The opportunities offered by his new land excited the industrious young immigrant and he promised himself that he would make the most of them. Shortly after arriving in the United States



CASE 7.9

First Securities Company of Chicago (Ernst & Ernst u Hochfelder et al)


Ladislas Nay immigrated to the United States from Hungary in 1921 at the age of 18.

 The opportunities offered by his new land excited the industrious young immigrant and he promised himself that he would make the most of them. Shortly after arriving in the United States. Nay made his way to Chicago and landed a job in the booming securities industry with a small brokerage firm. For the next several years, Nay worked long and hard hours learning the brokerage business.

Unfortunately for Nay, the Great Depression hit the securities industry particularly hard. Young stockbrokers like himself were the first to be released by their firms when personnel cuts were necessary.  During the bleak 1930s, Nay, who by this time had Americanized his first name to Leston, endured several job changes and two failed marriages. In 1942, as World War ll began to pull the United States out of the Depression, Nay landed a permanent job with the brokerage firm of Ryan-Nichols & Company.

Within two years of joining Ryan-Nichols, Nay was promoted to president. He eventually became the firm's principal stockholder, accumulating more than 90 percent of its outstanding common stock. In 1945, Nay renamed his firm First Securities Company of Chicago. Nay's firm also successfully applied for membership in the Midwest Stock Exchange that year. Over the next two decades, Nay's career and personal life flourished. His family settled into the upper-class neighborhood of Hyde Park, near the University of Chicago. Nay and his wife, Elizabeth, participated in a wide range of community affairs, including serving on several prominent civic boards. Nay made numerous friends among the faculty and staff of the University of Chicago. In fact, many of his best customers were associated with the prestigious school.

Nay's personal attention to the financial needs of his customers earned him their respect and admiration. One of his customers described him as a kind and considerate man, much "like an old-fashioned English solicitor who took care of a family's affairs." His conservative investment strategies particularly appealed to his retired clients and those nearing retirement. Nay offered many of these customers an opportunity to invest in a lucrative fund that he personally managed. This fund was not an asset of First Securities, nor were any other First Securities personnel aware it existed. Nay referred to this fund as the "escrow syndicate.”

Nay loaned funds invested in the escrow syndicate to blue chip companies that developed sudden and unexpected working capital shortages. These companies paid interest rates well above the prevailing market rates. Individuals who invested in the escrow syndicate earned 7 to 12 percent on their investments, considerably more than the interest rates paid at the time by banks on savings accounts.

One of Nay's closest friends, Arnold Schueren, entrusted him with more than 400,000 over three decades and granted him a power of attorney to make investment decisions regarding those funds. Nay invested a large portion in the escrow syndicate. Another individual who relied heavily on Nay for investment advice was the widow of a close associate of the famed University of Chicago scientist Enrico Fermi. This woman later testified that Nay had managed her family's investments for many years but did not offer her the opportunity to invest in the escrow syndicate until after her husband's death. Nay told her that he only offered this investment opportunity to his "nearest and dearest friends." Following the death of another of his customers, Norman Moyer, Nay convinced Moyer's widow to invest her husband's estate of $90,000 in the escrow syndicate. In total, 17 of Nay's friends and/or their widows invested substantial sums in the escrow syndicate.

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