While resisting federal intervention in the marketplace, Kansas and other states in 1911 began legislating “Blue Sky” laws to protect investors from predatory and fraudulent stock sales schemes. But the problem continued to grow, especially in a post-World War I economic boom.
About 20 million people set out to make their fortunes in the stock market during the 1920s, according to the Securities and Exchange Commission (SEC). These investors, both large and small shareholders, were “tempted by promises of ‘rags to riches’ transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing.”
Of the $50 billion in new securities offered in the 1920s, about half evenually became worthless, notes the SEC, which was established in 1934. The federal commisssion’s enforcement soon deterred many – but not all – scurrilous efforts to fleece unwary investors.
The often outrageous claims made by earlier oil stock promoters such as Seymour “Alphabet Cox” and former Arctic explorer Frederick Cook were constrained after establishment of the SEC and incarceration of offenders. “Caveat Emptor” nonetheless remained a primary mandate in the stock speculation as it did in decades past.
Homestead Oil Company of Dallas, Texas, ran afoul of the SEC in 1983. The company was charged with violating “the registration and antifraud provisions of the securities laws in the offer and sale of approximately $1.2 million of investment contracts in five oil and gas drilling programs to at least 125 investors.”
The Internal Revenue Service also pursued Homestead Oil for unpaid taxes amounting to “$247,532.37, plus statutory additions as allowed by law.” The company declared bankruptcy.
Litigation followed as Homestead Oil’s president sought to appeal his conviction “for common law fraud and for violations of the federal and state securities laws, (and) the Racketeer Influenced and Corrupt Organizations Act. (RICO)”
But on appeal, the court noted, “Homestead had offered to investors interests in oil and gas properties in eastern Oklahoma without proper SEC registration. They had failed to disclose investment information to Homestead’s investors and had made misrepresentations.”
Surviving stock certificates from Homestead Oil Company leave only scripophily value and a cautionary tale for investors to contemplate.
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The stories of exploration and production companies joining petroleum booms (and avoiding busts) can be found updated in Is my Old Oil Stock worth Anything? The American Oil & Gas Historical Society preserves U.S. petroleum history. Please support this AOGHS.ORG energy education website. For membership information, contact bawells@aoghs.org. © 2018 Bruce A. Wells.
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