From legendary short seller to god of American capital

Chapter 419 "I'm not afraid of being used as a pawn!" "I'm not afraid of others not taking the bait!"

Thursday evening, the editorial office of The Wall Street Journal, located on the second floor of 71 Broadway in New York City.

Behind the Dow Jones Company sign, gaslights cast a bright orange glow, the smell of ink lingered, and the office had a restrained quietness characteristic of an editorial department.

Charles Dow sat at his desk piled high with proofs, his gray eyes behind his glasses fixed on a copy of a newly delivered document—a copy of a pawn ticket and a brief analytical note.

The messenger, a large man, handed the document to Dao with only two simple sentences: "Mr. Livingston says you might be interested in a case concerning social justice. He said the truth should be seen."

After the man left, Dao hurriedly opened the document and discovered it was a pawn ticket.

The ticket read: National Rope Company Preferred Stock, pawned by John R. Dorsey, Deputy Chief Financial Officer of the company.

As a media professional who had spent years on Wall Street, he didn't need Larry Livingston to tell him what to do. After thinking for a few minutes, Dao picked up a pencil and wrote down a few keywords on a sticky note: insider financial crisis, unusual asset disposal, potential conflict of interest.

Livingston's investment had just given The Wall Street Journal the capital to survive, and the contract clearly stated in black and white: editorial independence and autonomous reporting.

Interestingly, the money arrived in my account the very morning after the contract was signed! And it was full payment. Then, this "exclusive news" came along.

Dao knew this was some kind of test, and also some kind of invitation. An invitation for him to wield the sword that had just been bestowed upon him.

"Edward," Dao looked up at Jones across the table, "put down what you're doing. We need to look into something."

"Now?" Jones glanced at his pocket watch; it was 8:30 PM. "About what?"

"Why would the CFO of a company with a market value of $24 million need to pawn his own stock to pay off a $2,000 gambling debt?"

Dao's voice was calm, but carried his characteristic thoughtfulness. "More importantly, we need to know what the insiders were doing as the company's stock price fell from $117 to $95 over the past year."

Jones frowned. "Is this Livingston's—a test?"

"That's news," Dao interrupted him, a serious glint in his gray eyes. "If a company's top executives pawn their stock on the eve of bankruptcy and the market knows nothing about it, that's news; but if the company is still using money that may belong to shareholders to prop up its stock price, that's a scandal. Our job is to find the evidence and then publish it."

Bergstriser poked his head in through the door. "Charles, this could get you into trouble. The National Rope Company is backed by—"

—”

“I know who’s behind them.” Dao stood up and walked to the huge map of New York on the wall. “Hanova Bank, New York Trust, and at least three old friends of the senators. So we need to be more careful, and the evidence needs to be more solid.”

He turned to his two partners, "Edward, go find our people in the judicial system and investigate the cases from the past six months."

There are civil lawsuits and debt disputes involving senior executives or affiliates of the national rope company. Especially—gambling debts.

"Charles, go visit Gentlemen's Pawnshop and at least three high-end private clubs in Manhattan. Use the Wall Street Journal's name—and whatever you do, don't mention Livingston. Just say we're conducting a series of investigations into executive financial conduct."

“I,” Dao picked up his coat, “am going to visit an old friend who works in the state banking commissioner’s office, which also oversees integrity issues at the New York Stock Exchange. I need to know how much the discrepancy is between National Rope’s most recent financial report and the banking system’s internal assessment.”

The air in the basement instantly tensed. Jones and Bergstriser exchanged a glance, both seeing hesitation and—excitement—in each other's eyes.

This is the first time since the Wall Street Journal's inception that it has proactively pursued a target of this magnitude.

"Charles," Jones whispered, "if Livingston is using us for his short-selling operations—"

"Then let him use us," Dao said calmly, putting on his hat. "As long as the leads he gives us are true, and as long as the reports we publish are factual, if our reporting can prevent more small investors from losing their savings due to information asymmetry, then even being used is worthwhile. I don't mind being used as a pawn!"

He walked to the door, paused for a moment, but did not turn around. "Don't forget why we publish this newspaper, gentlemen."

It's not because of ideals, it's because of anger—anger at those who lurk behind the smoke to plunder wealth. Now, a hand reaches out from the smoke, offering us a match. What we need to do is not ask who gave us the match, but see where to light it.

The editorial office door closed, and footsteps disappeared at the end of the stairs.

Jones took a deep breath, grabbed his notebook, and Bergstriser began flipping through the phone book.

"Let's do it—the only thing worse than being talked about is not being talked about at all!" Jones glanced at his partner and said Oscar Wilde's famous quote with self-deprecation.

On the other side of Wall Street, Larry Livingston stood at the window of his Waldorf office, gazing at the street illuminated by a mix of gaslight and electric lights in the night. He knew what the editor-in-chief of the Wall Street Journal would do; that man wouldn't betray his "persona."

Honesty, obsession, and a morbid obsession with the truth—and this was the most ingenious part of his plan.

On Thursday, April 20th, National Rope's stock price rose to $98.25 on light buying. Rumors began circulating that National Rope might have secured an emergency loan, thus averting a crisis.

Larry closed out half of his positions in Reading's main account as planned yesterday, and did so at the very beginning of the trading session. This eased the burden on the market-stabilizing funds, as the potential short positions were closed out, which in turn caused the stock price to rise.

The funds supporting the market could easily interpret this as a "stop-loss order from the short sellers."

Meanwhile, Larry's main account began to continuously buy in, but this time he did not continue to close out his short positions; instead, he actively bought in.

While the Reading main account was making purchases, Baruch, following Larry's instructions, slowly accumulated shares in the $96-$97 range, buying a total of about 3,800 shares throughout the day. This proactive buying activity was also very discreet, and he used his various brokerage channels to distribute the purchases across more than a dozen different brokerage accounts.

This covert buying further loosened the grip of the market-stabilizing funds. On the trading floor, after Wednesday's "sudden oversold" price drop, the stock price began to rise steadily—as if retail investors had finally gotten a chance for the National Rope Company's stock price to "reverse and pick them up," and a temporary wave of sustained buying emerged.

This buying continued after the market opened at 9 a.m. on Friday. After 11 a.m., National Rope's stock price even briefly approached the $100 mark.

However, just as the stock price in the market began to show unexpected resilience, Bernard Baruch had already begun borrowing all the real shares of the National Rope Company he could access, without any limit on the amount.

Meanwhile, in the archives of a law firm in Lower Manhattan, Edward Jones was rapidly copying a document:

Civil litigation number 1893-4472

Plaintiff: Atlantic Credit Corporation; Defendant: John R. Dorsey; Cause of Action: Default on a personal promissory note, amounting to $12,000; Date of Filing:

On March 15, 1893, Jones's fingers trembled slightly. Twelve thousand dollars! Even for an executive whose annual salary might only be a few thousand dollars, this was a huge debt.

The case was filed a month before the Dorsey Pawnshop stock incident.

He continued flipping through another document, which was a mortgage record for a townhouse in Dorsey's name on the Upper West Side—and it was a new mortgage from last December.

The creditor is Hanover National Bank, and the loan amount is $35,000. According to the property appraisal, the house is worth at most $60,000.

"He's deleveraging like crazy," Jones said in a low voice, his pen scribbling rapidly on the paper. "His personal debt is at least $62,000, plus the $10,000 worth of stock he pawned—his personal finances are ruined."

That evening, the Wall Street Journal's editorial office was brightly lit.

Dao brought back an even more fatal document—not the original, but a summary he had handwritten from memory:

Non-public memorandum from the New York State Office of the Supervisory Commission (April 10, 1893) Subject:

Summary of the assessment of National Rope Company's liquidity:

According to inquiries with its main banks, the company applied for a total of $45 in short-term bridge loans from Hanover Bank, Bank of New York, and New York Trust in the past three months, all of which were rejected.

Reasons for rejection include: questionable inventory valuation, excessively long accounts receivable aging, and negative operating cash flow.

Special note: There are unconfirmed reports that the company may have used some of the funds that should have been paid to suppliers to maintain its share price in the open market.

Dao put down his pen, took off his glasses, and rubbed his temples vigorously. He thought to himself—if this is true, it's not just a financial crisis, it's fraud!

Misappropriating operating funds to prop up the market, embellishing financial statements, and deceiving shareholders—even though the NYSE's oversight was lax at the time, the disclosure of such issues was enough to completely bankrupt the National Rope Company.

“Charles,” Bergstriser rushed to Dao’s side, his face unusually grave, “I went to three clubs. The manager of one of them hinted,” Dorsey had lost at least $20,000 in the past six months. And not just at the poker tables. He also had some off-the-table “investments,” which were also in trouble.

"Twenty thousand in gambling debts, twelve thousand in defaulted promissory notes, fifty thousand in mortgaged real estate, plus ten thousand in pawned stocks—" Dao quickly calculated, "His personal debt is approaching one hundred thousand. And his annual salary is at most six thousand US dollars."

"He's finished," Jones said.

"No," Dao raised his head, his gray eyes shining again, "this company is finished. A CFO in this level of personal financial crisis, the only way he can save himself is by abusing his position. And if the company itself..."

He was on the verge of collapse.

The three of them stared at each other in silence. They all understood what this meant.

"It'll be in the papers tomorrow," Dao finally said. "Front page! The headline will be: 'Dancers on the Rope: Financial Crisis and Stock Price Mystery of National Rope Company Executives.'"

"Without pointing out the crisis in the stock price?" Jones asked.

"It doesn't name any market manipulations," he said. "The Wall Street Journal simply states the facts: National Rope executives are mired in huge personal debts, pawning company stock, having their loan applications rejected, and there may be misappropriation of funds—leaving the readers to draw their own conclusions."

"Will Livingston be satisfied?" Bergstriser asked.

Dao glanced at him and said slowly, "This isn't to please him, Charles. This is for the ordinary investors who might buy this stock next Monday because of 'positive rumors.' They have the right to know what they're actually buying."

"Then how do we get Livingston to accept our favor?" Jones's face turned serious. "You need to be flexible. What if this involves his timing?"

"In principle, we must adhere to the rigor of a journalist. Before a news story is published, no one can know what we are going to publish," Dao said while wiping his glasses. But before his two partners could object, he casually added, "—But we also have an obligation to show our new boss the proofs of our company's restructuring."

An hour later, Larry Livingston received a copy of the report from the Daoist people in his office suite at the Waldorf Hotel on Fifth Avenue.

Larry quickly glanced at the screen, a slight smile playing on his lips.

The report was even better than he had expected—it made no mention of any market operations, offered no hint of short selling, and simply used a calm,

The restrained yet incisive writing presents the facts one by one. Like a surgeon showing a slide of a lesion, there is no judgment or sentimentality, but everyone who sees it understands—this is late-stage cancer.

Even more ingeniously, in the last paragraph of the report, Dao raised three questions: "First, was the board of directors of the National Rope Company aware of Mr. Dorsey's personal financial crisis? If so, why did they still allow him to serve as the chief financial officer?"

2. Are the funds the company has recently used to maintain its stock price from legal and compliant sources? Have funds that should have been used for production and operation been used?

Third, given that multiple banks have already rejected its loan application, what is the basis for the company's claim that it is about to obtain a large amount of financing?

These three questions are like three swords hanging over the board of directors. They cannot avoid them, because avoiding them would be tantamount to admitting wrongdoing.

Larry put down the proof, walked to the floor-standing telephone in the corner of the study, and turned the handle. "Operator, connect me to Reading's New York branch."

He waited a moment, then looked out the window. The New York night sky was quiet; no neon lights were yet polluting the skyline, but tomorrow was another story—

"Bernard, I've seen the proofs of the article they sent. Tomorrow morning, at the same time the Wall Street Journal goes public, I need you to do two things."

"Please speak!"

"First, contact every broker you can reach and place a sell order for 25,000 shares at $95 pre-market. Note, not 20,000, but 25,000! I want that number to appear on the quote board, so large that no one can ignore it."

"Okay, I understand!"

"Second, prepare all our cash and credit. Once the market starts to waver, sell all the stocks we've accumulated in the last two days—I want to see how much the market can absorb and how determined a major player is to support the market."

After a pause, the person on the other end of the phone asked, "But Mr. Livingston, what if they don't take the bait? What if they stubbornly hold on, absorbing all the shares the market and we dump, keeping the price above $90—what then?"

Larry laughed, his fingers unconsciously twirling the phone cord. "I'm not afraid he won't take the bait! If the bookmaker doesn't want to obediently take a big punch, then what awaits him won't just be one punch!"

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