An Antique From 1934: ~Skipper' Smith Tells How Forgeries Can Be Prevented

Harold S. "Skipper" Smith was memorialized in The Bond Buyer centennial edition with the rueful observation. "They say the first 50 years are the hardest, but from all indications the second 50 will be equally hard."

Mr. Smith, a partner at Minsch, Monell & Co., said this on Jan. 9, 1950, on beginning his 51st year on the Street. But he was also perhaps the most frequent correspondent for this publication, contributing letters during his first 50 years on various aspects of the business, from what to do about repudiated Southern debt to how to deal with forgeries.

For most of its life, the municipal bond business went along, with scant regard for technology. For most of The Bond Buyer's first 100 years, the only "technology" that was considered in any substantive way was the construction of sturdier safes and the prevention of forgeries.

The business was not computerized until the 1960s, and book-entry-only issues arose only in the 1980s - and there are still coupon-clippers out there, operating the same way they did in the 18th century.

In June 1934, Mr. Smith, a thoughtful bond man, "ventured a few remarks" on the prevention of forgeries:

"While there is probably no plan that will entirely prevent forgeries of bonds or other negotiable instruments, the principal thing which makes forgery of municipal bonds so remarkably easy to perpetrate is the fact that any printer will willingly prepare an issue of municipal bonds at the request of almost anybody and without asking any questions. The customer simply furnishes a bond form, tells the printer how many coupons are necessary, and the printer does the rest.

"Furthermore, the average municipal bond issue is printed and distributed with practically no regard to duplication or wastage. There have been, I believe, quite a few incidents in the past of a city selling say $500,000 bonds where the printer, for the sake of good measure, ran off 50 additional copies, and the surplus was secured by unscrupulous persons and afterwards negotiated.

"I have no doubt that in the case of most of the prominent bond forgeries of recent years the spurious bonds were prepared in the regular way by a printer who was a perfectly innocent party to the transaction. Forging of signatures and of the legal opinion is a relatively easy matter because, except in the case of an original purchaser, few buyers of municipal bonds ever see the signature certificate or have any opportunity to really authenticate signatures.

"It would seem, therefore, as if legislation along the following lines would at least make municipal bond forgery considerably more difficult:

"1. A nationwide law by all of the states, prohibiting the printing of anything in the nature of negotiable municipal bonds or notes without first checking with the municipality in question and receiving an authorization from some responsible official [preferably the city, town, or county treasurer]. This law should also require that after receiving such authorization, bonds or other evidences of indebtedness may only be printed on the orders of either the issuing municipality or the successful bidder, preferably the former.

"2. A second chapter in the law should absolutely require the checking and registration of the bonds by a disinterested third party, preferably a bank or trust company accustomed to this work. This would not greatly increase the cost of issuance as there are many trust companies in various parts of the United States equipped to this business for a nominal fee. The old United States Mortgage and Trust Co. of this city for many years performed a very valuable service in connection with the issuance and certification of municipal bonds. If a similar service was made mandatory, I believe it would greatly tend to reduce forgery as I cannot recall to mind any case of a forged bond where the original was prepared by this company."

Mr. Smith's suggestions did not meet with immediate success. States clung to their own rules on securities printing, and forgeries would continue until certificates were all but eliminated by the advent of book-entry-only bonds.

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