§ 2.2.1

• Jurisdiction: Arizona

§ 2.2.1 In General

Bucket shops¹⁴² and fraudulent mining ventures were intertwined in Arizona history. Bucket shops facilitated mining swindles by allowing wagers on future prices of copper, gold, silver, and the stock issued by these mining companies. As described in a 1909 Arizona newspaper, the gambling on future prices that bucket shops made possible "creates fictitious values, destroys confidence in the integrity of our territory and makes the territory particeps crimines in mining frauds or gambling schemes."¹⁴³ To outlaw the bucket shops, George W.P. Hunt introduced the 1909 antibucketing law,¹⁴⁴ which became Arizona's first securities legislation.¹⁴⁵

Similar legislation had been enacted in other states.¹⁴⁶ The Arizona legislation was most likely prompted by Hunt's anti-gambling sentiments.¹⁴⁷ The antibucketing laws, with few changes, remain on the books.¹⁴⁸

Bucket shops arose in the 1870s.¹⁴⁹ They allowed people to bet on stock or commodity prices rather than actually purchasing the stock or commodity.¹⁵⁰ The bucket shops attracted a socially lower class of customers.¹⁵¹ The shops made it easy to place orders, and the action was quicker than in true brokerage firms.¹⁵² The shops were "open longer hours, took fewer holidays, and welcomed those with little money."¹⁵³ Over time, many bucket shops were designed with the furnishings, ticker quotes, and formalities of true brokerage firms.¹⁵⁴ The firms purported to provide investment information and to mimic the operations of firms that actually bought and sold securities.¹⁵⁵ Fraud was prevalent.¹⁵⁶ Some investors were duped into believing that the stocks they picked were actually bought.¹⁵⁷ They did not realize that the bucket shop did not execute an order when it received the customer's money.¹⁵⁸ Instead, the bucket shop was betting that the leverage created by the customer's margin would work against the customer so that a small price movement would trigger margin calls that allowed the firm to liquidate the customer's position.¹⁵⁹ In other instances, the bucket shops rigged the time at which the customer's order was placed to catch a price favorable to the shop.¹⁶⁰ When necessary, the bucketers entered wash sales to drive down prices that allowed the shop to liquidate the undermargined account created by the price drop that the wash sales produced.¹⁶¹

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Notes:

^[142] The term bucket shop arose in the 1870s. Ann Fabian, Card Sharps, Dream Books, & Bucket Shops: Gambling in 19th-Century America...