High Noon at the NYSE: Stutz vs. the Shorts

Until 1934 when the Securities and Exchange Commission outlawed rigging the market, Wall Street was occasionally treated to a battle between shorts and long that ended in a corner on the market. A stock is cornered when shorts have sold more shares in a company than are in the outstanding float, and one shareholder owns the floating stock. Since the shorts must cover their positions by buying back the shares they have borrowed, if one person owns all the shares, he can set the price and the shorts have no choice but to pay the price the owner demands.
There were only four stock market corners in the United States in the twentieth century: Northern Pacific in 1901, Stutz Motor Co. in 1920, Piggly Wiggly in 1923 and RCA in 1928. Although the Northern Pacific short was settled amicably because the short squeeze was a by-product of the attempt to take over Northern Pacific, the Stutz corner turned into a war between the shorts and Allan A. Ryan, who owned Stutz Motor Co. and who cornered the shorts. Unfortunately, as detailed in John Brooks’ article in The New Yorker, “A Corner in Stutz,” the corner ended in a disaster for both sides. In today’s electronic stock market, the battle between bulls and bears is usually impersonal, one computer algorithm trading against another computer algorithm, but in 1920, it was man vs. man, bull vs. bear, and as in the Stutz corner, the conflict got personal. The New York Stock Exchange was still overseen primarily by “old school” financiers who ran the NYSE more as their personal fief than as a corporation that served its customers.  

Ryan Races to Produce Roadsters

Thomas Fortune Ryan, Allan A. Ryan’s father, helped his son to get his start on Wall Street. Thomas Ryan opened a brokerage firm in 1873 and bought a seat on the NYSE in 1874. Ryan made his fortune by consolidating public transportation in New York City, amassing personal wealth estimated at $50 million in the process. Ryan built the Metropolitan Traction Company out of street railroads that ran through New York City. Ryan also formed the Union Tobacco Co. in 1898 which consolidated with James Duke to form the American Tobacco Co. Together, Ryan and Duke developed the British-American Tobacco Co. to protect their American tobacco interests. Ryan also owned Royal Typewriter and backed the maker of the Thompson submachine gun. At the time of his death in 1928, Ryan’s fortune was estimated at over $150 million, making him the tenth wealthiest man in the United States. Thomas Ryan tutored his son, Allan Aloysious in the intricacies of finance and in 1905, when he was 25, he turned over his seat on the NYSE to his son. Three years later, Charles M. Schwab, first chairman of U.S. Steel, befriended Allan Ryan after Ryan’s father introduced him to Schwab. His son formed a brokerage firm, Allan A. Ryan & Co. The stock market boomed after America’s entry into World War I in 1917, with the DJIA almost doubling in price by October 1919. Ryan was one of the primary bulls on the exchange and enjoyed profiting from squeezing the shorts. Ryan also invested in the Stutz Motor Car Co. of America, Inc. which he gained a controlling interest in and became president of in 1916. The company was incorporated in New York and took control of the Stutz Motor Car Co. of Indiana. Stutz Motor Car Co. was most famous for making the Bearcat at its factory in Indianapolis, an expensive and high-performing roadster which became synonymous with the roaring twenties. While a Model T cost $500 in the 1920s, a Stutz Bearcat cost $2000. Stutz stock participated in the bull market rally, moving up from 40 at the end of 1918 to 144.875 in October 1919. The DJIA peaked at 118.63 on November 1, 1919, as inflation cut into post-war demand, but Stutz stock remained strong in the face of the post-war bear market. On February 28, 1919, the DJIA hit 91.31, a 23% decline from the top and by definition, a bear market. Nevertheless, the bear market still had strength left in it.  


The Bear Raid Begins

Ryan interpreted the decline in his stock as a bear raid designed to push the price of Stutz down so the shorts could profit from the decline in the stock. In March 1919 Stutz stock diverged from the rest of the market, making a spectacular rise. The stock had closed February at 110, but by March 23, the stock was at 245, on the March 24 it was at 282 and by the end of March, the stock stood at 391.
Other Stutz shareholders took their profits, but Ryan continued to buy Stutz stock while the shorts, even more certain that the price of the stock would ultimately collapse, shorted even more shares. Ryan borrowed millions of dollars to support the price of his stock, and by the end of the month, Ryan was almost the sole owner of shares in the Stutz Motor Co. Confident that he could break the back of the bear raid, and owning virtually all the outstanding stock, Ryan continued to loan shares to the shorts so he could squeeze them until they faced either financial ruin, or if they were unable to buy the shares back, potentially face prison for breach of contract. As Daniel Drew said during Jay Gould’s attempt to corner gold in 1869: “He who sells what isn’t his’n, must buy it back or go to prison.”  

The Shorts Are Cornered

Since Ryan was the sole lender, he knew who the borrowers were, and he knew they were primarily fellow members of the NYSE, including members of the Exchange’s Board of Governors. The men he worked with on the floor on a daily basis were shorting his company’s stock, trying to ruin him financially. During the week ending March 27, Stutz stock moved up from 220 to 318 on 73,900 shares. Stutz stock closed at 329 on March 29, at 370 on March 30 and at 391 on March 31 when only 930 shares were traded because no stock was available. The shorts had clearly underestimated Ryan’s resolve. Ryan was called before the Exchange’s Business Conduct Committee on March 31 to explain the wild gyrations in Stutz stock. As The New York Times put it, It was clear enough before noon that offerings of the stock had practically disappeared and the Governors acted through a moratorium to protect those speculators who had worked themselves into this untenable position. A single group was found to own more stock and contracts for delivery of stock than the full outstanding Stutz shares. The ruling prevents Stock Exchange members from participating in further dealings in Stutz stock until the ban is lifted. Ryan told the Committee that he would settle with the shorts, some of whom were on the Committee he faced, and allow the shorts to fulfill their contracts at $750 a share. The offer probably made the shorts sick to their stomachs. Ryan knew there were more shares short than there were shares outstanding, and that he owned all the outstanding shares. Ryan could have asked $1000 or $5000 per share. The shorts had put themselves in this position, and they had only themselves to blame. Ryan had cornered Stutz stock, and he wanted the shorts to pay for their bear raid. The shorts in the Northern Pacific corner had paid the price that Harriman had set, so why shouldn’t Ryan set the price for Stutz stock and force the shorts to pay up?  

The NYSE Tips the Scales

Ryan may have cornered the stock, but the shorts were determined to use their power in the NYSE to destroy Ryan and save their skin. The Committee threatened to strike Stutz from the stock exchange list, and Ryan responded by threatening to demand $1000 a share. Nevertheless, the NYSE decided to suspend all trading in Stutz stock. When a reporter said there was no precedent or rule for the suspension of trading in shares, a NYSE spokesman replied, “The Exchange can do anything.” On April 5 came the most amazing announcement of all when the Law Committee of the NYSE announced, “The Exchange will not treat failure to deliver Stutz Motor stock, due to inability of the contracting party to obtain same, as a failure to comply with his contract.” Essentially, the NYSE sanctioned breach of contract by the shorts, putting them under no legal obligation to cover their shorts. The NYSE told Ryan he was free to challenge their ruling in court. In response, Ryan demanded that the NYSE obtain a settlement price for all the shorts to avoid the trouble of Ryan having to negotiate with each of the shorts. When nations don’t agree, they go to war; when companies don’t agree, they call in the lawyers and go to court. The shorts hired the Dos Passos Brothers, who were the leading experts on stock exchange law. John Randolph Dos Passos had written the standard work on stock exchange law, Treatise on the Law of Stock Brokers and Stock Exchanges in 1882, and had rigorously opposed the Sherman Anti-Trust Act in his book, Commercial Trust, written in 1901. His son, John Roderigo Dos Passos, later wrote his socialist trilogy, U.S.A. in rebellion against his father’s defense of capitalism. Interestingly enough, by the 1950s, Dos Passos had changed his political views dramatically and campaigned for both Barry Goldwater and Richard Nixon. Ryan hired the firm of Stanchfield & Levy, the lesser firm in this David vs. Goliath battle. Realizing it was Ryan vs. the NYSE, Ryan resigned his seat in the NYSE because he felt the Exchange was changing the rules to benefit the shorts. Ryan’s resignation freed him to act independently. He was no longer bound by the NYSE’s restriction on members selling shares since he was no longer a member of the Exchange. Ryan gave a reporter of the New York World the names of the NYSE governors, some of whom were on the committees that had sat in judgment on Ryan, whom he said were caught short in Stutz stock. The obvious conflict of interest led some to demand that the NYSE come under state or federal regulation, something members of the NYSE definitely wanted to avoid. The NYSE backed down from their position that shorts could violate their contracts and left the resolution of the issue up to Ryan and the shorts. On April 20, the protective committee capitulated and said they were ready to accept impartial mediation on a negotiated settlement price between Ryan and the shorts. There were 56 firms that held shares short in Stutz involving 5500 shares. On the other hand, the banks that had loaned Ryan millions to defend Stutz stock also became involved to insure there were sufficient funds for Ryan to repay his loans. Negotiations dragged on for several days and with no resolution, Ryan indicated that he planned to buy in all the stock on April 24, a Saturday, on the Curb Stock Exchange which operated literally on the curb of the New York Stock Exchange on Broad Street. Traders on the Curb didn’t move into their own building until 1921 when the New York Curb Exchange Building was built on Greenwich Street. Brokers made trades on the street in the open air, then signaled to the clerks in the office windows above to carry out their trades. This was where the High Noon shoot-out between Ryan and the shorts was to take place.  

High Noon on the Curb

Hundreds showed up that Saturday morning just for the spectacle of seeing Ryan place his order to close out his position on the shorts. Colonel John W. Prentiss, who had become the principal spokesman for the shorts, said they should come to terms with Ryan before the Curb opened for its half-day of operations that Saturday. The shorts agreed to act in unison, and slips of paper were passed around where the shorts could write down what they thought would be an appropriate settlement figure. Prentiss then took the average of the numbers that had been written down. A delegation went to the office of Allan A. Ryan & Co. at 111 Broadway, arriving at nine-forty A.M. The delegation offered Ryan $550 per share, which Ryan unhesitatingly accepted, and at two minutes before ten, Colonel Prentiss announced to reporters that the Stutz matter had been settled at $550 per share. Everyone was happy except the spectators on Broad Street who were deprived of viewing the showdown. This appeared to be a great victory for Ryan since he had made almost $1.5 million in the transactions and remained the sole owner of Stutz Motor Co., and was worth, on paper, over $100 million. Unfortunately, for Ryan, this was a Pyrrhic victory. Ryan still owed millions to the banks, and the only way he could raise the money to cover his debts was by selling shares in Stutz Motor Co. With trading in Stutz stock still suspended on the NYSE, Ryan lacked a liquid market to sell large blocks of shares to the public. Unless he could raise sufficient funds to cover his loans, Ryan could become bankrupt.  

Ryan’s Victory Ends in Bankruptcy

Though defeated, the shorts were still determined to have their pound of flesh. The NYSE refused to accept Ryan’s resignation from the Exchange, and the Board of Governors adopted a resolution saying Ryan’s conduct had been “inconsistent with just and equitable principles of trade;” because he had created “an arbitrary and fictitious price” for Stutz stock. Ryan was called to appear at a closed hearing at the NYSE to defend his actions. Ryan refused to appear before the “star chamber” and he was tried in abstentia. Ryan was found guilty as charged and was voted unanimously to be expulsed from the NYSE. The NYSE sold his seat in July 1920 for $98,000, but by November, the Exchange was still withholding the proceeds from Ryan on a technicality. Ryan’s main problem remained the banks he had borrowed from who were pressing him for their money. The stock market had continued to decline and the prices of the other companies Ryan owned shares in, Stromberg Carburetor, Continental Candy, Chicago Pneumatic Tool, and Hayden Chemical, were falling in price dramatically. By November, Ryan was “cleaned out” and Ryan’s creditors turned to the Guaranty Trust Company, of which Ryan’s father was the largest shareholder, to see if his father would support Ryan. Unfortunately, Ryan and his son had been at odds for several years, and Ryan showed no interest in helping his son. In November the banks formed a committee to take charge of Ryan’s affairs. Ryan fought a losing battle until he was forced to declare bankruptcy on July 21, 1922. It turned out that Ryan owed over $1 million to Harry Payne Whitney, son of his father’s old partner, about $3.5 million to the Chase National Bank and $8.66 million to the Guaranty Trust Co. Ryan’s salvation lay in the shares he owned in Stutz Motor Co., which were to be sold at auction. A lawyer for Guaranty Trust estimated that if Stutz stock sold above $60, Ryan would probably be able to cover his debts and avoid bankruptcy. Stutz stock traded on the Curb, since it was not permitted to trade on the NYSE, and the stock had fallen in price dramatically in the intervening two years. The stock, which had been at $180 at the end of 1920, had fallen to $50 at the end of 1921 and was trading at $15 when Stutz declared bankruptcy.  

Stutz Motor Co. of America, Inc. Stock Price, 1918-1925

In the auction, Stutz’s holdings were sold at $20 a share to Charles A. Schwab, his erstwhile mentor. Schwab failed to turn Stutz Motor Co. into a profitable enterprise, despite the popularity of the Bearcat automobile. In December 1930, the company had to institute a 1-for-10 reverse split, and in 1932, the company was reduced to making grocery-delivery vans rather than luxury cars and roadsters. The company went bankrupt in 1938.

Ryan never recovered from the collapse of Stutz Motor Co. and he died in 1940. Unfortunately, Ryan never made up with his father, and when Thomas Fortune Ryan died in 1928, although he left millions to Allan Ryan’s siblings and sons, the only thing Allan Ryan received out of his father’s estimated $150 million estate was his father’s white pearl shirt studs.

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