Bond Fraud

Railroad Bonds

The most popular historical bond peddled by swindlers is the railroad bond. According to the Department of the Treasury, there are 12,000 to 15,000 different varieties of railroad bonds in existence. The most common railroad bond in circulation is the Chicago, Saginaw, and Canada Railroad Company. In 1873, the Chicago, Saginaw, and Canada Railroad Company issued 5,500 30-year gold-backed bearer bonds, which paid 7 percent interest to finance construction of the proposed railroad. In 1876, the Chicago, Saginaw, and Canada Railroad Company was forced into bankruptcy and its assets were acquired by CSX Transportation Incorporated. CSX Transportation did not assume any of the Chicago, Saginaw, and Canada Railroad Company's outstanding debt, including the railroad bonds. All claims to money due under the bonds, which had a face value of $1,000 apiece, was settled during Chicago, Saginaw, and Canada Railroad Company's bankruptcy preceding.

At that time, investors presented their bonds for payment and received less than 25 cents on the dollar. Following the bankruptcy preceding, the bonds were stored in the court archives until they were discovered in the basement of a federal building. At that time they were purchased by a museum in Michigan, packaged with other historical information about the Chicago, Saginaw, and Canada Railroad Company, and sold as collector's items for $29.95 each.

The U.S. District Court for the District of Wyoming held that the Chicago, Saginaw, and Canada Railroad Company bonds possess only nominal value as collectibles. On January 20, 1998, the Securities and Exchange Commission (SEC) filed a motion for preliminary injunction against Daniel Schneider and three codefendants. The SEC alleged that Schneider, doing business under the name of Global American Prosperity Foundation, perpetrated securities fraud in violation of the Securities Act of 1933 and the Securities and Exchange Act of 1934.

The Securities Act of 1933, often referred to as the truth in securities law, requires that “investors receive financial and other significant information [Page 100]concerning securities being offered for public sale and prohibits deceit, misrepresentations, and other frauds in the sale of securities.” The Securities and Exchange Act of 1934 prohibits certain types of conduct in the securities market and empowers the Security and Exchange Commission with disciplinary powers over regulated entities and persons associated with them.”

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