Saturday, March 18, 2017

"Eddie Gilbert: The Boy Wonder of Wall Street"

From Global Financial Data:
Eddie Gilbert died on December 23, 2015, four days shy of his ninety-third birthday, though few people outside of Albuquerque, noticed his passing.

This is surprising. Gilbert was once known as the “boy wonder of Wall Street” for his successful stock market trading and his takeover of E.L. Bruce in which he created the last corner on a U.S. Exchange. Gilbert also went to prison twice, was friends with Jack Kerouac, John Dos Passos and other luminaries, made and lost fortunes, and finally succeeded with his real estate business in New Mexico, becoming a multi-millionaire. Despite having one of the most colorful histories of anyone in the financial world, Eddie Gilbert doesn’t even have an entry in Wikipedia, though a cricketer, wrestler and hockey player of the same name do.

Eddie Gilbert was one of those driven individuals who was a born salesman and deal maker with plenty of chutzpah. He always had to make a deal, and no matter what the circumstances were, Gilbert could always find a way to make money. He would leverage his transactions, get others involved, and oversaw and coordinated his market transactions like a general at war. Gilbert was determined to win, and usually did, but sometimes the deals blew up in his face.

The Shorts Get Cornered, but Who Owns Bruce?

Gilbert began his business career in the 1950s working for Empire Millwork, which had been founded by his grandfather, and which was then headed by his father. By the 1950s, Gilbert had already spent years trading stocks and commodities, and had produced two plays on Broadway, including a production of Peter Pan with Jean Arthur and Boris Karloff.

Between 1955 and 1957, largely due to Eddie Gilbert’s determination, sales at Empire increased from $5 million to $30 million. Eddie demanded that his pay be increased from $15,000 to $50,000, the same as the officers of the company. When they refused to raise his salary, he quit, but he was soon hired back at $50,000 when they realized how much the company needed him.

Gilbert discovered that one of their competitors, E. L. Bruce, was poorly run, and he felt he could run it much more efficiently. Bruce’s sales had been stagnant for the past ten years while Empire’s sales were increasing. Gilbert began buying up shares of Bruce in February 1958 at 16.875 to acquire majority ownership of the company. As Gilbert bought more and more shares, Bruce’s stock price rose, and short sellers entered into the market believing that an underperforming company like Bruce wasn’t worth the price it was trading at.

In the process, Gilbert was acquiring all the float in Bruce’s stock. As the price of Bruce stock rose further, the shorts were forced to cover their positions. On June 12, 1958, the American Stock Exchange suspended trading in E. L. Bruce Stock when the stock soared to $77 a share. Shares were in short supply because the management of E. L. Bruce owned 50% of the outstanding shares and Gilbert had taken control over the remaining 50% of Bruce stock.

The shares that were sold short represented the balance between Bruce and Gilbert. Typically, in a situation like this, the exchange would step in, negotiate a fair price for the shorts to cover their position, and settle outstanding short contracts for cash, but Gilbert didn’t want to do this. Gilbert wanted the shares the shorts had borrowed because getting those few extra shares meant the difference between who owned E. L. Bruce Corp.

Although the American Stock Exchange required that all shorts cover their positions, the stock no longer traded on the ASE, and the shorts had to find shares over-the-counter. This led to a mad scramble among the shorts, and the stock reportedly traded as high as $190 as shorts desperately tried to cover their positions. Short interest in the stock gradually declined from 16,134 shares on May 15 to 6,440 shares by August 15 and to 3,500 shares by September 4.
E. L. Bruce (Old) Stock Price, 1955-1959
The remaining shorts simply could not find the shares to cover their position, so they filed suit to avoid having to cover their positions claiming there was no “fair market” in the stock and refused to have their shares bought in until a fair market was established; however, in Aronson v. McCormick, the court denied their preliminary injunction and the shorts were required to cover their shares.

The real question was, who controlled E. L. Bruce? Gilbert had invested over $5 million in his attempt to take over E. L. Bruce and the outstanding short shares could determine whether Gilbert had control of the company. It was important to have this issue resolved by September 18, 1958 when shareholders of record would be contacted for the corporate meeting at which Gilbert wanted to take over the company. Gilbert’s group demanded delivery of the shorts’ shares in the hope that it would give them 50.1% ownership in the company.

On September 22, the Gilbert and Bruce factions met at the Waldorf-Astoria hotel in New York. Gilbert arrived in a limousine followed by an armored truck. Inside the armored truck were the actual certificates for all the shares Gilbert owned. He had the shares taken up to the suite in the Waldorf-Astoria and had them dumped on the floor. Gilbert told the Bruce board members that he had over 50% of the outstanding shares and if they didn’t believe him, they could count them. Gilbert said he would allow the Bruce management to still be on the board, but he would have control of the company. Gilbert said was going out to lunch and when he came back, he wanted to know if they would accept his offer. When Gilbert returned from lunch, the piles of stock lay untouched on the floor, and the Bruce management acceded to Gilbert’s demands. Gilbert later confessed that they were a bit short of the full 50%, but he was happy his bluff had worked. With this coup, Gilbert became known as “the boy wonder of Wall Street.”...