The Man Who Made the Movies

by Vanda Krefft

  The ease of that stock offering was deceptive. Amid the mercurial and highly emotional atmosphere of the late 1920s, investors were not always willing to be led down the garden path, even when the professionals made the numbers make sense. Fox learned this with his second offering of Fox Film stock in January 1928. In that instance, he was dealing with the Wesco stockholders, who were represented by Hayden, Stone. Fox offered to buy their Wesco shares for $55 each or to exchange them at a rate of one Wesco share to three-quarters of a Fox Film Class A share. Because that formula effectively sold Fox Film shares at $73.33 each, Fox expected that almost all the Wesco shareholders would prefer the exchange option. As it turned out, the owners of 109,000 of the total 295,000 Wesco shares wanted cash, amounting to nearly $6 million.

  Fox didn’t have $6 million to part with. Consequently, Hayden, Stone assembled a group of investors to buy the 109,000 Wesco shares at $55 each from the owners. The group then exchanged the Wesco shares for 81,750 Fox Film shares, took another 60,466 Fox Film shares at $75 each, and set about marketing them to the public. It should have been an easy task. In the background, Fox was still running the Taylor, Thorne price-fixing syndicate, and four days before it was scheduled to end in early April 1928, he started another one. (The purpose of ending one group and forming another was to allow participants an opportunity to leave with their profits and to let in new members.)

  The plan failed. In the spring of 1928, Fox Film’s share price suddenly dropped. There wasn’t any good reason for it, but there wasn’t any good reason for much of the stock market’s behavior at the time. Hayden, Stone sold only a few of its Fox Film shares at a profit, and then, when the market price refused to move upward during the next few months, the firm halted sales.

  The situation resolved itself, but not in any way that was reassuring to Fox. Instead, mysterious forces took hold. In mid-June 1928, Fox Film’s share price suddenly began to climb from $72 to well over $100. The company’s performance didn’t warrant the price increase, Fox knew, and he did not want the price so high because of the risk that it would crash down to its rightful level.

  Although he was never able to confirm it, Fox believed that the driving force behind the price run-up was William C. Durant, the twice-deposed founder of General Motors who had moved to New York to play the stock market full time. Durant was one of the so-called “big ten,” which was actually a group of about twenty-five multimillionaires from the Midwest who—operating secretly with their brokers, in defiance of Wall Street customs and precedents and against considerable opposition—had commandeered the stock market by the summer of 1928. Throwing money at about fifty targeted securities, they lured the public to follow in their footsteps and then, with share prices rising by 10 to more than 100 points, cashed out with huge profits. One of Durant’s pet stocks was Fox Film.

  As the share price spiraled upward, the Hayden, Stone group sold all its remaining Fox Film shares, taking in a gross profit of $1.6 million. That effort ended on September 10, 1928, the very day that Fox Film stock hit an all-time high of 119⅝.

  The share price then drifted down and settled around $109. That was still too high. Fox worried that a sudden, sharp drop would make it difficult later on to market more shares. To ease the price back to what he believed was the appropriate level—and to raise more money to pay off mortgages, discharge bank debts, and help pay for more Movietone City construction—he arranged for Hayden, Stone to underwrite another 153,444 Fox Film shares at $85 each, beginning on October 1, 1928. Again, the offer had to go first to existing shareholders, and again, as they had at the beginning of the year, the existing shareholders responded enthusiastically, taking all but 247 shares within twenty-one days. Fox Film received $12.4 million, and as intended, the share price drifted down to the mid-$80s, where it had been at the beginning of the year.

  Again, this was not natural market activity. In the background, Fox was running a third Taylor, Thorne price-fixing syndicate. This one had started on August 31, 1928, the same day that the second syndicate closed, and continued until October 30, 1928, after the stock offering to the shareholders closed.

  Altogether, then, during the sixteen months from July 1927 through October 1928, Fox continuously manipulated Fox Film’s share price through secret trading activity. He had no misgivings. He considered it his “obligation to take care of the market” for the sake of Fox Film, and later said, “I did the best I knew how.” If he had personally invested in and profited from all three Taylor, Thorne syndicates (and he had), and if, for all three, he never put his own name on his account (and he had not), that was his own business. He had done nothing illegal.

  Fox also disregarded the lesson that had confronted him in his unsought entanglement with William C. Durant: he was dealing with forces he didn’t fully comprehend, and he’d been lucky to escape unharmed. Instead, he chose to believe he had mastered the situation. The incident seemed to confirm once again his supreme ability to triumph over every challenge. He saw what he wanted to see, and he had no one around him to suggest that the truth might be otherwise.

  With Fox Theatres, Fox acted even more aggressively than he did with Fox Film. He could do so because he had set up Fox Theatres differently. Fox Film’s bylaws required the company to offer new shares first to existing stockholders, so any new stock issue had to be publicly disclosed, and transactions were exposed to public scrutiny. Fox Theatres had no such restriction. Its board of directors could grant stock options to whomever it wished—and since Fox owned 100 percent of Fox Theatres’ voting stock and thus controlled the directors, they granted options to whomever he wished. There was no need to reveal these actions to outsiders. Behind that lowered veil, Fox was governed only by his own conscience. In the late 1920s, that was a hazardous proposition.

  From 1927 through 1929, Fox traded continually in Fox Theatres stock through as many as twenty-two brokerage houses. At each firm, he kept up to seven accounts, all in the names of relatives or employees, in order to disguise his participation. The purpose was to sell new Fox Theatres stock to the public without using bankers, whom Fox regarded as little more than parasites.

  It was a highly unorthodox way to conduct business. Typically, a company looking to raise money sold a block of new shares at a discount to investment bankers who, because they would get stuck with any unsold shares, first researched the company to make sure its prospects were sound. The existence of a middleman provided reassurance to potential investors, in that a seemingly independent, seemingly astute party had judged that this was not a swindle.

  But Fox didn’t want to pay the standard bankers’ commission of $3 per share. He didn’t think he had to. Fox Theatres had operated profitably since its inception, and it had some of the largest, most beautiful properties in the business. The public could see that. Bankers would have nothing to do except mail out paperwork and collect checks. That was all, he believed, that Hayden, Stone had done when it had sold the new Fox Film shares to existing stockholders in January and October 1928. The Wesco shares conversion did require some actual work, but altogether Hayden, Stone had received about $1.4 million in fees and commissions. Fox hated paying that $1.4 million. In his view, the money could have gone instead toward the upbuilding of his companies.

  Altogether, through his brokerage accounts, Fox moved 700,000 new shares out of the Fox Theatres treasury and into the hands of the public—supplementing the 800,000 shares that had been issued at the company’s inception in November 1925. (The other 83,000 Fox Theatres shares that would be outstanding by the end of 1929 appear to have been sold by the company directly to the public in the early fall of 1929.) At first, in selling the new Fox Theatres stock, Fox either covered his tracks very carefully or handled the transactions in a relatively unobjectionable way. At least, his activity in 1927 would never be pinpointed for public criticism.

  However, in mid-1928, amid the stock market’s broad, frenzied run-up, he cast off restraint and conducted two short-selling operations in
Fox Theatres stock that directly conflicted with his duties as president and chairman of the board of the company. A short sale amounts to a bet against a company’s performance. On the assumption that the share price is about to decline, one first borrows stock from a brokerage firm for a specified period of time for a relatively modest fee. Then one sells the borrowed shares. When the stock price declines, one buys the number of shares that one had borrowed and returns them to the lender. The arrangement reverses the order of the usual rule for stock market speculation. “Buy low, sell high” becomes “Sell high, buy low” and allows investors to profit in a down market. Company officers, of course, are supposed to concentrate entirely on doing well.

  To run the Fox Theatres short-selling scheme, Fox enlisted Michael J. Meehan, head of the M. J. Meehan & Company brokerage firm. In his late thirties, Meehan was a quiet, round-faced figure who wore glasses with severe metal frames and brushed his hair smoothly back from his forehead. A former cigar salesman, he was now considered one of the shrewdest minds on Wall Street.

  Fox and Meehan devised a nearly foolproof plan. To sidestep the main risk of short selling—that a stock price won’t decline but might actually gain—Fox gave Meehan options to buy Fox Theatres stock at prices ranging from $26 to $28. The options assured Meehan of the price at which he could buy shares in the future. Therefore, he knew the price at which his managers had to sell shares now in order to get the profits they wanted. On Fox’s side, the arrangement would raise money for Fox Theatres without incurring the usual $3 per share commission imposed by bankers. M. J. Meehan & Company would receive a more modest management fee—in one case, 10 percent of the net profits of the operation. To get working capital, Meehan formed syndicates of investors. The scheme’s only remaining risk was that no serious buyers would materialize and the operation would be a waste of time.

  Fox took care of that, too. Through his many brokerage accounts held in other people’s names, he created wash sales in order to stimulate the market. That is, he placed buy and sell orders in the exact same amounts, usually on the same day, to generate an appearance of interest in the stock. In the first Meehan syndicate, such phony transactions accounted for 35 percent of the total trading.* The trick worked. Traders on the floor of the New York Curb Exchange, where the stock was listed, ran after Fox Theatres shares. As the Meehan & Company syndicate manager later explained, floor traders “are always glad to follow . . . any activity in the stock.”

  As a result of these manipulations, Fox Theatres’ share price went as high as 37⅞. After selling at the artificially inflated prices, Meehan & Company exercised its option with Fox Theatres and bought the shares it needed to deliver to the buyers for as much as eleven or twelve points below the price at which it had sold them. The first short-selling syndicate lasted five and a half weeks, from August to October 1928, and generated a profit of $433,308. With a 26 percent share, Fox personally received $110,660. The second syndicate, which ran from December 1928 to April 1929, yielded a profit of nearly $2 million. Fox’s share was $322,960.

  There were so many dubious aspects of the process. The fact that Fox gave relatively low-priced stock options to Meehan meant that he was essentially betting that the public would pay more for the shares than he believed they were worth. And by running the wash sales campaign, he was manipulating the public into valuing the shares at an artificially high level. Moreover, through his personal participation in the Meehan & Company syndicates, he was profiting at the expense of his company. Fox Theatres received no more than the option price for its shares; the difference between that price and the market price all went to the syndicate members. In an ideal world, Fox Theatres would have benefited fully from the public’s estimation of its value.

  Later, Fox would say that he had conducted his personal trading accounts both for his own and Fox Theatres’ profit. However, Fox Theatres had never expressly authorized him to act on its behalf, and kept no written records of these transactions. “[I]t was best not to have an entry” on the books, Fox said. Instead, he stored the information in his head, and when questioned later, he couldn’t recall the specifics. There is no evidence that any of the syndicate profits made it back to the company.

  Much of what Fox did would soon be illegal, thanks to the Securities Exchange Act of 1934, which outlawed short selling by a company’s officers* and prohibited the buying and selling of shares in order to create an appearance of market activity. At the time, though, Fox broke no laws. He could further reassure himself by noting the stature of some of the other Fox Theatres syndicate participants. The second Meehan & Company syndicate included John J. Raskob, the right-hand man of Pierre du Pont and the former vice president for finance of General Motors; Walter P. Chrysler, founder of the Chrysler automobile company; and Nicholas F. Brady, chairman of the board of the New York Edison Company and a director of Chrysler, Westinghouse Electric, and Union Carbide.

  On some level, Fox was ashamed of the short selling and wanted as few people as possible to know about his involvement. In at least one of the wash sales, he routed the transaction through five different brokerage houses, although ordinarily it would have cleared directly between two houses. When the time came to pay out the profits of the second short-selling syndicate, he had his check made out to a Meehan & Company employee, who then endorsed it over to him. According to that employee, the purpose was to hide Fox’s identity from the brokerage’s three hundred to four hundred clerical employees. Later, Fox would call short selling a “rotten” practice that ought to be outlawed.

  On the other hand, with moral superiority at the heart of his self-image, Fox could never quite see himself in a guilty light. He insisted that all his trading in Fox company stock had been “perfectly proper”—which meant that short selling wasn’t wrong at all. In that frame of mind, he said, “Short selling is a common practice that is indulged in by many people. The New York Stock Exchange knows how to prevent it any morning if they wish to stop it. They permit it and I can’t see any crime in selling stock short.”

  An uneasy conscience made it difficult to think clearly.

  Not even the Fox companies’ mortgage bond issues (relatively conservative investments that were secured by real estate and buildings) went smoothly. After buying the land in 1925 to build his first two five-thousand-seat “super theaters” in Detroit and St. Louis, each of which would have an office building on top of it, Fox spent more than a year searching in vain for bankers to finance construction. Finally, in early 1927, the Chicago-based firm of Halsey, Stuart & Company signed on for the job. Halsey, Stuart president Harry Stuart said the firm did so to help Fox out of a tight spot. More plausibly, Fox claimed that Halsey, Stuart—never having handled theater securities before but wanting to get in on a promising new field—solicited the business.

  The relationship was contentious from the beginning. Halsey, Stuart miscalculated the amount of work involved to sell the Detroit and St. Louis Fox theater bonds and had to conduct an expensive publicity campaign that completely ate up its commission of less than 7 percent. The firm was not in the habit of working for free. Consequently, when Fox came to Harry Stuart in the fall of 1928 with an emergency situation, Stuart exercised his resentment.

  At that time, Fox’s $25 million deal to buy the Poli theater circuit in New England was about to collapse. Fox had arranged to borrow most of the money from the circuit’s founder and owner, Sylvester Poli, through a “purchase money first mortgage,” a type of agreement in which the seller acts like a bank and lends money to the buyer. Fox Theatres also threw in some cash, and because Halsey, Stuart hadn’t wanted the deal, Fox had lined up another banking firm to underwrite second mortgage bonds for the final $4 million. At the last minute, the other bankers backed out. Harry Stuart agreed to have Halsey, Stuart step in and take over the second mortgage bond underwriting, but only if Fox wrote a letter promising to make a special payment of $1 million for “past services.”

  Fox agreed, but not happily. In his v
iew, Halsey, Stuart was being well compensated: between 1927 and 1929, the firm would receive nearly $3.4 million from the Fox companies for issuing $48 million worth of securities. A lot of it was easy work. The public oversubscribed to second mortgage bonds for both the Roxy Theatre and the Poli Circuit, and a Halsey, Stuart executive told Fox his firm made good money on the deals. Furthermore, bankers were not builders of enterprise. They were buzzards, circling overhead, eyeing opportunities to feed upon others’ hard work. So, when Halsey, Stuart officials kept asking for the $1 million commitment letter, Fox kept not writing it.

  Fox’s involvement in high finance swept him into a circle of shady characters. Typically, they were well educated, sleekly groomed, socially prominent, and extremely wealthy. In the spirit of the times, all they lacked was a public conscience.

  Richard F. Hoyt, the Hayden, Stone partner who arranged the Wesco shares sale to Fox, was a Harvard University graduate, a yachting enthusiast, a skilled airplane pilot, and a ruthless mercenary. In 1926, Hoyt had unsuccessfully defended himself against fraud charges brought by a former client, Grace Van Braam Roberts, a railroad president’s daughter who had lost several hundred thousand dollars after Hoyt pushed her to buy stock in the Atlantic Gulf and West Indies steamship line. Hoyt claimed he had simply given honest bad advice. However, at the time he was urging Roberts to buy the shares, he was a director of Atlantic Gulf and West Indies and was dumping his personal holdings of the company’s stock. Hayden, Stone paid the $16,000 court judgment against Hoyt, and although Roberts tried for years, the New York Stock Exchange’s business conduct committee refused to censure Hoyt in any way. Roberts commented, “If the members of this firm had cheated at cards or in a yacht race they would have been expelled from their clubs. Why is stealing money from trusting customers more respectable?”