Commission. Last week, as the first third of the highly secret document came out in five volumes and 1,600 pages, weighing 12 pounds, Wall Street's professionals were relieved by its surface mildness.

Said SEC Chairman William L. Cary: "It is not a picture of pervasive fraudulent activity." With that, the Dow-Jones average of 30 key industrial stocks rose 13.22 points in the 2 1/2 trading sessions after the report's release, reaching 702.43, its highest level in a year. For all the relief, however, no one could afford to overlook an important fact that Chairman Cary had also noted: "Grave abuses do occur, and additional controls and improvements are much needed.''

Obviously, the SEC has been mindful too that--in an area so crucial to the economy and so sensitive to cross winds --unconsidered judgments and overstatements could have wide repercussions. In the great postwar bull market, Wall Street had become the common man's Monte Carlo. Between 1945 and 1961, the army of investors tripled to 17 million, and the value of listed stocks increased 400%. The New York Stock Exchange, which accounts for 71% of all trading in listed shares, has outgrown its famed disheveled trading floor and now plans a much larger exchange by the water's edge near Manhattan's tip. All the while that stocks kept going up, up, up, few of the millions involved had many worries. But after reports of rigging hit the smaller American Stock Exchange in 1961. the SEC decided that the time had come to take a thorough look at the whole securities business, and it stepped up its activities in 1962 when the bull market ended and stocks took a dive.

Late Hours. The SEC's evidence of grave abuses was gleaned with extraordinary care and effort. For 17 months Study Chairman Milton H. Cohen. 51, a reflective Chicago lawyer, rarely took a day off, frequently put in 110-hour weeks. Many of his 65 staffers fanned over the U.S. to interview hundreds of brokers, exchange officials and ordinary investors. The SEC sent out meticulously intimate questionnaires to 360 trading specialists and 600 member firms of the New York Stock Exchange. 800 members of regional exchanges. 2,000 companies whose stocks are traded over the counter. 5,000 broker-dealers who handle "unlisted" shares, and more than 1,000 pension funds, insurance companies and other publicly owned firms.

What the investigators turned up produced some significant and far-reaching indictments of certain practices in the securities business:

sb Some companies give only the scantiest information to stockholders. Unlike companies listed on stock exchanges, an estimated 25% of the nation's 14,000 over-the-counter companies do not make regular reports to stockholders on sales earnings and trading by insiders. The SEC wants to apply to them--and to banks and insurance companies as well--the same disclosure regulations that apply to exchange stocks.

sb Many securities salesmen are trained only poorly, if at all. More than half the chiefs of new brokerages set up in 1961 had no experience in the field. One example: Robert Martin, son of a rich textile-man, at 22 bought a seat on the New York Stock Exchange in 1960--and proceeded to violate a batch of regulations before the exchange finally "advised" him to sell his seat in 1961. Requested by the SEC: new laws to set up minimum standards of knowledge for salesmen and financing for new firms, and the power to discipline and perhaps fine them when necessary.

sb Many investment advisers are "irresponsible." Some market letters glowingly recommended shares in companies nearing bankruptcy, often drawing their false data from other misinforming tout sheets. Recommendation: tougher surveillance of market letters by stock exchanges and dealer organizations.

sb Even the biggest and most reputable of brokerage houses were at times extremely careless. Proceeding on only scant and unchecked information, branches of Mer rill Lynch and Shearson, Hammill & Co., among others, pushed some high-flying glamour issues that soon collapsed. Among them: Aquafilter, U.S. Automatic Merchandising Corp.

sb Some publicity men and newspaper, magazine and broadcast journalists were carefully cultivated by companies, usually by receiving allotments of hard-to-get "hot" new issues that went up in price just after coming out. Certain financial journalists used their positions of special knowledge and power to profit in the market.*

-"A considerable number" of public relations men artificially pumped up their employer's or client's stock by issuing fantasy announcements of expected earnings, mergers, new products. In one case an "extremely optimistic" claim that Chemtree Corp. had developed a shield against radiation fallout sent its stock up from 43-c- to $9.50 within a month. The SEC study proposed a new law to make "intentional or reckless dissemination of false and misleading statements" subject to stockholder damage suits and jail terms.

sb Some public relations men profited directly from trading in shares of client companies, a practice frowned on by the SEC because the public may not be aware that the "information which it receives comes from an interested source." The SEC added that "the most active trader among public relations men" was Jerry Finkelstein, president of now defunct Tex McCrary, Inc., who, among other deals in clients' stock, made $2,100,000 trading in Universal Controls, Inc.

Sure to Lobby Hard. While Wall Street professionals generally applauded the report, banks, insurance companies and other big unlisted firms are sure to lobby hard against the commission's attempts to put them under the full-disclosure, proxy-reporting and insider regulations. Some sort of legislation by Congress is almost certain to emerge from the SEC's investigation. By the end of next month, the SEC will release nine final chapters examining the mutual fund industry, self-regulation, last May's market break, credit and margin buying, and several other subjects. The Senate Banking Committee plans hearings on the entire SEC report, and so does the House Interstate and Foreign Commerce Committee. The SEC's full report is likely to be heard from for a long time to come.

* SEC investigators found that the stock of a small Long Island firm called Technical Animations, Inc. had jumped immediately after the appearance of a story on the company in TIME, April 28. 1961. They discovered that Joseph Purtell, then business editor of TIME, had bought 2,500 shares of the stock shortly before and sold 1,000 shares shortly after the article appeared. SEC investigation also showed that Purtell had acted similarly in some 26 other cases during the last four of his 15 years as business editor. TIME did not know of these activities when Purtell was dismissed for unsatisfactory performance in 1961. His transactions were contrary to Time Inc.'s long-standing policy against staff members profiting from special information.

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