Great Frauds in History: Michael Meehan’s market manipulation

Michael Meehan (right) with his lawyer at an SEC hearing

(Image credit: © Bettmann Archive/Getty Images)

Michael Meehan was born in Blackburn, Lancashire, in 1892, but grew up in New York. After leaving school to become a messenger boy he graduated to selling theatre tickets.

Owing to the connections he made while selling tickets, he managed to secure a seat on the New York Stock Exchange by 1925.

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How did the scam work?

Meehan was regarded as an expert market manipulator. He would assemble a group of investors who would agree to buy and sell the stock of a listed company between each other, giving the impression of large trading volume.

This would give the illusion of widespread public interest in the company, driving the share price up. Once the price rose high enough, they would suddenly sell out, causing the stock to collapse. One such “pool” helped drive the stock of the Radio Corporation of America (RCA) up from $85 in 1925 to $549 in 1929, making the pool $5m ($74.6m).

What happened next?

The Wall Street Crash and the election of Franklin D. Roosevelt in 1932 led to passage of the Securities and Exchange act in 1934, which outlawed most market manipulation, including the tactics that had made Meehan rich.

Nonetheless, Meehan tried to use similar “matched orders” tactics to push the price of Bellanca Aircraft in 1935 from $1.75 to $5.50 within a few months and then maintained the price while the company issued another 100,000 shares.

After a long investigation, regulators found Meehan guilty of most of the charges and banned him from every exchange that he belonged to, ending his career as a broker.

Lessons for investors

After the pool ended in October 1935, Bellanca’s price fell back down to $1.75 again, leaving those who had bought the additional shares with losses of around $300,000 ($5.6m today). While pools and matched orders have been eliminated from most major markets, illiquid micro-cap shares are still vulnerable to being manipulated in this way. So, while a rapid price rise or increase in volume can be a sign of momentum, be sure a stock’s fundamentals are solid enough to support its price.