The stock sold readily. A little was disposed of at 33 cents, but it soon rose to par, then went beyond, and before long was selling at $1.40 a share. Jernagan had selected for his officers and directors men of standing, well known in the New England states, and, as can be easily understood, with such names and claims to back the stock his announcements became irresistible. "One is at a loss," runs his prospectus, "to comprehend the enormous wealth thus floating in solution in the water. At the lowest estimate a cubic mile of sea water contains gold to the value of $65,000,000. It is probably nearer the mark to place it at $100,000,000. There is enough gold in the waters of Long Island Sound to pay off the national debt, and leave a larger gold reserve in the treasury than the government has yet possessed." 4. Operations of the Company. The new company installed a plant at North Lubec, a litle town on the shores of Passamaquoddy Bay, Maine. Jernagan explained that this spot was peculiarly suitable for his work, as the tide here rose from eighteen to twenty feet higher than anywhere else on the United States coast, thus supplying at no cost a greater volume of water for treatment. When the plant was once in operation, the sale of stock was assisted by judiciously inspired newspaper stories and by the "practical" working of the plant, backed up by reports from the United States Assay Office at New York showing that large amounts of gold were obtained from Jernagan's amalgam. Before the end of July, amalgam containing between $15,000 and $20,000 worth of gold had been sent to the government office. Wide currency was given to these treasure shipments and the government report was published broadcast. As a natural result, money flowed in and the price of stock rose steadily. 5. End of the Sea Water Gold Fraud. The farce went on until the middle of July, 1898, when a million dollars' worth of stock had been sold, most of it above par. About this time Jernagan went to France, taking a large sum in cash with him. So far as known he is still there. The process has never worked since his departure and the waters of the sea still retain their customary quantity of gold. In this case Jernagan gained his first important advantage when he satisfied two "credible" witnesses that his machine actually did recover gold from the waters of the sea. The demonstration given was obviously inadequate and unsatisfactory and its acceptance by two men of standing was unwarranted and mischievous. It gave Jernagan the foundation, apparently firm, on which to build and he lost no time in making the most of it. Those who came after naturally took for granted that the reputable names and material amounts of money loaned the new undertaking were a justified indorsement of the scheme warranted by duly substantiated facts. In conclusion it may be said that ready acceptance of claims or statements without adequate investigation leaves the door wide open for the perpetration of just such deliberate frauds. It also makes possible the more or less unintentional frauds and the honest mistakes so frequent in the history of financing, resulting in the investment of large sums of money in worthless, deficient, or impossible enterprises. No matter by whom the enterprise is taken up, whether by the owner, inventor, promoter, or investor, nor for what purpose, its thorough investigation cannot be waived or neglected save at the most serious risk of failure and financial disaster. CHAPTER IX INVESTIGATION OF AN UNINCORPORATED Scope and Purpose of an Investigation The investigation of an enterprise should be undertaken primarily by the owner or other original party who is interested in its sale, financing, or development. When undertaken by the owner or promoter, investigation is usually for the purpose of ascertaining whether the enterprise gives sufficient promise of profits to justify the time, trouble, and expense involved in its financing, development, or operation. Information in regard to the undertaking is equally important to those who are invited to come into it later, and unless these prospective investors are willing to accept the results already obtained it is probable that the enterprise will have to be investigated again-perhaps many times, as the conditions and interested parties change. The first investigations may not have been of sufficient scope or thoroughness, or may not cover additions or developments, or it may be desirable to complete, extend, or verify the earlier investigations, or to make an entirely new and independent research. Any of these later investigations will usually extend further than those that have preceded them, for not only must they go over the ground covered by the researches already made, but must also include any changes in the original conditions. It is obvious that these different investigations, though conducted at different times and by different parties, have the same general end in view, i.e., the determination of the value of the enterprise. Here again we find the general information required by the promoter almost identical with that required by the pur chaser or the investor, though these latter usually include in their investigations the standing and abilities of the parties handling the undertaking. Because of the general paralleling of the information required by all the parties interested-or to be interested -in anything of the kind, the considerations of the present and the succeeding chapters will apply equally to a research made by the owner, by a promoter considering its financing, or by a moneyed man contemplating its purchase, its development, its operation, or an investment in its stock. The investigation considered in the present chapter applies only to the more basic features of the enterprise. Beyond this, such an examination usually includes any other features of importance peculiar to the particular undertaking. If company organization, management, stock issues, and other matters of the kind come into the consideration, the scope of the inquiry is considerably broadened. The discussion of such investigations is taken up in the succeeding chapter. Fundamental Features of an Enterprise The general features common to all enterprises and to be covered in part or in whole in any investigation may be roughly classified as follows: 1. Basis of enterprise 2. Title 3. Output 4. Environment and conditions of operation A discussion of these features from the standpoint of investigation follows in the order in which they have been tabulated. Under each general classification the investigation should cover the indicated points. 1. Basis of Enterprise (a) Is the basic undertaking sound and likely to lead to substantial success? This matter is considered in an earlier chapter. It may seem almost too elementary a query to be included in an investigation, yet enterprises fail, time after time, simply because they are either not sound or are not worth while. The men who poured money into the Keely motor so liberally took chances and lost hundreds of thousands of dollars by their gamble. Not many years ago a New York concern sold stock widely in a South African diamond mine that existed only in the printed matter issued by the imaginative promoters. Gold mines very conveniently located near New York City have been announced and financed more than once on no sounder basis than a discovery of pyrites, or "fools' gold." Or even when the basis is sound enough in itself, it may not be sufficient or of proper character, condition, time, or environment for substantial success. For instance, the vast deposits of lowgrade iron ore in New Jersey could not furnish a profitable basis for a great reduction plant, though the effort was backed by millions of dollars and was directed by Edison's inventive genius; nor would a coal mine in the interior of Labrador offer attractive possibilities for immediate development, though the quality and quantity of coal were entirely satisfactory and its ultimate value very great. (b) If the subject of investigation be a process or an invention, will it do what is claimed for it? This is merely a different form of the preceding query. The question is sometimes a difficult one to answer, requiring the construction of a working model, or complete machine, or perhaps the development of the whole enterprise. For instance, a practical process for recovering gold from the black sands of the upper Hudson has been sought for many years. The discovery of such a process was finally announced; the laboratory tests worked perfectly, and it was the opinion of those who investigated the matter I Chapter IV, "A Sound Enterprise." VOL. 1-7 |