Boom or Magic?

The pricing of new stock issues, long a headache to underwriters, became a matter of Government concern last week. Specific object of Government curiosity: the bizarre price fluctuations of new issues. Examples: Publicker Industries, issued at 23, hopped to 30 by 3 o’clock the same day. Alexander Smith & Sons Carpet Co., issued at 31, closed at 39.

An interested spectator of these, and 14 similar transactions, was the Securities & Exchange Commission’s chief watchdog, James Aloysius Treanor Jr., a husky, hardworking lawyer who caught the eye of SEC by the way he had run an FCC investigation of the telephone system. He joined SEC as a lawyer, succeeded Ganson Purcell (now head of SEC) as director of the Trading & Exchange division in 1941. A soft talker, who used SEC’s big stick sparingly, he has been watching new issues.

By last week, Treanor had seen enough to act. He was not sure whether the boom in new stocks was caused by 1) the bull market (which brokers said it was), or 2) fiscal magic. If magic, he knew how the trick was worked. Many an issue was “sold out” early on the day of issue because underwriting firms and their broker-retailers had placed shares in the accounts of partners or employes, or in the firm’s own trading account. When the public heard the issue was sold out, they were convinced it was a good buy, so they hustled to purchase, soon drove up the price. Insiders could then sell at a profit.

SEC asked chapter & verse on all sales of the 16 issues. It also suggested a new rule, making it illegal for an underwriter to sell a new issue for more than the public offering price, or to sell it to partners or employes in the brokerage firm. Brokers, who have learned that SEC’s “suggestions” are something close to law, are expected to comply.