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First Casualty: Stock Crash Destroys 30-Year-Old Brokerage Firm

October 21, 1987

GRAND RAPIDS, Mich. (AP) _ A brokerage house with nearly 5,000 customers is under federal control today after going belly up in the wake of the panic on Wall Street.

U.S. District Judge Richard Enslen appointed a trustee Tuesday night to dismantle H.B. Shaine Co., a 30-year-old regional investment firm that sought federal help on Monday after suffering heavy losses.

″I suspect it had something to do with the market,″ observed Kevin Bell, assistant deputy counsel with the Securities Investor Protection Corp., a Congress-created agency designed to protect small investors.

H.B. Shaine, a member of the New York Stock Exchange, notified SIPC on Monday that it was in trouble and couldn’t cover its accounts, Bell said.

SIPC’s court order officially dissolves the brokerage house, a financial mainstay in this conservative community since 1957.

Meanwhile, the Wall Street Journal reported today that two other securities firms were forced to close and a third was taken over by a larger company because of losses suffered Monday.

The Journal said Brown, Knapp & Co., which dealt in over-the-counter stocks, and Metropolitan Securities, an options trading company, had shut down, while W. Damm M. Frank & Co., a specialist firm on the American Stock Exchange, had sold its position to Bear Stearns & Co.

The Journal did not give any details of the closings other than to report they faced shortages of capital. The newspaper said Metropolitan Securities was at least partly owned by Jon Edelman, brother of investor Asher B. Edelman.

Attorney Hugh Makens said Shaine, which employs more than 100 people, wouldn’t have collapsed if the Dow Jones average hadn’t plunged 508 points Monday, its biggest drop in history.

A statement by Kansas City Southern Industries, the firm’s Missouri-based parent company, said the collapse ″resulted in customer losses beyond (Shaine’s) ability to meet margin calls and created capital inadequacy for the firm.″

Makens said neither he nor former Shaine officials would comment on details of the collapse until the trustee, University of Michigan law professor and securities expert Cyril Moscow, completes a report.

Margin calls are demands for more collateral to back up purchases of stock made on partial credit.

Traders who buy on margin can make greater profits during rising markets than if they had bought the stock outright, but are subject to correspondingly greater losses in sharp market declines.

An investment firm with many clients who have made margin purchases could have been seriously jeopardized by Monday’s panic, said Tom Grigsby, manager of the Shearson Lehman Brothers brokerage branch here.

Bell said the Shaine firm has 4,500 to 4,800 accounts, but their value wouldn’t be known until Moscow files his report. Moscow also would determine whether Shaine was having financial troubles before the panic.

Securities owned by Shaine customers were frozen at their values of Tuesday while investors are given time to file claims on their accounts, Bell said.

″If you have 100 shares of IBM, you’re going to get 100 shares of IBM,″ he said. Ultimately, most of the accounts could be transferred to another broker, Bell said.

SIPC will advance up to $500,000 toward each customer’s claims for securities, but not more than $100,000 on claims for cash, Moscow said in a statement.

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