Madoffs of the mining days | AspenTimes.com
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Madoffs of the mining days

Before the 1934 establishment of the Securities and Exchange Commission it was “buyer beware,” and there was no entity more fraught with fraud than mining stock. Mining ventures were high-risk/high-yield enterprises akin to betting money on the roulette wheel.

Fledgling mining companies, whose optimism bordered on or crossed completely into fraud, followed a formula for mining investors’ pockets. By the 1880s, when Aspen’s mining companies sought capital, it was common practice to open offices in New York, Chicago or San Francisco. There, owners featured elegant display cases filled with what they called “ore samples.” In actuality, the samples were specimens that glinted with obvious mineral content that was not necessarily extracted from the promoted mine.

Like the opulent law or real estate offices of today, mining company offices flashed furnishings that inspired corporate confidence. In that male world, antlers hung on the walls and silver spittoons lined along the halls. A substantial safe dominated the rooms, not hidden as security would dictate had it been in use, but featured front and center, wide open in the implication that cash would soon fill its interior.



The time-honored method of driving customers into the offices was to create buzz. Mining town newspapers served as boosters for local companies and gatherers of discovery gossip. There is hardly an issue of The Aspen Times from its founding well into the 1920s that did not extol future fortunes to be made. A quotation from 1910 exemplifies the genre: “Something is doing at the Montezuma these days. The mine is looking better than at any time in its history. Drifts are being run on a four foot vein carrying 30 per cent lead and 60 ounces in silver.”

Larger city newspapers subscribed to the smaller ones and passed along mining news without verification. Distant mining companies sent press releases touting new discoveries directly to city papers, bypassing reporters who might smell deceit. A decline in stock value could be turned around with even a hint at newfound ore. The greater the distance between the mine’s location and the city paper that printed the gossip, the easier it was to sell a story and stock. Mines that shared similar company names also shared the boon of good news.




One shinning example of mining stock fraud was known as “the great diamond hoax.” Men in the mining West kept their ears attuned to hints of hot new discoveries. The slightest imagining whispered in a saloon could lead to a stampede anywhere in the West. Philip Arnold and John Slack entered a San Francisco bank in 1871 and asked to place a bag of diamonds into a safe deposit box. They hinted that they had recently found them. The teller sent word to William Ralston, the founder of Bank of California who made his fortune from the Comstock Lode, so he visited the two men. They seemed reluctant to tell him about their diamonds and swore him to secrecy. Despite his oath, they hoped Ralston would spread the word and he obliged. Soon a core of investors clamored to get in on the deal.

Arnold and Slack played their roles to perfection; slowly revealing that they discovered a field of diamonds. They offered to sell shares and take investors to their discovery. Ralston consulted Baron Rothschild and another English mining investor who asked that Tiffany and Company of New York evaluate the diamonds. Tiffany estimated the cut value, a figure far beyond the value of raw stones, which convinced the small list of investors to pay to be led to the diamonds.

Arnold and Slack expressed enthusiasm for taking a group, including a mining engineer and one of the major investors, to their diamond field in Wyoming. The group spent two days there gathering more diamonds plus rubies and sapphires, an unusual concurrence indeed. Excitement sparked as the investors extrapolated their profit across acres of diamonds. Upon returning they formed a company with 25 of San Francisco’s wealthiest investors, each sinking $80,000 into the enterprise. As winter set in, Arnold and Slack were bought out for $660,000.

Word spread around the world and investors continued to count their fortunes until famed geologist Clarence King visited the location and reported the fraud. He found a diamond there that had already been cut. Arnold had traveled to Europe twice, buying about $35,000 of uncut, low-grade, industrial diamonds that he then seeded across the Wyoming field.

Everything ventured; nothing gained. Why were some of the major investors of the time taken in? Why did mining stocks sell so easily? At the time many stories (many planted) circulated about high yields from low investments. It seemed as if all you had to do was dig a hole anywhere in the West and a fortune would be found. A little optimism fired a race to riches. Just a decade later, mining investors were no more skeptical, vying to invest in the fraudulent as well as the fortunate silver mines of Aspen.


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