by John Brooks
And then there was National Student Marketing Corporation, whose “story” was the youth market: half of the nation’s population was now under twenty-five, and that half, the experts contended, was spending $45 billion a year. Students were constantly on the front pages those days, though more often as a threat to business than as its potential customer. Yet at the very moment when the counterculture was having its brief day, while the front-paged students were seizing campus buildings and trashing deans’ offices, there was a campus counter-counterculture, as sedulously entrepreneurial as Andrew Carnegie, vigorously in pursuit of the quick buck. Students and recent graduates who burned not to right the world’s wrongs, but just to get rich in a hurry, were finding that they could possibly accomplish their aim soon after graduation, or even before it, by starting campus businesses or simply by playing the stock market. Such a young man, Andrew Tobias, wrote of Princeton in 1968, “One of the guys … was playing ‘puts and calls.’… Every lunch hour this fellow would walk up Nassau Street to the local office of Tout, Ticker, Dicker and Churn, I think it was, to punch out all his different holdings on the Quotro. … Another fellow got daily phone calls from his broker, and the news was usually good. … Across the hall there was a little company selling a combination life-insurance-mutual-fund package that was about to go public.* Sometimes in the evening a Blue Cross salesman would come by to trade stock tips. He had bought a thing called Omega Equities at fifty cents a share.…”
The young man who set out in the biggest way to exploit the youth market, or at least to convince Wall Street that he was doing so, was Cortes Wesley Randell. The son of a Washington, D.C. business consultant, a strapping six-footer with a glib tongue and an easy smile, who had attended the University of Virginia (where his thesis topic had been “How to Start a Small Business”) and then done brief stints with General Electric and I.T.T., Randell was about to turn thirty when, in 1965, he founded National Student Marketing Corporation in Washington as headquarters for a string of part-time student representatives on campuses whose job it was to distribute samples and employment guides, do market research, and sell fad items like posters and paper dresses. The enterprise took off like a bird. Sales for the first fiscal year, ending in August 1966, were $160,000, and for the following year, $723,000. By early 1968—just in time for the great national speculative fever—Randell had nearly six hundred campus reps and was ready to take N.S.M.C. public. And Wall Street was more than ready to receive it. Not Charlie Plohn, but the solid old-line brokerage house of Auchincloss, Parker and Redpath became N.S.M.C.’s underwriter for the stock issue; its lawyers were Covington and Burling, its accountants Arthur Andersen and Company. Buoyed by this parlay of glamour and apparent respectability, the stock, offered to the public on April 24, 1968, at a price of 6, went to 14 the same day and by early June was selling at 30.
Randell, who still held more than half of all the stock, along with several million dollars of cash proceeds from the sales of the other half, was now rich, and not temperamentally inclined to disguise the fact. Soon he had acquired a $600,000 castle on the Potomac, a fifty-five-foot yacht, and a $700,000 Lear jet to buzz around in. He paid himself only a modest presidential salary of $24,000, and for good reason; by denying himself and his colleagues high salaries, he could increase company profits, and that was where the real money was, at least for large stock and option holders. A small event that occurred shortly after the underwriting—the sudden resignation, without explanation, of both Covington and Burling and Arthur Andersen and Company—may be considered, in hindsight, to have been an evil portent for Randell and N.S.M.C. But nobody in Wall Street was looking for evil portents just then, certainly not in connection with a shooter like N.S.M.C.
And so, armed with a red-hot stock appraised by the market at a price-to-earnings multiple of 100, Randell set out to make his company a giant through acquisitions: six of them in 1968 and more in 1969, including three school-bus companies, Arthur Frommer’s low-cost-travel guides, compilers of high-school student lists, publishers of campus telephone directories, even some companies scarcely related to the youth market at all. Since the companies acquired, almost always with N.S.M.C. stock, had comparatively low multiples, N.S.M.C. earnings automatically went up with each acquisition. And Wall Street reacted as it was supposed to do in such situations; as the earnings rose, so did the bids, and before the year was out, N.S.M.C. stock had skyrocketed on the over-the-counter market from the original price of 6 to a 1968 high of 82.
Meanwhile, Randell had moved his headquarters from Washington to New York, to be where the financial action was. Significantly, the corporate style he fostered was anything but countercultural. N.S.M.C. executives, however youth-oriented or youthful themselves (and some of them were scarcely out of their teens), did not affect long hair or mustaches or love beads or jeans, nor did they smoke marijuana; rather, they wore dark suits and narrow ties, and kept their shoes shined. The chief, indeed the sole, gesture that N.S.M.C. seems to have made to the mood of campus revolt was to try to cash in on it by selling special pillows for the use of sit-in demonstrators. In simple truth, N.S.M.C. was not primarily selling goods and services to youth at all—it was primarily selling stock to Wall Street.
Its astonishing success in that particular enterprise is a crucial sign of the times in Wall Street. Randell would impress and flatter security analysts and fund managers by taking them on tours of his castle or calling them on the skyphone from his Lear. It became his standard procedure to predict tripled earnings for each coming year over the previous one, and he was a persuasive young man—particularly when his hearers were people who wanted to believe. Indeed, even if he were not entirely to be believed, did it matter, for the short run? In the market of 1968 and 1969, wasn’t an illusion, so long as it was universally shared, just as good a money maker as a reality? Bankers Trust, Morgan Guaranty, the Continental Illinois of Chicago, and the State Street Fund of Boston bought N.S.M.C. stock; so did the Harvard and Cornell endowment funds, the General Electric pension fund, and the University of Chicago. There seemed to be scarcely any investment citadels left for Randell to conquer.
And the stockbrokers—did they doubt Randell’s glowing accounts of N.S.M.C.’s present and future? He was able to arrange things so that they could hardly afford to; before long a number of them were working for him, beating the bushes to find companies for N.S.M.C. to acquire so that it could keep increasing its earnings, and being paid off handsomely for their efforts with batches of N.S.M.C. stock. Finder’s fees in the form of stock were paid to W.E. Hutton, Halsey, Stuart, and Smith, Barney, among others. Sometimes the brokerage firms apparently found it possible to sweeten up the deal with a recommendation of N.S.M.C. stock to their customers; thus, in 1969, Kidder Peabody gave it a rave review in a seventeen-page report, and hardly more than a week later, Kidder received 4,000 shares of N.S.M.C, then selling above 120, solely for its imagination and resourcefulness in proposing to N.S.M.C. that it acquire a company called Stuckey and Spear that manufactured college rings.
So the money factory was a closed chain, infallible so long, and just so long, as the chain remained unbroken. The weak link was, of course, the disparity between Cort Randell’s promises and his company’s real results, which, closely scrutinized, were unspectacular. After having predicted tripled earnings for a given year, Randell found himself forced to resort to creative accounting to make the prediction come true; then, having written artificially high earnings for that year, he was compelled by his game’s inner dynamics to predict that those earnings would be tripled again in the following year—and then, somehow, goad his accountants to Parnassian heights of accounting genius to fulfill the new promise. The first serious test of his credibility in Wall Street came late in 1969. N.S.M.C.’s report for the fiscal year ended that summer showed net profit of around $3.5 million, duly fulfilling Randell’s projections. But to achieve the figure, the company’s accountants had been obliged, among other strokes of creativity, to def
er until a future year product development and start-up costs of $533,000, even though the money had already been spent; to include as income $2.8 million of “unbilled receivables,” which was to say, money that had not been received because it had not even been asked for; and—perhaps most egregiously—to include as net income more than $3 million attributable to the profits of N.S.M.C. subsidiaries that N.S.M.C. had not yet acquired at the close of the year being reported on. With the elimination of that single item, which was explained to investors in a small, mumbled footnote, N.S.M.C.’s 1969 profit would have been all but wiped out.
N.S.M.C. stock dropped briefly after the report appeared—only to rise again to the 100-times-earnings range. But a few Wall Streeters seem to have read the footnotes; stock analysts and investing institutions began asking N.S.M.C. executives pointed questions for the first time late in 1969. Simultaneously, Randell began to be pressed by his colleagues within the company; some of them came to wince whenever he made a public statement, and a few of the more conservative of them went so far as to demand that he resign as president. He can hardly have failed to realize that the game was nearly up—that he had not succeeded in exploiting the youth market, assuming there was one, if only because he had never seriously tried to exploit it in his preoccupation with exploiting the stock market; and that now, at last, investors were catching on. Nevertheless, he bulled ahead until the last. On November 5, 1969, speaking to the New York Society of Security Analysts, he predicted, true to form, that earnings for fiscal 1970 would be almost triple those for 1969. The stock jumped 20 points, causing Randell’s personal worth to rise $6.5 million. That he and his colleagues had somewhat different private notions is suggested by the fact that in December the company and its principal officers suddenly unloaded more than 325,000 shares. In January 1970, Randell—over the frantic objections of his colleagues, some of whom by this time would have liked nothing better than to silence their president with a gag and adhesive tape—made a nationwide speech tour during which he constantly reiterated his 1970 earnings projection.
In early February, N.S.M.C.’s financial vice president gave a dumbstruck group of company executives the jolting news that the actual result for the quarter just ended would be a loss. By February 17, Randell’s ebullience had been dampened at last, at least to the extent that, in a speech to the St. Louis security analysts that day, he said merely that N.S.M.C.’s first 1970 quarter would be “profitable.” His partial concession to reality was too little and too late. The following day, amid panic in the councils of N.S.M.C, Randell resigned as president; a week later, a first-quarter loss of $1.2 million was announced, and two days after that, the company shamefacedly admitted that there had been a “mechanical error in transferring figures from one set of books to another,” and that the actual loss was more like $1.5 million. By this time the market for the stock had understandably caved in; having sold at 140 as recently as late December, it was down to 50 and sinking fast; by July it would stand at 3 1/2, a loss of more than 97 percent from its peak seven months before. By then, it may be assumed, the investing public, including many of its firmly established corporate citizens, would be sadder if not wiser about fast-talking young entrepreneurs selling companies with faddish stories. As for Cort Randell, he would by then have vanished into the obscurity of his Potomac palace, with a few million dollars intact from stock sales made in time—one more stock-market rocket of youth’s short era, rich and burned out at thirty-five.
Well and good. But the question remains, How could he have fooled the Morgan Guaranty, the Bankers Trust, Harvard and Cornell, the whole brains trust of institutional investing, for as long as he did—and, of course, taken the innocent investing public along with them? The answer appears to be painfully simple: that he was plausible and they were gullible as well as greedy; that, in times of speculative madness, the wisdom and experience of the soundest and soberest may yield to a hysteria induced by the glimpse of fool’s gold dished by a young man with a smile on his lips and a gleam in his eye.
6
Late in September 1968, at the height of the Presidential election campaign, the Republican candidate Richard M. Nixon sent a letter to a group of top Wall Street executives in which he attacked the S.E.C. under Democratic leadership for its “heavy-handed bureaucratic regulatory schemes,” expressed the fear that a continuation of such policies “might seriously impair the nation’s ability to continue to raise the capital needed for its future economic growth,” and went on to promise, in effect, that regulation of the securities business under his administration would be relatively passive and permissive.
The free and healthy operation of the market [Nixon wrote] is of utmost importance to the investor. … Our securities laws were designed to protect the investor by insisting on full and complete disclosure.… I believe in the full enforcement of the securities laws to assure absolute protection for the investor. … The philosophy of this [Democratic] administration, however, has been that disclosure alone is not enough and that the Government can make decisions for the investor better than he can make them for himself. This philosophy I reject.
Wall Street was electrified. What the Republican candidate was rejecting, of course, was the now generally accepted view that in an age of stock-market participation by the millions, full disclosure alone is by no means sufficient to protect the general investor; and he was clearly and categorically announcing his intention to undo the activist work at the S.E.C. of Cary and Cohen, and turn the clock back to the old Wall Street era of “Eisenhower prosperity.” Could this really be happening, the thoughtful minds on Wall Street wondered, at the very moment when a new speculative binge was clearly building to its climax, when portfolio-churning brokers, letter-stock-buying mutual funds and law-avoiding offshore trusts were clearly making a mockery of “full disclosure” and taking renewed advantage of unsophisticated investors?
Some in Wall Street could hardly believe their luck—apparently the cookie closet was to be no longer watched or locked. Others were dismayed. “I’m bewildered by it all,” said a senior partner of an investment banking firm. “The S.E.C. has been in the picture now for more than thirty years and it’s doing its job. Regulation is here to stay.” Indeed, many practical Wall Streeters believed that the public confidence in securities promoted by the presence of a vigorous S.E.C. was a positive factor for business, and that any weakening of the S.E.C. or its authority would be concomitantly bad. Such dismay was mitigated in a somewhat equivocal way by a large measure of skepticism as to whether the Republican candidate really meant what he said. It was widely known that much of Nixon’s fund-raising base was in Wall Street—that Bernard J. Lasker, then vice chairman of the New York Stock Exchange, was a leading Nixon fund-raiser as well as a close Nixon friend, and that Peter M. Flanigan of Dillon Read (later a high and controversial White House aide) was a key man in the campaign. Perhaps, it was reasoned, Nixon was just trying to tell Wall Street what he thought it wanted to hear, in the familiar spirit of campaign rhetoric. There were even rumors—given wide currency by disconcerted Nixon supporters—that the letter had been sent out without its having been read by the candidate.
Such speculation was cold comfort to the more dedicated and able members of the S.E.C. and its staff. The prospect they faced, should Nixon win, was apparently that of working under a President who either opposed everything they were trying to do, or who wished to give the appearance that he did. It was scarcely a morale-building pair of alternatives. Cohen’s four year regime as chairman had been strong on enforcement and somewhat less so on policy innovation, but it had been imaginative and aggressive enough to keep most of the best S.E.C. staff men active and happy. It is axiomatic in the S.E.C. that the star performers who stay there for any length of time do so on principle and at personal sacrifice, since much higher-paying jobs on Wall Street or in the law firms are almost always available to them. Now, with Nixon’s letter, the occasion for worthwhile sacrifice seemed to have been removed. Within wee
ks after publication of the letter, a small ebb tide of talent began to flow out of the S.E.C.; in November, after Nixon’s election, the tide became a torrent.
A hard core of skilled, experienced, and well-motivated staff men hung on into the new year and new administration, doing the day-to-day job of processing new stock registrations, and waiting to see whom Nixon would appoint as Cohen’s successor. The man he appointed in February was hardly one to please a dedicated S.E.C. activist. Hamer H. Budge was a short, bald former Congressman from Idaho and political protégé of Senator Everett Dirksen, who had become an S.E.C. commissioner in 1964 as a Republican appointee of President Johnson. At Commission meetings, Judge Budge—so called in recognition of a brief term he had served as a federal judge back in Idaho, and maybe just because it sounded good, too—had happened to sit on the left of Manny Cohen, and Cohen had had many a good laugh about that. Politically, Judge Budge was by no means to the left of Cohen; rather, he was an amiable Republican with middle-of-Main-Street Republican ideas and, as to the S.E.C.’s role and function, a holder of the philosophy that the best regulation is generally the least regulation.
