A Lesson for Henry

Motormaker Henry Kaiser and Moneyman Cyrus S. Eaton of Cleveland's Otis & Co. were a smooth-working financial team. The two friends had floated two issues of Kaiser-Frazer stock, and when K-F needed steel, Eaton had set up a steel company to supply some of it. When K-F decided to float a third stock issue to raise capital for expansion (TIME, Feb. 16), it was Otis & Co. which headed the underwriting syndicate. Last week, Friend Cyrus performed another service for Friend Henry. He gave him a dazzling lesson in high finance that broke up the old friendship and cost K-F a pretty penny. Result: this week K-F sued Otis & Co. for over $7.7 million damages.

The falling out came over the third issue of K-F stock, a fast-moving, on-again-off-again deal that baffled the sharpest-eyed in Wall Street. Fortnight ago, Otis & Co. announced that 900,000 shares of the new issue had been "sold." But most of it had not been sold to the public; the underwriters had been stuck with it. As they had agreed to pay K-F $11.50 a share and offer it to the public at $13--and the stock was selling below the offering price--they could not unload it on the public without risking a loss. If the stock dropped lower, the underwriters stood to lose plenty. So Otis & Co. flabbergasted Wall Street by calling the whole deal off. No one could remember when an underwriter had ever done so before when a "firm commitment" had been made.

Lucky Loophole. Otis & Co. had slipped out of the money-losing deal through a loophole provided in the nick of time by a Philadelphia lawyer named James F. Masterson. The day the underwriters were to have paid K-F for the stock, Masterson had filed suit in Detroit to prevent the stock from being sold, charging that the company had rigged the price of its stock and that the underwriters would make an excessive profit on it. Fortunately for Otis & Co., its contract with K-F provided that such a suit would nullify the deal.

But Wall Streeters thought it quaint that Lawyer Masterson should be attacking Otis & Co. In a previous suit, he had been Otis' counsel. This moved Kaiser-Frazer to charge, in its own suit, that Otis & Co. "inspired" Masterson to disrupt the deal. But Masterson had another story. He charged that Kaiser-Frazer profits were finding "their way into the pockets of Kaiser and Frazer personally [via parts companies and other agencies personally owned by them] and not to the stockholders." He said the accounting he demanded would "wise up the whole country about Mr. Kaiser."

Otis & Co. had charges of their own to make. They complained that K-F had used over $2.5 million of the company's funds to buy its own stock at $13.50 in order to "stabilize" the price just before the offering. This had caused "mounting criticism." To offset it, Otis had recommended that Kaiser and Frazer pay for this stock out of their own money, but they had refused.

Unlucky Henry. Kaiser-Frazer had paid through the nose for that stock-buying job. Wall Street gossiped that many of those with inside information had taken advantage of the "stabilizing" to unload their holdings at the higher price. After K-F stopped buying, the stock started down. At $11, K-F had already lost over $460,000 on its stock. K-F had suffered another blow. It had tied up a good chunk of its ready cash in stock. With all the hue & cry over the stock, chances looked slim that K-F would soon be able to find new buyers at the same price to help it raise the $10,000,000 in new capital it badly wanted for expansion.

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