a r V'' 12864 The Flagg Raid ' -^-^rneil university Ubrarv arV12864 The FlaaaJmilllll January 26, 1912, Edition, 2,000 February 8, 1912, Edition, 10,000 March 12, 1912, Edition, 50,000 Copyright 1912 by Jared Flagg "THE FLAGG RAID" Chapter I Twenty- four years ago — 1887 — impress the date upon your mind — twenty-four years ago; it was in the month of February, and it was cold, biting cold, ears were tingling and over- coats were buttoned up tightly. It was early in the evening. Lights were beginning to flicker in the store windows, when from out of the crowded thoroughfare (lower Broad- way) a young man turned into Ann Street, and walked as a man walks when he knows where he is going and is in a hurry. His hands were jammed deep into his outside coat pockets ; and if any one had taken the trouble to notice, he would have seen projecting slightly from one of these pockets a roll of yellow paper; and if he could have looked inside of the same pocket he would have seen a hand clutching tightly to it. It was not be- cause the young man was afraid any person intended to grab the paper that he held it so tightly. He knew no one wanted it, but he did not want to lose it. It meant something to him; it represented thought and study; it had cost him days, weeks, months and years of labor. It was manuscript. And it was I — ^Jared Flagg — with my manuscript, who turned the corner that cold winter evening, twenty-four years ago, on my way to the old time publishing house of Dick & Fitzgerald, 18 Ann Street, New York City. Later in this same year a book was pub- lished and copyrighted by Dick & Fitzgerald, entitled "How to Take Money Out of Wall Street." No person disputes this fact, nor the fact that I was the author. In this book I had outlined a certain method of operating. My motive in doing so was to try to gain fame as a financial writer, and moijey, in the shape of a royalty, from its sale. For twenty odd years I have drawn such a royalty. And Dick & Fitzgerald, who are still at the same old stand, will confirm this statement. Now, then, the question I wish the reader to determine is this: Would an author, with such a motive, essaying to write a treatise on such a subject, knowingly advocate rules, that, if adopted, would result in disaster? It seems to me that this question admits of but one answer, and yet, I will grant the writer might not have known what he was writing about. Few financial writers do, but for all this, where this is the motive — fame and a royalty — he will invariably try to do his best. I tried to do my best. Not with a view of interesting those unskilled in finance, but to command the attention of trained Wall Street men — those best qualified to pass judgment on the merits or demerits of my work. This I made clear in the. .very first para- graph on the first page. It read and still reads as follows: "This book is not published to teach Novices the Art of Speculating, but to explain to Wall Street Operators the absurdity of trying to make money by speculating in Railroad Stocks with- out adequate capital, and the ease with which it can be made with capital." I was no child when I wrote this preface; but, even as a child, I was not altogether ignorant in matters relating to Wall Street. From the age of fourteen to nineteen I had kept the purchase and sales book of Frank Work, the veteran operator and multi- millionaire. On Wall Street, even to this day, it is gen- erally conceded that Mr. Work knew a thing or two about the scale method of speculating, which is sometimes called the "Pettibone Pro- gressive System." But it was all "Greek" to me the first year, and I simply' did what I was told to do. The second year I did not know much more, but before the end of the third year it commenced to dawn on me that a system was being operated. Out of the maze of bewildering figures — bewildering to a boy fresh from the country — I could begin to see a meaning — a method. By turning over the pages of the purchase and sales book (and books) and looking back sometimes one year, sometim.es two, and sometimes more than two I was enabled to see — to know — why certain orders in certain stocks were executed; but even then moves were made not wholly clear to my mind. It was puzzling to know just why he traded in the same stocks on the short side of the market in conjunction with the long side. To me, at that time, it seemed like an offset, a meaningless pair-ofif. But before the end of the fourth year, when the panic of 73 struck us, his motive in utilizing both sides of the market was as clear to my mind as the noonday's sun ; and long before the end of the fifth year I knew as much about this 8 particular system of operating, in the stand- ard, investment. New York Stock Exchange Stocks, as Work himself. One day, in a, rising market, I called his attention to a certain short commitment over- looked. "Who told you about it?" he said. "No one," I replied. Whereupon he gave a grunt and walked away, but I noticed he lost no time in buying in the stock. It is this same system— this scale system which is as old as the hills, and which Mr: Work, and which, for aught I know, hundreds of other rich men have adopted, that I ex- plained in my 1887 treatise on speculation. The papers of that day, that is many of them, not only in New York but throughout the country, spoke in high terms of my book. Charles A. Dana, at that time Editor of the New York Sun, wrote quite an article on it, and said it was the best work on finance that had been published in twenty-five years. But despite all this I am now, in 1911, told, ap- parently in all sincerity, by certain Post Office officials that it is a swindling scheme. If it is such a scheme, why have not these authorities raided my publishers — Dick & Fitzgerald? They, for the past twenty- four years, have been using the mails for the pur- pose of sending this plan of operating to the public. In delaying all these years — a quarter of a century — before taking action, what ex- cuse have the post-office inspectors to offer — ignorance? In the eye of the law ignorance is no excuse. I have always known, have always owned up to the fact that this way of dealing could not be worked successfully without large cap- ital. Away back in 1887 I admitted it, and so stated, not only in the preface of my book, but also on pages 7, 13, 48 and 52. It was owing to this knowledge, and to my inability, in my early days, to raise this large capital that I put up with a small royalty. I felt then that it was a royalty or nothing. Later in life, at different times, I endeavored to interest men with large capital. Once, with a Mr. G. Ladd, I called on Russell Sage with the hope of interesting him; but he told me that probably forty per cent, of all the millions he had accumu- lated had been made by adhering prac- tically to the same rules I advocated. I thought he had made the bulk of his for- tune by selling puts and calls and straddles, but he informed Mr. Ladd and myself that such was not the case. About four years ago — in the latter part of 1907 — I made one more great effort to taise enough money to operate this same scale or so-called "Pettibone System." This time, however, instead of interviewing capitalists I interviewed a few personal friends. I in- vited them to come around and spend an even- ing with me. At that particular time I was residing in a bedroom located on the attic floor of the old "Pond's Extract" building in New York City. But this did not deter them, and they came. It was not, however, to be a social call; it was business — I was to elucidate a problem in mathematics. I was to explain how, with money, money could be made by methodically taking advantage of the innu- merable little variations in prices that are everlastingly occurring in the standard, rail- road and industrial stocks listed on the New York Stock and Consolidated Stock Ex- changes. I made it clear to them that I did not contemplate, nor would I tolerate, dealing in outside, curb, or mining stocks. Now these friends of mine were no fools. They all claimed to be "from Missouri" ; and while willing to listen to reason, would be- lieve only what they could see. They saw my charts, my statistics dating back thirty years; and with their own eyes saw the mar- ket when it was dull, when it was active, when it was advancing, when it was declining, when it was booming, and when it was crashing down. Slowly and with patience they traced back, went over the seemingly intricate but simple figures, and became convinced I was right in my contention that if the margins were large enough and the lots small enough, money could be taken out of Wall Street by purchasing stocks on a scale down and selling them on a scale up, according to the rules laid down in my book which Dick & Fitzgerald published twenty-four years ago. It does not take long to tell it, but it was a long session, so long that it was not long after they had left when a glimmer of daylight could be seen creeping in through my bed- room window. These men that night there assembled were in deadly earnest. By looking into the past they could see into the future and as the possi- bilities of the future opened up, and, as by degrees the import of all that they had heard and seen commenced to dawn upon them, they agreed there and then to back me, to con- tribute their influence — their time^their money. A few days later, in January, 1908, and the first transaction was made. Ten shares were bought, and although I encountered a few obstacles, the business prospered — up, up, up. One thousand, one hundred thousand, a million dollars and over! And what then? A Raid! And later, indictments. I did not care so much for myself. This was not the first time my hopes had been temporarily shattered by the stroke of a pen. But these other men — my friends? Not one of them would have been indicted, or arrested, or handcufifed, or locked in a prison cell had he not— true to his word — backed me, stood by me, and given me his time, his influence and his money. For them — for each one of them — I felt and I feel sorry. They are innocent. They would be innocent even if I were guilty. They were not my partners, they had no voice in the conduct of my business; I did not even consult them; I dominated, I decided, I settled all questions barring legal ones, and these I referred to my lawyer. Furthermore, I alone handled the money. My bank and trust company bal- ances, and the contents of my safe deposit vaults I kept to myself. Having no partners, 13 and being accountable, therefore, to my cus- tomers only, I felt that so long as I stood ready to meet any and every just obligation, no per- son had the right to pry into my private af- fairs. This was — this still is my attitude. Why then should the postal authorities under- take to implicate thege men? They answer as follows : "You shared commissions with these men, and this makes them partners with you." But I reply, I shared commissions with more than one hundred other men. If sharing commissions with a man makes him a partner of mine, I must be well supplied with part- ners; and yet so far I have been unable to discover one willing to share with me my losses. "That is not the question — we are only in- terested in the six," they say. [There were two other men indicted who were not even cus- tomers.] "And these six indicted men are co- conspirators with you." If this is so, I ask. Whom did they plot to defraud? Was it themselves? Did they intend to rob themselves? Most of the money that they brought to me, and on which I shared with them my commissions, was their own money or that of their near relatives and friends. 14 Then I am told that this makes no differ- ence — that it is not a question of how little or much confidence they reposed in me; nor is it, I am told, a question of intent. "Their intentions might hav,©- been honor- able ; but they are guilty j\j8fthe same." "How do you make^th'at out," I ask. "Simple enough," thffw depltr^. "These men who were iodicted\;Wi"th y9# have, on more thap-:6ne ^9asion,'''been,vkhown to speak highly-6'f you." />''"' .a^'" .^, and then wrote a letter which reads as follows : "G. T. Reeder, Esq., No. 242 West 23rd St., City. Dear Sir: I think I have done very well for you. Yours truly, (Signed) F. J. Menzie, for Mr. Sage." 6s I could fill a volume citing similar cases, and when my case is called for trial, if I am forced to set up a fight, I shall subpoena hundreds of reputable New York Stock Ex- change brokers who will testify it frequently happens that a broker will stand by a customer when there is nothing, in shape of money, left to his customer. Stock brokers are not noted for their liberal- ity nor are they regarded as parsimonious. As a rule they are sufficiently intelligent to realize that it is greatly to their interest, from a finan- cial point of view, to see that their customers prosper. I am no exception to this rule. At the very start I borrowed money, and put it up with my brokers in order to keep my cus- tomers from being sold out after their margins had become exhausted. Later, after I had made money T used it for this same purpose. Had I used the money of one customer to pro- tect another that would be a different matter — a breach of confidence. But my books will prove I never resorted to such kiting tactics. It was my own money, and what a man does with his own money is his own business. The postal authorities say I charged interest for carrying stocks valued at $15,000,000, 66 which they can prove, by my books, I was not carrying. It is true, in most cases, I did not have actual possession of the stock certificates, but at no time did I lose control of them. This I can readily prove by my books. Furthermore, I can show that my customers gave me permission in writing to loan their stocks. A paragraph in my order contract reads as follows: "I understand that I am to receive 6 per cent, per annum on the monej; I have placed with you as margin. I also understand and agree to pay you interest at the rate of 6 per cent, per annum on all moneys necessary for the purpose of carrying my stocks, and such revenue tax on stocks I deliver to purchasers, as may be required by law. I also accord to you the privilege of loaning all my securities which I have de- posited with you, or which you are carrying for me, according to the usages of the New York Stock and Consolidated Stock Ex- changes, or of pledging the same as collateral to your loans." Does that read straightforward and to the point, or does it impress you as being obscure? Before and since the time of the founding of the New York Stock Exchange, it has been 67 the custom, when one customer was long of a certain stock carried on margin, for his broker to loan it to another customer who had sold the same kind of stock short. Although the certificate, under such circumstances, was not in the possession of the broker, yet the broker's obligation to his customer was in evidence, and if the stock happened to pay a dividend, the customer was credited with the dividend just as if his broker had actual pos- session of the certificate. The customer who had sold the stock short was debited with the dividend, as is the custom in all such cases, in all the stock markets of the world. But, whether the broker was carrying the cer- certificate in his tin box for his customer who was long, or whether he had used the cer- tificate as collateral for his loans, or whether he had loaned it to some other broker in the loan crowd on the floor of the Exchange, or whether he had loaned it to one of his own customers who had sold the same kind of stock short, the customer who held title — who was long of it — had to pay interest to his broker for carrying it, whether his broker was, or was not, in actual possession of it — the stock certificate. 68 This is just what I have done — nothing more — nothing less. And I say, knowing and realizing what I am saying — knowing and realizing its gravity — the great number in- volved — yet I say that the man does not live who can point out to any biased or unbiased broker who is a member of the New York Stock Exchange, and show him wherein my business, in any of its essential parts, differs from his own business. Therefore, if I am a criminal, every member and every partner of a member, not only of the big, but of the little, board is also a criminal. Even Kincaid himself admits they do it this way. They all do it this way, and yet I am jailed, and they are free. Is this right? Is this justice? To make this matter clear to those unfamil- iar with the technicalities of the stock broker- age business, the following explanatory deals should be studied with care : Mr. A. and Mr. B. are customers of Mr. U — who is a stock broker. Mr. V. and Mr. W. and Mr. X and Mr. Y. and Mr. Z. are also brokers. Mr. A. goes to Mr. U. and asks what is the customary margin demanded by brokers. 69 Mr. U. says 10 per cent, in other words $1,000 to buy or to sell 100 shares. Mr. A. puts up with Mr. U., his broker, $1,000 as margin and orders 100 Mop. bought at 40. Mr. U. goes over to the Stock Exchange and purchases one hundred Mop. from broker V. at 40 and so reports to his customer Mr. A. The next day when the stock is delivered by broker V. to broker U., broker U. draws a check for $4,000, payable to the order of broker V. (Broker U. is now long 100 Mop.) Broker U. for carrying this stock charges his customer Mr. A. 6 per cent, interest on $4,000 and credits him at the rate of 6 per cent, per annum on his $1,000 margin. Instead of going up the market happens to go down and a few days later Mop. was selling at 35. Mr. B., another customer of Broker U., thinking that Mop. might go still lower, put up $1,000 with his broker, U. as margin and ordered Broker U. to sell 100 Mop. short for him at 35. Broker U. rushed over to the Board and sold 100 Mop. for the account and risk of his cus- 70 tomer, Mr. B., at 35, to a broker named Mr. W., and so reported to his customer, Mr. B. As this stock was sold the regular way it was delivered by broker U. the next day to broker W. and broker U. received broker W.'s check for $3,500. Now where did broker U. get the 100 shares of Mop.? Did he go in the loan crowd and borrow it? No. He would have borrowed it however in the loan crowd had he not had it in his tin box. When a broker has stock be- longing to one customer in his tin box that another customer has sold short he invariably goes into his tin box and takes out the cer- tificate, the title of which belongs to the cus- tomer who is long of it, and delivers it to the broker to whom he has sold it for the account and risk of his customer who has gone short of it. This is what broker U. did according to the usages and customs of the New York and Con- solidated Stock Exchanges. (Broker U. now has no Mop. on hand.) A year rolls by and Mop. has advanced to 45. Mr. A., broker U.'s customer, orders it sold at 45. Broker U. goes over to the Exchange and n sells 100 Mop. at 45 to a broker named Mr. X., but as he has no Mop. on hand he goes into the loan crowd and borrows 100 Mop. from a broker named Mr. Y. Upon receipt of which broker U. gives Broker Y. his check for $4,500 (the market value of the stock). He then delivers the said certificates of 100 shares of Mop. to the broker named Mr. X., receiving broker X.'s check for $4,500. Mr. A., broker U.'s customer, now requests broker U. to close his account and give him a check for his balance. His balance amounted to $1,293 as per fol- lowing statement: Dr. 1910. July 1. Bot. 100 Mop. at 40 $4,000 1911. July 1. To 1 year Int., at 6% 240 " " " Commission P. & S 25 " " " Revenue tax 2 Balance 1,293 a II a Cr. $5,560 1910. July 1. By Check (Margin) $1,000 72 1911. July 1. Sold 100 Mop. at 45 4,500 " " Int. 1 year at 6% 60 1911. $5,560 Julyl. By Balance $1,293 Mr. B.'s margin, $1,000, which he put up with broker U. when he sold 100 Mop. short a year ago at 35 is now wiped out, and as he failed to reply to broker U.'s call for addition- al margin, broker U. bought in Mr. B.'s stock at 45 from a broker named Mr. Z. The next day when broker U. received this 100 Mop. from broker Z. he gave broker Z. a check for $4,500. (Broker U. now has in his tin box 100 Mop.) Broker U. then took this certificate, 100 Mop., and delivered it to broker Y. from whom he borrowed it, and received from broker Y. a check for $4,500, plus interest, and thus the transaction is closed. As a rule when a broker borrows stock he does not have to pay anything for the use of the stock; but the person from whom he borrows it, as a rule, pays him inter- 73 est for the use of his money — the money he gives the lender to insure the return of the stock. Kincaid claims my customers did not know how they stood — that I did not want them to know — and that this is why I refrained from rendering them monthly statements. Had I done so, he says, they would have realized how deeply in the hole they were. I will admit, as a rule, a stock broker's monthly state- ment has a tendency to send a cold shiver down the spinal column of almost any person. In my 1887 treatise on speculation, page 49, I defined it as being: "A monthly reminder of what an ass you have made of yourself." Yet, seemingly, these very Post Office financiers at- tach importance to it. Possibly if they should take a "flyer" on "the Street," its real import — not to them, but to their broker — might dawn upon them. Before I was seventeen years of age I knew how to express my opinion of, and talk to, a broker who dared to pass out any such document to me. In plain English a monthly statement, which I regret most bro- kers persist in sending to their customers with marvelous punctuality, is simply a written notification that henceforth they will be 74 charged compound interest, and each succeed- ing monthly statement indicates, but in a most subtle manner, that the compounding process is still progressing. My customers agreed to pay me straight 6 per cent, interest per annum. They did not agree to pay me compound interest, and this, and this only, is why I did not spring monthly statements on them. As for claiming that my customers did not know they had given me the right to charge them 6 per cent, interest for carrying their long stocks, it's preposterous — it's a reflection on their intellect; and as for claiming that I kept them in ignorance of the dividends, that I have the privilege of charging against their short commitments, it's even more ridicu- lous, in the face of the fact that every news- paper, in every city in the United States, not only publish when these dividends are de- clared, but when paid. My customers were not dealing in wildcat securities — they were handling the recognized, standard, investment stocks of the country. And there is not an iota of truth in the report that they were kept in ignorance of how they stood on my books. Not one out of the lot — out of the whole 75 eight hundred and fifty — was kept in igno- rance. When a share of the stock was bought or sold for a customer he received a report of the purchase or sale or both as the case might be. The date, the price, the name of the broker from whom the stock was bought, or the name of the broker to whom the stock was sold, or both, as the case might be, was sent to him. He therefore could tell at any and all times to a penny just how he stood if he cared to take the trouble of examining these reports, which were made out daily, and if not called for, mailed weekly to every customer I had, and I defy them to bring forward one who will not say that this is true. "Yes," says Kincaid, "this may be true, but we are going to prove by your books that you kept your customers short as many shares as long. You had two different kinds of order contracts — some read buy certain stocks, and sell certain stocks, and then by reversing this order contract, and having a different group of customers sign the reverse contract, you were enabled to buy the stocks you were selling, and to sell the stocks you were buying, and this shows fraud on its face." If this is true, and if it shows fraud on its 76 face now in 1912, what did it show in 1887? Under the head of questions and answers — page 43 of my book, "How to Take Money Out of Wall Street," written by me and pub- lished by Dick and Fitzgerald, twenty-four years ago, this question and this answer ap- pears : Question: "How can you make anything, if always short as many shares as long?" Answer: "We do not rely upon a bull or bear market for profit; we depend only upon the myriad little changes that each year amount to seven times the market value of the stock." Does this answer mean anything to Kin- caid? — does he know anything about aggre- gate annual fluctuations in the standard issues? And as for Thompson, in order to appreciate his familiarity with the ways of "the Street" it is only necessary to cite what he said to one of my brokers: "Flagg bought in your house 10 Union Pacific for a certain group of his customers, and sold it in another house, at an advance, for this same group, and sent theni the profit. Had he delivered the 10 shares you bought to this other house it would have been all right, but he didn't, and this makes the transaction fictitious." 77 Mr. Thompson might just as well say that I purchased a $1,000 letter of credit on Lon- don from Munroe & Co., bankers, and paid them in greenbacks for it, and when I ar- rived in London instead of giving me green- backs they redeemed it in gold. Munroe & Co. should therefore be indicted on the ground that it left them long $1,000 in New York and short $1,000 in London, just as it might have left me long in one house and short in another. But, what I did do, in point of fact, was to go long in my short house and short in my long house, thus making an exchange of cer- tificates superfluous. What do such men know about the stock brokerage business? Had they known of me years ago when I called on Russell Sage with a view of explain- ing to him this same method of operating they would have had me indicted on the ground that I was "fishing for a sucker." In the presence of three witnesses Kincaid said: "Soon as we tell the jury that you paid out $600,000 and over, and never drew a dol- lar out of Wall Street, you are gone — that will settle it — no jury will ever go beyond this." I admit that I paid out this money, and I 78 admit that I never drew a dollar out of Wall Street. With new ten thousand dollar groups, or as we called them, units being formed every few days; and each of these groups giving orders, and trading in the same stocks the older groups were interested in, but at dif- ferent ranges of the market, how could I help putting up more margin? More customers — more commitments — more margin. Did I ever contract not to put up margin — unlimited margin? And if it never came back did I guarantee to make good the loss? Does the word or any synonyms of the word guarantee appear in my order contract? But, it comes back, and now that no new cus- tomers or money is coming in, it will come back, and with a more active market it will come back still faster. I realized all this and knew that the very moment I stopped extend- ing the business, by accepting new customers and new money, that the tide would turn, and the old money would begin to flow in my di- rection. Naturally, therefore, when the busi- ness was brought to a standstill I was anxious not only for my customers, but for my own sake to start in and liquidate without loss. 79 This would effectually put an end, for all time, to the ridiculous impression that I was conducting an endless chain, Miller syndicate, business. Whether Kincaid and young Thompson knew enough to know this I do not know, but I do know they turned heaven and earth to prevent me from proceeding in the matter. So fearful were they that I might be granted permission, by their superior of- ficers, to liquidate the business without loss that they blocked me for weeks on every turn I made. A committee was appointed, by my customers, for this purpose; and when young Thompson heard of it he became so incensed that he threatened to arrest Mr. T. E. Mor- ford, chairman of this committee, and all its other members. These two young men — Thompson and Kin- caid — posing as protectors, and who had given it out to the public, through the press, that the community at large, to say nothing of my customers, should be thankful to them for watching over and protecting these customers — my customers — against the wiles of a fraud, fought me tooth and nail to injure, if not to ruin, these customers — my customers. So Does any one think for a moment, has any one the temerity to say, that if John D. Rocke- feller should undertake to liquidate my busi- ness, without loss to my customers, that he would fail in the attempt? He would simply order his brokers to carry the long stocks until such time as they could be sold without loss; and in regard to the short commitments he would simply order his brokers to buy in the stocks as the opportunity to do so occurred without loss — that's all. It might take a few years, or it might take only a few months. This would depend solely upon the up and down swings of the market, but it could be ac- complished, and the members of the commit- tee for my customers are now accomplishing it. They have engaged their own brokers, and their own clerk, Mr. David L. O'Sullivan, to give the orders, and he is right on the job every day from the opening to the closing of the New York Stock Exchange. Dull and narrow as the market has been they have already made some progress in buying in short and selling out long stocks. When the market broadens out and becomes more active greater progress will be made, and then Si Kincaid's pet theory — that it is necessary for new customers — new money — to keep coming in in order to keep the business from explod- ing — will be exploded. With no new commitments being made — with no new customers, or new money coming in, and with one old commitment after an- other being closed out without loss, there can be but one result — one hundred cents on the dollar. I am as sure of this as I am of my life, if not more so. And this means that every dollar advanced by me as margin to protect my customers will be recovered by me, and that every dollar advanced by my cus- tomers as margin to protect me will be recov- ered by them; not to mention the $600,000 and odd thousands already paid and made on the transactions actually closed prior to the raid. My name may not be John D. Rockefeller, but I am standing back of my customers just the same, and what is more am abundantly able to do so without availing myself of my borrowing facilities. But were I not in this position, or were I unwilling to use my own money for this pur- 82 pose, I would still have the privilege of calling on my customers to take up — to pay in full for their stocks, which they could, and undoubted- ly would, do if I so requested. Would any one doubt then, with the actual stock certificates in their possession, that a time would come when they could be disposed of without loss? "Paid out over $600,000, represented it as profits made on Wall Street, and never drew a penny out of Wall Street." This is what the postal authorities say they can prove. But I will save them the trouble of doing so by ad- mitting it. If the profits on transactions actually closed amounted in one week to $10,000, and if the paper shrinkages, this same week, amounted to $20,000, my broker would call for an addi- tional $10,000 margin. But, had I drawn from him the $10,000 actually made, on closed transactions, he would have demanded of me $20,000 additional margin. To save this extra bookkeeping, and trouble 5f passing back and forth these checks, I would simply send him one $10,000 check as he had requested, and draw the $10,000, which stood to my credit on 83 his books, from some uptown Trust Company. This money I would turn over to my cashier, Mr. Sewall, who, in turn, would deposit it in his bank, and check out against it the money my customers, on their closed transactions, were entitled to receive. This is the way I did it, but it was not the correct way. I should have sent my broker my check for $20,000 and then have requested him to send me his check, for the profits made on transactions actually closed, say, $10,000, and this check, payable to my order and signed by my broker, I should have endorsed over to my cashier, Mr. Sewall, who would, in turn, deposit it in his bank, from which, later, it would be distributed pro rata by him, to my customers, as profits on closed transactions. Had I made use of all this red tape every- thing would have been legal, according to Kincaid, who says I had the right to use my customers' money as margin, but not the right to pass it out as profits. When my case comes on for trial this will be used as a strong point against me, and now that it is too late I see my error. I should not have regarded a dollar placed to my credit on my brokers' books the 84 same as a dollar placed to my credit on the books of some uptown Trust Company. I sup- posed that a dollar was a dollar, and worth as much downtown as uptown, but it appears, from a Post Office inspector's point of view, that this is not sound reasoning. A paragraph in my order contract reads as follows: "In weeks when the cash profits on closed transactions, including 6 per cent, an- nual interest upon margin which I have de- posited with you, amount to one per cent, or less on said margin, send to me the said cash profits, irrespective of the unclosed paper profits or unclosed paper losses." Does this mean what it states, or does it mean the reverse? Does it mean that so long as my customer received each week this one per cent, or less, on his margin, he was justi- fied in eliminating the word "irrespective," and taking it for granted that there were no unclosed paper shrinkages, and that his mar- gin stood unimpaired on my books? Has a customer of mine, who has deposited money with me as margin, the right to order me to remit certain profits, and have I the legal right to obey his order? For example: 8s If a person gave me an order to purchase ten shares each, of ten different stocks, and if nine of them went against him, declining to the extent of one point each, and the remaining stock went in his favor — advancing to the ex- tent of one point, would he have the right to order me to send him this profit, of one point, made on this one stock, irrespective of the shrinkages sustained on his other nine stocks? And have I a legal right to obey his order? If I have I am innocent. If I have not I am guilty. This is the pith of the whole charge. Has my customer the right to order me to send him a check on account of his principal or on account of any little turn he may have made in the market, regardless as to whether his ac- count with me, as a whole, shows a net profit or a net loss? And have I the legal right to obey his order? This is the question. The fact that my books show a paper shrink- age of $200,000, and my brokers' books a real loss of $200,000, signifies nothing. If my books showed a paper shrinkage of $2,000,000, and my brokers' books a real loss of $2,000,000, it would signify nothing; and yet, they are try- ing to send me to Atlanta on just this account 86 — on a fluctuation. For example, if all our stocks had fluctuated in just the right direction would they have any case against me? Cer- tainly not. But, as many of our stocks fluc- tuated in just the wrong direction, and conse- quently, as my books show a large paper shrinkage, and as my brokers' books show a large actual loss, the postal authorities feel sure of a conviction. In saying that my books show a paper shrinkage, and my brokers' books a real loss, I mean just what I say; but to make it clearer I will explain. If the first person to read this pamphlet bought, through me, 100 Union Pa- cific at 170, and if the next day the stock had declined to 167, and the second reader of this pamphlet sold short, through me, 100 Union Pacific at 167, the first reader's account, on my books, would show a paper shrinkage of three points — $300; but, my brokers' books, where all my customers' accounts were carried in one name — my name, Jared Flagg — this account — my account — on his books would show a real loss of the difference between 170 and 167, $300. This explains the $200,000 actual loss deb- 87 ited to my account on my brokers' books, also the $200,000 paper shrinkage, which would be debited to my customers' accounts, pro rata, if they closed out their open commitments, at the market, plus carrying and commission charges. Furthermore, it explains what an open com- mitment is. After these two orders in Union Pacific have been executed, although the bro- ker will have no Union Pacific on hand, never- theless, he will have two open commitments on his books— the long customer's commitment and the short customer's commitment. Had a transaction of this kind been made in my brother's brokerage office there is not a member of the New York Stock Exchange, or a judge in the United States, or a person in the world, familiar with finance, who would not admit that the two open commitments existed, and that they were, in all respects, lawful. But in my case the postal authorities will not admit that I have any open commitments. They contend that I have only book entries — that I have been playing solitaire, juggling, so to speak, with my customers — playing one against the other; I can, however, by my own, as well as by the books of other reputable bro- kers, easily prove that they are mistaken. Were they not mistaken, I would like to have them tell me who gave the members of the New York Stock Exchange the right to have open commitments. Who gave them the right to clear stocks — the right to conduct a clearing, house? Is there such a thing as class legisla- tion? Do the postal authorities want me to understand that it is wrong for me to clear for my customers; but right for my brother to clear for his customers? Had I been transacting a $10,000,000 busi- ness, my customers' paper shrinkages, on their open commitments, might have been $2,000,000 and my closed commitments, standing in my name, Jared Flagg, on my brokers' books, might have shown a real loss of $2,000,000 ; on the basis as previously stated — more custo- mers, more commitments, more margins. This is liable to be the case with every rap- idly growing business. But I will set forth Mr. Kincaid's reasons for not wishing to ad- mit it: , Suppose, in 1908, a man started a small res- taurant, and had ten regular table boarders. Suppose he gave them good food, and they 89 told their friends it was a wholesome, clean little place to go to, and, suppose, after a year or two, he had one hundred customers ; would he not have to buy more dishes, chairs, tables, and rent a larger place to accommodate all these extra patrons in addition to his ten old customers? And then suppose he kept right on serving tempting food, and so tempting all his customers, not only to keep coming to his place, but to bring their friends ; and suppose at the end of three years he had five hundred customers; would he not have to lease still larger quarters, and incur still greater ex- penses in equipping it to accommodate so many customers? And if he went to all this outlay, and six months later, by actual count, had eight hundred and fifty customers — what then? What would have happened to him then if a young man had quietly walked into his place, right up to the desk at which he was seated, and have said to him: You are under arrest. Don't move! This thing has got to stop. You have been dipping into your prin- cipal. I will admit for the past few years you may have made a little money, but for every dollar made you have squandered two in tin 90 pans and dishes, and this is a crime. I am a Post Office inspector, and am hungering for notoriety and thirsting for advancement — therefore, I propose to prove by your own books that you not only never drew a dollar out of this place, but have sunk thousands of dollars in it. You started small and had you remained small you would not have been mo- lested ; but now that you have attracted atten- tion, and are up in the millions, if I can blast your good name, and wreck your business it will be a feather in my cap. It will help me to make a record — a reputation for myself. It is this mad desire to gain recognition — to make a reputation at any cost, that keeps Kincaid from admitting that the out-go of a rapidly growing business, during its period of growth, frequently exceeds its income. Of all the fool charges preferred against me the most ridiculous is the one now, at the eleventh hour, made by the postal authorities. At first we heard a great deal about bucketed transactions — we also heard that Kincaid was running around and warning different lawyers not to touch my case as it might injure their standing in the community. When I told one 91 of these lawyers that Kincaid was lying and that I had never bucketed an order he looked at me as if I were demented. I am tempted to mention this lawyer's name ; but what's the use? He prides himself on his probity, and it might wound his pride were it generally known that he was willing to swallow it, along with the "bucketed" transactions, had I agreed to pay him $60,000. But now, after the investigators have been at work investigating my books for four months, we hear no more about bucketed deals. On the contrary we are told there are none, and that all the transactions are legal if taken individually; but illegal if taken col- lectively, on the ground that the interest on the open commitments would in time, have ruined my customers, and that I, knowing this, con- tinued to accept new money. I did not know anything of the kind, and to prove it I will tell them of a few things I did know, and do know. Twenty-four years ago I knew that with money, money could be made, and I still know it. I know that I have just as much right to call on my customers for additional margin 92 as other brokers have to call on their customers for additional margin. I know that if I should send out such a call I could raise one million dollars. I know if I should require another million I could borrow it. I know that since the raid I have refused to accept hundreds of thousands of dollars my custom- ers have olifered to me. I knew, before I em- barked in the stock brokerage business that my commissions would not amount to — not equal SO per cent, of my salary list. I knew, and I know, that nine tenths of all the commission houses on Wall Street would go out of busi- ness if obliged to depend solely on their com- missions to pay expenses. I know that I can prove by the books of all the commission house brokers on the New York Stock Exchange that their commissions, derived from the pur- chase and sale of stocks, during the past three years, have not averaged, in proportion to their size, one dollar more than mine have averaged. I knew and I know that every commission house broker down there depends, almost solely, on his interest account to make ends meet. To say, therefore, that my trans- actions, if taken separately are legal, but if 93 taken collectively are illegal, is equivalent to saying that a lot of pennies are good if scat- tered loose in a money drawer, but counterfeit if wrapped up in a neat paper package. If every honest commission house broker on Wall Street supports himself on his interest, what should I support myself on? I claim to be honest, but the postal authorities say: "It is different with Flagg, he was doing a great business — he was taking in millions." What if I were? Am I an incompetent? Am I incapable of managing a large business? Could I not handle fifty millions as easily as one? Is there a brokerage ofKce on Wall Street, is there a National Bank in the United States, is there a financial institution in the world, that ever kept a cleaner, a more elabor- ate, and withal, a more comprehensive, sim- ple and accurate set of books? Let them an- swer this question before presuming to talk about my inability, or lack of executive abil- ity. The Government's own bookkeepers, brought on from Washington for the express purpose, and with the hope that they, with their versatile knowledge, could rip my books 94 apart now, after months of labor, stand aghast, amazed and dumbfounded. Even the prose- cuting attorneys, loth as they are to admit any- thing, are now constrained to acknowledge that these expert accountants have expressed, to them, surprise and admiration at the manner in which I kept my books. Does this indicate incompetency, or com- petency, on my part, to direct the afifairs of a large financial business? While it is true that I, like all other com- mission house brokers, had the privilege of charging my customers interest on long stock which I was not carrying, in the sense of having actual physical possession, but which I was carrying according to the way most of the stock on Wall Street is being carried, what do my books show? Do they show that I charged up interest on all the $15,000,000 long stock my customers were carrying? Now we are getting right down to facts. What are the facts? As previously stated the postal au- thorities have my books, and have had them in their possession from the moment of the raid. I could not, therefore, even had I been so inclined, tamper with them. There they 95 are, in the Federal building, just as they were taken from my office, and what do they prove? They prove (and if it were not so I would be a fool to say it) that I have never charged up one penny in interest to any customer's ledger account, barring interest which was taken out of Wall Street, and which I deducted, along, with my commissions, from the gross profit on transactions actually closed, and of which the net profit was credited to my customers. The same is true of dividends charged against short commitments. Not until the stock was cov- ered, bought in, showing a net profit over and above my commissions, and any dividends paid out, was it charged to my customers' ledger accounts. There is no way in God's world that the postal authorities can wiggle out of this — there are the books — -there are the facts which they can see with their own eyes. Does this indicate that I knew the interest on the open commitments would, in time, ruin my customers, or does it indicate that I knew the 6 per cent, interest to which I was entitled could, in time, all be taken out of Wall Street, and that a net profit, over and 96 above this interest, would be credited to my customers? "If you were aware of this, and if you in- tended always to conduct your business on this liberal basis, why did you exact from your customers, in writing, the privilege of con- ducting it differently — the privilege of, at any time, charging up interest against their ledgej; accounts?" ^ ,Nt ?^-- ^ My reply to this questioil is as' follows :v "To protect them and myself. I had no de- sire to see my customerHTCCome panic stricken,., in a panic, and try to ruin themselves and me by making a run on me. I, like a savings bankj wanted the legal right in the event of an emergency, to close my doors, and hold my creditors at bay until the clouds rolled by. All my customers approved of this, for the obvious reason they had no more desire to see me ruined than I had to see them ruined. The day after I was locked in the Tombs, my Secretary, Madeline Russe, left town. Here was Kincaid's opportunity, and he made the most of it. "Flagg's confidential secretary, the brains, the master mind, the real head of the concern, and she had flown, ab- 97 sconded, to escape arrest." Could any one say now that he had made a mistake — would this not lend color — did this not prove fraud — ^was he not a great detective — if doubts had existed, were they not now dispelled — was it not a tri- umph, a complete vindication, for Mr. Kin- caid? He told the Associated Press reporters that Mrs. Rand, a reporter on the New York World, had told him that Miss Russe had ad- mitted to her that most of my transactions were fictitious. For months this Rand woman, who also worked for the Post Office, played the part of a snake in the grass, lying, sham- ming, accepting my hospitality, and yet all this time only waiting for the opportune moment to arrive when she could, figuratively speak- ing, plunge a knife blade in my back. She, like Kincaid, was hungering for advancement; and the New York World, against which I have a $50,000 damage suit pending, appreciat- ing her wonderful prevaricating ability, when writing articles relating to me, awarded her $100 — a prize it had offered for the greatest 1911 sensation. Kincaid was also awarded a prize in the shape of a $100 increase in his 98 salary; at least, it was so reported in the news- papers. He got wind of this increase before it came, and called a lot of reporters about him, and from what you have read in the news- papers, you can imagine what he said, and what he gave to them. Miss Russe's pictures, which the Rand woman, by worming herself into her good graces, had obtained, were given to these reporters. And newspapers in every city and large town in the United States cop- ied these pictures, and published the lies put in her mouth, as God's truth — representing, far and wide, that my own secretary had con- fessed that most of my transactions were spu- rious, and to save herself had fled the coun- try. But she would be caught; Kincaid, the Great, with his army of detectives, would run her down. It would cost thousands ; but what of it? It was the people's money; and, be- sides, Kincaid's name would be in the papers — he would become noted. We are following up several clues — we are watching the outgo- ing steamers — we have ordered her father and mother to come down from White Plains — ^we are going to subject them to the third degree — we will get her — now, put that in the papers, and let the public know I am on her track. 99 Judging from the way the papers talked, I imagine that must have been the way Kincaid talked. No actress ever had such a press agent as E. L. Kincaid. Under his management, Madeline Russe, in one week, was advertised from the Atlantic to the Pacific; not in the advertising columns, but on the front pages. Theatrical managers came to me in droves and offered fabulous prices if I would let her ap- pear, merely for a few nights. But I didn't know where she was — why she had run away, or when she would return. Now why did she leave the country? She does not know why herself, but she thought she was obeying orders. It came about in this way: Madeline, who is not quite nineteen years of age, is somewhat lacking in experience when it comes to dealing with the police. She was not in my office at the time of the raid, having left for the day, and as she attended a matinee, heard nothing about it until evening. She was told that I might be out on bail, and that it was too late to see me if I was not out. So she decided to wait for developments ; but nothing developed. I was there, all right, safe and secure, walking around in a six by three steel cage. I was 100 there all Saturday night, and right there in the same spot, when Madeline rang up Sunday morning. Nothing would do, but she must speak to the Warden— "it was impor- tant." When he took the receiver she asked him if he would kindly request me to step to the telephone. "Telephone!" He said: "Young woman, do you know who I am? I am the Warden." "That's it— that's right— I merely wanted to have you ask Mr. Flagg if he would kindly come to the 'phone." And the Warden replied, "We do not allow prison- ers to come to the 'phone." "Oh !" said Made- line, "I didn't know it"; and then, although I do not know how she accomplished it, she per- suaded him to send a "trusty" to my cell with a message. A "trusty" is a prisoner they trust to carry messages to prisoners they do not trust. Madeline wished to know if she could call and see me. My reply, in accordance with the rules of the city prison, had to be written. I wrote: "Keep away. Don't come near this place." That "trusty" read this reply and looked wise. He had also read the morning papers. He understood, he said. I did not ask him what he understood, but he ad- vised me to destroy this message, as it would 101 have to be put on the Warden's file, and might be misunderstood. He told me to write they do not admit visitors on Sunday, and I did so. I expected to be, and was, out on bail the next morning, so one message answered my purpose as well as the other. But this "trusty," after placing this message on the Warden's file, walked into the telephone booth, and al- most in a whisper— according to Madeline — told her to "get out of the country, and get out in a hurry." She was stunned. It was so unlike me, as she later remarked, to run away — "to tell her to run away." But there was the whispered order, transmitted to her, as she sup- posed, by my order. Was it possible she knew so much about my business that there was something she did not know? This thought, she says, flashed through her mind, and she hesitated, but it was only for a moment. She had a little money — her sister had more, and her sister's intended had still more, and with her bag filled with bills she started, and never stopped until she landed in the Bay of Fundy. And there she remained. If any one knew where she was, it was not I. I inserted a card in the New York American, which was copied in the country papers. It read : "The postal au- 102 thorities say that they want my secretary. When they get her they will drop her like a hot potato, and if I knew where she was I would advise her to return." After reading this card in some Boston paper, Madeline did return, and she told the Federal Grand Jury and the Post Office inspectors and newspaper reporters who interviewed her that she had never said or intimated that my transactions were fictitious. Furthermore, she told them she knew they were not, and that every entry on my books was bona fide. She has said, written and sworn to this. And so it goes; every charge when un- raveled — every accusation against me when analyzed — resolves itself into just so much hot air — nothing to it. If it is true, as reported in the New York Evening World, that the George Graham , Rice trial will cost the Government — the tax- payers — $1,000,000, and if it has been in progress five months and may last ten more, mine, although it is admitted in the District Attorney's office that the two cases are wholly dissimilar, may last as long, and may cost as much. Why, therefore, squander all this money for the sake of appeasing or of afford- 103 ing young Thompson and Kincaid an op- portunity to try to make a record for themselves, when I am willing to have the matter settled, one way or the other, in ten minutes, in or out of court as they may elect? I have written to the postal authorities — I have gone down to the Federal Building, and in the presence of witnesses have said to Mr. Kincaid that if he or if any other Post Office inspector down there ; or if any attorney in the Department of Justice or any other person can show me wherein I ever represented that money used as margin for speculative pur- poses could be made to pay anything; or if he can show me an advertisement or circular or letter in which, or a scrap of paper on which I ever guaranteed, represented or intimated that I would protect a customer against loss, or conveying even an impression that he could not lose his money; or if he can bring forward an agent of mine who can show any kind of a document or letter signed by me, which by any stretch of the imagination could be construed into authorizing him to make any such promise to a customer, or to a prospective customer; or if he can show me a dollar out of all the money it has cost to run the business (percentages, commissions, salaries and other expenses) that 104 I ever abstracted from the money belonging to my customers ; or if he can show me a dollar converted, misappropriated — ever used by me — for any other purpose than that for which it was lawfully intended to be used; or if he can produce a customer who ever bought or sold a share of stock through me without re- ceiving a transcript of my broker's' notice, made at the time, not later, but at time the sale or purchase was made, that it was made at his — the customer's — risk — not mine; or if he can show me a dollar that I ever took from one customer and paid to another; or if he can show me a dollar that was ever paid to a customer from my own or his principal; or if he can show me why, with adequate capital, my customers could not have gone on, just so long as stocks fluctuate, just so long as the opinions of men differ, just so long as the ex- pected and unexpected happen, and panics and booms and raids and rallies and slumps and recoveries and financial squalls occur — if he can advance any sane reason why they could not have continued to make money, on their closed commitments, systematically, per- petually and infallibly; or if he can show me a dollar, out of the whole $650,000 paid 105 to my customers, that was not made on Wall Street — that I am unable to prove by my brokers' books, or by the Stock Exchange clearing house sheets was actually made on Wall Street, and duly passed up to my credit on my own and on my brokers' books ; or if he can show me an entry of long stock, on my books, where the stock is missing — where I am unable to promptly produce the certificate ; or if he can show me an entry of short stock, on my books, where the stock is missing — where I am unable to name the per- son or persons to whom I have loaned the stock, or where I am unable to promptly pro- duce the certificate by calling it in from the person or persons to whom I have loaned it; or if he can show me that I cannot — or that my customers could not, close out at a net profit each and every open commitment they have on my books after the market swings to the ex- treme high at which some of their purchases were made, and back to the extreme low at which some of their sales were made; or if he can show me one out of the hundreds and hundreds of transactions my customers made, after my brokers, in compliance with the order of President Jarvis, of the Consoli- 106 dated Stock Exchange, declined (presumably at Kincaid's request) to execute my orders, that was not made — not executed on this Ex- change ; or if he can show me a transaction, of all the transactions recorded on my books, or on my brokers' books, knocked down, made for my benefit — not made for the benefit of my customers ; or if he can in short show me one, just one, bucketed, bogus, fictitious, or crooked entry, of any kind, on my books, from the day I started, January 2d, 1908, down to and in- cluding the day of the raid, September 23rd, 1911, I will go before any Judge he may name, and plead guilty on the spot. JARED FLAGG. January 26, 1912. 107 N. B. February 2, 1912. A few days after the raid, Mr. Kincaid, when ex- amining one of my customers, Mr. E. C. DeWolfe, whom he had summoned all the way from Chicago, said: "I have got to make a case against Flagg, or I might as well resign my position." On February 2d, 1912, he resigned his position. Nothing exemplifies more lucidly the incentive a Post Office inspector has to persecute a man, once raided, if not guilty, than the words ascribed, in the New York "Herald" of March ioth,i9i2, to Chief Post Office Inspector Warren W. Dickson : "Uncle Sam gives us ample authority, but Heaven help us if we make a mistake." (Which means that if an innocent person is raided by mistake "Uncle Sam" will look into the matter, and Heaven help the inspectors responsible for the mistake. Dickson having made a mistake and realizing the predica- ment in which he is placed, is now comparing me by innuendo through the public press, and before I have had a trial, to "safeblowers and yeggmen." Obviously this public official is willing to prosti- tute his manhood in an attempt to create sentiment against me, and in his favor, to the end that I — the person whose office was raided by mistake — may be adjudged guilty, and that he — the person who sanctioned the raid by mistake — may be exonerated. 108 FLAGG'S FLATS. "Flagg's Flats" is the most damning book that has been written in a hundred years. RALCY HUSTED BELL, M.D., New York. My God! what a nerve you had! JACK FREAR, Dallas, Tex. It is Stranger than anything in fiction and shocking and outrageous beyond words. EUGENE V. DEBS, Chicago, 111. It's the most amazing book, written out of the heart of a man, I've ever read. F. W. FLEITZ, Asst. Attorney General of the State of Pennsylvania. It shows up the municipal corruption of New York City as it never was shown up before. D. N. MORGAN, former Treasurer of the United States It will be read, and the name, Jared Flagg, will live long after we are all dead and buried. COLLINS ARNOLD, Albany, N. Y. There seems to be a subtle species of fascination about it hard to explain, save that the reader, as he passes over page after page, realizes that he is imbibing positive facts tenfold more astounding than the weirdest fiction ever written. ST. GEORGE RATHBORNE, Bloomfield, N. J. It rings true, and the people of this republic owe Jared Flagg a debt of gratitude. JULIA LESTER DILLON, Countess of Roscommon. Your book cannot fail to make an impression, in your favor, with all honest people. ROB'T. B. BRANDGEE, Farmington, Conn. Every voter in the United States should read "Flagg's Flats." It should be staged. It ought to stir the people and rouse them to a frenzy against ring rule. It is capable of accomplishing as much in this direction as Uncle Tom's Cabin did in ending slavery. JUDGE ARTHUR M. HIGGINS, Minneapolis, Minn. The fourth edition of "Flagg's Flats" is now on sale at the office of Jared Flagg, 105 West 40th St., New York City. Wholesale price, 25 cents; retail price, 50 cents; post paid.