The necessary procedure by a corporation issuing bonds is very complex, and the work, after it is accomplished, is generally reviewed by some competent lawyer, and approved by him, before such an issue of bonds is accepted by a banking house. His written statement or approval is called an " attorney's opinion," or " legal opinion."
In the case of a municipality issuing bonds, the steps which it must take also necessitate great care, and it is likewise customary to have some competent attorney approve the issue. In fact, all banking houses of repute condition a purchase of bonds upon the same being approved by their attorney, and in making a contract for purchase this phrase is usually inserted: " The necessary papers evidencing the legality of the issue satisfactorily to our attorney to be furnished us, prior to our taking up and paying for the bonds."
An investor in bonds should assure himself that the banking house offering the same has a proper " attorney's opinion " covering the issue, unless it is some well known established issue which has been upon the market for years, and which is the obligation of such a stable and established corporation or municipality that he has the right to assume that all such steps have been properly taken. One would hardly ask for a " legal opinion " covering an issue of City of Boston bonds, which has been outstanding for some years.
The opinion of a lawyer, no matter how clearly setting forth the correctness of the legal status of an issue, does not for a moment imply that such an issue is a sound investment, for, as Moody puts it in his excellent book: " The Art of Wall Street Investing," he " has never yet known a security so poor that a lawyer's opinion could not be had to back it."
When an " attorney's opinion " is produced there are one or two precautions which should be taken. In the first place, the bond issue covered by the opinion should be thoroughly described, so that there may be no way of mistaking its identity; again, the attorney should state clearly that he has not only examined all the papers necessary to establish the legality of the issue, but, furthermore, that he has examined one of the executed bonds and approved the same. There have been cases known where ail the steps leading up to the issue of bonds had been approved by some attorney, but when the bonds themselves were finally issued, they did not agree with the conditions set out in the papers furnished. Such a bond would probably not be a legal or binding obligation, or at least it might give an opportunity to escape payment, if the inclination to do so existed.