In 1933, a precedent was set for paying whisky as a dividend on common stock. As I have discussed in an earlier blog, entitled The Famous Whiskey Dividend, companies can invent creative ways to pay out dividends. In fact, when the going gets tough, the tough go drinking.
After Prohibition was repealed in 1933, National Distillers Products Corporation distributed a dividend of one case of whiskey for each five shares that were owned. This pulled out the stops with paying dividends. Twenty years later, Park & Tilford provided a more sobering saga.
In 1943, in the middle of World War II, whiskey was scarce. Most companies that produced whiskey had their factories diverted to manufacturing more important goods – in the opinion of some folks – making whisky a hot product to the public. Since Park & Tilford owned a drug store in New York and went public during prohibition; the company diversified into cosmetics, perfumes and other drug sundries. Though Prohibition had been repealed in 1933, the diversion of resources to the production of war materiel had some people worried that Prohibition was being reintroduced de facto if not de jure.
On December 15, 1943, D.A. Schulte, the President of Park & Tilford announced that the company was contemplating a distribution of whiskey to its shareholders. The announcement by Schulte had its effect. Based on these rumors, the stock advanced roughly 40 points over the next five months, as new shareholders tried to get access to scarce whisky to sell on the black market. This advance was an aggressive move in any market. The Schulte family owned over 90% of Park & Tilford stock, and they took advantage of the promise of the whiskey dividend to sell their stock to the public
During the five months that followed the announcement, the family unloaded 93,000 shares through their broker, Ira Haupt & Co. The 93,000 shares the family sold may not seem like a large amount of stock until you realize that there were only 243,683 shares outstanding when the whiskey announcement was made. Ira Haupt & Co unloaded 40% of the outstanding shares as the stock hit new highs between December 1943 and May of 1944, as can be seen by the graph below. Park & Tilford stock had been at 57.625 on December 15, 1943 and advanced to 98.25 on May 26, 1944. It was classic pump and dump. Pump up the stock price then dump the shares on unwitting investors.
Since some shareholders were more interested in making cash than in drinking whiskey, they saw their profits from the whiskey dividend melt away, further causing a collapse in the stock price. If the government had not intervened with their ruling, the result might have been otherwise, but the government did intervene. The price of Park & Tilford fell 10 points on May 31st; and declined over 60 points during the month of June to close at 32 on June 28. The stock’s behavior relative to the S&P 500 is shown in the graph below.
Unloading such a large number of shares caused Park & Tilford and the brokerage firm of Ira Haupt & Co. to run afoul of the SEC. During the period in which the 93,000 shares were dumped on the public, ten representatives of Ira Haupt & Co. solicited twenty-one customers to buy shares in the company, and the company’s chief statistician prepared a written analysis of the stock for a customer.
The sale of stock by the Schulte family was, essentially, a secondary offering since the company had used a brokerage firm to distribute the stock. In a secondary offering, potential buyers know that insiders in the firm are unloading stock and the float is increasing. This tends to drive down the price of the stock. Park & Tilford used the rumors they had circulated about the Great Whiskey Dividend to push the price up so the family could unload their shares at a higher price; however, potential buyers were completely unaware they were buying shares from insiders.
If Park & Tilford’s principal shareholders had only sold a few hundred shares, there would have been no violation of SEC rules, but since the company had unloaded a large block of shares, they were effectively making a secondary offering. Ira Haupt & Co. should have insisted on a registration statement for the securities being distributed from Park & Tilford, and should have provided potential customers with a prospectus, but they did not. As a result, Ira Haupt & Co.’s membership in the NASD was suspended for twenty days.
What have we learned here? Besides the fact that investors need to have all of the facts before investing, they also need to have a brokerage firm that is transparent with all relevant information, just the opposite of the behavior of Ira Haupt & Co. Had investors known they were being solicited to buy shares from insiders, and that the government was going to limit the profitability of the Whisky Dividend, the stock would never have risen in price as it did in order to be dumped by the Schultes. This is a classic case of not only buy on rumor and sell on news and don’t count your chickens before they are hatched, but most importantly, there is a sucker born every minute.