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STOCK EXCHANGE PRACTICES HEARINGS BEFORE THE COMMITTEE ON BANKING AND CUBEENCY UNITED STATES SENATE SEVENTY-THIRD CONGRESS SECOND SESSION ON S. Res. 84 (72d CONGRESS) A RESOLUTION TO INVESTIGATE PRACTICES OF STOCK EXCHANGES WITH RESPECT TO THE BUYING AND SELLING AND THE BORROWING AND LENDING OF LISTED SECURITIES AND S. Res. 56 and S. Res. 97 (73d CONGRESS) RESOLUTIONS TO INVESTIGATE THE MATTER OF BANKING OPERATIONS AND PRACTICES, TRANSACTIONS RELATING TO ANY SALE, EXCHANGE, PURCHASE, ACQUISITION, BORROWING, LENDING, FINANCING, ISSUING, DISTRIBUTING, OR OTHER DISPOSITION OF, OR DEALING IN, SECURITIES OR CREDIT BY ANY PERSON OR FIRM, PARTNERSHIP, COMPANY, ASSOCIATION, CORPORATION, OR OTHER ENTITY, WITH A VIEW TO RECOMMENDING NECESSARY LEGISLATION, UNDER THE TAXING POWER OR OTHER FEDERAL POWERS PART 4 Dillon, Read & Co. OCTOBER 3 TO 13, 1933 Printed for the use of the Committee on Banking and Currency 175541 U N I T E D STATES GOVERNMENT P R I N T I N G O F F I C E WASHINGTON : 1933 COMMITTEE ON BANKING AND CURRENCY DUNCAN U. FLETCHER, Florida, Chairman CARTER GLASS, Virginia PETER NORBECK, South Dakota ROBERT F. WAGNER, New York PHILLIPS LEE GOLDSBOROUGH, Maryland ALBEN W. BARKLEY, Kentucky JOHN G. TOWNSEND, JE., Delaware ROBERT J. BULKLEY, Ohio FREDERIC C. WALCOTT, Connecticut THOMAS P. GORE, Oklahoma ROBERT D. CAREY, Wyoming EDWARD P. COSTIGAN, Colorado JAMES COUZENS, Michigan ROBERT R. REYNOLDS, North Carolina FREDERICK STEIWER, Oregon JAMES F. BYRNES, South Carolina HAMILTON F. KEAN, New Jersey JOHN H. BANKHEAD, Alabama WILLIAM GIBBS McADOO, California ALVA B. ADAMS, Colorado WILLIAM L. HILL, Clerk R. H. SPARKMAN, Acting Clerk SUBCOMMITTEE ON STOCK EXCHANGE INVESTIGATION DUNCAN U. FLETCHER, Florida, Chairman CARTER GLASS, Virginia PETER NORBECK, South Dakota ALBEN W. BARKLEY, Kentucky JOHN G. TOWNSEND, JR., Delaware EDWARD P. COSTIGAN, Colorado JAMES COUZENS, Michigan THOMAS P. GORE,1 Oklahoma ALVA B. ADAMS,1 Colorado PHILLIPS LEE GOLDSBOROUGH,1 Maryland FREDERICK ^TEIWER,1 Oregon 1 Alternates, serving in the absence of Senators Barkley, Costigan, Norbeck, and Couzens. CONTENTS Testimony of: Christie, Robert E, jr. a member of the firm of Dillon, Read & Co—„ 1638, 1659, 1691 Dillon, Clarence, of Dillon, Read & Co., New York City 1535, 1573, 1617,1857, 2097 Forrestal, James V 2053 Hayward, Robert Otis, a member of the firm of Dillon, Read & Co._ 1891, 1900, 1949, 1993, 2122 Hopson, Howard C 2139 Hurley, Hon. Patrick J 1752 Kennedy, Leonard 2133 Knollenberg, Bernard 2076 Strieffler, Paul M . 2088 Tracy, Ernest B 1707, 1719, 1781, 1821 Travis, Charles M 1756 in STOCK EXCHANGE PBA0TI0B8 TUESDAY, OCTOBER 3, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, ^Washington, D.C. The subcommittee met, pursuant to call of the chairman, as a resumption of the hearing recessed on July 6, 1933, at 10:30 o'clock a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams (substitute for Barkley and proxy for Costigan), Norbeck, Townsend, and Couzens. Present also: Senator Goldsborough. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Eead & Co.; Boot, Clark, Buckner & Ballaritine, George H. Murphy of counsel, counsel for United States & Foreign Securities Corporation. The CHAIRMAN. The subcommittee will please come to order. We resume the hearings where we left off on July 6 last, and will proceed from that point on. Mr. Pecora, who is your first witness ? Mr. PECORA. Mr. Clarence Dillon. The CHAIRMAN. YOU will come forward to the committee table, Mr. Dillon, hold up your right hand, and be sworn. You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee. So help you God. Mr. DILLON. I do. The CHAIRMAN. YOU may be seated, Mr. Dillon. And, Mr. Pe- cora, you may proceed. TESTIMONY OF CLABENCE DILLON, OF DILLON, EEAD & CO., NEW YOEK CITY Mr. PECORA. Mr. Chairman and gentlemen of the committee, I deem it only fair to the firm represented by the witness, Mr. Clarence Dillon, to state to you that the members of the investigating staff of this committee have received from Mr. Dillon and his associates in that firm, from the very outset, the fullest possible measure of cooperation, aid, and assistance that we have asked for in our investigation of various matters connected with their business. At no 1535 1536 STOCK EXCHANGE PRACTICES time has there been the slightest hindrance or obstacle placed in our path by their office; but on the contrary they have extended every courtesy and accommodation, which has all contributed, to facilitate our work of investigation. I think it only fair and just to the witness and his firm that that statement be made by me on the record, and I am very happy to make it. The CHAIRMAN. The committe is very glad to hear that statement. Mr. PECORA. Mr. Dillon, give your full name and address to the committee reporter for the record, please. Mr. DILLON. Clarence Dillon. My business address is 28 Nassau Street, New York City. My residence is Bedminster, N.J. Mr. PECORA. Will you just raise your voice. This is a large room and the acoustics are not of the best. Mr. DILLON. Yes, sir. Mr. PECORA. Mr. Dillon, are you connected with the firm or company known as Dillon, Eead & Co.? Mr. DILLON. I am, Mr. PECORA. HOW sir. long has that organization or firm been in ex- istence? Mr. DILLON. DO you mean the present firm or its predecessor firm? Mr. PECORA. The present firm, the firm that is called Dillon, Eead &Co. Mr. DILLON. William A. Eead & Co., our immediate predecessor firm, became Dillon, Eead & Co. in January, the 14th, I think, 1921. Mr. PECORA. And has continued in existence under that firm name and style of Dillon, Eead & Co. since that time to the present time? Mr. DILLON. It has; yes, sir. Mr. PECORA. What is the legal form of that organization? Is it a partnership or a corporation? Mr. DILLON. It is a joint-stock association under the laws of New York, and Mr. PECORA (interposing). Has that firm Mr. DILLON (continuing). Excuse me. Mr. PECORA. GO right ahead. Mr. DILLON. The joint stock association started October 11, 1922. We were a copartnership until 1922. Mr. PECORA. In 1922 it was organized under the laws of the State of New York as a joint stock association, a corporation, was it? Mr. DILLON. That is correct. Mr. PECORA. And who are the stockholders or members of this joint stock company known as Dillon, Eead & Co. Mr. DILLON. I think we have a list. Mr. PECORA. All right, if you wish to refer to it. Mr. DILLON. I am the president. The following men are vice presidents: W. M. L. Fiske, Eoland L. Taylor, Win. A. Phillips, James V. Forrestal, Ealph H. Bollard, Dean Mathey, Wm. S. Charnley, Eobert O. Hayward, Henry G. Eiter, 3rd, and Harry H. Egly. Mr. Eobert E. Christie, Jr., is secretary and treasurer. Mr. PECORA. Are those gentlemen all the holders of stock of this joint stock company? Mr. DILLON. I do not think all of them own stock. I can give you that list of stockholders if you wish. Mr. PECORA. If you please. STOCK EXCHANGE PRACTICES 1537 Senator COUZENS.- Mr. Pecora, ask him the percentage that they own. Mr. PECORA. Senator Couzens suggests that you also state the percentage or proportions of stock of this joint stock corporation owned by each of the stockholders. Mr. DILLON. The stockholders are Clarence Dillon, Abbott Trading Corporation, The Beekman Co., Ltd., E. J. Bermingham, Isabelle Bollard, E. H. Bollard, W. M. S. Charnley, W. M. L. Fiske, W. M. A. Phillips, Eoland L. Taylor. What was your question, Senator Couzens ? Senator COUZENS. The percentage of stock which each holds in that corporation. Mr. DILLON. Of stock? Senator COUZENS. Yes. Mr. DILLON. I have no objection to giving any information to this committee that you feel will be helpful to you. But I am wondering if a statement of the interests of the various members is something you want me to tell publicly. If you feel it is going to help you in your deliberations, that it be given publicly, I have no objection to doing so; but I would appreciate it if you would consider whether that is pertinent. Senator COUZENS. SO far as I am concerned, if I know who controls the corporation I am satsified, speaking personally. Mr. PECORA. I think similar consideration was requested by members of the firm of J. P. Morgan & Co. and that the committee at that time accorded them that consideration, by not including in the public record, or the record of the public hearings the apportionment of interest among the various partners that composed the banking firm of J. P. Morgan & Co. The information was given to the committee as I recall it, however, in executive session. Senator COUZENS. But we did get who controlled the firm of J. P. Morgan & Co. Mr. PECORA. Yes; insofar as that would be indicated by Senator COUZENS (interposing). And we put in the record that Mr. Morgan controlled absolutely the organization. I am asking for the same information as to Dillon, Eead & Co. Mr. PECORA. Well, perhaps Senator COUZENS (continuing). And wasn't it put in the record in detail later on ? I mean as to the holdings of J. P. Morgan. Mr. PECORA. It was given to us in executive session, but not put in the record. I mean as to their respective apportionments of interest. Senator GOLDSBOROUGH. It got to the public just the same, as I recall. Mr. PECORA. Well, perhaps Mr. Morgan gave an interview. Senator GOLDSBOROUGH. I did not mean to intimate that. Mr. PECORA. Mr. Dillon, who is the principal stockholder of Dillon, Eead & Co.? Mr. DILLON. Mr. Pecora, if Senator Couzens and his associates feel that that information is going to be helpful if given publicly, I have no objection to giving it. But, naturally, I prefer not to do so. 1538 STOCK EXCHANGE PRACTICES The CHAIRMAN. If you have no objection to giving it I see no reason why it should not go in our record. Mr. DILLON. I have no objection, Mr. Chairman, to answering any questions whatsoever, and I have no objection at all to answering that question if you gentlemen decide it will help you in your deliberations. But, naturally, there are some things I prefer not to have in the public record. But I am prepared to answer anything you want. Mr. PECORA. I think, perhaps, if you would give the information Senator Couzens has indicated that he is especially desirous of having as going to the control of this joint-stock association, that would satisfy our immediate purpose. Senator COUZENS. That would satisfy me, Mr. Pecora. I am not attempting to speak for the other members of the subcommittee, but if he will give that information that will be sufficient for our purposes at this time. Mr. DILLON. I own the majority of the stock. Senator COUZENS HOW much stock is out? Mr. DILLON. HOW many shares? Senator COUZENS. Yes. Mr. DILLON. I haven^t the exact figures here. But there are between 73,000 and 74,000 shares. I haven't just the exact figures but can furnish them later. Senator COUZENS. That is sufficient. The CHAIRMAN. What is the par value of the stock? Mr. DILLON. $1 par value. Senator COUZENS. HOW many shares do you own, Mr. Dillon? Mr. DILLON. We haven't that figure here but we can "get it for you. Senator COUZENS. All right. Mr. PECORA. Mr. Dillon, what is the business of Dillon, Read & Co.? Mr. DILLON. Dillon, Read & Co. in the investment banking business. Mr. PECORA. When you say " investment banking business ", are you seeking to draw a distinction in the use of that term between the business of investment banking and the business, we would say, of a private banker ? Mr. DILLON. A private banker may be engaged in any banking business. I was distinguishing rather between investment banking and commercial banking. The field of investment banking as I am trying to make clear would have more to do with long-term investments as opposed to short-term credits, which would be the proper business, I feel, of commercial banking. I think the two fields are distinct in their functions. The commercial banker makes shortterm credits more or less in the nature of self-liquidating credits, because he makes them largely with depositors' money, and the depositors may want that money on demand. He would be financing what you might call " consumable goods," things which by their nature would be consumed in a short time and the loan repaid. On the other hand, the investment banker has to do with the financing of credits which would not be immediately self-liquidating and short term but would be devoted rather to durable goods than to consumable goods. Mr. PECORA. Such as public improvements? STOCK EXCHANGE PRACTICES 1539 Mr. DILLON. Yes. For road construction, I should say; the building of factories; the building of bridges and tunnels, and expenditures that in themselves and by their nature are not consumed but, rather, produce other things, the revenues from which would in time liquidate such a loan. Senator ADAMS. The disregard of that distinction has caused a good deal of trouble in this country, hasn't it, Mr. Dillon ? Mr. DILLON. I think so. That is why I am trying to make it clear. I think those functions are distinct banking functions. The CHAIRMAN. Mr. Dillon, do you receive deposits? Mr. DILLON. I think, Senator Fletcher, we may have some small amounts on deposit with us, which are in the nature of sinkingfund moneys, or moneys for payment of coupons. But we do not solicit deposits simply to be held against checks. Mr. PECOEA. Are the deposits to which you refer deposits that are intrusted to your firm as fiscal agents for those making the deposits ? Mr. DILLON. Those deposits are largely in the nature of deposits to cover sinking fund and coupon payments. Mr. PECORA. They are not the kind of deposits that are payable on demand, and such as commercial banks carry ? Mr. DILLON. NO. We do not take those deposits. Mr. PECORA. YOU do not take deposits of that character ? Mr. DILLON. NO, sir. Senator COUZENS. May I ask Mr. Dillon at this time to distinguish between his house and the House of Morgan ? Mr. PECORA. I think it would be very enlightening if Mr. Dillon would undertake to do that for the subcommittee. Mr. DILLON. I would be very glad to describe the business of our firm, and Senator COUZENS (interposing). What I am trying to get at is this: You distinguish the nature of your business from that of the commercial banker. Now, J. P. Morgan & Co. are not commercial bankers, are they? Mr. DILLON. N O ; but Senator COUZENS (interposing). They are private bankers ? Mr. DILLON. Yes. Senator COUZENS. And an investment house, both? Mr. DILLON. Yes. Senator COUZENS. Can you think of anything in the operations of J. P. Morgan & Co. that is a distinguishing difference between your operations and theirs, if any? Senator ADAMS. Senator Couzens, might I interpose right there: You say J. P. Morgan & Co. are not commercial bankers? Is that correct? Senator COUZENS. Yes; in the sense that they are not incorporated as a commercial bank. Mr. PECORA. But that they do what might be .regarded as a commercial banking business or something akin to it. Senator COUZENS. Well, they are not under the law a commercial bank. I think we understand the different factors connected with a commercial bank and the house of Morgan. Mr. PECORA. I think Mr. Dillon will be glad to make that distinction clear. 1540 STOCK EXCHANGE PEACTICES Mr. DILLON. I will be glad to describe my own business. But I think you gentlemen of the committee are more familiar with the business of J. P. Morgan & Co. after your inquiry, probably, than I am. Senator COUZENS. Mr. Dillon, before you go into that let me make myself clear. I want to know the difference between a private bank and this business of yours. I understand that J. P. Morgan & Co. were described as a private bank. Mr. DILLON. Senator Couzens, I am not trying to fence with you at all. But I hesitate to attempt to go into a detailed description of the difference between my own business and some other business I may not be familiar with. I understand that J. P. Morgan & Co. do take deposits, which we do not. We do not take them because we have no use for them in our business. It would be money that we would have to pay back to some one on demand, and we have no useful employment for that money in the investment banking business as we conduct it. Senator ADAMS. Doesn't the confusion come in the use of the term " banking " in connection with your business ? Mr. DILLON. I think so. Senator ADAMS. Isn't there a misunderstanding when one applies the term " banking " to your busines ? Mr. DILLON. I think so That is why I call it dealing in investment securities. Senator GOLDSBOROUGH. And isn't it a fact that J. P. Morgan & Co. carry accounts subject to check, while you mean that your house does not do so ? Mr. DILLON. I understand that that is correct. We do not do so. There are none subject to check as I understand. Isn't that true? (Speaking to an associate.) I am told there may be two or three accounts against which checks may have been drawn during past years, but we do not make commercial loans, or issue letters of credit, or deal in foreign exchange, or anything of that kind. Our business is devoted to what I will describe to you if you like as the investment security business. And I shall be glad to enlarge upon that subject so that you may understand it if you wish. Senator COUZENS. Aren't there three kinds of banks ? As I understand, you describe yours as an investment banking business Mr. DILLON. Yes, sir. Senator COUZENS. And it is that kind of banking business which does not accept, in the general .sense of the word, deposits. Mr. DILLON. We do not. Senator COUZENS. Nor doe,s it honor checks. Mr. DILLON. N O ; we do not. Senator COUZENS. Then there is the private banker, like the Morgan house. And then there is the incorporated bank, either under a State or a i^ational charter. Isn't that so ? In other words, aren't there three kinds of banks in the general acceptance of the term "bank"? Mr. DILLON. I would say two kinds. There is the commercial bank, which I might say deals in short-term credits, and then there is the investment bank, which we may briefly call a dealer in long credits. I think tho(se are the distinct functions. Then you may STOCK EXCHANGE PRACTICES 1541 have a house, a private bank, that combines those two things. But I do not mean to describe it as a third function. Senator COUZENS. In fact it is, isn't it? Mr. DILLON. It is probably a combination of the other two. Senator COTJZENS. In other words, you have a charter from the State of New York? Mr. DILLON. We? Senator COTJZENS. Mr. DILLON. Yes. Senator COUZENS. Yes; I mean you. And J. P. Morgan & Co. does not as I understand it. Mr. DILLON. AS I understand it that is a partnership. Senator COUZENS. SO that is another distinction between the two methods of operation. In other words, Morgan & Co. do not have a limited liability, do they? Mr. DILLON. I do not think so, but I do not know. Mr. PECORA. N O ; as partners of course each partner is liable for all of the obligations of the entire copartnership. Senator COUZENS. And, Mr. Dillon, your company does have a limited liability. The stockholders do have a limited liability, don't they? Mr. DILLON. NO. Mr. PECORA. Senator Couzens, in the case of a joint stock company under the laws of the State of New York the stockholders are distinguished in that important respect. The stockholders have unlimited liability in the case of a joint stock association. Senator COUZENS. Then what are the advantages, may I ask Mr. Pecora, so I may have it clear, in having a joint-stock company if there is no limiting of liability. Mr. PECORA. AS I apprehend the principal advantage is that it carries with it all the features of a copartnership, plus the additional advantage, if it be considered an advantage, of a continuation of the interest of a deceased partner, in the case of his estate, through stock ownership. Senator COUZENS. That is the chief advantage? Mr. PECORA. That is what I consider the chief advantage- Mr. Dillon might speak for himself, but the withdrawal of a stockholder would not necessitate the reconstitution of the firm, such as would have to take place in the case of a copartnership. Mr. DILLON. I think your counsel, Senator Couzens, has stated it very clearly. Senator COUZENS. All right. Mr. PECORA. And Mr. Dillon is a good lawyer, too. Senator COUZENS. That is a self-compliment. Mr. Pecora says that Mr. Dillon is a good lawyer, too. [Laughter.] Mr. PECORA. Well, perhaps that remark was a little immodest, Senator Couzens. Senator COUZENS. All right. Mr. PECORA. Mr. Dillon, in your answer to one of the questions previously put to you, you stated that Dillon, Eead & Co. do not carry any deposit accounts, payable on demand. Has that always been the case? 1542 STOCK EXCHANGE PRACTICES Mr. DILLON. At times in the past, we have had substantial deposits that were subject to withdrawal. Mr. PECORA. And when did your firm—and I shall continue to refer to Dillon, Read & Co. as a firm for the sake of convenience rather than as a joint-stock corporation—when did your firm discontinue the practice of carrying deposit accounts payable on demand for the account of customers ? Mr. DILLON. That has been a gradual process. We take no new accounts, and we have been eliminating our old opes during the last 3 or 4 years. Mr. Pecora, at this point I should like to state that we do have another company, Dillon, Eead & Co., Inc., whkh is a Maryland corporation, of which I own all the common stock. There are some preferred stockholders. That was just formed last year, and is not a very active company. We also have the Dillon Eead Corporation, which is a Connecticut company, which conducts our European business. But the former concern that has to do with the period of your inquiry. Mr. PECORA. Then when you speak of Dillon, Eead & Co. it is understood that we have in mind this joint stock company organized under the laws of the State of New York. Mr. DILLON. That is correct. Mr. PECORA. And that has been in existence since some time in 1922. Mr. DILLON. That is correct. Mr. PECORA. All right. Now, Mr. Dillon, according to information that was furnished to us in answer to a questionnaire that we submitted to your firm, at one time, and I refer specifically to the end of the year 1927, your firm carried deposit accounts aggregating $5,250,907.9<3, which were subject to withdrawal on demand, those deposits being kept and maintained by various corporations doing business in interstate commerce. So you will see from that, that at one time, a few years ago, your firm did carry some deposit accounts for customers of a rather substantial amount. Would you tell this committee why in more recent times your firm has discontinued this practice of carrying deposit accounts for customers? Mr. DILLON. In 1927 such deposits were in excess of $5,000,000, as you have read. And there were 17 accounts. In 1928 there were seven accounts with a million and a quarter dollars, roughly. In 1929 there were seven accounts with $3,100,000. In 1930 there was one account with $123,000. And in 1931 there were no accounts of that nature. Mr. PECORA. And none in 1932? Mr. DILLON. NO ; nothing except that I am informed there were a few thousands of dollars someone left there. Mr. PECORA. Will you tell the committee for what reason your firm discontinued that portion of its business ? Mr. DILLON. That deposit business grew up with no particular solicitation on our part, just as a natural consequence of our business. After 1927 we discouraged that business, because those funds were of no use to us. There was simply the responsibility of holding them. We do not make commercial credits. We do not do foreign exchange or issue letters of credit. We had no use for depositors' money in our business. That was simply a responsibility, the keep STOCK EXCHANGE PRACTICES 1543 ing of it, keeping it always liquid and ready to be paid out on demand. It served no useful purpose for us, and as time went on we became more and more convinced that we did not want demand deposits. As we went through such years as we have gone through recently, we adopted the policy of carrying against deposits only cash and short-time governments, so they were of no value to us. Therefore we have gradually discouraged that business, until today we won't accept it. We do not want it.. We feel that it is an entirely distinct business from our security business. Mr. PECORA. NOW, Mr. Dillon, can you give the committee in a general statement the principal features of the business conducted by your firm? Mr. DILLON. We are not versed in the commercial banking business as such, and we do not want those deposits, because we are not commercial bankers ourselves. We are in the investment business. The nature of our business is the financing as I said before, of the durable industries of this,country; and you might be interested in a rough picture of just what the relation of that sort of financing is to commercial financing and short credits. I think I have some figures here which will show that. There was a report prepared by A. B. Tebbutt, of the Harvard University Graduate School of Business Administration, and that material indicates that in this country there was probably produced and distributed as great a volume of consumption goods—that is, the sort of thing that you ordinarily buy in stores—in the depression years of 1930, 1931, and 1932, as in the prosperous years of 1927, 1928, and 1929. The Federal Eeserve Board index of industrial production shows that the consumption of such consumable goods declined about 15 percent in value from July 1929 to July 1933, which more or less corroborates that, while the production of durable goods, which are the goods that we would be financing, declined about 65 percent in value from July 1929 to July 1933. These figures are all compiled, I might say, by Leonard P. Ayres, who is a well-known economist. The census report of manufactures for 1929 will show that the production of industries which the Federal Eeserve called durable was equal to about $30,000,000,000, while the production of industries which the Federal Eeserve would call consumable was equal to about $30,000,000,000. In other words, the business of the country is about equally divided between the sort of business which would be financed, probably, by commercial credits, and the business which would be financed by the investment banker, with the longer term credit. Senator ADAMS. I S that even distribution prior to 1929 or subsequent to 1929? Mr. DILLON. These are the 1929 figures. I have something here which will help you in connection with subsequent figures. I just read the percentages. You may not have heard Senator ADAMS. I heard the percentages. Mr. DILLON. The decline since 1929 has been 15 percent in consumable goods, and 65 percent in what we call durable goods. The census report of manufactures shows that in 1929 there were employed in durable goods industries about 10,100,000, and in consumption goods industries about 3,900,000. By applying to these figures the Federal Eeserve index of employment we can get an estimate of 1544 STOCK EXCHANGE PRACTICES the present employment in these two groups of industries. This estimate shows that in June 1933 those employed in the durable goods industries were about 4,400,000, or a decrease of 5,700,000, ^whereas in the consumption goods industries the employment was 15,100,000, or a decrease of about 800,000. This shows that approximately 7 men out of 8 unemployed today belong to the durable goods industries. Those figures may not be exact, but they will give you a picture, I think, according to Mr. Ayres, of the field and the function of the investment banker. Today you have the business that is financed by the commercial banks, in connection with consumable goods, functioning reasonably well. The industries that would be financed by the investment banker are functioning at only a fraction of their normal production. Senator COUZENS. May I ask a question at that point? Mr. DILLON. Yes, sir. Senator COUZENS. When you speak of enterprises financed by security bankers, do you make any division between those that you finance from the ground up, new institutions, and those, that you just buy out and sell the stock of? Mr. DILLON. I do not know whether that would be included. I would assume not, because those figures are made up from the census of manufactures. I did not prepare those figures. Mr. Ayres prepared them, but I should think they would not include recapitalization, if that is what you mean. Senator COUZENS. If you are going to submit figures, I wanted to know the difference between the figures representing the amount of money that was floating through these security ventures for refinancing institutions like the Dodge Brothers, and those which they might float for an entirely new industry. In other words, a mere change of ownership between one group and another is of no importance, except to the fellow who gets stung, or the fellow who profits, whichever the case might be. The investment banker, as you have described him, as I understood it, means a banker who floats a new company, a new enterprise, and does something constructive, rather than a mere change of ownership. I wondered if you had any figures in connection with those two groups. Mr. DILLON. I agree with what you say. Senator, to this extent. I t does not necessarily have to be a new industry. The financing of an existing industry, in order that it may expand or develop, is equally as constructive as the financing of a new industry. Senator COUZENS. Yes; but when you finance such an industry as you have just described, it is assumed that they add capital goods. Mr. DILLON. Yes, sir. Senator COUZENS. YOU do not finance them simply to increase their consumptive goods, but rather to increase their facilities of a capital nature. That is as I understand your description. Mr. DILLON. I think that is correct. Senator COUZENS. Then, what did the public gain, or what did the industry gain by the mere exchanging of ownership of the Dodge plant from one group to another? Mr. DILLON. They gained this, as I see it, Senator Couzens. I think that when a great industry in this country, owned by one man, or by one family, reaches the proportions which some industries have STOCK EXCHANGE PRACTICES 1545 reached it is probably better for the general community if that industry is owned by the public rather than being owned by one man or one family, because too great a responsibility attaches to a very small control. Mr. PECORA. DO you think that might be attended with unhappy social consequences? Mr. DILLON. I t might be, Mr. Pecora, and, again, if that industry needs additional capital for its expansion and development, it is much easier to get that capital when the ownership is a public ownership. It is on a much sounder basis. I should think, from the social point of view, the labor employed in that industry is on a sounder basis if that great industry is owned by the public rather than by one family. Does that answer your question, Senator Couzens? Senator COUZENS. That is very illuminating, but I wonder how you would put the price that you pay for that into figures. Into what classification would you put those figures—in the classification of capital investment in a constructive enterprise, or what ? Mr. DILLON. I should think those figures would not be in either of these classifications. The CHAIRMAN. IS it not true, Mr. Dillon, that what you call ownership by the public is rather a myth, and that the actual, real ownership continues in the hands of a few just the same? Mr. DILLON. NO, Senator. The ownership goes with the stock, and the stock is owned by the public. The CHAIRMAN. I understand; but there is a certain controlling interest in the stock that manages the industry just the same, even though a great deal of the stock is owned by the public. Mr. DILLON. I think the general practice is that the stockholders send their proxies in, probably to a small group of people. Mr. PECORA. Does not that practice really lead to control of the industry, which is owned by a large body of stockholders, by a few persons who receive the proxies and who exercise the actual management and operation of the corporation ? Mr. DILLON. That is with the consent and approval of the stockholders. They send in their proxies to that group to vote their stock. Mr. PECORA. I know that is the legal machinery by which the exercise of that control is manifested. What I would like to ask you is, if it is not your knowledge and experience that the control of a large corporation, whose stock is widely held among the public, is very, very frequently vested in a few men, or a small group composed of a few individuals, whose actual combined stock ownership might represent a very small minority of the stock. Mr. DILLON. I think, as long as the management runs a company to the satisfaction of its stockholders, the practice is that the stockholders leave the management of that company in the hands of those men. Mr. PECORA. DO we not have Mr. DILLON. The stockholders always have the potential control, and the power to remove the management if the company is not run to their satisfaction. Mr. PECORA. We know the naked legal power that ownership of stock conveys or gives to the owners of the stock. But, as a matter 1546 STOCK EXCHANGE PRACTICES of actual practice in operation, have you not found, in your experience in the financial world, so to speak, that large corporations whose stock is very widely held among the public, are, in a majority of instances, probably, controlled and managed by a small group of individuals whose total stock ownership might comprise a very small minority of the actual outstanding stock? Mr. DILLON. The management of a company, the men actively running the company, are generally, as you say, supported by the stockholders, by the sending in of proxies, and they leave the control of the company to that active management as long as that management is running it successfully. I think it is the exception where a group of stockholders get together to dislodge an existing management, if I understand you correctly. Mr. PECORA. Yes. That is one of the features I have in mind. Mr. DILLON. That is unusual, and would only happen, I should think, when the management was mismanaging the property. Mr. PECORA. Or when something happened which aroused and unified the public, or that portion of the public that owned most of the outstanding stock, and caused them to take defensive measures. Mr. DILLON. I did not follow that. Mr. PECORA. The reporter will read it. (The reporter read the pending question.) Mr. DILLON. Was that a question? I did not follow it. Mr. PECORA. I t is a sort of observation embodied in the form of a question. I t was designed to elicit your opinion and judgment upon it. Mr. DILLON. That stockholders as a rule do not dislodge a management unless they are aroused, either by public opinion or by mismanagement of the property? Mr. PECORA. Yes. Let me give you a concrete case that came to the notice of this committee in the course of hearings held by it last May or June. One of the witnesses, a Mr. Van Sweringen, testified that he and his associaties sought to buy, and succeeded in buying, 15 percent of the outstanding stock of a certain railroad corporation, because Mr. Van Sweringen and his associates engaged in that transaction felt that they could get a management control of that railroad company through the ownership of this block of 15 percent of its outstanding common stock. Those instances of management control going with the ownership of a block not exceeding 15 percent of the outstanding stock of a corporation are not rare and infrequent, are they ? Mr. DILLON. AS I understand your question, the control of corporations is often exercised; that is, the working, nominal control Mr. PECORA. The management control. Mr. DILLON. The management control—by blocks of stock less than the majority of the stock. Mr. PECORA. Far less than the majority. Mr. DILLON. I think that is correct. Senator ADAMS. Mr. Dillon, would it not be almost an impossibility for a small stockholder to raise a successful insurrection in great companies like the Steel Corporation, the A. T. & T., or the Pennsylvania, so as to have a change in management, even though there was dissatisfaction among the small stockholders ? You would not want to undertake that kind of a revolt, would you ? STOCK EXCHANGE PRACTICES 1547 Mr. DILLON. I should not like particularly the job of lining up the small stockholders to try to oust the management of any of the bigger corporations. Senator ADAMS. YOU are confronted with this, are you not, in the first instance, that the outside stockholder does not know who the other stockholders are? You are combatting those in the citadel, as it were, who have the list of stockholders. Mr. DILLON. I think the lists of stockholders are available. Senator ADAMS. Usually after bringing court proceedings to compel them to exhibit them. You remember we went through that in the American Smelting & Refining Co. That was one of the last revolts sought to be staged. Mr. Eilers and others sought to stage a revolt against the Guggenheims. Mr. DILLON. I was under the impression that you could get a list of the stockholders by requesting it. Mr. PECORA. It all depends upon the provisions of the law in the several States, and sometimes it all depends on the personality of the court. Senator ADAMS. But, as a practical matter, it is tremendously difficult in the case of a large, wide-spread corporation. Mr. DILLON. I should think it would be difficult to cover the great number of stockholders. Senator ADAMS. There are 1,000,000 stockholders in one or two of these corporations, are there not ? I have seen some of the statistics. It seems to me that the A.T.&T. list of stockholders runs up to 1,000,000 stockholders, does it not, Senator Couzens ? Mr. DILLON. It seems to me I have seen somewhere that it has about 700,000 stockholders. Senator ADAMS. I know it is an enormous number. Mr. PECORA. Where the stock of a corporation is widely held, that is, held by a body of several hundred thousand stockholders, the general body of the stockholders is disorganized, or rather unorganized, whereas the group having as much as 15 per cent of the outstanding stock is a cohesive, united body, which usually has its hands on the levers of control of the machinery of the corporation. Are these not factors that make it extremely difficult, even in the case of wide-spread dissatisfaction with the management of a corporation, for the unorganized stockholders to oust a small minority that may be in control ? Mr. DILLON. I should think that unless the criticism of the management was something very substantial, the minority stockholders would have a difficult job organizing to oust an existing management. Mr. PECORA. YOU mean the majority stockholders? Mr. DILLON. NO ; the general public. I should think it would be a difficult task to organize them unless there was something very seriously wrong with the management, because I think investors buying stock, as a rule, buy it because they are satisfied with the management. Mr. PECORA. Very often because they know nothing about the management. Mr. DILLON. That is also true. Senator COUZENS. If they did they would not buy it. May I inject a question at this point? If this does not disclose any trade 175541—33—PT 4 2 1548 STOCK EXCHANGE PRACTICES secrets, would you tell us how you go about bidding in a big corporation, to fix the purchase price ? To go back to some of these big corporations which you have purchased and refinanced, how do you go about it to compute the value? Mr. PECORA. Perhaps the Senator has in mind the Dodge Motor •Co. Senator COUZENS. Yes. I am just speaking from press reports. I understand that there was some competition in my home town as to who should get that company, and you were the successful bidder for it. I was wondering how you went about finding out how much you could afford to pay for that institution. Mr. DILLON. That would be a very long story, because it requires Senator COUZENS. I mean the principles involved, if there are any principles. Mr. DILLON. The chief principle involved would be the earning power I think, largely. Senator COUZENS, The earning power would determine how much you could afford to pay? Mr. DILLON. Yes; very largely. Senator ADAMS. Some of them are worth nothing now, then. Senator COUZENS. We went through a great deal of consideration of the excess-profits tax, and we always had difficulty in fixing the ratio on which we collected the excess-profits tax—whether it was 8 to 1, or 10 to 1, or 10 times the earning power, or 6 times the earning power, or 4 times the earning power. What percentage would you use when you go to fix the purchase price of a corporation such as that? Mr. DILLON. We would consider their past record of earnings and their present record of earnings, and our estimate of their future earnings. On a combination of that picture, we would fix a price that we thought was fair. Senator COUZENS. Then you do not use any percentage, as we use in the Government when we come to arrive at the excess-profits tax. Mr. DILLON. A fixed percentage, you mean? Senator COUZENS. Yes. Mr. DILLON. NO. Senator COUZENS. SO, you could not give me1 a " tip " on how to value a corporation which I wanted to buy. Senator ADAMS. Or sell. Senator COUZENS. Or sell. Mr. DILLON. That would depend, Senator, very much on the conditions that existed in the world at that time. Senator ADAMS. The financial appetite of the public at the time, I think, would have something to do with it. The CHAIRMAN. Mr. Dillon, what was the purpose of forming these two corporations, one in Maryland and one in Connecticut, of very much the same name as yours ? Mr. DILLON. The Connecticut corporation, Senator Fletcher, was to control our business in Europe. That was the reason for its formation. The CHAIRMAN. I t is really a part of your parent organization, but a branch, as it were, or a department of Dillon, Read & Co. ? Mr. DILLON. Yes; you might so call it. STOCK EXCHANGE PRACTICES 1549 Mr. PECORA. It was a separate legal entity, but composed of the same individuals, virtually, is that correct? Mr. DILLON. Virtually. The CHAIRMAN. And the same as to Maryland. What was the object in forming the Maryland corporation? Mr. DILLON. The Maryland corporation was formed this last year. Its exact uses are still to be demonstrated. Senator ADAMS. In your Maryland company you own all the stock. Is that true of the Connecticut company ? Mr. DILLON. NO. The Connecticut company is owned similarly to the association. Senator ADAMS. It belongs to the association ? Mr. DILLON. In the Maryland company I own all the common stock. My associates in the business have arrangements by which they participate in the profits, if there are any. Senator ADAMS. YOU might sell them some of the stock. Mr. DILLON. I do not sell stock, as a rule, in the companies in which I am active. Senator ADAMS. YOU would to your partners. Mr. DILLON. I think they would be satisfied to let me keep it. Mr. PECORA. DO any of the stockholders of Dillon, Head & Co., the joint-stock company that has been referred to, sit as members of the board of directors of any commercial banks ? Mr. DILLON. None of the members of Dillon, Head & Co.—I believe I am correct in stating that none of them sit on the boards of any member banks. Mr. PECORA. When you say " member banks" what are you referring to ? Mr. DILLON. Members of the Federal Reserve System. Mr. PECORA. I mean any commercial banks, whether members of the Federal Eeserve System or not. Mr. DILLON. Mr. Christie is on the board of a country bank in Hartsdale, the town where he lives outside New York, a small bank in that suburban town; and Mr. Mathey is on the board of a similar bank in Princeton, N.J., a small bank in the town where he lives. He is also on the board of the Empire Trust in New York. Aside from that, none of the members of Dillon, Read & Co. sit on the boards of any banks. Mr. PECORA. YOU are speaking of conditions as of the present time? Mr. DILLON. AS of the present time. Mr. PECORA. In recent years, have any of the members of Dillon, Read & Co.—and when I say " members " I mean its partners—sat on the boards of any commercial banks other than those you have just mentioned? Mr. DILLON. I, for a number of years, have been on the board of directors and executive committee of the Central Hanover Bank & Trust Co.; also on the board and executive committee of the Chase National Bank. Mr. Phillips has been a member of the board and executive committee, I believe, of the Chemical Bank. I do not recall at the moment any others. One moment and I will see. [After conferring with an associate.] I think that is all. Senator COUZENS. Are you still on these boards? 1550 STOCK EXCHANGE PRACTICES Mr. DILLON. NO, Senator Couzens. When the banking bill passed, requiring private bankers to resign from those boards, I resigned at once rather than wait for the expiration of the time limit. Senator COUZENS. What date was that? Mr. DILLON. What date was the bill passed ? Senator COUZENS. NO ; the date you resigned. Mr. DILLON. I do not know. If you would like those dates, I can get them. It was soon after the bill became law. Mr. PECORA. Soon after the so-called " Glass-Steagall banking bill " became law ? Mr. DILLON. Yes. Mr. PECORA. That was passed in 1933. Mr. DILLON. That is correct. Mr. PECORA. I understand the law became effective June Mr. DILLON. It was subsequent to that that I resigned 16. from the Central Hanover. I am not sure of the date as to the Chase. Mr. PECORA. Did you find, while you were a member of the board of these two banks to which you have referred, namely, the Chase National Bank and the Central Hanover National Bank & Trust Co.,. that it was any advantage to the business of your firm for you to be on the boards of those commercial banks, or did you find it to be a disadvantage, or what did you find to be the effect upon your business,, if any? Mr. DILLON. We served on those boards at the invitation of those companies, and I assume they asked us because they thought it would help their business. As far as our business goes, we find it no advantage to us to sit on those boards. Mr. PECORA. Considered from the broad standpoint of public policy, Mr. Dillon, would you care to give this committee your opinion or judgment as to the advisability of private bankers or investment bankers, while actively conducting such a business, sitting on the boards of commercial banks? Mr. DILLON. From our own point of view, we do not like to sit on any boards. We are busy enough running our own business, and we try to serve on as few boards as we can. Since the passage of the Glass-Steagall bill, I think it is called—the banking bill—we were glad enough of the opportunity of relieving ourselves of the responsibility of serving on bank boards. We serve on very few industrial boards for the same reason. We feel that it takes all our time to run our own business. Mr. PECORA. Have members of your firm in the past sat on the boards of industrial or general business corporations ? Mr. DILLON. TO a limited extent they may have (after conferring with an associate). Only to a limited extent. Mr. PECORA. DO any of them sit on any such boards at the present time? Mr. DILLON (after conferring with an associate). Some of them do, yes; a few. Mr. PECORA. Are any of those boards the boards of companies whose securities your firm has underwritten or issued or sold? Mr. DILLON. Yes; some of them are. Mr. PECORA. What would you say to this committee as your judgment or opinion concerning the advisability from the standpoint of STOCK EXCHANGE PRACTICES 1551 public policy and general public welfare, of investment bankers, such as your house is, sitting on the boards of industrial corporations or business corporations with whose securities they have been identified ? Mr. DILLON. Would you read the question please? (The reporter read the pending question.) Mr. DILLON. From our point of view as investment bankers, we liave not felt it necessary to sit on boards for the purpose of protecting or looking after the securities which we have issued. We have iound, either from contractual obligations with those companies, or from our association with them, or both, that we are able to get all the information that we require about their operations to properly follow their business, and it has been our experience that we were often in a better position to criticize the management or policy if we were not members of the board, than if we were. Senator COUZENS. May we have at this point the names of some of the industrial corporations on whose boards you have been represented ? Mr. DILLON. Personally I am on no industrial boards. Senator CouzEisrs. In the last 3 or 4 or 5 years, on the boards of what industrial companies has your firm been represented ? Mr. DILLON. I can give you that list. Mr. PEOORA. Senator Couzens, one of the questions we submitted t o Mr. Dillon's firm in our questionnaire calls for the specific information that you now ask for, and at the proper time I propose to put their return to that question in our questionnaire in evidence. I will do it now if it will serve your immediate purpose. Senator COUZENS. AS long as it is coming out, I have no interest in when it comes out. It seems to me appropriate at this time, as long as you are determining the policy, or what Mr. Dillon thinks should be the public policy. I think it would be of interest to the committee to know, at this particular time, what corporations they probably influenced or dictated to by virtue of their representation on the boards. Mr. PECORA. I will read to the witness from the information furnished by his, firm, in answer to our questionnaire, the names of these corporations. The question was known as " Question No. 3 " in our questionnaire, and called for the names of all corporations in which any partner or representative of the firm of Dillon, Bead & Co., or any of its agencies, is a director or officer. The answer listed the following corporations: Amerada Corporation; Beneficial Industrial Loan Corporation; Brazilian Tractipn, Light & Power Co., Ltd.; Broadway Department Store, Inc.; Commercial Investment Trust Corporation; Consolidated Cigar Corporation; Educational Pictures, Inc.; Empire Safe Deposit Co.; Equitable Office Building Corporation; Goodyear Tire & Rubber Co.; Louisiana Geophysical Exploration Co.; Louisiana Land & Exploration Co.; Loew's, Incorporated; Nederlandsche Crediet en Financiering Maatschappij; Panhandle Eastern Pipe Line Co.; St. Louis-San Francisco Railway Co.; A. G. Spalding & Bros.; Tubize Chattilon Corporation; United New Jersey Railroad & Canal Co.; United States & Foreign Securities Corporation; United States & International Securities Corporation; Union Oil Co. of California; Victor Chemical Works; Warner Co. 1552 STOCK EXCHANGE PRACTICES Do you recall any others, Mr. Dillon ? Mr. DILLON. NO ; I do not. Mr. PECORA. Does that, Senator Couzens, answer your question for immediate purposes ? Senator COUZENS. I think it does, because it will enlighten the committee when Mr. Dillon gives his answer as to what relations might be brought about by these corporations themselves through interlocking directors. Mr. PECORA. I think it might be timely, in view of this questioning, for me to offer in evidence at this time the answer made by5 Dillon, Eead & Co. to question 3 in our so-called " questionnaire. ' So for that purpose I will show Mr. Dillon this typewritten document. Will you kindly look at it and tell us if you can identify it as the answer to question no. 3 of our questionnaire addressed to your firm ? Mr. DILLON. Mr. Pecora, do you want us to take the time to compare that? That is not the copy that we sent in to you. It is a transcript that your office made. We assume it is a correct one, if you would like that. Yes, Mr. Pecora; if there is any error in your transcript, we can correct it later. Mr. PECORA. YOU are assuming it is a correct copy ? Mr. DILLON. Yes, sir. You have it there. Mr. PECORA. Then, subject to correction, I offer it in evidence. The CHAIRMAN. Let it be admitted into evidence. (Dillon, Eead answer to question 3 was thereupon designated " Committee Exhibit No. 1 " and is in the words and figures following:) COMMITTEE EXHIBIT NO. 1, OCTOBEB 3, 1933 Question. Names of all corporations in which any partner or representative of said firm or any of its agencies is a director or officer. Answer. Names of corporations in which any director of Dillon, Head & Co. or any of its agencies is a director or officer (see note below) : Amerada Corporation; Beneficial Industrial Loan Corporation; Brazilian Traction, Light & Power Co., Ltd.; Broadway Department Store, Inc.; Commercial Investment Trust Corporation; Consolidated Cigar Corporation; Educational Pictures, Inc.; Empire Safe Deposit Co.; Equitable Office Building Corporation; Goodyear Tire & Rubber Co.; Louisiana Geophysical Exploration Co.; Louisiana Land & Exploration Co.; Loew's Incorporated; Nederlandsche Crediet en Financiering Maatschappij; Panhandle Eastern Pipe Line Co.; St. Louis-San Francisco Railway Co.; A. G. Spalding & Bros.; Tubize Chattilon Corporation; United New Jersey Railroad & Canal Co.; United States & Foreign Securities Corporation; United States & International Securities Corporation; Union Oil Co. of California; Victor Chemical Works; Warner Co. Names of corporations in which any employee or representative (other than a director) of Dillon, Eead & Co. or any of its agencies is a director or officer (see note below) : Ault-Wiborg, Ltd.; Ernesto Breda Co<.; Cespedes Sugar Co.; CommanderLarabee Corporation, 419-435 Flatbush Avenue Extension, Inc.; General Cable Corporation; German Credit & Investment Corporation; International Printing Ink Corporation; International Water Co., Inc.; International Water Corporation, South America; Layne-New York Co., Inc., of Delaware; National Cash Register Co.; San Francisco Bridge Securities Corporation; Societe <i'Electricite de la Region de Malmedy; Societe d'Etude d'Execution des Grands Travaux. NOTE.—The above lists do not include names of corporations the securities of which were not offered or sold to the public, or names of corporations fron* STOCK EXCHANGE PRACTICES 1553 which directors, employees or representatives of Dillon, Read & Co., or its agencies have resigned, or names of corporations in which employees of Dillon, Read & Co. or its agencies are directors or officers in a purely personal capacity. Mr. PECORA. NOW, Mr. Dillon, in the answer you made to the question just put to you a moment or two ago you indicated an opinion that as I recall was somewhat in conflict with the opinion expressed in answer to a similar question by a previous witness before this committee, a member of the firm of J. P. Morgan & Co.? who stated in his testimony that it was considered by them advisable and of importance for a member of that firm to sit on the board of a corporation whose securities it had handled, issued. Mr. DILLON. That would be a question of personal judgment or policy. I would not want to take issue with their opinion. They may have found that desirable. It may be it is desirable. In our experience we do not feel as strongfy. Mr. PECORA. Among the corporations mentioned in your answer to question 3 of our questionnaire is one called the United States and Foreign Securities Corporation. Are you familiar with that corporation ? Mr. DILLON. Yes, I am, sir. Mr. PECORA. IS that corporation a so-called " investment trust" ? Mr. DILLON. It is. Mr. PECORA. And what are the distinguishing features of invest- ment trusts? Mr. DILLON. I have here a statement describing investment trusts. It would take me probably 2 or 3 minutes to read it. If you would like to have it, I would be glad to do it. Mr. PECORA. I tell you what we will do in order to save time: You have a typewritten statement defining investment trusts? Mr. DILLON. The story of investment trusts and of this particular one's organization. You might just put it in the record without reading it. Mr. PECORA. I would suggest, Mr. Chairman, to save time, we receive that in evidence and then let the witness explain in his own way, if he will, the principal features of an investment trust as distinguished from other kinds of investment corporations. Mr. DILLON. May we give you a clean copy of this after lunch? Mr. PECORA. Yes. The CHAIRMAN. Let the copy be entered in the testimony and you can proceed with any statement about it you care to make. (The statement submitted by Mr. Dillon was marked " Committee Exhibit 1A October 3,1933 ", see p. 1606.) Mr. PECORA. NOW, please indicate to the committee in your own language, Mr. Dillon, the distinguishing features of an investment trust. Mr. DILLON. I shall, and the reasons why we formed this one. If you will go over the business we have done you will see that from 1919 down to today, we will say, the amount of business we did was varied. The industrial business that we financed amounted to 28.78 percent roughly of our total. Public-utility business was 20.52 percent, steam railroads 6.18, investment companies 2.29, real estate 1.50, 1554 STOCK EXCHANGE PEACTICES Canadian securities 17.25, municipals 1.45, European securities 14.26, S,outh American securities 6.58, other foreign loans 1.19. We had for some time considered the British and Scotch practice of investment trusts. They were first formed in England about 1860, to give the investor a chance to make a diversified investment. They have had a rather satisfactory, in fact popular, record in England, until today the British investment trusts I think have a total invested capital probably close to the equivalent of a thousand million dollars. It is one of the popular and accepted forms of investment. In this country we first considered forming an investment trust that would allow the investor to have a diversified investment in bonds and other things of the nature that we ourselves were bringing <out. But under the tax laws that existed here you could not form an investment to buy bonds, because the company itself would be taxed on its income from that interest, and then when it went to the investor in dividends the penalty was too great. I should like to see that changed if it could be, because I believe it is to the advantage of the small investor to be allowed to buy shares in an investment trust that bought bonds. So then we turned to consider an investment trust that would buy stocks. The thing that moved us most in this consideration was the fact that the small investor cannot get diversification. He can buy a few shares of this or that, but he takes the risk in that one company, whereas if he bought stock in an investment trust he would get a diversification. I think the investments in this particular company that you are speaking of, United States and Foreign, must number (after conferring with associate)—I haven't the number here,'but there is a great variety of items, and the investor's risk is spread over a large field. That was the particular advantage in forming it. The function of it was to invest this large sum of money at the minimum of expense, because the expenses of administration would be spread over a large fund, and to give the investor the advantage, of a management, if I may say so with due modesty, persons skilled in that particular line, and also to diversify his risk. In addition to this, we went further and decided that we ourselves would put in money junior to the public's money as an additional protection. In fact, in forming this trust we gave the public 6 percent stock with a real doubt in our minds as to whether over a period of time we could conveniently earn 6 percent on a diversified investment. Aside from the money we put in junior being an additional protection to that stock, it also would mean that an earning of 5 percent the total assets would have been enough to pay the public 6 percent. That company has been in operation now for about 8 years, I think it is, and we feel very successfully. Through these times, good and bad, we have paid the public on their preferred stock a total of 6 percent per annum. The capitalization of that company was 25 million preferred stock, 5 million second preferred. That company over the last 8 years has paid out in cash dividends over 13 millions of dollars, 11 million-odd to the first preferred and 2 million-odd to the second preferred. STOCK EXCHANGE PRACTICES 1555 Mr. PECORA. NOW, I think, Mr. Dillon, I will go into the matter of the organization of this investment trust and the issuance of its securities and their sale to the public through the medium of definite questions which I will ask you to answer. When was the United States and Foreign Securities Corporation organized ? Mr. DILLON. October 1924. Mr. PECOKA. And who caused it to be organized? Mr. DILLON. The figures that I have been giving in connection with this testimony are approximate. I would not want them to be considered exact. Mr. PECORA. I understand. Who caused the United States and Foreign Securities Corporation to be organized in 1924? Mr. DILLON. Dillon, Read & Co. Mr. PECORA. And what was the set-up of the corporation at its outset ? Mr. DILLON. The set-up of the corporation was arrived at in this fashion: There was 25,000,000 of first preferred stock that was to be offered to the public. We, ourselves, were putting in junior money for $5,000,000. Mr. PECORA. And for that so-called " junior" money what did you get? Mr. DILLON. In our original consideration of that set-up we were going to take common stock so that the public would get preferred stock and we common .stock. During those discussions we determined to give the public something more, in case the company should be prosperous beyond normal expectations, so that they would share beyond the 6 percent dividend on their preferred stock, and in order to do that we changed our set-up. Instead of taking common stock ourselves, we created a second preferred stock which we took for our $5,000,000. Mr. PECORA. What was the total amount of first preferred stock that was issued? Mr. DILLON. Twenty-five millions. Mr. PECORA. That was represented by 250,000 shares of no par value, was it not ? Mr. DILLON. That is correct. Mr. PECORA. And the 6 percent dividend-paying stock? Mr. DILLON. That is correct. Mr. PECORA. With cumulative features? Mr. DILLON. Correct. Mr. PECORA. Was that $25,000,000, or rather the 250,000 shares of first preferred 6 percent dividend-paying cumulative first preferred stock, issued by your house to the public, sold to the public ? Mr. DILLON. It was. Mr. PECORA. For how much? Mr. DILLON. It was offered in the form of allotment certificates* The total amount payable on those was $25,000,000. Mr. PECORA. And what did these allotment certificates call for? Mr. DILLON. That is as I was explaining before. In order to give the first preferred something more than their 6 percent should the profits exceed normal expectations, we then took for ourselves^, 1556 STOCK EXCHANGE PRACTICES instead of taking all the common stock for our $5,000,000, a second preferred stock and created a common stock of a million shares. Mr. PECORA. HOW many shares of second preferred stock were issued ? Mr. DILLON. Five million dollars' worth. That is 50,000 shares. Mr. PECORA. Having any par value? Mr. DILLON. A hundred dollars (after conferring with associate)—no; no par value. Mr. PECORA. Did the second preferred stock carry any dividend rate? Mr. DILLON. Six percent. Mr. PECORA. Also cumulative? Mr. DILLON. Yes; also cumulative, but it was subordinated to the first preferred. The first preferred received their 6 percent first, and then if there was anything further earned the second preferred would get their 6 percent. In liquidation the first preferred would get 100 percent plus accumulated dividends before the second preferred got anything. Then we took that common stock. Mr. PECORA. HOW many shares of common stock were provided for in the original set-up of this investment trust? Mr. DILLON. When we determined to give the first preferred stock some interest in the equity which they would not have had had we just bought $5,000,000 common for our junior money, as I say, then we took $5,000,000 second preferred stock and created a million shares of common stock of which a quarter was given to the first preferred stock. With each share of their first preferred stock went one share of common. The balance of that equity of a million shares, 750,000 shares, went to the purchasers of the* second preferred stock. Mr. PECORA. The purchasers of the second preferred stock were Dillon, Read & Co. ? Mr. DILLON. Yes. My statement there is literally correct, but, as a matter of fact, that second preferred stock and common was sold in two blocks. You will develop that probably as you go along. Mr. PECORA. Yes. Senator COUZENS. Did this Mr. DILLON. The preferred preferred stock have votes? stock did not have a vote when it was issued, because it did not occur to us at the time. We gave a share of common with each share of preferred, and the common voted. Later those certificates were broken up. At the time of listing on the New York Stock Exchange after that break-up we amended that provision and gave the vote to the first preferred stock in the event of default in the dividends. Mr. PECORA. Dillon, fiead & Co. were the organizers or creators of this investment trust? Mr. DILLON. That is correct. Mr. PECORA. And they caused to be issued and sold to the general public 250,000 shares of first preferred stock carrying 6 percent cumulative dividends; is that right? Mr. DILLON. May I have that question again? (The shorthand reporter read the last question of Mr. Pecora.) Mr. DILLON. Well, it was issued and we did sell it; yes. STOCK EXCHANGE PRACTICES 1557 Mr. PECORA. And those 250,000 shares of the first preferred stock which had no $ar value were sold to the public for an aggregate of 25 million dollars; is that right? Mr. DILLON. The 250,000 shares of preferred and 250,000 shares of common were sold for 25 million dollars. Mr. PECORA. I was coming to that, only I was going to put it in this form: That the subscribers to the first preferred shares received an allotment certificate calling for one share of common stock with each share of first preferred stock? Mr. DILLON. Yes. The allotment certificate called for 1 share of preferred and 1 share of common. Mr. PECORA. That is the first preferred stock? Mr. DILLON. Yes. Mr. PECORA. SO that these allotment certificates each calling for 1 share of first preferred and 1 share of common stock sold for $100 per certificate or at that rate ? Mr. DILLON. Calling for a total payment of that. Mr. PECORA. Yes, at that rate. Now, the common stock that was authorized to be issued by this investment trust by its organizers amount to 1,000,000, shares? Mr. DILLON. That is correct. Mr. PECORA. That is the so-called equity stock, isn't it? The common stock is the so-called equity stock? Mr. DILLON. Well, that is the stock that would be entitled to anything beyond the 6 percent on the preferred and the 6 percent on the second preferred. Mr. PECORA. This investment trust also sold to the organizers, namely, Dillon, Read & Co., its 50,000 shares of second preferred 6 percent dividend cumulative stock? Mr. DILLON. Yes. Mr. PECORA. For $100 a share? Mr. DILLON. Wait; I am not sure that is correct. Mr. PECORA. That is, at that rate? Mr. DILLON. There is the equity stock—that is, the second preferred and the common. I speak of both as equity stocks. They are junior stocks rather. The 50,000 shares of second preferred were :sold to Dillion, Eead with Mr. PECORA (interposing). For a total of 5 million dollars ? Mr. DILLON. With 250,000 shares of common, for a total of 5 million. Mr. PECORA. I was coming to that. With that 50,000 shares of second preferred stock Dillion, Bead & Co. acquired 250,000 shares of the common stock, did not not? Mr. DILLON. That is correct. Mr. PECORA. SO that with each share of second preferred 6 percent stock there went 5 shares of the common stock ? Mr. DILLON. YOU can put it that way, but in reality with the 50,000 shares of second preferred, that is, for the 5 million dollars went the whole 750,000 shares of common. The legal detail of the way that was issued you probably will develop. That 250,000 went with the 5 million dollars, and 500,000 went for $100,000. But the actual substance of it was that the men who subscribed the junior money—that is, the $5,100,000, received 750,000 shares of the common rstock. 1558 STOCK EXCHANGE PRACTICES Senator COUZENS. Then, in effect, that is complete control? Mr. DILLON. That is complete control. Senator COUZENS. In spite of the fact that they collected 25 million from the public ? Mr. DILLON. That is correct. Senator COUZENS. They controlled it for 5 million? Mr. DILLON. That is correct. Mr. PECORA. They controlled it through the ownership of 75 percent of the common stock. Senator COUZENS. Yes. Mr. DILLON. Yes. Mr. PECORA. Which went with the second preferred stock? Mr. DILLON. They controlled it by the fact of putting up 5 million dollars junior money to the 25 million preferred stock. Mr. PECORA. The common £tock was the only stock that had voting power, wasn't it, at that time ? Mr. DILLON. I think that is correct. (After conferring with associate) : Yes, that is correct. Mr. PECORA. And subsequently, about 1931 or 1932 Mr. DILLON. Thirty, it was, I think, 1930. Mr. PECORA. The bylaws were amended so as to give the holders of the first preferred stock a voting power at the rate of one voter for each share of first preferred stock Mr. DILLON. In the event of default. Mr. PECORA. Which voting power, however, was only to be exercised in the case of any default ? Mr. DILLON. That is correct. Mr. PECORA. On the payment of dividends on the first preferred stock? Mr. DILLON. That is correct. Senator COUZENS. Why was that change in the bylaws made? What prompted it ? Mr. DILLON. I think I explained that to the Senator a moment ago. It was by a change in the charter and not the bylaws. Senator COUZENS. Why did you change the charter so as to give the first preferred the vote ? What prompted that ? Mr. DILLON. When we originally sold the allotment certificates under one share of common and one share of preferred went together the allotment certificate. The share of common had a vote. Later when the allotment certificate was fully paid, and it was divided,, the common had the vote, the preferred had no vote, and we then amended it so as that the preferred stockholders would have a vote in the event of default. Senator COUZENS. That was only because of what? I am sure I do not get your answer yet as to the reason for changing it. Mr. DILLON. That was the only reason, such as I have given ity the only reason that I can think of now. Mr. PECORA. YOU have indicated that in a practical sense Dillon, Read & Co. purchased the entire issue for $5,000,000 or 50,000 shares of second preferred stock, also received 750,000 shares of the common stock in connection with that purchase. Mr. DILLON. The group that put up that junior money of $5,000,000 for the second preferred and $100,000—$5,100,000 total—received the second preferred stock and 75 percent of the common stock. Some STOCK EXCHANGE PRACTICES 1559 of that second preferred went to the directors. When I say Dillon, Kead put it all up, there was a small amount that went to the directors. Mr. PECORA. The actual transaction by which Dillon, Bead & Co. purchased for the aggregate sum of $5,000,000 the entire issue of 50,000 shares of second preferred stock also enabled Dillon, Eead & Co. to get 250,000 shares of the common stock, did it not? Mr. DILLON. When you say Dillon, Eead bought it all, I would simply want to correct it. I think some of the directors bought some of that stock, but for the purpose of your discussion when you say Dillon, Eead sold, including Mr. PECORA (interposing). But the purchase was confined to various gentlemen who composed the firm or company of Dillon, Eead & Co.? Mr. DILLON. Plus, I think we will say, gentlemen who were on the board of directors. I think they bought some of it. Mr. PECORA. DILLON. Mr. PECORA. Mr. DILLON. Mr. PECORA. Mr. DILLON. Mr. PECORA. Mr. Yes. Didn't they? Yes. Some of the second preferred. I will bring out all those details. When I answered that, I just wanted to correct that. Wasn't there a subsequent transaction whereby the United States & Foreign Investment Corporation sold 500,000 shares of its common capital stock for the sum of $100,000 ? Mr. DILLON. NO, there was not. Mr. PECORA. There was not? Mr. DILLON. There was not. I think you will find that record shows that 500,000 shares was sold by Olcott later to me and my associates. Mr. PECORA. Well now, Olcott was a mere dummy, wasn't he, for Dillon, Eead & Co. in the transaction? Mr. DILLON. I don't know what you mean by " dummy ". He is a bookkeeper in our office through which the legal machinery of this transaction was carried out. Mr. PECORA. SO that when you refer to the interposition of this Mr. Olcott in this transaction you are referring to a man who was a subordinate employee, namely, a bookkeeper, of Dillon, Eead & Co., who made the formal offer in writing to the United States & Foreign Securities Corporation to purchase from it for the sum of $100,000 five hundred thousand shares of its common capital stock? Mr. DILLON. NO, Mr. Pecora; that is not correct. Mr. PECORA. IS it not? Mr. DILLON. NO. He made no such offer to the Securities Co. Will it help you, Mr. Pecora, if I state exactly what happened there? Mr. PECORA. Well, you state it in your own way. Go ahead. Mr. DILLON. The Securities Co. sold its first preferred stock for $25,000,000, less $1,000,000 for expense of selling. They actually received $24,000,000. Then Olcott bought the second preferred and 750,000 shares of common for $5,100,000. And the result of that was that the corporation issued all of its capital stock and received $29,100,000. That is the substance of it. Senator GOLDSBOROUGH. $29,100,000? Mr. DILLON. Yes. 1560 STOCK EXCHANGE PRACTICES Mr. PECORA. Have you produced here in response to a subpoena' served upon your company a certain letter addressed to the United States & Foreign Securities Corporation under date of October 10r 1924, signed by one J. Perry Olcott? Mr. DILLON. Yes; we have. Mr. PECORA. Will you produce it, please ? Mr. DILLON. Certainly. Mr. PECORA. SO that I may offer it in evidence. Mr. DILLON. Yes. Will you use your copy, Mr. Pecora ? Ours is bound in a file. We do not have a loose copy. Mr. PECORA. Well, ours is similarly bound. Mr. DILLON. Ours is simply a photostat. I think you have a xnorer readable one. Senator COUZENS. Who has got the original? Mr. PECORA. They have the originals. Mr. DILLON. It is in the files. Mr. PECORA. But I have what purports to be a photostatic copy. Mr. DILLON. I will be glad to identify that, Mr. Pecora. Mr. PECORA. Mr. Dillon, I show you what purports to be a photostatic, copy of a letter dated New York, N.Y., October 10, 1924r addressed to " United States & Foreign Securities Corporation, Baltimore, Md,", signed by one J. Perry Olcott. Will you be good enough to look at this photostatic copy and tell us if you can identify it as being a true and correct copy of such a letter which was written by Mr. Olcott to the United States & Foreign Securities Corporation ?' Mr. DILLON. I will concede it to be true, subject to any corrections, sir. Senator COUZENS. If it is a photostatic copy, there cannot be any corrections. Mr. DILLON. NO, sir. Mr. PECORA. I may say that this photo,static copy was furnished to us by Dillon, Eead & Co. Mr. DILLON. Then it is correct. Mr. PECORA. It is correct? Mr. DILLON. Yes. Mr. PECORA. All right. I ask that that letter be received in evidence and spread upon the record. The CHAIRMAN. Let it be admitted and entered in the record. (Letter dated New York, N.Y., October 10, 1924, addressed to United States & Foreign Securities Corporation, Baltimore, Md., signed by J. Perry Olcott, was received in evidence and marked " Committee Exhibit No. 2 of October 3, 1933.") Mr. PECORA. Mr. Chairman, I will read this letter into the record, because it is important that we should have the text of it in our minds' as we go along. [Reading:] COMMITTEE EXHIBIT NO. 2, OCTOBER 3, 1933 NEW YORK, N.Y., October 10,1924. UNITED STATES & FOREIGN SECURITIES CORPORATION, Baltimore, Maryland. DEAR SIRS : I offer: 1. To cause Dillon, Read & Co., on or before October 21, 1924, to pay to your corporation the sum of $5,000,000 in cash, being an amount equivalent to $100 per share for every share of the authorized amount (50,000 shares) of your second preferred stock, on the condition that of such STOCK EXCHANGE PRACTICES 1561 amount $50,000 or $1 per share for such stock shall be fixed and accepted by you as the full consideration for the issuance of said second preferred stock and credited to the capital stock of the corporation, and that the remaining $4,950,000 of such amount shall be accepted by you as a contribution for, and set aside as, a general reserve, under the terms of your charter. 2. To cause persons satisfactory to you, on or before November 3, 1924, to make the initial payment of twenty-five percent (25%) of the allotment price for 250,000 shares of your first preferred stock on the terms set forth in the form of first preferred stock allotment certificates hereto attached; the sum of $1,000,000 to be retained by Dillon, Read & Co. as my nominee from the initial payment for the purpose of affecting the sale and distribution of the allotment certificates referred to above. 3. To provide out of the common stock to be issued to me, all of the common stock distributable to purchasers of first preferred stock in accordance with the provisions of the allotment certificates referred to in item 2 above. 4. To pay or cause to be paid to your corporation the sum of $100,000 in cash. In consideration of (1) the execution and delivery by you of a letter to Messrs. Dillon, Read & Co. in the form attached, a copy of my proposal to Dillon, Read & Co. referred to in said form of letter also being attached hereto. (2) The issuance and delivery by your corporation, in accordance with the terms of said letter to Dillon, Read & Co., of first preferred stock allotment certificates in the form hereto attached, for the 250,000 shares of your first preferred stock and 250,000 shares of your common stock. (3) The execution and delivery by you of a contract in the form attached to this offer with the depositary named in said allotment certificates. (4) The retaining by Dillon, Read & Co., as my nominee, out of the proceeds of the initial payment on the allotment certificates above specified of the said sum of $1,000,000. (5) The issue to Dillon, Read & Co. or its nominee or nominees of 50,000 shares of your second preferred stock, being the entire amount of such stock authorized by your charter, and 250,000 shares of your common stock. (6) The issue to me or my nominee or nominees of 750,000 shares of your common stock. (7) The assumption by you of all liabilities incurred in the organization of your corporation, and your agreement to pay all out-of-pocket expenses incident to the issue of your stock and to the allotment certificates hereinbefore referred to. Upon your acceptance, the foregoing will constitute a contract between us. Very truly yours, J. PERRY OLOOTT. Accepted, October 10, 1924. UNITED STATES & FOREIGN SECURITIES CORPORATION, By ROBERT O. HAYWARD, Vice President. Mr. PECORA. NOW, Mr. Dillon, the Robert O. Hayward whose name is signed to this letter by way of acceptance of the terms and conditions of the proposal embodied in this letter, is one of the stockholders and associates of the joint-stock corporation called Dillon, Eead & Co., is he not? Mr. DILLON. He is one of the directors and officers; yes. Mr. PECORA. Yes. In other words, to put it colloquially, he is one of the partners of Dillon, Eead & Co. Mr. DILLON. Yes. Mr. PECORA. NOW you will notice from this agreement as expressed in this letter, and the acceptance thereof by the United States & Foreign Securities Corporation of its terms, that 250,000 shares of the first preferred stock authorized to be issued by this investment trust by its charter was to be sold to the public through Dillon, Read & Co. for $25,000,000, and that the purchasers of that first preferred stock were to get one share of common stock for each 1562 STOCK EXCHANGE PRACTICES share of first preferred stock subscribed and paid for? That is correct, is it not? Mr. DILLON. Well, I do not recall that this letter says it will be sold through Dillon, Eead or that it will be sold for $25^000,000. Mr. PECORA. Well3 the fact of the matter is that this letter provides that $1,000,000 out of the proceeds of $25,000,000 for which these 250,000 shares of first preferred stock were to be sold was to be retained by Dillon, Eead & Co., presumably as a commission for its sale of the first preferred stock to the public ? Mr. DILLON. That presumption is correct; yes. Mr. PECORA. And I based my statement or my assumption of fact in my question to you with respect to that upon that provision of this agreement. Now that is not a violent assumption, is it? Mr. DILLON. But may I explain what happened here? Mr. PECORA. Well, is that not what happened ? Mr. DILLON. What? Mr. PECORA. I S that not exactly what happened, namely, that the United States & Foreign Securities Corporation accepted this proposal of J. Perry Olcott, who was a bookkeeper in the employ of Dillon, Kead & Co. at the time, to cause to be issued 250,000 shares of its first preferred stock to the public for $25,000,000, and that that stock was to be sold through Dillon, Eead & Co., and that Dillon, Eead & Co. were to receive $1,000,000 as its fee or commission for making such sale to the public? Mr. DILLON. Mr. Pecora, this letter does not say that they will be sold for $25,000,000. At least I do not find it. But it is stated, they tell me, in the allotment certificate, that $100 a share must be paid. Mr. PECORA. Yes; but the allotment certificate is attached to this letter and forms a part of the agreement embodied in this letter? Mr. DILLON. That is correct. Mr. PECORA. SO that it is part of the agreement. Mr. DILLON. That is all right then. Mr. PECORA. Yes. I t is so understood, is it not, by you? Mr. DILLON. Well, I did not realize that it was attached to this letter. Mr. PECORA. Well, you see, Mr. Dillon, in assuming the facts that I have embodied in my question to you I am attempting to reduce to practical terms the provisions embodied in this contract between J. Perry Olcott and the United States & Foreign Investment Corporation with respect to the issuance and sale of the 250,000 shares of first preferred stock that the corporation was entitled to issue or authorized to issue under its charter. Now have I correctly stated the facts, stripping them of all legal verbiage ? Mr. DILLON. AS I look through this letter, Mr. Pecora, to me it is just a lot of legal phraseology and legal mechanics. What really happened was that the United States & Foreign sold its first preferred stock under this offer to Olcott Mr. PECORA. Offer by Olcott. Mr. DILLON. Offer by Olcott Senator COTTZENS. But now, at that point, was not Olcott really Dillon, Eead & Co.? Mr. DILLON (continuing).—or through some legal mechanics—he was a bookkeeper in our office. STOCK EXCHANGE PRACTICES 1563 Mr. PECORA. He was what is in the vernacular called a dummy for Dillon, Eead & Co. in this transaction? Mr. DILLON. NO. I do not really know why Dillon, Eead & Co. did not sign this offer. I mean that was a legal formality. I see no reason why it was done through a name like that. The substance of it was that this company was formed, received the $29,100,000, and issued against that $25,000,000 of preferred stock, $5,000,000 of second preferred stock, and a million, shares of common. Mr. PECORA. N O ; but let us get it down to its constituents' elements. Mr. DILLON. I will do that. I am not trying to quibble. I am trying to show what happened. The allotment certificates for 250,000 shares of first preferred stock and 250,000 shares of common—in this letter, as I read it, Mr. Olcott's offer to them was that if they would issue those allotment certificates first just calling for 250,000 shares of preferred stock; if they would then issue to Dillon, Kead 50,000 shares of the second preferred stock with 250,000 shares Of common, and then issue to him the balance of 750,000 shares of common, he agreed to provide out of that the 250,000 shares of common to go with the first preferred, and for all of that he would cause to be paid them $5,000,000 and $100,000, and provide for public subscribers for their allotment certificates $25,000,000, but $1,000,000 of that to be retained by Dillon, Eead & Co. Now that $1,000,000 was retained by Dillon, Eead & Co. to cover the cost of distributing that stock. Mr. PECORA. That is, the first preferred stock? Mr. DILLON. That is right. Dillon, Eead & Co. made no charge for organizing this company. That million dollars represented the four points on that $25,000,000, and that was allowed to dealers all over the United States. There were 380 dealers selling that stock, and any one that sold it got that four points for selling it. For what Dillon, Eead & Co. sold themselves they were paid the same as any other of the three hundred-odd dealers. And Dillon, Eead & Go's, own sales netted them three hundred thirty-nine thousand-odd dollars, as they retailed about ninety-four thousand-odd shares. Is that clear ? Mr. PECORA. NOW, Mr. Dillon, let us see if we cannot even digest this meal one bite at the time. Mr. DILLON. But do I not make that clear ? Is not that the picture you were asking for? Mr. PECORA. But I would rather take that step by step. Mr. DILLON. Step by step suits me. Mr. PECORA. NOW this corporation, this investment trust called the United States & Foreign Investment Corporation, was organized under the laws of the State of Maryland at the instance of Dillon, Eead & Co., was it not? Mr. DILLON. That is correct; yes. Mr. PECORA. Its charter authorized it to issue 250,000 shares of first preferred stock, having no par value, 50,000 shares of second preferred stbck having no par value, and 1,000,000 shares of common stock having no par value ? Mr. DILLON. That is correct. 175541—33—PT 4 3 1564 STOCK EXCHANGE PRACTICES Mr. PECORA. That is correct. Now, on October 10, 1924, which was about the time of the incorporation and organization of the United States & Foreign Securities Corporation, one J. Perry Olcott submitted an offer in writing in the form of this letter that has been received in evidence here to that investment corporation, and the offer was accepted on the same date by the corporation, the signature of the corporation having been affixed by one Robert O. Hayward as its vice president. Is that correct ? Mr. DILLON. That is correct. Mr. PECORA. NOW, this J. Perry Olcott who made this offer was at that time not a capitalist or a person possessed of independent means, but a mere bookkeeper in the employ of Dillon, Read & Co. ? Mr. DILLON. Whether or not he was a man of means was of no importance, as he was simply a part of a legal step. Mr. PECORA. A legal scheme or method ? Mr. DILLON. Yes; method. Mr. PECORA. And the machinery so employed, which involved, among other things, the use of J. Perry Olcott for the purpose of making this offer, was designed to enable Dillon, Read & Co. to fix the terms upon which the securities of this investment trust which Dillon, Read & Co. has caused to be organized to be issued and disposed of, was it not ? Mr. DILLON. When Dillon, Read &> Co. decided on the capital set-up of this company, that was given to the lawyers, and then went on to carry it out. Now, I am not a lawyer, Mr. Pecora, and the detail of this use of Olcott or his letters or other letters is just a legal procedure to carry out the capitalization which resulted finally in the company receiving its full $29,100,000, for which it issued $25,000,000 of first preferred stock, $5,000,000 of second preferred stock, and the common stock. Mr. PECORA. But again I want to remark that that is a little bit too general a statement of the organization of this corporation and the issuance and sale of its securities. Mr. DILLON. I will try to help you. Mr. PECORA. YOU know, there' is an old hymn that says " I do not ask to see the distant scene. One step's enough for me." Let us go one step at a time. Mr. DILLON. All right. But when you get into this legal procedure, frankly, I cannot be of much help to you. Senator ADAMS. I gather, Mr. Pecora, that Mr. Dillon does not think very much of the legal mechanics or phraseology. Mr. PECORA. That suggests a question, Senator Adams, that I will now ask Mr. Dillon. Mr. Dillon, whatever the legal steps and proceedings were that were employed in this matter, they succeeded in effectuating the objects and the purposes of the organizers of this investment trust? Mr. DILLON. I think that is correct. Mr. PECORA. All right. What were those purposes ? The CHAIRMAN. A, process by which Dillon, Read & Co. made a contract with Dillon, Read & Co. to do certain things ? To carry out certain things? Mr. DILLON. NO, Senator. Dillon, Read & Co. were causing to be formed an investment trust. The CHAIRMAN. Yes? STOCK EXCHANGE PRACTICES 1565 Mr. DILLON. Normally you just pay in your money and the company is formed. The lawyers go through these legal steps, whieh5 frankly, I do not understand. I see no reason to employ J. Perry Olcott. Senator ADAMS. I do not like a reflection to be made upon us lawyers, because that is the way we lawyers have to do. We have got to do these things to keep the set-up. Mr. DILLON. That is to make it seem strange. Senator ADAMS. And really, as a matter of fact, Mr. Dillon seems to feel that the lawyers are a sort of an impediment, if perhaps a necessary impediment. Some of us really think that we are very vital. As a matter of fact the lawyers are what make it possible for Mr. Dillon to do the things that he does. Senator COUZENS. Mr. Peroca admitted that Mr. Dillon was as good a lawyer as he was. Mr. PECOEA. I am afraid I was not paying Mr. Dillon a very high compliment. Senator Couzens, when I said it. Mr. DILLON. TO try to return an answer to your question, Mr, Pecora. Mr. PECORA. Yes. Mr. DILLON. The object which we wanted to accomplish, namely, the issuance of $25,000,000 of first preferred stock, of $5,000,000 of second preferred stock, and the issuance of a million shares of common stock, the company to receive for those $29,100,000, was accomplished by this procedure. Have I answered your question ? Mr. PECORA. I am now going to ask you a series of questions to bring out, step by step, this entire operation whereby the United States & Foreign Investment Corporation was launched on the financial waters. Dillon, Eead & Co. caused this investment trust to be organized in the first instance? Mr. DILLON. That is correct. Mr. PECORA. Dillon, Read & Co. had one of its employees, a bookkeeper by the name of J. Perry Olcott, make a written offer in the form of this letter which has been received in evidence here to this investment trust? Mr. DILLON. Well, I do not know that Dillon-Read did that at all. The lawyers did that. Mr. PECORA. Well, the lawyers did it for the purpose of carrying out the purposes and objects of Dillon, Read & Co., did they not! Mr. DILLON. Yes. I mean they may have used Olcott or any man in their office. That is what I understand. Mr. PECORA. Who employed these lawyers to do this ? Mr. DILLON. Dillon, Read. Mr. PECORA. Who were the lawyers? Mr. DILLON. Root, Clark, Buckner & Howland. I think that is the name of the firm. Mr. PECORA. Yes. And you felt that they fully carried out their legal operations and purposes designed by the authors, namely, Dillon, Read & Co. ? Mr. DILLON. I trust the legal steps were all properly carried out. The result was what we wanted. Mr. PECORA. Yes. Mr. DILLON. The result is correct. 1566 STOCK EXCHANGE PRACTICES Mr. PECORA. NOW this employe of Dillon, Eead & Co. made this offer in writing to the Investment Trust? Mr. DILLON. That is right. Mr. PECORA. Immediately upon its incorporation and organization, did he not? Mr. DHXON. Well, I do not know when that happened. If that is true. Mr. PECORA. It was in October 1924. Mr. DILLON. Yes. Mr. PECORA. That offer was accepted by the corporation through its vice president, Mr, Hayward, one of the partners of Dillon, Eead &Co.? Mr. DILLON. That is correct. Mr. PECORA. NOW, as a matter of fact, whose offer, or for whose benefit did Mr. Olcott make his offer to that investment trust ? Not • for his own benefit, did he ? Mr. DILLON. NO. I do not know. Dillon, Eead were the ones that were going to pay in the $5,000,000. Why the lawyers did not make the document with Dillon, Eead I do not know, Mr. Pecora. What these steps all mean or the object of them I do not know. It accomplished what we wanted in the end, which was that we paid in the $5,000,000 and received the $5,000,000 of second preferred. Mr. PECORA. NOW, if it accomplished what you wanted in the end, did it not accomplish the financing of this investment trust through the sale to the general public of 250,000 shares of first preferred stock, which carried with it 250,000 shares of the common stock, for a total consideration of $25,000,000, $1,000,000 of which went to Dillon, Eead & Co. as a fee or selling commission ? Mr. DILLON. NOW, that $1,000,000 went to Dillon, Eead & Co.; Dillon, Eead & Co. using that to pay the three hundred and odd distributors around the country for selling that stock. Mr. PECORA. Yes. Dillon, Eead & Co. did not retain all of this $1,000,000 fee or selling commission. It distributed that among the various dealers? Mr. DILLON. Who sold the stock. Mr. PECORA. It distributed that among the various dealers who aided Dillon, Eead & Co. in selling to the general public the allotment certificates for the first preferred stock? Mr. DILLON. That is correct. Mr. PECORA. Yes. Now of that $1,000,000 is it not a fact that Dillon, Eead & Co. retained for its own part in that commission, in that selling operation, something like $339,000 ? Mr. DILLON. That $1,000,000 was equivalent to $4 a share on the 250,000 shares, and each of these three hundred-odd dealers received $4 for each share that they sold. Dillon, Eead & Co. sold some 94,000 Senator COUZENS. He has already testified to that. Mr. DILLON. Yes. Some ninety-four thousand and odd shares, and received three hundred and thirty-nine thousand and odd dollars. Mr. PECORA. Yes. Now by this same process Dillon, Eead & Co. were enabled to acquire for a stated consideration, cash of $5,000,000, the entire authorized issue of second preferred stock consisting of 50,000 shares thereof, and by the payment of a further sum of STOCK EXCHANGE PRACTICES 1567 $100,000 the entire balance of the authorized issue of common stock, amounting to 750,000 shares? Mr. DILLON. I do not know what you mean by " this process ". Mr. PECORA. By this legal process that Dillon, Read & Co., as you said, engaged this well-known firm of lawyers to act? Mr. DILLON. It carried out our intention of selling to the public $25,000,000 of first preferred stock, with a quarter of the common, and Dillon-Read putting in the $5,100,000 of their own money junior to the first preferred stock—junior to the public's money and receiving three quarters of the common. That was accomplished. Mr. PECORA. That was accomplished? Mr. DILLON. Yes. Mr. PECORA. SO that by this means the general public purchased for $25,000,000 the entire issue of first preferred stock and got with it 250,000 shares of its common capital stock, or 25 percent of the common, and Dillon, Read & Co. and their associates for $5,000,000 Mr. DILLON. $5,100,000. Mr. PECORA (continuing). $5,100,000, acquired the entire issue of the second preferred stock, consisting of 50,000 shares, and 750,000 shares of the common stock ? Mr. DILLON. That is correct. Mr. PECORA. Yes. The common stock was the only stock that at that time had any voting powers or rights ? Mr. DILLON. That is correct. Mr. PECORA. And the ownership of the equity of the company was vested in the common stock, was it not ? Mr. DILLON. And the second preferred was junior money. The equity was the common. Mr. PECORA. Yes. The CHAIRMAN. This trust started out in business with about $30,000,000 cash? Mr. DILLON. That is correct. Mr. PECORA. Five million dollars of which came from Dillon, Read & Co., and the other $25,000,000 from the public? Mr. DILLON. Five million one hundred thousand dollars from Dillon, Read &> Co. and $25,000,000 from the public. The CHAIRMAN. What did it do with that capital ? Mr. DILLON. It handled that capital, Senator, I am very happy to tell you, in a very fortunate way. That capital has been invested in diversified investments, and through these very uncertain times that we have faced that capital remains intact. When this corporation was formed $116 roughly was the equity back of each share of the first preferred that the public bought. Since that time this company has paid out in excess of $13,000,000 cash in dividends, paying the first preferred 6 percent per annum from the time they bought that stock. Today the equity back of that stock, instead of being $116, is approximately $138. So that money has been very fortunately handled. Senator COUZENS. May I ask a question at that point ? When you sold this stock—— Mr. DILLON. I want to add to the answer I have just given to the chairman, if I may, Senator Couzens, that those of us that put up the money for the second preferred stock and did not do any selling 1568 STOCK EXCHANGE PEACTICES in the market but kept it as an investment—which I did, and which many of our associates did—have not even had our 6 percent on our second preferred, and we have had nothing on the common, whereas the public have received their 6 percent interest. Excuse me, Senator Couzens. Senator COUZENS. IS there any prospectus that was issued at the time the stock was sold ? Mr. DILLON. Oh, yes. Senator COUZENS. Have you got Mr. DILLON. There is one there. a copy of that ? Does that answer your question, Senator Fletcher? The CHAIRMAN. Yes. I understand that the second preferred stock and the common stock had not paid dividends? Mr. DILLON. N O ; the second preferred paid dividends for a year or two. I have forgotten just what. It paid dividends until 1931, and it has been in arrears since 1931. I think that is correct. The CHAIRMAN. There has been no dividend on the common stock ? Mr. DILLON. NO dividend at all has been paid on the common stock. Mr. PECORA. Mr. Dillon, following the acceptance on October 10, 1924, by the United States & Foreign Securities Corporation of the offer made in the name of Mr. Olcott under date of October 10, 1924, did your firm receive from the same man, J. Perry Olcott, another letter dated October 10, 1924, addressed to Dillon, Eead & Co., a photostatic copy of which I now show you ? You had better look at it and see. Mr. DILLON (after examining paper). That is a photostatic copy. Mr. PECORA. And that is a true copy of such letter which was received by your firm? Mr. DILLON. Yes, sir. Mr. PECORA. I offer it in evidence and ask that it be spread on the record. The CHAIRMAN. It will be received in evidence and entered on the record. (The letter referred to, dated Oct. 10, 1924, from J. Perry Olcott to Dillon, Eead & Co., was received in evidence, marked " Committee's Exhibit No. 3, Oct. 3, 1933 ".) Mr. PECORA. I shall read it for the present information of the committee. You had better listen to the reading of the letter, Mr. Dillon, because you are going to be asked about certain provisions [Beading:] COMMITTEE EXHIBIT NO. 3, OCTOBER 3, NEW DILLON, READ & 1933 YORK, N.Y., October 10, 192Jh Co., 28 Nassau Street, New York, N.Y. DEAR SIRS: I hand you herewith: (a) A copy of the certificate of incorporation of United States & Foreign Securities Corporation. (&) A copy of the bylaws of United States & Foreign Securities Corporation. (o) A form of the first preferred stock allotment certificates of United States & Foreign Securities Corporation. (d) An offer by United States & Foreign Securities Corporation to you relative to the issue upon your order of First Preferred Stock Allotment Certificates in said form with respect to 250,000 shares of its first preferred stock (each share of first preferred stock to carry one share of common stock as provided in said form of allotment certificate), upon the receipt on or before November 3, 1924, of the sum of $6,250,000 (the total 25 percent initial STOCK EXCHANGE PRACTICES 1569 payment called for under said allotment certificates) plus such additional amount as may be paid in under the terms of such certificates by the purchasers thereof, and less the sum of $1,000,000 which you are to retain as nominee of J. Perry Olcott under his offer of even date therewith. (e) A Copy of an offer by me to the United States & Foreign Securities Corporation relative to the issue of its stock and first preferred stock allotment certificates. , If you will (a) Pay to the United States & Foreign Securities Corporation the sum of $5,000,000 on the terms set forth in said offer by me to said corporation, and (&) Pay or cause to be paid to United States & Foreign Securities Corporation on or before November 3, 1924, the amount called for by clause (d) above with respect to its said issue of first preferred allotment certificates concerning 250,000 shares of its said first preferred stock as above stated. I will (a) Cause to be issued and delivered to you or on your order, in accordance with the terms of my said offer, the 50,000 shares of second preferred stock of United States & Foreign Securities Corporation and 250,000 shares of common stock of said corporation; (&) Authorize you as my nominee to retain from the initial payments made under said allotment certificates the sum of $1,000,000, to be applied for the purpose of effecting the sale and distribution of said allotment certificates, this letter when accepted by you to constitute such authority without the execution of any further instrument; and (c) Cause said corporation to pay all out of pocket expenses incident to the issue of its stock and of the allotment certificates. Very truly yours, (Signed) J. PERRY OLCOTT. We accept the foregoing proposal. (Signed) DILLON, BEAD & COMPANY. OCTOBER 10, 1924. Mr. PECORA. NOW, accompanying this letter which has been marked " Committee Exhibit 3 ", as of this date, and which is in evidence, Mr. Olcott sent to your firm a copy of a letter addressed to Messrs. Dillion, Eead & Co., dated New York, October 10, 1924, signed by United States & Foreign Securities Corporation, by Robert O. Hayward, vice president. I show you a photostatic reproduction of that last-mentioned letter, Mr. Dillon, and a,sk you if you can identify it as being a true copy of such letter [handing paper to the witness] ? Mr. DILLON. I identify it. Mr. PECORA. I offer this letter in evidence and ask that it be spread on the record. Mr. DILLON. That is, with the exception of markings on it. I notice you have some markings on it, your own marks. Mr. PECORA. I am only going to read the photographic portion. The CHAIRMAN. I t will be admitted as committee exhibit no. 4. (The letter referred to, addressed to Dillon, Eead & Co., signed by Robert O. Hayward, and dated Oct. 10, 1924, was received in evidence, marked " Committee Exhibit No. 4, Oct. 3, 1933.") Mr. PECORA. This is the letter which accompanied Mr. Olcott's letter, marked " Committee's Exhibit 4 " , which reads as follows [reading] : COMMITTEE EXHIBIT NO. 4, OCTOBER 3, 1933 NEW YORK, N.Y., October 10, 1924. Messrs. DILLON, READ & Co., 28 Nassau Street, New YorJc, N.Y. DEAR SIRS : If you will accept the proposal dated October 10, 1924, made by J. Perry Olcott to you, United States & Foreign Securities Corporation in consideration of such acceptance will: 1. Issue upon your order the first preferred stock allotment certificates, as specified in said proposal, with respect to 250,000' shares of its first preferred 1570 STOCK EXCHANGE PRACTICES stock upon receipt therefor on or before November 3, 1924, of the sum of $6,250,000 (the total 25 percent initial payment called for under said allotment certificates) plus such additional amount as may be paid in under the terms of such certificates by the purchasers thereof, and less the sum of $1,000,000 which you are to retain, for the purpose of effecting the sale and distribution of said allotment certificates, as nominee of J. Perry Olcott under his offer of even date herewith. 2. Issue upon your order 50,000 shares of this corporation's second preferred* stock and 250,000 shares of this corporation's common stock upon receipt of $5,000,000 to be paid to this corporation on the terms and conditions stated in paragraph 1 of an offer made to this corporation by J. Perry Olcott under date of October 10, 1924, and referred to in his said proposal to you; 3. Subscribe for approximately 25 percent of the $10,800,000 initial issue of capital stock of American and Continental Corporation. 4. Invest approximately $2,500,000 in the securities of the following companies : Brooklyn Edison Co., Continental & Commercial Trust & Savings Bank, Chicago, General Electric Co., Central Union Trust Co. of New York, and First National Bank of New York; 5. Cooperate with you in meeting the requirements of the Blue Sky laws^ so called, of the various States in which the said first preferred stock allotment certificates may be offered for sale by you; 6. Make application to the Boston Stock Exchange for listing the corporation's full paid and 25 percent paid first preferred stock allotment certificates (separate full-paid allotment certificates to be issued if required for listing) ; and 7. Upon your request, make application for listing said allotment certificates and this corporation's first preferred stock and common stock on the New York Stock Exchange. Very truly yours, UNITED STATES & FOREIGN SECURITIES CORPORATION, ROBERT O. HAYWARD, Vice President. Mr. PECOEA. NOW, Mr. Dillon, I want to call your attention to specific provisions of exhibits 3 and 4, being the two letters last read in evidence, relating to the payment by Dillon, Read & Co. to the United States & Foreign Investment Corporation of the sum of $5,000,000 in return for the issuance to Dillon, Eead & Co., or its nominees or order, by the corporation, of 50,000 shares of second preferred stock and 250,000 shares of the common stock of the United States & Foreign Securities Corporation. Does not that clearly indicate, Mr. Dillon, that for this $5,000,000 which Dillon, Kead & Co. agreed to pay, and actually did pay, to this Securities Corporation, this investment trust which it caused to be organized, you received the entire issue of second preferred 6 percent cumulative dividend stock, amounting to 50,000 shares, and 250,000 shares of the common capital stock ? Mr. DILLON. If you take it that way, your statement might be misunderstood. What happened to that $5,000,000 Mr. PECORA. If it is misunderstood, then the language employed by this firm of attorneys who were retained to attend to the legal machinery for this transaction is ambiguous; but I do not think it is. The language is as follows, which is embodied in clause 2 of this letter of the United States & Foreign Securities Co. to Dillon, Kead & Co., which is marked in evidence as committee's exhibit 4 of this date—and I will read that clause to you again. [Reading:] Issue upon your order 50,000 shares of this corporation's second preferred stock and 250,000 shares of this corporation's common stock upon receipt of $5,000,000 to be paid to this corporation on the terms and conditions stated in paragraph 1 of an offer made to this corporation by J. Perry Olcott under date of October 10, 1924 Mr. DILLON. If I might suggest, you are reading only from one of a series of letters that completed this transaction. Digitized forletter FRASER STOCK EXCHANGE PRACTICES Mr. PECORA. I am reading Mr. DILLON. Yes. Mr. PECORA (continuing). 1571 from the last letter Which was written with respect to this transaction under date of October 10, 1924. Mr. DILLON. There is another letter. Mr. PECORA. What other letter are you referring to? Mr. DILLON. Of a later date, where there is an offer to sell Mr. PECORA. That is the letter of October 20, I have that before me and I am coming to it; but as I said before, let us go step by step. Mr. DILLON. The only danger in going step by step is that you might not get a clear picture, because, as I said before, what happened was that we paid in $5,100,000 for which we received the junior stock, $5,000,000 second preferred, and 750,000 shares of common. The public received the senior securities, that is, preferred stock, and 250,000 shares of common. When you separate these transactions it might look like for the $5,000,000 we received 50,000 shares of second preferred and 250,000 common, and for $100,000 received 500,000 shares of common. But it is the same parties, the same interests paying both the $5,000,000 and the $100,000. So the real picture is that for $5,100,000 there were $5,000,000 second preferred received Mr. PECORA. But the reason that I am separating it is because the transaction itself was separated into those steps or parts. Mr. DILLON. It was. Mr. PECORA. And the separation was made originally not by me or by any member of this committee, but by your own attorneys who sought to effectuate their own purposes, I assume. Mr. DILLON. They wrote those three or four different letters; and I think, in fairness, they should all be read together. Mr. PECORA. I cannot read them all at once, nor can I offer them all in evidence at once. Now, did you individually subsequently receive a letter from J. Perry Olcott dated October 20, 1924, a photostatic copy of which I now show you [handing a paper to the witness] ? Mr. DILLON (after examining paper). I identify that. That is all right, except for the notations on it. Mr. PECORA. I S this photostatic copy, except for such lead-pencil notations as appear thereon, a true copy of such a letter received by you from Olcott? Mr. DILLON. I t is. Mr. PECORA. I offer it in evidence. The CHAIRMAN. It will be received and spread on the record. (The letter referred to, from J. Perry Olcott to Mr. Clarence Dillon, dated October 20, 1924, was received in evidence, marked, " Committee's Exhibit No. 5, October 3, 1933.") Mr. PECORA. The letter reads as follows [reading] : COMMITTEE EXHIBIT NO. 5, OCTOBER 3, 1933 NEW YORK, N.Y., October 20, 1924. Mr. CLARENCE DILLON, 28 Nassau Street, New York, N.Y. DEAR SIR: Referring to the United States & Foreign Securities Corporation now in process of organization under the laws of the State of Maryland: It is my understanding that you and your associates will through me pay in $100,000 for one half the authorized common stock of the corporation. The 1572 STOCK EXCHANGE PRACTICES disposition to be made of the stock to be used for the purpose of obtaining the full capital of the corporation is indicated in my letter to United States & Foreign Securities Corporation of this date, a copy of which is enclosed, and my letter of this date to Dillon, Read & Co., a copy of which is also enclosed. I will advise you when the amount to be paid in for your stock will be called for, which will be not later than November 3, 1924, and will expect you to advise me as to how the stock certificates are to be made out. Yours very truly, J. PERRY OLCOTT. Mr. PECORA. Did you accept or agree to the proposal embodied in this letter addressed to you individually by Mr. Olcott under date of October 20, 1924? Mr. DILLON. Yes; I did. Mr. PECORA. This proposal relates solely to the issuance to you and your associates of one half of the authorized common stock of the United States & Foreign Securities Corporation, does it not? Mr. DILLON. I t does, but it is a part of the whole transaction. Mr. PECORA. I know it; but I mean, this particular portion relates exclusively to the issue to you and your associates of one half of the authorized common stock of this investment trust, namely, 500,000 shares ? Mr. DILLON. That particular letter does. Mr. PECORA. I am referring to this particular letter; and according to this particular letter, marked " Committee Exhibit 5 ", these 500,000 shares of the common stock of the investment trust were to be issued to you and your associates for the sum of $100,000 to be paid by you and your associates to the investment trust? Mr. DILLON. That is correct; and that was bought in the same proportions as the $5,000,000 for the second preferred stock. The CHAIRMAN. That would mean 2(3 cents a share ? Mr. DILLON. Yes, sir; if you figure it that way. Senator ADAMS. What was the book value of it? Mr. DILLON. Nothing—a million dollars less than nothing. The CHAIRMAN. It was not on the market then ? Mr. DILLON. When it was, it was a million dollars less than nothing. We used a million to pay the distribution expenses on the first preferred. Mr. PECORA. Instead of having a negative value, it had a minus value ? Mr. DILLON. That is right. Mr. PECORA. This common stock, which had a minus value at the time of its issuance in October 1924, by the end of 1928 or 1929 reached a market value on the New York Stock Exchange of as high as $72 a share, did it not? Mr. DILLON. That is correct, and had a book value at that time of $30 or $40. I am not sure of the figures. The asset book value was $48 I am told. Senator ADAMS. When was it first listed on the stock exchange? Mr. DILLON. I will give you the date, Senator. Mr. PECORA. SO this infant which was born with practically no life, assumed the lusty proportions of a 72-dollar stock within 4 years' time? STOCK EXCHANGE PRACTICES 1573 Mr. DILLON. And had a book value, they tell me, of $48. We do not want to claim any magician's power. It was in that very rapidly advancing market that those great profits accrued. Senator ADAMS. Where is it now? Mr. DILLON. The value? Senator ADAMS. The common stock, the book value. Mr. DILLON. I do not know exactly. It has a book value now of three or four dollars. Mr. PECORA. The market value is about $9 or $10 ? Mr. DILLON. Yes, about that. Mr. PECORA. I think we will go into the question of this common stock in the open market, after recess. I suggest that it is now past 1 o'clock, and this would be an appropriate place to stop. The CHAIRMAN. We will take a recess until 2 o'clock. We expect to continue until 4 o'clock. (Whereupon, at 1: 05 p.m., a recess was taken until 2 p.m.) AFTER RECESS The subcommittee resumed at 2 p.m. on the expiration of the recess. TESTIMONY KESTJMED OF CLAKEMJE DILLON, OF DILLON, READ & CO. The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora. Mr. PECORA. When we recessed we were on the question of the letter of October 20, 1924, I believe. Mr. DILLON. Yes. Mr. PECORA. NOW, referring to that letter, addressed to you individually by J. Perry Olcott, under date of October 20, 1924, which has been marked " Committee's Exhibit No. 5, October 3, 1933 ", Will you tell this committee, Mr. Dillon, if you accepted, either in writing or otherwise, the proposal embodied in this letter of Mr. Olcott to you ? Mr. DILLON. Yes, sir; I did. Mr. PECORA. In what form was your proposal evidenced ? Was it in writing or by word of mouth ? Mr. DILLON. There was no written acceptance, but I paid the money. Mr. PECORA. NOW, did your firm on the same date that you received this letter from Mr. Olcott, dated October 20, 1924, cause to be addressed to the United States & Foreign Securities Corporation a letter of which this which I now hand you is a photostatic reproduction ? Mr. DILLON. Yes, sir; that is correct. Mr. PECORA. IS that a true copy of such a letter ? Mr. DILLON. That is a true copy. Mr. PECORA. I offer it in evidence and ask that it may be spread on the record, eliminating therefrom whatever lead pencil notations appear on the face of this copy. 1574 STOCK EXCHANGE PRACTICES The CHAIRMAN. It will be made a part of the record. The letter was marked "Committee Exhibit No. 6, October 3, 1933 ", and was read by counsel as follows: Mr. PECORA. The letter reads as follows: OCTOBEB 20,1924. UNITED STATES & FOREIGN SECURITIES CORPORATION, Baltimore, Md. DEAR SIRS : We hand you herewth our check in the sum of $5,000,000 payable to your order. This payment is made to you pursuant to the terms of paragraph 1 of offer made October 10, 1924, to you by J. Perry Olcott, and accepted by you October 20, 1924. A copy of the contract so made is annexed hereto. Kindly confirm by acceptance below our understanding that the $5,000,000 above referred to is received by you on the terms and conditions stated in said paragraph 1 of said contract. Very truly yours, DILLON, READ & Co. Accepted" October 20, 1924. UNITED STATES & FOREIGN SECURITIES CORPORATION, By R. E. CHRISTIE, Jr., Treasurer. Now, Mr. Dillon, is the R. E. Christie, Jr., whose name is signed to this letter, or to the acceptance of the proposal of this letter, as treasurer of the United States & Foreign Securities Corporation, one of the associates or partners or stockholders of Dillon, Read & Co. ? Mr. DILLON. He is, sir. Mr. PECORA. NOW, isn't it clear to you, Mr. Dillon, from the documentary evidence relating to the transactions surrounding the issuance of the stock of the United States & Foreign Securities Corporation, that the sum of $5,000,000, as a separate consideration, was paid by Dillon, Bead & Co. to that securities corporation in return for 50,000 shares of its second preferred stock and 250,000 shares of its capital common stock? Mr. DILLON. Yes; if you will let me add that for the privilege of that subscription the same parties obtained the right to buy the 500,000 shares for Mr. PECORA (interposing). For $100,000? Mr. DILLON. Yes. Mr. PECORA. NOW, can you explain, in view of that, why the letter of J. Perry Olcott of October 20, 1924, which is marked " Committee's Exhibit No. 5, October 3, 1933 ", and which relates to that portion of the transaction that covers the issuance of the 500,000 shares of common stock for $100,000 is addressed to you individually and not to the firm of Dillon, Read & Co. Mr. DILLON. I do not recall any particular reason for that. The people who bought that with me were the same people who were interested in Dillon, Read & Co.; and why it was not done in one transaction I do not remember. Excuse me a moment until I inquire. (Inquiring of an associate.) This letter refers to me and my associates. Why it was not all done in one transaction—and that was your question, Mr. Pecora, wasn't it ? Mr. PECORA. NO. Why the letter of Olcott's referring to the issuance by the Securities Corporation of 500,000 shares of its capital common stock for $100,000 was addressed to you individually and not to the firm or company known as Dillon, Bead & Co. Mr. DILLON. That particular part of the stock was bought, it says here, " by me and my associates." STOCK EXCHANGE FRACTIOUS 1575 Mr. PECORA. That is, as distinguished from the legal entity known as Dillon, Eead & Co. ? Mr. DILLON. Yes; although the interests were the same, there is a distinction between them and the entity Dillon, Eead & Co. Mr. PECORA. In other words, the legal entity known as Dillon, Bead & Co. never undertook to acquire 500,000 shares of the common stock of the United States & Foreign Securities Corporation for $100,000, did it? Mr. DILLON. NO ; but Mr. PECORA (continuing). That undertaking was assumed by you and your associates as individuals, separate and apart from the legal entity called Dillon, Read & Co. ? Mr. DILLON. That is correct. Mr. PECORA. What was the reason for that? Mr. DILLON. I don't remember any particular reason for that. We were to subscribe $5,100,000 for that second preferred and that common. Why it was not all done in one block I don't know. I don't recall what difference it makes in doing it this way from the other. Mr. PECORA. I notice that upon the face of these exhibits that have been put in evidence today, consisting of these various letters, that they appear to have the same kind of typing. Would you say from that that they were all prepared in the same office? Mr. DILLON. Well, I don't know; but these letters were prepared by the lawyers. Or I should assume at least that they might have been prepared in the lawyer's office. Mr. PECORA. YOU mean the firm of lawyers that Dillon, Read & Co. retained to handle the legal machinery for the organization and launching of this investment trust ? Mr. DILLON. Yes, sir. Mr. PECORA. And there was only one firm that undertook that legal work? Mr. DILLON. Yes, sir; that is correct. Mr. PECORA. NOW, as a matter of fact, in whose name were the 50,000 shares of second preferred stock acquired originally? Mr. DILLON. Mr. Pecora, do you mean the original stock certificates, in whose name they were issued ? Mr. PECORA. Yes. Mr. DILLON. We will have to get that for you. We do not have it here. Mr. PECORA. Well, to whom were those 50,000 shares originally issued by the Securities Corporation ? Mr. DILLON. YOU do not mean the 50,000 shares of common stock, do you? Mr. PECORA. NO. The 50,000 shares of second preferred stock. Mr. DILLON. The directors bought some of that, the actual breakdown of the certificates we do not have here. Mr. PECORA. They were originally issued to the legal entity known as Dillon, Read & Co., were they npt? Mr. DILLON, We think so, but we haven't got the actual information here. Mr. PECORA. I want to show you what purports to be a photostatic reproduction of a ledger account which was furnished to us by your 1576 STOCK EXCHANGE PRACTICES firm and relating to the issuance of this second preferred stock of the United States & Foreign Securities Corporation. Will you be good enough to look at it and tell us if that serves to refresh your recollection as to the identity of the person or persons or legal entity to whom or to which those 50,000 shares of second preferred stock were issued? Mr. DILLON. From this, Mr. Pecora, the 50,000 shares were issued—well, the way the certificates were made out, just the names, I cannot tell from this, but 500,000 shares went to Mr. F. H. Ecker and 500,000 shares to John Sherwin Mr. PECORA (interposing). You mean 50,000 shares and not 500,000 shares, don't you? Mr. DILLON. NO, not 500,000 shares. But 500 shares were issued to F. H. Ecker, 500 shares to John Sherwin, 500 shares to Robert S. Schaffner, 500 shares to Herbert Fleischhacker, 500 shares of Anson W. Burchard, 100 shares to George W. Wickersham, and the balance, 47,400 shares, to Dillon, Eead & Co. Mr. PECORA. Exactly. Now, Dillon, Eead & Co. received originally the issue of 50,000 shares of the second preferred stock, comprising the entire authorized number of those shares, and in turn caused to be issued to the six gentlemen whose names you have just given us, certificates for the numbers of second preferred shares which you have enumerated. There were six certificates. Mr. DILLON. I think that is substantially correct. Mr. PECORA. All told, these six gentlemen received certificates calling for 2,600 shares of the second preferred. Mr. DILLON. Yes. Mr. PECORA. The balance of the 50,000 shares of that classification of stock was retained by Dillon, Eead & Co. as a separate legal entity. Mr. DILLON. That is correct. Mr. PECORA. With these shares of second preferred stock that were issued to these six gentlemen, were there also issued to them certificates for common stock of the Securities Corporation at the ratio of five shares of common for one share of second preferred ? Mr. DILLON. That is correct. Mr. PECORA. What did these six gentlemen pay for these shares of second preferred and common? Mr. DILLON. The same as Dillon, Eead & Co., I think, $100 a share. Mr. PECORA. That is for the second preferred. Mr. DILLON. That is for the second preferred; and they were given five shares of common with each share of preferred. Mr. PECORA. Who were the original directors of this United States and Foreign Securities Corporation? Mr. DILLON. Just a second. We will get that from the minute book. It is right here. Mr. Pecora, I assume you do not mean those in the law firm that formed it as an original organization? You mean the first operating organization? Mr. PECORA. The board of directors that succeeded the directors who attended to the formalities of the legal incorporation. Mr. DILLON. We are getting that for you right now. Mr. Pecora, I have here a statement of December 31, 1924, which I assume is the original board. Mr. PECORA. If you read off the names, I will check them against my own data. STOCK EXCHANGE PRACTICES 1577 Mr. DILLON. Anson W. Burchard; Clarence Dillon; Frederick H. Ecker; Herbert Fleischhacker; John W. Hornor; William A. Phillips; Robert C. Schaffner; John Sherwin; Hon. George W. Wickersham; Harrison Williams; Edward G. Wilmer, chairman. Mr. PECORA. That corresponds to .my data. When did these gentlemen become the board of directors of this Securities Corporation ? Mr. DILLON (after conferring with an associate). I am sorry for the delay. Mr. PECORA. Was it not within a very short time after the incorporation of the company in October 1924? Mr. DILLON. Yes; I am sure of that. Mr. PECORA. If your associates will be good enough to give you the date later, we can put it into the record. This approximation will serve for our present purposes. Mr. DILLON. They will have it in just a moment. Mr. PECORA. Mr. Dillon, who selected these gentlemen to serve as directors of the corporation shortly after its organization? Mr. DILLON. I assume the stockholders. Mr. PECORA. The stockholders at that time, to the extent of at least 75 percent of-the common stock, were Dillon, Eead & Co. or their associates, were they not ? Mr. DILLON. Probably that board was simply made up by discussions in our office. Mr. PECORA. I suppose you took part in those discussions, as the senior partner of Dillon, Read & Co. ? Mr. DILLON. Undoubtedly. Mr. PECORA. Who is Mr. Fleischhacker? Mr. DILLON. Mr. Fleischhacker lives in San Francisco. He is, I think, the president or the chairman of the Anglo, London and Paris Bank I think it is. Mr. PECORA. He is known as a capitalist out in San Francisco, is he not ? Mr. DILLON. He is a banker out there. Mr. PECORA. Hi,s home is there, and his principal office for the transaction of business. Mr. DILLON. Yes. Mr. PECORA. When he was selected as a member of the board of directors of this United States & Foreign Securities Corporation, was it expected reasonably that he would come across the continent to attend board meetings? Mr. DILLON. NO ; I should not ,say it was expected he would come across for every board meeting. He was in New York occasionally, at irregular intervals over the year. He was selected, as I remember it, so that we could have someone on the coast whom we could call upon for advice in regard to investments we might make in that part of the country. Mr. PECORA. Then it was not reasonably expected that he would fae physically able to attend meetings of the board. Mr. DILLON. Ye,s, some of them; not every meeting; no. Mr. PECORA. But he functioned as a director for a number of years, did he? That is, he was carried on the board? Mr. DILLON. I will find out in a moment. 1578 STOCK EXCHANGE PRACTICES Mr. PECORA. Who is Mr. E. C. Schaffner; another one of the directors ? Mr. DILLON. E. C. Schaffner lives in Chicago. He is a banker there. He has an office in New York, and he is in New York quite often, and has been reasonably regular in attendance on the meetings. Mr. PECORA. But his home is in Chicago and his principal office was there ? Mr. DILLON. I do not know which he calls his principal office. I assume it would be there, because his home is there; but he has an active office in New York. Mr. PECORA. Who is Mr. J. Sherwin, of Cleveland, Ohio ? Mr. DILLON. John Sherwin, I think, is retired now. At that time he was either chairman or president of the Union Trust Co., I believe it was. Mr. PECORA. Of Cleveland? Mr. DILLON. Yes. Mr. PECORA. And lived in Cleveland ? Mr. DILLON. And lived in Cleveland. Mr. PECORA. He had his principal office Mr. DILLON. He had his principal office Mr. PECORA. Was it expected that he » there ? there. would be able to attend with some regularity the meetings of the board of directors of this investment trust? Mr. DILLON. Yes; I should say with some regularity, because he was in New York in those days quite often. Mr. PECORA. Who is Mr. Anson W. Burchard? Where did he live? Mr. DILLON. Mr. Burchard was vice chairman of the board, I believe, of the General Electric Co., and lived in New York. Mr. PECORA. And hence was easily available for attendance upon board meetings? Mr. DILLON. Easily available. Mr. PECORA. And Mr. Harrison Williams was on this board of directors. Where did he live? Mr. DILLON. He lives in New York, and has his principal office and business there. Mr. PECORA. Mr. Wilmer, former president of Dodge Brothers, Inc.—where did he live? Mr. DILLON. I am not sure whether he lived in New York at that time, or just outside of Philadelphia. I do not remember. Mr. PECORA. Mr. Phillips was a member of Dillon, Eead & Co. ? Mr. DILLON. Yes. Mr. PECORA. And you were a member Mr. DILLON. Yes. Mr. PECORA. Mr. J. W. Hornor was of Dillon, Eead & Co. ? a member of Dillon, Eead & Co.? Mr. DILLON. That is correct. Mr. PECORA. And presumably all available for attendance at the board meetings? Mr. DILLON. Yes. Mr. PECORA. AS was General Wickersham? Mr. DILLON. Mr. Wickersham lived in New available. York, and was also STOCK EXCHANGE PRACTICES 1579 Mr. PECORA. Mr. F. H. Ecker is the remaining member of the board of directors of this Securities Corporation for its first year. Is he the man who is also president of the Metropolitan Life Insurance Co.? Mr. DILLON. That is correct. Mr. PECORA. DO you know that Mr. Ecker at that time was a member of a great many boards of directors of different corporations engaged in business ? Mr. DILLON. I do not know that to my own knowledge, but I assume that is a correct statement. Mr. PECORA. And as president of this Metropolitan Life Insurance Co., he was the executive head of an organization that commanded resources running into the billions of dollars. Mr. DILLON. That is correct. Mr. PECORA. Was it reasonably expected by you, in selecting or assisting in the selection of Mr. Ecker to serve on the board of directors of this Securities Corporation, that a man with the responsibilities attaching to Mr. Ecker's position as president of this life insurance company, would find adequate time to give to the discharge of his duties as a member of the board of directors of this investment trust? Mr. DILLON. Yes. Mr. Ecker was a very regular attendant at the directors' meetings, and the mere fact that he is the head of this great company, which has such large and varied investments, which he follows, made him valuable to us, because of his knowledge of investments. Mr. PECORA. Was he also valuable, or did you think he might be valuable to this investment trust because he was also the head of a corporation commanding tremendous cash resources that might purchase securities that were in the portfolio of this investment trust from time to time ? Mr. DILLON. No; I do not think they have ever bought any securities from the investment trust portfolio. Mr. PECORA. Were these directors paid a salary as directors, as distinguished from a fee for attending meetings? Mr. DILLON. Yes; at the beginning the directors were paid $5,000 a year. Mr. PECORA. Each of them received a salary of $5,000 a year regardless of the number of meetings he attended ? Mr. DILLON. Each director with the exception of myself. I did not take that at the beginning, and I am informed that neither Mr. Hornor nor Mr. Phillips took it. Mr. PECORA. The other directors received a salary of $5,000 a year. Mr. DILLON. That is correct. Mr. PECORA. Eegardless of the number of meetings of the board that they aittended ? Mr. DILLON. That is correct; but obviously, if a man did not attend at all, he would not stay a director. I have just been informed that at a later date Phillips, Hornor, and myself did take the compensation. From December 1924 to October 1926 we took no compensation. At that time we did take it, I suppose because the others urged us to do so. 175541—33—PT 4 4 1580 STOCK EXCHANGE PRACTICES Mr. PECOEA. HOW many meetings of the board of directors were held during the first year of the corporate existence of this investment trust? Mr. DILLON. We will look that up. Mr. PECORA. While that is being looked up, perhaps you can tell me from memory how many of those meetings were attended by Mr. Fleischhacker, if any. Mr. DILLON. I could not tell. That is 8 years ago. But we can get it from the record for you. There was one date they were looking up. October 27, 1924, was when the board of directors was elected. Mr. PECORA. Yes. Mr. DILLON. Mr. Fleischhacker resigned Mr. PECORA. HOW many meetings of the January 19, 1926. board of directors did he attend while he was a member of the board between October 1924 and January 1926? Mr. DILLON. They are looking that up. That will take a little time. Senator COUZENS. Were these subscriptions to this preferred stock paid on the installment plan ? Mr. DILLON. The first preferred ? Senator COUZENS. Yes. Mr. DILLON. Yes. It was paid in four different installments. Senator COUZENS. What periods? Mr. DILLON. Just a moment. [To an associate.] Can you give me the periods? [After ^conferring with an associate.,] The first call was October 1, 1925, for payment November 2, 1925. Mr. PECORA. 1924, wasn't it? Mr. DILLON. NO. That was when they paid for the original quota, when they bought the allotments. Senator Couzens is asking for subsequent calls. March 26, 1926, for payment May 1, 1926; September 26, 1927, for payment November 1, 1927. Senator COUZENS. SO, this money, after you got it in,, was invested after you got it in, and you did not have the investments at the time they paid it. Mr. DILLON. It might be possible, Senator Couzens, that at some time we might have borrowed to make investments, and then made calls to repay that. Mr. PECORA. Mr. Dillon, at the present moment it appears quite conclusively that 50,000 shares of second preferred stock were issued by this investment trust to Dillon, Read & Co., that is, 47,400 were issued to Dillon, Eead & Co. as a separate legal entity, and the other 2,600 shares were distributed among these six gentlemen who found places on the board of directors. Mr. DILLON. That is right. Mr. PECORA. With regard to the 500,000 shares of the common stock referred to in Mr. Olcott's letter to you of October 20, 1924, and in which it is set forth, in substance, that these 500,000 shares will be issued by the investment trust for the consideration of $100,000, were any of those shares of the common stock issued to the legal entity known as Dillon, Eead & Co. ? Mr. DILLON. May I correct you, Mr. Pecora? I do not think that the investment trust issued those shares for $100,000. Olcott offered to sell them to me and my associates for $100,000, but the investment STOCK EXCHANGE PRACTICES 1581 company did not issue them for that. They issued them in consideration of the payment of $5,100,000. I think it is all together. There is no reference in Olcott's proposal to the investment company that they sell 500,000 shares for $100,000. That does not occur. Those letters that were read this morning, I think you will find, state that the investment company sold 50,000 shares of second preferred, 750,000 shares of common, and the allotment certificates, all for the lump sum. Mr. PECORA. According to the letter of Dillon, Read & Co. to United States & Foreign Securities Co., dated October 20,1924, which is marked " exhibit 6 " as of this date, Dillon, Read &' Co. sent its check for $5,000,000 to the investment trust on that date, did it not ? Mr. DILLON. Yes; that is correct. Mr. PECORA. When was the $100,000 paid to the investment trust by anybody? Mr. DILLON. By Olcott, under the terms of his letter to the investment trust. He agreed, as I remember it, to pay them $5,000,000, and to pay them $100,000, and to get subscriptions to the allotment certificates, and for all of that they would issue to him the allotment certificates plus the 50,000 shares of second preferred and 750,000 shares of common, and with that second preferred they would give 250,000 shares of common. Mr. PECORA. Are you not referring to the letter marked as " Exhibit 5", written by Olcott to you individually, under date of October 20, 1924? Mr. DILLON. NO. Mr. PECORA. Let me remind you that in this letter Olcott says to you: It is my understanding that you and your associates will, through me, pay in $100,000 for one half the authorized common stock of the corporation. Mr. DILLON. Yes. Mr. PECORA. Does not that read like a separate transaction, or a separate proposal covering those 500,000 shares ? Mr. DILLON. That is not a letter, Mr. Pecora, to the securities company. Mr. PECORA. I know it is not. I t is a letter by Olcott to you. Mr. DILLON. That is correct. Mr. PECORA. In which he says, referring to the United States & Foreign Securities Corporation now in process of organization under the laws of the State of Maryland. It is my understanding that you and your associates will, through me, pay in $100,000 for one half the authorized common stock of the corporation. Mr. DILLON. Yes, but Mr. PECORA. Just look at the language of that (handing a paper to the witness). Does not that indicate, Mr. Dillon, that a separate step in that transaction, whereby this investment trust was financed at the outset, involved the issuance to you and your associates, as distinct from the legal entity of Dillon, Eead & Co., of 500,000 shares of its common stock for a specific consideration of $100,000? Mr. DILLON. I can not say yes to that, because, Mr. Olcott Mr. PECORA. DO you say no to that? Mr. DILLON. Yes. I say no, because the Securities Co. did not issue anything to us. As I understand these letters, Mr. Olcott 1582 STOCK EXCHANGE PRACTICES bought from the Securities Co. the allotment certificates, for which he got the subscriptions. Then he agreed to get them a purchaser for the second preferred, with 250,000 shares of common^ and they agreed to give him the 750,000 shares. Then Olcott sold to me and my associates the 500,000 shares for the $100,000. Mr. PECORA. Does not Olcott, in turn, say in that letter to you that he was simply being used as the conduit whereby you and your associates were to pay $100,000 to the investment trust for 500,000 shares of its capital common stock? Mr. DILLON. We did not make any contract with the security company, as I read these letters. Olcott did. When he got the stock, he sold it to me. I see no difference in it myself. I do not want to say that I see what I do not see in this letter. Mr. PECORA. DO you read anything in that letter other than what its plain terms purport to set forth, namely, that it was the agreement or understanding that Clarence Dillon and his associates were,, through Olcott, to pay to the investment trust $100,000 for 500,000 shares of its common capital stock ? Does that letter mean anything other than that, in your opinion ? Mr. DILLON. Mr. Pecora, I see no difference in that, but I must say what happened, and what it was—this legal proceeding whereby Olcott got the stock. In substance, we bought the second preferred and 750,000 shares of the common for $5,100,000. Mr. PECORA. But not in one transaction, Mr. Dillon. We have seen, from letters already received in evidence here, that your firm, Dillon Eead & Co., sent its check for $5,000,000, not for $551OO,OOO> but for $5,000,000, on October 20, 1924, to the United States and Foreign Securities Corporation. That appears by committee's exhibit no. 6. Mr. DILLON. The whole thing, Mr. Pecora, is really one transaction in these steps. The only reason I can see for these steps is that for some reason this group, which was the Dillon, Eead & Co. group^ wanted the second preferred, with 250,000 shares of common issued to the entity Dillon, Read & Co., and the 500,000 shares issued to them as individuals. Mr. PECORA. What was the reason for that ? Mr. DILLON. AS I say, I see no reason, because it was the same interests. Mr. PECORA. Was there not a substantial difference between issuing to Dillon, Read & Co., as a separate legal entity, the 50,000 shares of the second preferred stock and issuing, in various amounts, the 500,000 shares of the capital common stock of the company to individuals who composed partners in the entity known as Dillon,. Read& Co.? Mr. DILLON. In substance, no difference, because they took it in the same proportions. Mr. PECORA.In what proportions? Mr. DILLON. They took Mr. PECORA. In proportions commensurate with their proportionate interests in the firm of Dillon, Read & Co. ? Mr. DILLON. That is correct. Mr. PECORA. Who paicl over the $100,000 referred to in Olcott's letter to you of October 20, 1924, or who paid that in to the investment trust? STOCK EXCHANGE PRACTICES 1583 Mr. DILLON. I think, Mr. Pecora, the facts are that Mr. Hornor, in the office, collected these amounts from the different individuals to make up the total of $100,000, and then sent his check in for that amount. Mr. PECORA. The firm of Dillon, Eead & Co. did not send its check for the $100,000? Mr. DILLON. NO. Mr. PECORA. And the moneys that were repaid to Mr. Hornor for the $100,000 payment that he made out of his personal funds to the investment trust for these 500,000 shares were paid in by the individuals who composed the firm or stockholders, of Dillon, Eead & Co. to Mr. Hornor ? Mr. DILLON. That is correct. That is as I understand it. Mr. PECORA. Can you explain the reason why that was done? Mr. DILLON. NO ; I cannot. Mr. PECORA. In other words, give the committee, if you can, the reason why the second preferred stock, which was purchased by the legal entity known as Dillon, Eead & Co., was issued to the firm of Dillon, Eead & Co., and the common stock was issued, not to the firm, nor paid for by the firm's funds, but issued to the various individuals who happened to be members of the firm. Mr. DILLON. That is right. Mr. PECORA. Will you explain why that was done, if you can ? Mr. DILLON. The 250,000 shares of common were issued, I think, to Dillon, Eead & Co. Mr. PECORA. The 250,000 that accompanied the purchase of the 50,000 shares of second preferred. Mr. DILLON. Yes. Mr. PECORA. NOW, I am talking about the 500,000 shares of common for which you say Hornor gave his personal check to the investment trust for $100,000. Mr. DILLON. I do not know any particular reason for having done it that way at all. Mr. PECORA. Did Mr. Forrestal have an interest equal to that of Mr. Hornor in the legal entity known as Dillon, Eead & Co. ? Mr. DILLON. I would assume so, if he bought the same amount of that stock. Mr. PECORA. That is just what I was coming to. He did not get the same amount of stock, of these 500,000 shares of capital common stock. Mr. DILLON. Yes ? Mr. PECORA. For which Mr. Hornor paid the investment trust, on behalf of the purchasers thereof, his check for $100,000. According to my data, Mr. Phillips received 47,500 shares, and Mr. Forrestal only 7,500 shares, which would indicate that Mr. Forrestal had an interest in the firm much less than Phillips' interest. Mr. DILLON. Forrestal received 7,500 shares. And what was your question, Mr. Pecora, now? Mr. PECORA. And Mr. Phillips at that time received 47,500 shares of this block of 500,000 shares of common stock, as did Mr. Hornor ? Mr. DILLON. Well, without Mr. PECORA (interposing). Does that represent the difference in the proportionate interest of these gentlemen in the legal entity known as Dillon, Eead & Co. ? 1584 STOCK EXCHANGE PRACTICES Mr. DILLON. Mr. Peeora, may I check that up, because I still assume that that is correct, it represented that proportion of interest at that time. Mr. PECORA. Will you check it up ? I tell you what you do, Mr. Dillon. Mr. DILLON. Yes, sir. Mr. PECORA. Or have your associates do it between now and to- morrow morning. Mr. DILLON. Yes, sir. Mr. PECORA. Determine from your records the proportionate interests of the different members of the firm of Dillon, Kead & Co. in October 1927, when this distribution of this block of Mr. DILLON (interposing). 1924, isn't it? Mr. PECORA. 1924—500,000 shares of the common stock was made and see if it conforms to the proportions of this distribution of stock. Will you? Mr. DILLON. Yes, I will. I assume it does, but I will check it. Mr. PECORA. And give that to us tomorrow morning. Now, Mr. Dillon, some time.in the month of October 1924, the firm of Dillon, Eead & Co. undertook to distribute and sell to the public the 250,000 shares oi the first preferred stock, and you indicated in your testimony this forenoon that something like 300 other dealers in investment securities assisted Dillon, Eead & Co. in the making of this distribution and sale. Who invited these 300 dealers, that being only an approximate number, to participate in this distribution ? Was it Dillon, Read & Co. ? Mr. DILLON. Yes; Dillon, Eead & Co. Mr. PECORA. And were these 300 dealers, dealers who were carried along on the lists of Dillon, Eead & Co. as distributing agencies for securities in which Dillon, Eead & Co. were interested? a Mr. DILLON. I do not know just what you mean by carried on the list." It was our regular list of dealers. Mr. PECORA. Did you maintain a list that included these three hundred odd dealers and invite them to participate in the distribution of other securities in which Dillon, Eead & Co. were interested ? Mr. DILLON. I assume that is true in general. That is, there may be a few exceptions, but that would be generally true, I should say. Mr. PECORA. I show you a list entitled " 250,000 shares United States & Foreign Securities Corporation first preferred stock allotment certificates—Syndicate." I ask you if that list shows the names of all these dealers who assisted Dillon, Eead & Co. in the distribution and sale of this first preferred stock. Mr. DILLON. I assume that list is correct. Mr. PECORA. It was furnished to us by your office. Mr. DILLON. Well, if it is. I thought maybe it was a copy. Mr. PECORA. It is a copy, I presume. Mr. DILLON. Yes, sir. [After checking with associates] : Yes; that is correct. Mr. PECORA. I offer it in evidence. The CHAIRMAN. It will be received and marked exhibit 7. (List of dealers who assisted Dillon, Eead & Co. in sale and distribution of first preferred stock was thereupon designated " Committee Exhibit 7, October 3, 1933 ", see p. 1611.) STOCK EXCHANGE PRACTICES 1585 Mr. PECORA. NOW, Mr. Dillon, who determined the extent of the participation of these various dealers in this syndicate that was organized by Dillon, Eead & Co. to float those 250,000 shares of the first preferred stock? Mr. DILLON. I suppo.se our regular syndicate department that ordinarily made up those lists. That would be true Mr. PECORA (interposing). And determine the extent of the participation of the members of the syndicate ? Mr. DILLON. That would be true as regards the general run and file of the list. There may be exceptional cases where it was done otherwise. The CHAIRMAN. I understood these people got around 4 percent. Mr. DILLON. Four percent selling commission; yes, sir. Mr. PECORA. IS that the usual rate of commission allowed in flotations of this character, Mr. Dillon ? Mr. DILLON. It was at that time; yes. We could not have done it any cheaper, though we should have been glad to do it, because we were the equity holders in that company. Mr. PECORA. YOU sought to pattern this investment trust in part; at least on the form of investment trust incorporation that had been in existence in England and Scotland for a period of more than a half century ? Mr. DILLON. NO. The theory of those trusts is what inspired us to work this out. Mr. PECORA. By the theory you mean the obtaining for the investor in the certificates or stock of an investment trust that diversity of investment? Mr. DILLON. That is right, under an active management. Mr. PECORA. Dillon, Eead & Co. were the managers of this investment trust, were they not ? Mr. DILLON. N O ; the investment trust was managed by its board of directors. Mr. PECORA. Who bought and sold the securities that from time to time went into its portfolio ? Mr. DILLON. The board of directors at its meeting approved them, or the officers in between the meetings made up the lists which were approved at the next board meeting. Mr. PECORA. They made the determination of the investments to be made and to be disposed of from time to time ? Mr. DILLON. Yes. Mr. PECORA. Who actually made the purchases and sales for the investment trust of the securities that from time to time found their way into its portfolio ? Mr. DILLON. I should think that was done by the ordinary brokers on the street. Dillon, Kead probably executed, as intermediary^ some of those orders, but we are not members of the stock exchange, so we could not have done the actual buying of the listed stocks. Orders may have been placed through our office. Mr. PECORA. Was any management fee paid to anybody by the investment trust ? Mr. DILLON. None that I know of. Mr. PECORA. Who were the executive officers of this investment trust at the time of its commencement of business in 1924? 1586 STOCK EXCHANGE PRACTICES Mr. DILLON. October 27, 1924, the president was John W. Horner. Mr. PECORA. One of the partners of Dillon, Read & Co.? Mr. DILLON. That is correct. Hayward was at that time a vice president. Mr. PEOORA. Another partner of Dillon, Read & Co., wasn't he? Mr. DILLON. Yes, sir. Mr. PECORA. Mr. Christie was treasurer? Mr. DILLON. Just a moment [conferring with associates]. Christie was treasurer on October 10, 1924, also. And the secretary at that time was C. F. Stone. Do you want anything further, Mr. Pecora? Mr. PECORA. NO. Who was the chairman of the board, do you know? Mr. DILLON. At that time Mr. Wilmer was chairman of the board. Mr. PECORA. And who succeeded him as chairman of the board? Mr. DILLON. Mr. Benjamin Joy in January 1926. Mr. PECORA. In October 1924, Dillon, Read & Co. and the syndicate whose members are named in this list that has been offered in evidence undertook to sell to the public the 250,000 shares of first preferred stock and the 250,000 shares of common stock that went with the allotment certificates? Mr. DILLON. That is correct. Senator COUZENS. Did the bonus, so-called bonus or common stock, go with every share of preferred stock that you sold ? Mr. DILLON. Yes; it was an allotment certificate that called for one share of preferred and one share of common. Mr. PECORA. I show you this document which purports to be a photostatic copy of a prospectus or circular issued by Dillon, Read & Co. under date of October 21, 1924, and I ask you if that is a true copy of a circular or prospectus that your firm caused to be issued to the public in making this offering of these allotment certificates covering the first preferred shares. Mr. DILLON. This is not a circular, Mr. Pecora; this is an advertisement. Mr. PECORA. It is an advertisement published in the daily newspaper? Mr. DILLON. That is correct. Mr. PECORA. And the contents of that advertisement are exactly the same as the contents of the circulars that were issued, are they not, accompanying this offering? Mr. DILLON. They are substantially the same, certainly. Mr. PECORA. If not textually the same, they are substantially the same ? Mr. DILLON (addressing an associate). Is that correct? [After a pause.] I am so informed. Mr. PECORA. If you can produce a photostat copy of the circular I will be very glad to have you do so, and then we will not rely upon any speculation as to whether they are exactly the same or substantially the same. Mr. DILLON. YOU have a copy, Mr. Pecora, they tell me. Mr. PECORA. Not of this circular. We have copies of other circulars issued in 1926 and 1927, but not the original. Mr. DILLON. Our record shows the contrary, that you have. Mr. PECORA. Well, it was lost in transit. I have never seen it. If you have a copy there I will take it. STOCK EXCHANGE PRACTICES 1587 Mr. DILLON. Yes; we have. Mr. PECORA. My examiners inform me that they got the copy of the advertisement and not of the circular, but I understand that they do correspond. Mr. DILLON. DO they? Well, here we have a record that shows us that you did have that. [Mr. Dillon handed a document to Mr. Pecora.] They inform me that our files are only made up of the things that you have. Mr. PECORA. Hurriedly reading over, Mr. Dillon, this copy of a circular, I would say that it corresponds exactly to the contents of the photostatic copy of the advertisement. I offer the advertisement in evidence or the photostatic copy thereof. The CHAIRMAN. It will be received and marked as an exhibit. (Photostat of advertisement for sale of stock was thereupon designated " Committee Exhibit 8, Oct. 3,1933," and appears in the words and figures following:) COMMITTEE EXHIBIT NO. 8, OCTOBER 3, 1933 OCTOBER 21, 1924. Two hundred and fifty thousand shares United States & Foreign Securities Corporation First Preferred Stock. Cumulative dividends $6 per share per annum. Shares without nominal or par value. Entitled to $100 per share and accrued dividend in case of liquidation. Redeemable as a whole or in part on any dividend date upon 60 days' notice at $105 per share and accrued dividend. Dividends payable quarterly—February 1, May 1, August 1, and November 1. Central Union Trust Co. of New York, transfer agent; Guaranty Trust Co. of New York, registrar. Dividends free of the present Federal normal income tax. Each share of first preferred stock will carry one share of common stock. The United States & Foreign Securities Corporation has been formed to buy, sell, underwrite, offer, and generally to deal in, corporation, governmental, and other securities, both American and foreign, and, when desirable, to take part in the organization and operation of corporations. The company will afford to its stockholders the means to participate in diversified investment and financial opportunities arising from time to time which would not be available to them as individuals. The company may extend its operations by issuing its own debentures. Mr. Edward G. Wilmer will be the chairman of the board of directors, which is composed of representative bankers and industralists. CAPITALIZATION The authorized and issued capitalization of the United States & Foreign Securities Corporation will be as follows: First preferred stock ($6 cumulative dividend), 250,000 shares (now offered under allotment certificates). Second preferred stock ($6 cumulative dividend), 50,000 shares (purchased for cash by Dillon, Read & Co. and associates). Common stock, 1,000,000 shares (250,000 shares to go with first preferred; the balance to go with second preferred and to the organizers). JUNIOR CAPITAL The company has received $5,000,000, equivalent to $100 per share for the second preferred stock, the entire amount having been paid in by Dillon, Read & Co., excepting only such amounts as have been paid in by members of the board of directors. The $5,000,000 so obtained will be used principally for the establishment of a general reserve. The company will receive this $5,000,000, and the proceeds from the sale of first preferred stock, free of any deductions for originating charges by the organizers. INVESTMENTS The United States & Foreign Securities Corporation will subscribe for approximately 25 percent of the $10,800,000 initial issue of capital stock of the American and Continental Corporation, which is being formed for the purpose of financing 1588 STOCK EXCHANGE PRACTICES industrial and commercial companies in Europe. The balance of the stock of the American and Continental Corporation is being acquired by American banking institutions and associates. The American and Continental Corporation will begin its operations in Germany, where it has associated with it a group of leading German banks. The United States & Foreign Securities Corporation also will invest approximately $2,500,000 in the securities of the following companies: Brooklyn Edision Co., Continental & Commercial National Bank, Chicago; General Electric Co.; Central Union Trust Co. of New York; First National Bank, New York. Earnings from the securities named above, together with income from the unexpended amounts received on first preferred stock allotment certificates and from the additional $5,000,000 paid in, should be sufficient to provide for initial dividend requirements on the first preferred stock. PEOVISIONS OF FIRST PREFERRED' STOCK The first preferred stock has preference over the other classes of stock as to dividends and as to assets in liquidation. It is entitled to dividends of $6 per share per annum cumulative from November 1, 1924. The first preferred stock is redeemable as a whole or in part on any dividend date on 60 days' notice at $105 per share and accrued dividend. PAYMENTS With each share of first preferred stock there will be delivered one share of common stock. Payments will be called for as follows: 25 percent on delivery, subsequent calls to be made at intervals of not less than three months and no single call to be for more than 25 percent of the allotment price named below. Purchasers have the option, however, to make payment in full at once or on any first preferred stock dividend payment date. Allotment certificates of the company will be deliverable on or about November 3, 1924. Holders of these certificates will be entitled to receive currently dividends in proportion to payments made on the allotment price called for by the certificates. Upon payment of the entire allotment price holders will be entitled to subsequent dividends in full, and on November 1, 1926 (or earlier at the option of the company), to receive certificates for the first preferred stock called for by the allotment certificates, and for an equal number of shares of common stock. We offer this stoc^k in the form of allotment certificates, when, as, and if issued, subject to approval of legal matters by counsel. Price, $100 per share. DIIXON, READ & Co. Mr. PECORA. NOW, according to this advertisement these allotment certificates entitling the subscriber to one share of first preferred and one share of common were offered at $100 per share or certificate; is that right? Mr. DILLON. That is correct. Mr. PECORA. And that is what they were actually sold for, weren't they, subscribed for by the public ? Mr. DILLON. At that rate, yes. Mr. PECORA. NOW, in this advertisement appears the following statement concerning the capitalization of the United States & Foreign Securities Corporation: The authorized and issued capitalization of the United States & Foreign Securities Corporation will be as follows: First preferred stock ($6 cumulative dividend), 250,000 shares (now offered under allotment certificates). Second preferred stock ($6 cumulative dividend), 50,000' shares (purchasedfor cash by Dillon, Read & Co. and associates). Common stock, 1,000,000 shares (250,000 shares to go with first preferred, the balance to go with second preferred and to the organizers). STOCK EXCHANGE PRACTICES 1589 Was there any practical difference in identity between subscribers purchasing second preferred stock and the organizers ? Mr. DILLON. Only to this extent: I should say that the directors who purchased second preferred stock were not organizers. Mr. PECORA. That is, those of the directors who purchased in the aggregate 2,600 shares of the second preferred stock were not the organizers ? Mr. DILLON. NO. Mr. PECORA. Or were not among the organizers. Mr. DILLON. That is correct. Mr. PECORA. The organizers were solely and distinctly the firm of Dillon, Read & Co. or its members ? Mr. DILLON. That is correct. Mr. PECORA. NOW, this advertisement contains this further statement under the caption of "Junior capital ": The company has received $5,000,000, equivalent to $100 per share for the second preferred stock, the entire amount having been paid in by Dillon, Read & Co., excepting only such amounts as have been paid in by members of the board of directors. The $5,000,000 so obtained will be used principally for the establishment of a general reserve. The company will receive this $5,000,000 and the proceeds from £he sale of first preferred stork free of any deductions for originating charges by the organizers. Well now, the company was not to receive $1,000,000 was it, out of the total purchase price of $25,000,000 that was paid by the public for the 250,000 first-preferred shares ? Mr. DILLON. NO ; that is correct, but they were to receive the proceeds from the sale of the first-preferred stock, and the proceeds of the sale according to the letter from Olcott were the $25,000,000 less the $1,000,000 which should be retained. Mr. PECORA. But there is nothing in the advertisement that informs the public investor Mr. DILLON. NO. Mr. PECORA. Among the body of the general public, that Dillon, Read & Co. or anyone else was to receive $1,000,000 out of the total consideration of $25,000,000 for which the first-preferred stock was to be sold ? Mr. DILLON. That is correct. I t would simply ordinarily be presumed that there would be a charge for selling, but there is nothing here that states that. Mr. P'ECORA. Well, there is no ordinary assumption as to the amount of the charge, is there, in this circular ? Mr. DILLON. NO. Mr. PECORA. Nor as a matter of custom ? Mr. DILLON. NO ; that varies. Mr. PECORA. That varies. And in this case it was at the rate of 4 percent? Mr. DILLON. That is correct. Mr. PECORA. DO you know any reason why that information was withheld in the advertisement and the circular from the investing public in the offering of this first preferred stock ? Mr. DILLON. It was not withheld. Mr. PECORA. What is that? Mr. DILLON. I would not say it was withheld. 1590 STOCK EXCHANGE PRACTICES Mr. PECOEA. Well, why wasn't it given ? Mr. DILLON. I see no reason except the general practice had not been to state what you are paying for the distribution and selling of securities. Mr. PECORA. NOW, as you look back upon that, Mr. Dillon, would you say that that general practice was a sound one as a matter of public policy? Mr. DILLON. N O ; I should like to see those things all stated. I should think that Mr. PECORA (interposing). And the only reason it was not stated back in 1924 by your firm at that time was because it was not the general practice to do it ? Mr. DILLON. That is the only reason. Mr. PECORA. YOU know that under the Securities Act that was passed by Congress at the special session this year such information is specifically required to be given under penalties of the law? Mr. DILLON. I think that is proper. I am glad to see that. Mr. PECORA. YOU approve of the principle of that bill to that extent? Mr. DILLON. I do, sir. I think the maximum information you can give of every nature is good. Mr. PECORA. What was the answer ? Mr. DILLON. I think the maximum information you can give of any nature and every nature is desirable. Mr. PECORA. YOU think as a matter of fairness the investing public is entitled to have information of that kind given to it upon the offering to it of a security? Mr. DILLON. If they want it I should think they would be entitled to have it. Mr. PECORA. YOU cannot determine whether they want it or not in determining policy, can you? Mr. DILLON. NO. I would see no objection to it. Mr. PECORA. The public would not object to $ny such information on any conceivable ground that you can think of, would it? Mr. DILLON. NO ; and I think it is proper to put it in the circular. Mr. PECORA. I take it, Mr. Dillon, that from the views you just expressed, and those views are valuable as coming from a man of your experience, that you are in hearty sympathy with those provisions of the Securities Act, so-called ? Mr. DILLON. I am in hearty sympathy, Mr. Pecora, with any movement to give more publicity, more information to the investing public. We in investing the funds of the Securities Co., those of us on the board, often feel the lack of proper information in our own purchases, and anything that is done to give more information to the public and more regular information I think is highly desirable. Mr. PECORA. Mr. Dillon, we observed from the evidence introduced this morning that of the $5,000,000 paid in by Dillon, Eead & Co. and its associates for the 50,000 shares of second preferred stock $50,000 was to be set up on the books of the investment trust as the consideration for that stock and $4,950,000 was to be set up as a reserve, general reserve. Mr. DILLON. That is correct. Mr. PECORA. Why was that done ? STOCK EXCHANGE PRACTICES 1591 Mr. DILLON. That was done in order to protect the first preferred stock that was sold to the public, because from that reserve you could charge losses, it could also be used for the payment of dividends, and a temporary decline in the market would not impair your capital structure and stop the payment of dividends. It was done for the protection of the first preferred. If you had had that simply set up entirely as capitalization of the second preferred and then there had been a decline in your portfolio, you would have had to stop payments on your first preferred, as I understand it, under the Maryland statute, because your capital was impaired—whereas if you had that set up in this other way as your reserve, it could continue to pay your dividends on your first preferred until the reserve is wiped out. So it was set up that way as an additional protection for the continuity of dividends on the first preferred stock. Senator COUZENS. Did the common stock ever pay dividends ? Mr. DILLON. NO. Senator COUZENS. Has it had a market value at all? Mr. DILLON. The common stock? As high as $72. Mr. PECORA. I brought out this morning that the common stock reached on the New York Stock Exchange in the year 1929 as high as $72 per share. Senator COUZENS. Never paid a dividend, did it ? Mr. DILLON. NO. Mr. Pecora developed that this morning. Mr. PECORA. This last week the price of this common stock was quoted on the New York Stock Exchange as $11. Senator COUZENS. Have you any preferred stock, Mr. Dillon? Mr. DILLON. Have I personally preferred stock? You mean the first preferred stock that the public has ? Senator COUZENS. Yes. Mr. DILLON. Senator, I think so highly of that first preferred stock that the public has as an investment that I have myself bought for my family in the open market at an average cost of, I think it is over $90 a share, 25,000 shares of that first preferred stock as an investment. I think so highly of it that I bought that amount for my family in the open market without any common stock bonus at all, simply as an investment stock. Mr. PECORA. NOW this reserve fund of $4,950,000 was really created out of payments made to the investment trust for its second preferred stock, wasn't it? Mr. DILLON. That is correct. Mr. PECORA. And to call it a reserve out of which dividends were payable or could be paid to the holders of the first preferred stock simply is a matter of the employment of bookkeeping terms, isn't it ? Mr. DILLON. But bookkeeping is to comply with the statute. You see, as I understand it, Mr. Pecora, if the capital structure is impaired, that is, if your portfolio at any time in the market is worth less than your capital structure, under the Maryland statute you would have to stop payment of dividends, even though the money were available. That reserve is set up that way so that the capital structure, instead of being $30,000,000, would be $25,050,000, or whatever the figure is, and would leave that surplus set lip out of capital available. 1592 STOCK EXCHANGE PRACTICES Mr, PECORA. Did you by any chance have in mind at the time of this establishment or set-up of this investment trust that by setting aside out of the $5,000,000 which your firm paid for the 50,000 shares of second preferred stock the sum of $4,950,000 as a general reserve, and by pointing that out in the circular and advertisements offering the first preferred stock to the investing public you were in substance telling the investing public that aside from any actual earnings the investment trust might make subsequently there was available a fund of $4,950,000 for the payment of dividends on the first preferred stock ? Mr. DILLON. I don't know that we would tell them in substance it was available for the payment of dividends, but we stated it was set up out of capital, that reserve, and I suppose people that understand it would know that the reserve was available for losses without impairing capital. Mr. PECORA. In creating this setup of the company you had in mind, didn't you, creating a situation whereby the public that was invited to subscribe to the first preferred stock would learn of the existence of a substantial fund, no earnings, which would constitute a fund from which dividends on the first preferred stock would be paid, or could be paid? Mr. DILLON. Not necessarily just dividends, but losses or anything that might be charged against that. Mr. PECORA, Well, as a matter of fact did you not in the circular advertisement say as follows about that, under the caption " Investments " ? Earnings from the securities named above, together with the income from the unexpended amounts received on first preferred stock allotment certificates, and from the additional $5,000,000 paid in, should be sufficient to provide for initial dividend requirements on the first preferred stock." Mr. DILLON. Yes. That would mean this. You see, thefirstpre- ferred stock made their initial payment, which was a 25 percent payment. It was about six and one quarter million dollars they did pay. But you had that plus the $5,000,000 that we had paid in, which made more than $11,000,000, so that the income of that $11,000,000 was more than sufficient to pay the requirement on their $6,000,000. That is what that means. Mr. PECORA. DO you know any particular reason why this investment trust was incorporated under the laws of the State of Maryland? Mr. DILLON. No; I do not, Mr. Pecora. Mr. PECORA. Was it because the corporation laws of the State of Maryland contained provisions that enabled the corporation out of a reserve that did not come from earnings to pay dividends on its preferred stock? Mr. DILLON. I do not know that. May I ask about that? [After conferring with associates.] They say the State was simply selected because it was a good State for incorporations. Mr. PECORA. Well, was it a good State for the purpose of this particular incorporation in order to enable you legally and under the laws of the State of Maryland to set up this reserve out df sums received by the corporation from the sale of its second preferred stock and to have those sums available for payment of dividends on the first preferred stock? STOCK EXCHANGE PRACTICES 1593 Mr. DILLON. I do not think it was selected for that reason. Mr. PECORA. DO you happen to know that under the laws of the State of New York such a reserve could not have been created and used for the payment of dividends on the first preferred stock? Mr. DILLON. NO ; I do not. Mr. PECORA. Who determined that this investment trust should be incorporated in the first instance under the laws of the State of Maryland ? Mr. DILLON. The attorneys who were handling it, I assume. Mr. PECORA. And the attorneys were advised, I assume, also by your firm, what set-up the firm desired to make and did make of this corporate structure? Mr. DILLON. Yes; I should assume that is correct. Mr. PECORA. YOU have no doubt, have you, that the insertion of that statement in the advertisement and in the circular offering to the public the first preferred stock helped to influence investors in purchasing the first preferred stock? Mr. DILLON. The fact that a reserve was set up out of that ? Mr. PECORA. Yes. Mr. DILLON. I do not know that that would influence them. I do not know that the ordinary purchaser would figure that out one way or another. Mr. PECORA. DO you not know that under the laws of the State of New York dividends cannot be paid except out of earnings ? Mr. DILLON. I would not know that without consulting the lawyers. If you say so I will gladly accept it. Mr. PECORA. I would rather have your own lawyers advise you on that. Mr. DILLON. They say in general that is true, Mr. Pecora. Senator COUZENS. When you purchased those securities for this corporation did you purchase any of them from Dillon, Read & Co. ? Mr. DILLON. NO. Senator COUZENS. Who did you purchase them from; on the market or did you have any specified local dealer from whom you purchased the certificates? Mr. DILLON. They were purchased through Dillon, Read & Co. They came from the open market or from people who had the certificates. Senator COUZENS. Did you get a commission for purchasing these for the corporation? Mr. DILLON. On the first $14,000,000 that were purchased through Dillon, Read & Co. they received a commission of about $5,700. Mr. PECORA. NOW, I understand that there is a customer's account on the books of Dillon, Read & Co. with this United States & Foreign Securities Corporation showing that between October 15, 1924, and December 31, 1925, securities for the account of this investment trust had been bought and sold to an aggregate amount of $46,436,233.96. Does that generally accord with your recollection? Mr. DILLON. Yes; that generally accords. Mr. PECORA. Does the fact of the purchase and sale of these securities for that aggregate amount over a period of about 14 months indicate to you that these securities were purchased and sold by Dillon, Read & Co. for the account of the investment trust ? 1594 STOCK EXCHANGE PRACTICES Mr. DILLON. Yes; they were purchased through Dillon, Eead & Co. Mr. PECORA. Well, is it fair to assume that Dillon, Eead <& Co. received commissions on those transactions according to the prevailing rates then current? Mr. DILLON. I think it would have been fair to assume it, but I do not think it is the fact. I do not think we did get the full commissions on those accounts. I think when it was a stock exchange transaction that went through us we probably made no charge. Mr. Pecora, to try to find out what that did amount to, on that $46,000,000, we checked the first $14,000,000 of those transactions, and our total commissions on that were about as I stated, $5,700, which was just' a spot check to get about the average. Mr. PECORA. NOW, in the year 1928 did your firm cause to be organized a second investment trust known hs the United States &> International Investment Corporation? Mr. DILLON. The United States & Foreign Securities Co. caused that to be organized. Mr. PECORA. Well, 75 percent of the control of voting stock was owned by Dillon, Head & Co. ? Mr. DILLON. Or their associates. Mr. PECORA. Of that United States & Foreign Securities Corporation? Mr. DILLON. Well, it may not have been just that. Some of it may have been sold by some of them, but all my stock was intact, and the stock that went to Dillon, Head & Co. was intact, so we owned the control, if that is what you mean ? Mr. PECORA. Yes. What was the set-up of that second investment trust? Mr. DILLON. That second investment trust had $50,000,000 of first preferred stock, five-percent dividend, which was cumulative. That was sold to the public. Mr. PECORA. At $100 per share ? Mr. DILLON. At $100 per share with one share of common in the form of allotment certificates. Mr. PECORA. Was that floated also by a syndicate headed by Dillon, Eead& Co.? Mr. DILLON. That is correct. Mr. PECORA. GO ahead. Mr. DILLON. And there was a second preferred stock there which was paid, for at $100 a share, in the amount of $10,000,000, which was put in junior to the public's money. Mr. PECORA. Did Dillon, Eead & Co. as an entity buy any of the first preferred or second preferred stock of this second investment trust? Mr. DILLON. AS an investment they bought none. The second preferred was all subscribed for by the United States & Foreign Securities Corporation which caused the United States & International Investment Corporation to be formed. Mr. PECORA. What common stock was authorized to be issued by the second investment trust under its charter ? Mr. DILLON. Three million shares. Mr. PECORA. Having no par value ? Mr. DILLON. NO par value. STOCK EXCHANGE PRACTICES 1595 Mr. PECORA. Were any of those 3,000,000 shares given as a bonus or otherwise to the purchasers of the first preferred stock and second preferred stock of that company ? Mr. DILLON. The first preferred stock received 500,000 shares. Mr. PECORA. That is, one share of common for each share of first preferred ? Mr. DILLON. That is right. The entire balance of common went to the purchasers of the second preferred. Mr. PECORA. That is 2,500,000 shares? Mr. DILLON. NO ; I am wrong. Mr. PECORA. All right. Mr. DILLON. They tell me 2,000,000 shares went to the purchasers of the second preferred stock. Mr. PECORA. NOW the second preferred stock was sold to the first investment trust, namely, the United States & Foreign Securities Corporation, for $10,000,000 cash? Mr. DILLON. NO. That company at the organization bought it direct from the United States & International Securities Corporation. Mr. PECORA. That is what I said, the second preferred stock of the United States & International Securities Corporation was sold directly to the first investment trust, namely, the United States & Foreign Securities Corporation, for $10,000,000 cash? Mr. DILLON. Yes. And they received 2,000,000 shares of the common stock. Mr. PECORA. They received 2,000,000 shares of the common stock, which represented two thirds of all the authorized common capital stock ? Mr. DILLON. That is right. Mr. PECORA. Received that as a bonus ? Mr. DILLON. Well, they paid $10,000,000 for the second preferred and the common. Mr. PECORA. The second preferred consisted of 100,000 shares, did it not? Mr. DILLON. That is correct. Five-percent dividend. We have got 500,000 shares of common that is not accounted for here. Mr. PECORA. We will account for it. Mr. DILLON. Well, warrants were given with the first preferred stock to subscribe for common stock. Mr. PECORA. At what price ? Mr. DILLON. 500,000 shares were just held for that. Mr. PECORA. TO subscribe for the common stock at what price ? Mr. DILLON. $25 a share. Mr. PEOORA. At $25 a share ? Mr. DILLON. Yes. So that was just set aside. Mr. PECORA. And 500,000 shares of the capital stock of the secondinvestment trust were set apart to meet the requirements of those option warrants ? Mr. DILLON. That is right. Mr. PECORA. That went to the purchasers of the first preferred stock; is that right ? Mr. DILLON. That is right. They received one share of first preferred and one share of common plus this option. 175541—33—PT 4 5 1596 STOCK EXCHANGE PRACTICES Mr. PECORA. Plus this option ? Mr. DILLON. Yes. Senator COUZENS. What was the purpose of organizing the second trust? Mr. DILLON. The United States & Foreign Securities Corporation I suppose simply felt that it was good business to do it. Mr. PECORA. Well, the United States & Foreign Securities Corporation really executed or consummated the judgment of Dillon, Bead & Co., did it not? Mr. DILLON. Well, of their stockholders—yes; you might say that, yes. Senator COUZENS. Why could you not have expanded the operations of the first investment company instead of organizing the second one ? Was there more profit in organizing the second one ? Mr, DILLON. May I answer Mr. Pecora's question, Senator ? Mr. PECORA. Answer the question Senator Couzens asked first, Mr. Dillon. Mr. DILLON. The United States & Foreign Securities Corporation had an independent board of directors. When you say that Dillon, Read & Co., did own that stock, it is true if you include the stock owned by individual members of the firm. The directors used independent judgment on the question. The directors were not made up from my-office. Mr. PECORA. Well, the independent judgment of those directors who were not members of Dillon, Read & Co. in no way collided with the independent judgment of those directors who were members of Dillon, Read & Co., did it? Mr. DILLON. NO ; I should not think it did. Mr. PECORA. It is just merely a coincidence? Mr. DILLON. Just merely a coincidence. At that time I think there were only two Dillon, Read & Co. directors. The forming of the United States & International Securities Corporation, they tell me, was the idea of Mr. Tracy, who was the president. He brought it up. But it coincided with our feelings. We did not object to it. Mr. PECORA. Will you now answer Senator Couzens' question? Mr. DILLON. Yes. What was the question? Senator COUZENS. I asked you why you organized the second investment trust ? You controlled the first one ? Mr. DILLON. Yes. Senator COUZENS. And then you organized the second one. I wondered why. Mr. DILLON. Simply because in our judgment it was a desirable thing to do. I do not know why. Mr. PECORA. Why was it more desirable to go through all the burden and expense of organizing a second investment trust with a total capitalization of $60,000,000 when you already had an investment trust qualified and equipped to transact the same kind of business that the second investment trust conducted and operated ? Mr. DILLON. It was simply to expand the operations, to put them on a little larger scale. Mr. PECORA. Well, could you not expand, as Senator Couzens has suggested, by the issuance and sale to the public of additional stock by the original investment trust in the amount of $60,000,000? STOCK EXCHANGE PRACTICES 1597 Mr. DILLON. I do not think you could have sold it. What sort of stock would you have sold? What sort of security would you have offered? . Senator COTTZENS. Just simply increased the authorized capital stock. Mr. PECORA. Simply increased the authorized capital stock; certainly. Mr. DILLON. I do not think you could have sold it. Mr. PECORA. Why not? Mr. DILLON. Because this second investment trust was set up with $10,000,000 junior to the public's money. Now you could not do that again in the first one because you did not have such a ratio probably. Mr. PECORA. The ratio was identical to the ratio that was used in the first investment trust, was it not? Mr. DILLON. Yes; but if you would have sold $60,000,000 more, what would you have sold? I do not quite follow what you mean. I do not see how you could have expanded United States & Foreign to that extent. I do not think the structure would carry it. Mr. PECORA. Well, was the second investment trust organized to conduct the same kind of business as the first investment trust was organized to conduct and did conduct ? Mr. DILLON. Yes; that is correct. Mr. PECORA. Well, why could not an additional sum of $60,000,000 have been added to the capital structure of the first investment trust through the issuance and sale of additional stock by an appropriate amendment to its bylaws that would have authorized it to issue such additional stock? Mr. DILLON. Well, you might have worked out such a set-up. I do not know. Senator COUZENS. Would you not have saved money if you had done it? Mr. DILLON. I t would not have made any difference how you did it. The CHAIRMAN. Was the second trust organized under the laws of the State of Maryland just like the first trust? Mr. DILLON. Yes; it was under the Maryland laws also. Mr. PECORA. And were the legal formalities incident to its birth and christening also attended to by the same law firm ? Mr. DILLON. Yes. I do not think they used Mr. Olcott in this case. I think they did it directly with the corporation. Mr. PECORA. YOU had some other bookkeeper, or what ? Mr, DILLON. I think they found that they did not need bookkeepers, and I think they did it straight with the United States & Foreign Securities Corporation subscribing directly for the stock. Mr. PECORA. Through the medium of the incorporation and organization of the second investment trust called the United States & International Securities Corporation the public subscribed for its first preferred shares $50,000,000, and the United States & Foreign Securities Corporation subscribed for its $10,000,000 issue of second preferred stock and got two thirds of its common stock ? Mr. DILLON. That is correct. Mr. PECORA. NOW that $10,000,000 was furnished by the first investment trust, was it not? 1598 STOCK EXCHANGE PRACTICES Mr. DILLON. But, Mr. Pecora, it got more than two thirds of the issue. It got 2 million out of 2y2 million. Mr. PECORA. Out of a total authorized issue of 3,000,000 shares of which 500,000 were held for the holders of the option warrants? Mr. DILLON. That is correct. But out of the stock that was issued—out of the 2y2 million they got 2 million, which really is 80 percent, is it not? Mr. PECORA. Yes. Four fifths. Mr. DILLON. Yes. 80 percent. The CHAIRMAN. Did this first investment trust make any investments in foreign securities, or did they confine themselves to domestic securities ? Mr. DILLON. Senator, they have made certain investments in foreign securities from time to time. The CHAIRMAN. And the second investment trust also ? Mr. DILLON. Yes; and the second also. But the large bulk of their investments—far and away the large part of it—are American securities. Mr. PECORA. NOW, by this method is it not a fact that Dillon, Read & Co., through an original investment of $5,000,000 which it paid for the second preferred stock of the first investment trust—the United States & Foreign Securities Corporation—plus the $100,000 that was paid for the block of 500,000 shares of the common stock of the first investment trust, acquired a control measured by the ownership of a large majority of the common stock of the first investment trust, and through the medium of the first investment trust buying for $10,000,000 all of the authorized second preferred stock of the second investment trust, plus 2,000,000 shares of its 2,500,000 shares of common stock actually issued and outstanding, were enabled to acquire control of both of these investment trusts having a total capitalization of $90,000,000? Mr. DILLON. Was it $90,000,000? Mr. PECORA. $30,000,000 of first; $60,000,000 of second. Mr. DILLON. That is correct, but you are duplicating, because the first trust took $10,000,000 of its own assets to put in junior to the public's money in the second trust. Mr. PECORA. All right. It made that contribution to the capital of the second investment? Mr. DILLON. That is correct. Mr. PECORA. And that $10,000,000 which was paid by the first investment trust for the second preferred shares of the second investment trust was paid out of an earned surplus ? Mr. DILLON. That is correct. It was paid out of the equity money—money belonging to the common stock. Mr. PECORA. SO that there was not necessarily this duplication of $10,000,000 in the capitalization of both companies, was there ? Mr. DILLON. N O ; you are correct. Mr. PECORA. The $10,000,000 was paid out of earned surplus? Mr. DILLON. YOU are correct. Mr. PECORA. And paid into the treasury of the second investment trust? Mr. DILLON. That is correct. Mr. PECORA. That leaves us upon the ground brought out by the former question, that through this initial investment of $5,000,000 STOCK EXCHANGE PRACTICES 1599 Dillon, Bead & Co. acquired control represented by the ownership of a majority of the capital stock of both of these investment trusts which had a total capitalization of $90,000,000? Mr. DILLON. That is correct; but it was not just by the $5,000,000. Senator COUZENS. YOU mean, it was plus Mr. PECORA. And minus the $1,000,000 received as commissions for the sale of the preferred stock of the first investment trust. Mr. DILLON. But it was after the first investment trust had made— I don't know just what it was at that time. There was a total of $10,000,000 earned surplus. It had a large amount of unrealized profit there. Mr. PECORA. It had a very prosperous record ? Mr. DILLON. Up to that time. The CHAIRMAN. YOU would have had money for dividends on the common stock if you had not put that money into another investment in the second investment trust? Mr. DILLON. We might have, but we never paid dividends on the common stock. The CHAIRMAN. I know; but you had it there. You had the $10,000,000 there. Mr. DILLON. We had the $10,000,000 there and we invested it in the second company and lost that in protecting the public's money that went into the second company. The public's money is still practically intact. There is about ninety dollars-odd a share, I am told by my associates, still there for the public* although our $10 000,000 that was junior has been lost. Mr. PECORA. YOU do not mean " our $10,000,000 ", do you? Mr. DILLON. Yes. I thought you said $10,000,000 from the investment trust. Mr. PECORA. That had been earned by the first investment trust? Mr. DILLON. Yes. Mr. PECORA. When you say " our $10,000,000 " you do not mean $10,000,000 that came out of the pockets of Dillon, Eead & Co. or its individual members ? Mr. DILLON. Oh, no; I mean the earnings available for common stock. Senator COTJZENS. SO, as a matter of fact, the 250,000 shares that went as bonus stock for tiie 250,000 shares of preferred was sacrificed for the purpose of creating the second investment trust? Mr. DILLON. NO, sir. Senator COUZENS. Why, certainly. In other words, if you had not taken the $10,000,000 out of the first investment trust you could perhaps have paid dividends on the common stock of the first trust; but you did not do that, although you had distributed 250,000 shares as bonus stock Mr. DILLON. That is right; but we have never paid dividends on the common stock. Mr. PECORA. But you had earned enough to justify the payment of dividends on the common stock. Mr. DILLON. If you would pay your dividends out of capital appreciation. We did not, because we were working on the theory that dividends on the common stock would be paid out of income; that is, interest and dividends received. As the capital grew we did not use that. We left that to protect the first preferred, and as the income 1600 STOCK EXCHANGE PRACTICES from that capital would have become large enough to take care of the first preferred and the second, and if there had been anything left over, we would have paid dividends on the common. Senator COUZENS. What constituted this $10,000,000 you took out of the first trust to buy stock in the second trust ? Mr. DILLON. Cash. Mr. PECORA. Representing earned surplus? Mr. DILLON. That is correct. Senator COUZENS. Well, then, that was not appreciation of capital. That was cash that you could have disbursed to the common stockholders of the first trust. I t was a realization; it was earnings. Mr. DILLON. Yes, sir. Mr. PECORA. A surplus made up of earnings. Mr. DILLON. That is correct. Senator COUZENS. SO you sacrificed the common-stock holders of the first trust to create a second truest by taking $10,000,000 of cash out of the first trust to buy common stock in the second trust ? Mr. DILLON. We could have taken that $10,000,000 and invested it in something else, bue we invested it in this company, rather than investing it in Steel common or anything else. Senator COUZENS. I know you did not buy Steel common. You bought something which you yourself controlled. So I do not think it is quite comparable. The CHAIRMAN. It enabled them to get control of $60,000,000 more. Senator COUZENS. Certainly. Mr. DILLON. TO manage for the public, Senator. It waks no advantage to us. Our record has been that of the $5,000,000 which we put in there junior we have not received full 6-percent dividends. On our common stock we have never received anything. I have worked for 8 years and have never received any salary or compensation of any kind. I have given it a large portion of my time. We have been fortunate enough to continue to pay dividends to the public on their money that was put in, and we have the assets of the first trust today still intact, above the value of the first preferred stock. Senator ADAMS. YOU paid dividends on the first preferred stock in the second company? Mr. DILLON. For a brief time. They are in arrears now, Senator. But we who put in this original$5,000,000 and have kept that stock, kept our investment, have not even received 6 percent on our investment. We have received nothing on the common. I t is true that these stocks have market value, but those of us, like myself, who have been trying to do a serious work in running a company like this for the public investors, have not even had full interest on the money we invested junior. Mr. PECORA. Let me say, to possibly save time, that for the time being we will say no more about what profits or dividends were or were not received by the associates of Dillon, Read & Co., because I propose to go, on the subsequent examination of yourself and your associates, into the matter of the receipt by these men, through the sale of common stock of the shares of the first investment trust, profits that represented much more than 6 percent dividends. STOCK EXCHANGE PRACTICES 1601 Mr. DILLON. Very much; but, unfortunately, I was not a party to that. I was not in that account. I was simply saying to the Senator that I personally have not sold any of my stock and have not even had interest on my second preferred. Senator COUZENS. When was it organized? Mr. PECORA. In 1928. Senator COTJZENS. SO it was much more desirable to get $60,000,000 of the public's money than it was to take 6 percent on $5,000,000 ? Mr. DILLON. I do not quite follow you there, Senator. Senator COUZENS. YOU say you did not even get your 6 percent on the $5,000,000 invested, but in 1928 you sacrificed that so as to get $60,000,000 of the public's money to further use in an investment. Mr. DILLON. We did not use it except for the benefit of the public. Mr. PECORA. But as owners of the majority of both the first and second investment trusts you did have a considerable amount at stake; did you not? Mr. DILLON. We had all our junior money at stake, and our reputation in running it properly as far as we did. The board of directors were functioning. Dillon, Read & Co., as I said, did not run these companies. I gave them a great deal of my time, and I took a personal interest in it. I am deeply interested. I am a large holder of what you call the " public's money." Mr. PECORA. With regard to the issuance and sale to the public of the $50,000,000 worth of the first preferred stock of the second investment trust, you said that was sold through a syndicate headed by Dillon, Read & Co.? Mr. DILLON. That is correct. Mr. PECORA. Were those sales made in very much the same general fashion as the $25,000,000 worth of first preferred stock of the first investment trust? Mr. DILLON. I should assume so. Mr. PECORA. What commissions were received by Dillon, Read & Co. and its participants in this selling syndicate upon the sale of the $50,000,000 worth of first preferred stock of the United States & International Securities Corporation? Mr. DILLON. Dillon, Read & Co. received their originating fee of 1 percent on that stock, I think. Mr. PECORA. $500,000? Mr. DILLON. Yes. Mr. PECORA. And further, it received about a million dollars, did it not, out of the commission paid by the investment trust, the United States & International Securities Corporation, to the members of this syndicate ? Mr. DILLON. Whatever that was. There were 3 points allowed there to the distributing syndicate. Mr. PECORA. That is $150,000? Mr. DILLON. Oh, no. Mr. PECORA. $1,500,000? Mr. DILLON. A million and a half. Senator COUZENS. Why did you pay less on that than Mr. DILLON. I t was the same. I t was 4 points, but on the first? we realized at that time, I suppose, that we could sell it for 3 points, and we took the 1 point for originating it, I suppose. 1602 STOCK EXCHANGE PEACTICES Mr. PECOEA. AS a matter of fact, the second investment trust paid a commission of 4 points, or 4 percent, for the selling of the first preferred stock? Mr. DILLON. We bought the stock less 4 points. Mr. PECORA. SO the investment trust virtually paid 4 points commission for the flotation of that first preferred stock? Mr. DILLON. That is right. Mr. PECORA. Which amounted to $2,000,000? Mr. DILLON. Yes. Mr. PECORA. Of that $2,000,000, $500,000 went immediately to Dillon, Eead & Co. apart from other members of the syndicate? Mr. DILLON. Yes. Mr. PECORA. And the balance was distributed among all the members of the selling syndicate, including Dillon, Eead & Co. ? Mr. DILLON. On the basis of the stock they sold. Mr. PECORA. Of that $1,500,000 Mr. DILLON. One moment. There was a banking group in between there. Mr. PECORA. Of that $1,500,000 how much went to Dillon, Eead & Co. as its share ? Mr. DILLON. The commission on the stock that Dillon, Eead & Co. sold amounted to $516,893.95. It was paid them on the same basis as the other members of the syndicate—3 points. Mr. PECORA. HOW much of that $1,500,000 was received by Dillon, Eead & Co. as its share of the syndicate commission ? Mr. DILLON. I think I just read you that figure. Mr. PECORA. Oh. Mr. DILLON. Here is the total. Of the $2,000,000, Mr. Pecora, there was a small amount off for expenses, some forty thousand odd. That left $1,953,000. Of that Dillon, Eead & Co. received in the original group originating this, $500,000. There was then a banking group formed, and in the total profits Dillon, Eead & Co. received $39,000; the Dillon Eead Corporation, $9,000; a total of about $48,000, $161,0000 going to other participants. Then in the selling syndicate Dillon, Eead & Co. received their commission on the stock they sold amounting to $516,893.95. Dillon Eead Corporation, $51,502.50; and the other participants in the business received $675,321.10. That accounts for that $2,000,000. Mr. PECORA. SO that, all together, Dillon, Eead & Co. received for its participation in the sale of the first-preferred stock of the secondinvestment trust an aggregate of $1,016,000? Senator ADAMS. $1,065,000. Mr. PECORA. Yes; $1,065,000. Mr. DILLON. That is approximately correct. Mr. PECORA. It would not be doing violence to the facts to say that this was about as handsome a return to Dillon, Eead & Co. as it might have received if it received dividends at 6 percent on its second-preferred stock in the first-investment trust, would it ? Mr. DILLON. I t is better, I should say. But, Mr. Pecora, may I bring out here—I do not think I made it clear—this point? Senator Couzens spoke of the $10,000,000 that was paid in the second preferred and that should have gone as dividends to the common stockholders. Had that been done, you realize that Dillon, Eead & Co. would have received $7,500,000. STOCK EXCHANGE PEACTICES 1603 Senator COUZENS. YOU would have made much more off that $60,000,000 than on this $5,000,000, even if you had done that. But the question is not how much you made. The point, I think, is that it is rotten ethics to take $10,000,000 out, of an investment trust you own, or which you control, rather, its ownership being in the public hands, and put it in another investment trust to further augment your own profits. I think that is reprehensible. Mr. DILLON. Oh, that was not the fact. Senator COUZENS. Certainly it augmented it, because you controlled this and the other $60,000,000 you sold to the public, and you also had common stock from which you might have earned dividends. Mr. DILLON. From which we might have. The public has been taken care of. Senator COUZENS. Yes; but, Mr. Dillon, you understand, of course, that I am not attacking your good faith. I still insist that you were speculating and using the stockholders' money in another corporation, which you had no right to do. Mr. DILLON. But we were stockholders. Senator COUZENS. YOU controlled them. Mr. DILLON. Of this $10,000,000, $7,500,000 would have come to us. Mr. PECORA. Seventy-five percent of the capital stock of the first investment trust? Mr. DILLON. That is right. Senator ADAMS. The theory of your first investment trust was the investment in standard stocks; that is, you were taking those standard stocks? Mr. DILLON. Yes. Senator ADAMS. This was a diversion of earnings of the first trust into an investment that was not in that classification, was it? Mr. DILLON. Except that it was a new trust. It was to buy the same standard stocks as the first one did. I t was engaged in the same sort of business. Senator ADAMS. YOU did not invest it in first preferred; you invested it in the second ? Mr. DILLON. Yes. Senator ADAMS. YOU did not invest in the same grade of securities? Mr. DILLON. We invested it in the same grade of securities in this way. That was money that belonged to the common stock of the first trust. Senator ADAMS. Are you sure it belonged to that ? In other words, you had first preferred stock out to whom you owed a first obligation, didn't you? Mr. DILLON. That is correct. Senator ADAMS. SO it did not belong to the common stockholder unless you were perfectly sure that your first preferred dividend was secure, did it? Mr. DILLON. Yes, sir; that is true. Senator ADAMS. Then you had second preferred ahead of the common stock? Mr. DILLON. Yes, sir. 1604 STOCK EXCHANGE PEACTICES Senator ADAMS. SO you cannot say that this all belonged to common stock? Mr. DILLON. Well, it could have been declared as dividends on the stock. It was available for that. Senator ADAMS. It could have been done, do you say ? Mr. DILLON. Yes, sir. Senator ADAMS. But, as wise managers you would not have cleaned down the accumulations. You would not have cleaned them right down, but you paid the first dividend, and then what was left you would have paid out in that way ? Mr. DILLON. Yes. That was why we did not pay that. The CHAIRMAN. The second trust was a 5-percent stock instead of a 6-percent stock, was it not ? Mr. DILLON. Yes, sir. We have found that 6 percent is more than you can reasonably expect to earn over a period of years in conservative investments. We wouldn't do that again—putting the money that we had in that first trust in in that way. Some of these individuals sold some of their jjommon stock, but those that have held it, such as myself, have found that it has not been a profitable investment. Senator COTJZENS. Mr. Chairman, how much longer will you run this afternoon? The CHAIRMAN. Just a few moments. Mr. Dillon, can you sell 5 percent stock about as well as 6 percent stock ? Mr. DILLON. At that time in the market it sold about as well. Mr. PECORA. Mr. Dillon, just prior to the purchase by the first investment trust of $10,000,000 of second preferred stock of the second investment trust in 1928, the first investment trust had in its treasury more than $10,000,000 representing earned income, as surplus made up of earnings. The fact that it had such a large amount of undistributed earnings in its treasury was reflected in the market value of the common stock, wasn't it? Mr. DILLON. Yes. I should think that that is a fair assumption. That showed the asset value of the stock. Mr. PECORA. And that would give an enhanced market value to the common stock ? Mr. DILLON. I would think so. Mr. PECORA. Which would have been entitled to the ownership, we will say, of the equity? Mr. DILLON. I should think the equity of the company would reflect the market value of its common stock. Mr. PECORA. We have seen that around 75 percent of the common stock of the first investment trust was owned by Dillon, Read & Co. or its individual members. Mr. DILLON. Yes. Mr. PECORA. If that money, those earnings, had been distributed by way of dividends on that common stock, the market value of the common stock would not have been enhanced, as it was, by the accumulation in its treasury of those undistributed earnings, would it ? Mr. DILLON. Well, as to that I do not know. STOCK EXCHANGE PRACTICES 1605 Mr. PECORA. Well, isn't that a fair inference to draw ? Mr. DILLON. I do not know whether it is, because if you have common stock that is paying dividends whether that would sell higher or lower in the case of that same common stock with the surplus accumulated, I do not see how any man can say. You will have to try it out on the market. Generally stock that pays dividends sells better than one that does not. Mr. PECORA. In 1928 the market value of securities was not determined on that basis, was it? On actual dividend payments, I mean, was it ? Mr. DILLON. In 1928 and 1929 I do not know what basis people used. Mr. PECORA. And it was in 1928 and 1929 that this common stock of the first investment trust reached a high of $72 a share on the New York Stock Exchange? Mr. DILLON. That is correct. At that time it had an asset value of about $48, they tell me. Senator COTJZENS. Did they pay dividends on the second preferred up to that time ? Mr. DILLON. Yes, sir. Senator COUZENS. SO you got dividends for the $5,000,000 you put in ? Mr. DILLON. That is right, up until—well now, let me see when. Mr. PECORA. Until 1931, wasn't it? Mr. DILLON. Yes; I think so. Senator COUZENS. SO when you were organizing your second investment trust you were just sacrificing dividends on a $100,000 investment for the other common shares ? Mr. DILLON. YOU can put it that way if you like. Senator COUZENS. Well, that is a fact, isn't it ? Senator ADAMS. Mr. Dillon, as to those $10,000,000 accumulated profits, did they have their origin in dividends upon stocks which were held in the portfolio or was it partly due to profits upon the sale of securities ? Mr. DILLON. It was largely due to profits upon sales of securities, because had it been income on securities in the portfolio, following the policy we were then following we would have paid dividends. Senator ADAMS. It was capital appreciation. Mr. DILLON. Yes, sir. We were holding that hoping it would accumulate so that on the basis of capital appreciation it might some day justify dividends. The CHAIRMAN. HOW about the second investment trust, have dividends been paid on that preferred stock? Mr. DILLON. They were paid up until 1930. They were passed in 1930. The CHAIRMAN. On both the second and the first preferred ? Mr. DILLON. They are looking that up for you now. Mr. PECORA. Mr. Dillon, how much did you say was the asset or book value of the common stock of the first investment trust in 1928, prior to its purchase of the $10,000,000 of second preferred stock of the second investment trust? 1606 STOCK EXCHANGE PEACTICES Mr. DILLON. I will have to inquire here [speaking to some of his associates]. They tell me it reached a high of $48, but I do not know whether just then or not. No; it was around $28 at that time, Mr. PECORA. At what time? Mr. DILLON. In October of 1928 it was about $28. Mr. PECOEA. And reached what? Mr. DILLON. And reached $48 in August of 1929. Senator GOLDSBOROTJGH. Was it $28 when you took the $10,000,000? Mr. DILLON. About that. Mr. PECORA. In the matter of the 750,000 shares Mr. DILLON (continuing). Now, as to those figures, they are taking the market value of the assets at the time and figuring the value. It was not realized value. Mr. PECORA. I know. On the basis of the common stock of the first investment trust in 1928 it reached a book or asset value of $48 per share, and 750,000 shares of the common stock of that first investment trust, which went to Dillon, Read & Co. and its associates for $5,100,000, it had an asset or book value of $36,000,000, didn't it? Mr. DILLON. Yes. Mr. PECORA. And the market value was considerably in excess of that $36,000,000, wasn't it? Mr. DILLON. On the quotation at that time I assume it was, because all those investment stocks were selling much above their book value. I think ours were probably—well, I have not the quotations on the market at that time, but undoubtedly the quotation was above that. Mr. PECORA. Did any of your associates ever complain to you as to an unwise investment that you made in this $5,000,000 of junior money in first investment trust ? Mr. DILLON. I have not heard of any such complaints. Well now, wait. I believe I am wrong in stating that. Mr. PECORA. There was some little complaining, was there ? Mr. DILLON. Well, one of them complained and thought it was a bad investment because you cannot afford to pay 6 percent on that senior money and earn anything for yourself. And that has been true. We have not been able to earn dividends on it. Mr. PECORA. HOW many shares of common stock has that gentleman got in the first investment trust ? Mr. DILLON. I do not know what he has now. He may have sold some of it. The CHAIRMAN. We will now take a recess until tomorrow morning at 10 o'clock. {Whereupon, at 4:10 p.m. Tuesday, Oct. 3, 1933, the subcommittee adjourned until 10 o'clock the following morning.) COMMITTEE EXHIBIT 1-A, OCTOBER 3, 1933 Dillon, Read & Co. was responsible for the organization of United States & Foreign Securities Corporation and later offered to the public first preferred and common stock of United States & International Securities Corporation. These are both investment companies, of the type commonly termed " investment trusts." In view of the fact that the public is insufficiently aware of the outstanding record of the well-managed investment companies and of the par- STOCK EXCHANGE PKACTICES 1607 ticularly outstanding record of these two companies, it may be of interest if I give a few facts as to the basis for their organization and the history of their operations. The investment trust is largely a creation of English and Scottish finance, trusts of substantial size having been organized in England as early as 1865. Since that time they have gone through periods of great prosperity, notably the boom years 1887-90, during which large numbers of investment trusts were organized with very considerable capital and through periods of prolonged depression. The losses incurred by English trusts during the years following the Baring failure in 1890 brought them into popular disfavor for some time. However, as the persistently better-than-average investment record of the wellmanaged trusts became apparent, they a g a n returned to favor and came to occupy an increasingly important place in British finance. At the present time it is estimated that the capital of English investment trusts is in excess of £200,000,000. In this country, very little had been done with the investment trust up to 1924, it being estimated that the total resources of such companies operating at that time was less than $15,000,000. In 1923 and 1924, the members of Dillon, Read & Co. gave considerable study to the English investment trust idea as it applied to the general problem of finding a form of investment which would provide the investor with security and an adequate yield. Anyone familiar with investments realizes the difficulty of investing funds so that they produce a yield to average better than 5 percent per annum over a long period of years. To do so requires continuous and expert supervision and a distribution of investment risks. The principle underlying the investment trust, that is, that it merges the funds of many investors into one fund of sufficient size to permit intelligent diversification and the maintenance of specialized management at a cost moderate in relation to the size of the fund as a whole, appeared sound. The actual record of the English trusts seemed to prove not only the soundness of the principle but also, when intelligently handled, its success in actual practice over many years. Still another principle became evident in studying the English and Scottish trust. Almost without exception their capitalization other than funded debt consisted of two or more classes of stock. One class was usually called preference stock, having priority as to assets in liquidation and priority as to a fixed dividend, ranging in the case of different trusts from 4% to 5 percent, but excluded from any further share in the earnings, the second being what in England is called "ordinary or deferred stock", which is entitled to whatever additional earnings may be available for dividends after satisfying the rights of the preference stock. In this way two types of investment were provided, one enjoying a high degree of security and a limited but adequate yield, while the other offered the possibility of greater yields but involved far greater risks. In England ordinary or deferred stock of investment trusts is held almost exclusively by those active in finance and able to assume the risks involved. With these principles in mind we approached the problem of adapting the investment-trust idea to conditions in this country. The American people were unfamiliar with investment trusts at that time. It would have been impossible to sell a straight preferred stock with a fixed dividend of 4% percent, which about is the average dividend of English investment trust preference stocks. On the other hand, it was felt that exceptional opportunities were then available for the investment of funds and that, using what in our judgment was the best investment skill available, it might be possible to better somewhat the record of 6 percent per annum earnings achieved in recent years by the best English companies. Accordingly, in 1924 we decided to organize United States & Foreign Securities; Corporation. The following capitalization was authorized and issued: 250,000> shares first preferred, 50,000 shares second preferred, 1,000,000 shares common. The first preferred was to be similar to the preference stock of English and Scottish trusts. It was provided that dividends of $6 per share per annum should be payable on the first preferred stock before any payments were made on the second preferred or common. Furthermore, that in the event of liquidation of the company the first preferred stock should be entitled to $100 pet share before any payments were made on the second preferred. Not only wasthe dividend rate on the first preferred fixed at $6 per annum as against the 1608 STOCK EXCHANGE PRACTICES substantially lower rate paid on English investment trust preference stocks, but in addition it was decided to give the subscribers to the first preferred stock an additional share in possible earnings. Had the typical English capitalization for investment trusts been followed, a single class of common stock junior to this first preferred stock would have been created, all of which we would have purchased for cash. It was solely for the purpose of giving the subscribers to the first preferred stock an additional share in possible earnings over and above 6 percent per annum that the two classes were authorized, second preferred and common, instead of one single class. It was felt that we should fairly receive 6 percent per annum on the actual cash paid in by us before a share of the additional earnings should accrue to the subscribers to the first preferred. It was therefore provided that the second preferred should be entitled to dividends of $6 per share per annum, but only after $6 per share per annum had been paid on the first preferred; and that in the event of liquidation of the company it should be entitled to $100 per share but only after all of the outstanding first preferred had been paid $100 per share. The common stock which represented the right to earnings over and above 6 percent per annum on the subscribed capital, went one fourth to the subscribers to the first preferred and three fourths to us as subscribers to the second preferred. Dillon, Read & Co. and our associates paid in $5,100,000 of our own funds for 50,000 shares of second preferred and 750,000 shares of common. Of this amount $4,950,000 was specifically set aside by the corporation as a general reserve against which losses could be charged without jeopardizing the dividends payable on the first preferred. This $5,100,000 has provided a cushion of protection to the money invested by the public. If the assets of the corporation had been liquidated on June 30, 1932, when their indicated market value had reached its lowest level, this $5,100,000 would have been wiped out and nothing would have been available for the second preferred or common, but there would have been, based on such market values, $87,64 available for distribution on every share of first preferred outstanding in the hands of the public. The 250,000 shares of first preferred, with which went 250,000 shares of common stock, were offered to the public in the form of allotment certificates at $100 per share and were fully subscribed for. Subscriptions to these allotment certificates were received through the medium of an underwriting syndicate formed for this purpose by Dillon, Read & Co. The underwriting syndicate was paid a total of $1,000,000 being a sum equal to $4 for each $100' of subscriptions so received. The syndicate was composed of 380 participants. Dillon, Read & Co. made no charge for its services in organizing the syndicate, our only compensation being as a participant in the syndicate on the same terms as dealers throughout the country. Such compensation aggregated $339,461.64 arising from our syndicate participation of 82,455 shares and our retail sales of 94,858 shares. It should be noted that this compensation is gross, no deduction having been made for selling or overhead expenses. The total amount payable to the corporation from subscribers to the first preferred and common stock and from the sale of the second preferred and common, after deducting the payment to the underwriting syndicate, was* $29,100,000. As it seemed unwise to attempt to invest the entire capital of the corporation at once, the 250,000 shares of first preferred and 250,000 shares of common stock were offered in the form of allotment certificates, 25 percent being payable upon issuance and the balance subject to call by the corporation. Subsequently, the remaining amounts due from subscribers to the allotment certificates were called by the corporation and were paid in full by the subscribers. At the outset it was recognized that the chief factor in the success or failure of an investment company was the ability and conservatism of its management. All activities of United States & Foreign Securities Corporation have been under the supervision and subject to the approval of its board of directors. The original board consisted of Messrs. Anson W. Burchard, F. H. Ecker, Herbert Fleishacker, J. W. Horner, William A. Phillips, Robert O. Schaffner, John Sherwin, George W. Wickersham, Harrison Williams, Edward G. Wilmer, and myself. The strength of the board has at all time been maintained. The STOCK EXCHANGE PBACTICES 1609 present directors are B. J. Bermingham, F. H. Ecker, Charles S. McCain, G. M. P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, Edward G. Wilmer, and myself. The members of Dillon, Read & Co., having been responsible for the formation of the corporation, have done everything in their power to assure its success. In the early years of its activity, space in the offices of Dillon, Read & Co., and the services of some of our employees were donated to the corporation free of charge. At a later date, as its activities became more extensive, the corporation set up offices of its own. The successful record of the original investments of the corporation reflects the sound judgment with which they were made. The return received from interest and dividends averaged approximately 6 percent in 1924 and 1925, and this was supplemented substantially by earnings from participations in underwriting and syndicate accounts offered to the corporation by Dillon, Read & Co. The extraordinary prosperity of the next few years not only resulted in substantial increases in the dividends paid on some of the securities in the portfolio of the corporation, but also resulted in the increase of the quoted prices for these securities to levels far beyond our expectations. From time to time the corporation realized on a portion of this increment in the value of its portfolio. In the annual reports to stockholders it was clearly stated that profits of this type were of a special character and not to be confused with earnings from interest and dividends. Owing to the realization by the directors that some day losses of a similar nature might have to be met, these profits were never used as a basis for making a distribution on the common stock of the corporation. During the unfortunate days of the depression, the corporation has suffered along with others. In 1929, 1930, and 1931 the directors kept a large proportion of the company's funds in cash, call loans, and United States Government securities, these items amounting to $19,688,000' on December 31, 1929, and $22,440,000 on December 31, 1930, but the remaining assets of the corporation suffered severe depreciation in common with those of other investors. In the spring of this year the corporation invested the major portion of the funds then held in the form of cash and governments. The subsequent appreciation in the market value of these investments has been large. As one looks back over the record of the corporation from its organization to the present day, one is again impressed with the soundness of the investment trust principle and of the management of this company. The corporation has paid $11,020,049.57 in dividends to the first preferred stockholders, which is the full 6 percent per annum on their shares up to the present day. Two million one hundred thousand dollars has been paid in dividends on the second preferred stock, this being less than 6 percent per annum, dividends on this stock being in arrears since November 1931. After these payments, the books of the corporation as of August 31, 1933, show a surplus of $5,398,679.55. Taken at market prices on that day the assets of the corporation had an indicated value of $29,319,000. This is more than $138 per share of first preferred stock outstanding. After deducting an amount equal to $100 per share of first preferred stock, and $100 per share of second preferred stock outstanding, there remains a substantial liquidating value for the common stock. The attached charts show how the investments of United States & Foreign Securities Corporation have fared since December 31, 1927, at which time it had received all amounts due on its allotment certificates, as compared with the action of the recognized stock averages since that time. They indicate that $100 invested from that date as United States & Foreign invested its assets would have had a value of $72 on June 30,1933. One hundred dollars invested in the stocks: comprising the Dow Jones industrial average would have declined in value to $49, the record of United States & Foreign being better by 47 percent. One hundred dollars invested in the securities comprising the Dow Jones railroad average would have declined in value to $35, United States & Foreign's record being better by 106 percent. One hundred dollars invested in the securities comprising the Standard Statistics bank stock average would have declined in value to $39, United States & Foreign's record being better by 85 percent. 1610 STOCK EXCHANGE PRACTICES By the fall of 1928 United States & Foreign Securities Corporation had demonstrated the soundness of the principles on which it was organized. Mr. Tracy, president of the company, thought that a second corporation organized on the same basic principles and affiliated with it in management should be organized. The same principle of junior money acting as a cushion of protection to the funds subscribed by the public was again employed. In this instance United States & Foreign paid $10,000,000 for 100,000 shares of second preferred, and 2,000,000 shares of common of the United States & International Securities Corporation. Dillon, Read & Co. formed a syndicate which received subscriptions to 500,000 shares of first preferred stock with which went a like number of shares of common stock. This first preferred and common stock was offered in the form of allotment certificates for the same reason that that procedure was adopted in the case of United States & Foreign. In 1928 securities were selling at prices to yield considerably less than they yielded in 1924. The dividend rate on the first preferred and second preferred stocks was therefore fixed at $5 per share per annum. At the time United States & Foreign Securities Corporation made its investment in the second preferred and common stock of United States & International Securities Corporation, it had an earned surplus in excess of the amount of this investment. During much of the time United States & International Securities Corporation was investing its funds, the prices of industrial securities, public utilities, and bank stocks had risen to such a level that the current dividend yield on them was small. The railroad stocks, as a class, offered more substantial yields and seemed to offer as great, if not greater, security than other classes of stock. After having several engineering reports made on individual railroads, United States & International Securities Corporation invested a considerable portion of its funds in railroad stocks. At the time these investments were made it was recognized that.car loadings might drop 10 or 20 percent, as they had dropped in previous depressions, but it never occurred to any of us that they might drop 50 percent, as they subsequently did. In the case of United States & International Securities Corporation the sound' ness of the investent trust principle of diversification is very clearly portrayed. In spite of serious depreciation suffered in railroad securities, other investments turned out to be profitable. As a result the actual investment record of United States & International Securities Corporation between comparable dates, as indicated by the attached charts, is superior even to that of United States & Foreign Securities Corporation. These charts compare the investment record of United States & International Securities Corporation from December 31, 1930, at which time its allotment certificates had become full paid, with the action of the recognized averages since that time. They indicate that $100 invested from that date as United States & International invested its assets would have had a value of $86 on June 30, 1933. One hundred dollars invested in the securities comprising the Dow Jones industrial average would have declined in value to $59, the record of United States & International being better by 46 percent. One hundred dollars invested in the securities comprising the Dow Jones railroad average would have declined in value to $51, the record of United States & International being better by 69 percent. One hundred dollars invested in the stocks comprising the Standard Statistics public utility average would have declined in value to $61, United States & International's record being better by 41 percent. One hundred dollars invested in the securities comprising the Standard Statistics bank stock average would have declined in value to $43, United States & International's record being better by 100 percent. This record speaks for itself and makes perfectly clear the service rendered investors by the conservatively managed investment company. There is no doubt that as the splendid showing of such companies in the United States during the past few years becomes more widely appreciated, their securities will achieve a popularity with the American investing public comparable to that of the English and Scottish trusts with the British public. 1611 STOCK EXCHANGE PRACTICES COMMITTEE EXHIBIT* NO. 7, OCTOBER 3, 1933 250,000 shares United States & Foreign Securities Corporation First Preferred Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks mailed to participants Dec. 21, 1924 Name of participant Brown Bros. & Co Bernhard, Schiffer &Co Barney & Co., C D Byllesby & Co. H. M. Braderman Co., Inc., M.W Barrett & Co., G. E Barstow •& Co _ Bauer, Pond & Vivian Berwin & Co Bogert, Beverly , Boland & Preim Bortle & Co Borden & Sampter Bennett Coghill & Co_ Bronson & Co., Theo. L Buell & Co.. Burr & Co., George H Burchard, Anson W Blake Bros Callaway Fish & Co Clark & Co., Richard W Craig Colgate & Co Crawford, Wm. C._ Danforth & Marshall Dean, Onativia & Co Debevoise, Foster Dominick & Biominick Dominion Securities CorporationDresser & Escher Dederiek, Arnold & Co Fiske & Sons, Harvey _ __. Glidden, Morris & Co — Greenshields, Wills & Co., Inc Greer, Crane & Webb Goodbody & Co Horner, Mrs. Grace M Hemphill, Noyes & Co Hitt, Farwell & Co -•_. Howe, Snow & Bertles 1. Hampton, Chas. H Harris, Ayers & Co Iselin & Co Ingraham & DuBosque Ittleson, Henry Keech & Co., F. B _.. Kissell, Kinnicutt & Co Kelley, Drayton & Converse Koch, Spencer B. & Co Kennedy & Co., Leonard Lage Bros. & Co Lamport & Co., Inc Love, Macomber & Co McDonough & Sloan Morgan, Livermore & Co Mabon & Co. Manufacturers Trust Co Mathey & Co., L. A Mayer & Co., R. O Merrill, Lynch & Co Millett, Roe & Co Minsch, Monell & Co Moore, Leonard & Lynch Morris & Smith Martin, R. W Naumberg & Co., E Noble & Corwin Peabody, Houghteling & Co Parker, Robinson & Co Pogue & Willard Phillips & Zoller Public National Bank Price & Co 175541—33—PT 4 6 Profit Participa- and/or comtion mission Shares 1,000 1,500 250 250 100 2,000 500 400 250 150 100 300 200 150 300 3,000 200 500 50 150 100 500 150 300 1,000 4,000 150 250 200 500 250 300 100 500 4,000 2,000 650 200 100 500 2,000 200 250 1,000 100 150 100 200 500 150 200 100 200 750 1,100 350 500 150 1,200 600 150 50 1,200 100 750 500 2,000 100 150 150 $3,838.33 5,757.50 959.58 959.58 383.83 7,496.67 1,919.17 1, 535.33 919.58 575.75 383.83 1,151.50 767. 67 575.75 1,151.50 1,427. 25 1,151.50 11, 515.00 767.67 1,919.17 191.92 575. 75 383.83 1, 609.17 575.75 1,151.50 3,838.33 15,353. 33 575. 75 959. 58 767.67 1,899.17 959. 58 1,151. 50 383.83 1,919.17 14,973.33 7,676. 67 2,494.92 767.67 383.83 1,919.17 7,676.67 767. 67 959.58 3,838.33 383.83 575. 75 383.83 767. 67 1,919.17 575. 75 767. 67 383.83 767.67 2,878.75 4, 222.16 1,343.42 1, 719.17 575.75 4,606.00 2,303.00 575.75 191.92 4,606.00 383.83 2,878. 75 1,919.17 7,076.67 383.83 575.75 525.75 1612 STOCK EXCHANGE PRACTICES 250,000 shares United States & Foreign Securities Corporation First Preferred Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 19M, checks mailed to participants Dec. 21, 1924—Continued Name of participant Prince & Whitely Reinhart & Bennett Roach, John J _ Robjent, Maynard & Co Robbins & Co,, Charles D Russell, Miller & Carey Russell, Faris R._ Redmond & Co_ _ Seasongood, Haas & MacDonald.. Shields & Co Shore & Jolles Simmonds & Slade ScholleBros Sutro, Lionel -. Sweet, Richards & Co Tooker, Gilbert & Co._ Tracy, Ernest B West & Co., Wm Williams, Clark & Co Wood, Low & Co Williams & Co., H. D O'Sullivan, T . C_.___ American Ex. Securities Co OUT OP TOWN Newton: Newton Trust Co Newark: Goldsmith. Meyer & Lobeell Newark & Essex Security Co Post & Flags—Standard Security Corporation of New JerseyMontclair-Essex Trust Co Albany: W. Vam A. Waterman Co., Inc __ J. A. Ritchie & Co George R. Cooley _. Charles E. McElroy Schenectady: Mohawk National Bank__ _. Willis T. Hanson _ _ Buffalo: Baker, Mandeville & Co _ A. L. Chambers & Co Hayes & Collins _ O'Brian, Potter & Co. _ _. Pistell, Trubee & Co., Inc ___ L. G. Ruth & Co _ Edward N. Wilkes & Co Young & Spaulding Evers Rebers & Co T. N. Pistell _ Olean: J. H. VanBuren & Co., Inc Geneseo: Livingston County Trust Co Rochester: Converse, Hough & Co., Inc Sage, Wolcott & Steele Willard J. Smith & Co__ Union Trust Co Charles E. Mudge Frank J. Little Binghamton: Chittenden, Phelps & Co Ithaca: Henry N. Hinckley , Syracuse: E. G. Childs & Co___ Stone, Seymour & Co _ _ Hudson & Eddy _ _ XJtica: Mohawk Valley Investment Co Scranton: Weissenfluh & Co Wilkes-Barre: W. D. Morris, Jr. & Co_ _ Booker Bros Atlanta: Trust Co. of Georgia Baltimore: Atlantic Exchange Bank & Trust Co Frank B. Cahn & Co _ Continental Co_ _ aitlCipa" tion Profit and/or commission Shares 2,500 600 100 100 2,500 450 400 750 150 2,500 500 400 2,000 75 100 600 1,100 4,000 500 800 400 400 1,000 $9,415.83 2,303.00 383.83 383.83 9,595.83 1,587.25 1,535. 33 2,678.75 575.75 9,545.83 1,919.17 1,535.33 7,676.67 287.88 383.83 2,303.00 4,222.16 15,353.33 1,919.17 3,070.67 1,535.33 1,535.33 3,838.33 100 483.83 200 200 100 200 50 767.67 767.67 383.83 767.67 191.92 400 100 400 100 700 100 200 800 300 200 2,300 400 50 100 500 100 200 100 1,535.33 383.83 1, 535. 33 383.83 350 350 200 100 50 100 150 200 1,343.42 1,343.42 767.67 383.83 191.92 383.83 575.75 767.67 600 1,200 50 250 600 2,303.00 4,606.00 191.92 959.58 2,303.00 200 250 100 767.67 959. 58 383.83 250 400 100 959. 58 1,535.33 383. 83 2,686.83 383.83 767.67 3,070.67 1,129.50 767.67 8,828.17 1,535.33 191.92 303.83 1,919.17 383.83 567.67 383.83 1613 STOCK EXCHANGE PRACTICES 250,000 shares United States & Foreign Securities Corporation First Preferred StocJc Allotment Certificates, Syndicate. Date offered, Oct. 12, 1924, checks mailed to participants Dec. 21, 1924—Continued Name of participant OUT OF TOWN—continued 3 altimore—C ontinued Gillet & Co.___ _ ___ P. H. Goodwin & Co John D. Howard & Co._ . Birmingham: Marx & Co.... Greensboro: Atlantic Bank & Trust Co _ Raleigh: Durfey & Marr Wilmington: C. P. Bolles & Co._. Washington: Henderson-Winder Co Cleveland: R. B. Keeler & Co Otis & Co Hosford, Harry W Worthington Murfey & Co Saunders Co., T. H Murch Co., MaynardHStanley & Bissell Collins Co., Philip H Canfield & Co., G. B Mid-Continent Sec. Co Hord Curtiss & Co W. K. Sadler & Co Akron: Mayfield-Adams Co Canton: United Security Co — Dayton: Thomas Ruttman Toledo- Collin-Norton Co Youngstown: Realty Guarantee & Trust Co.._ Pittsburgh: J. H. Holmes & Co Wells, Deane & Singer Hill, Wright & Frew __ Dinkey & Todd Co Geo. C. Applegate R. W. Evans & Co Stout & Co_ ___ ! Glover & MacGregor _._ Peoples Savings & Trust Co Zimmerman & Co Finsthwait & Co_._ David R. Hill Farrell: Colonial Trust Co Erie: Chas. Messenkopf _ Ambridge: Ambridge Savings & Trust Co Altoona: Calahan & Co Charleston: Kanawha Banking & Trust Co Jamestown: Western Reserve Securities Corporation... Warren: C. Q. Calderwood & Co E. H. Lampe__ _ Berkeley, Calif.: Security Bond & Finance Co _•_. Los Angeles: G. Brashears & Co Citizens National Co A. H. Frank & Co. _ Hunter, Dulin & Co Howard G. Rath Co Stevens, Page & Sterling Oakland: J. F. Hassler Waite H. Stephenson & Co Pasadena: Andrew W. Stewart & Co _ San Diego: Arthur Dewar__ R. K. Williams • San Francisco: Anglo California Tr. Co . Anglo-London-Paris Co Bancitaly Corporation J. Barth & Co — Bond & Goodwin & Tucker. Bradford, Kimball & Co ,. F. M. Brown & Co Geo. H. Burr, Conrad & Broom „ Carstens & Earles, Inc Wm. Cavalier & Co Paul W. De Fremery _ A. H. Frank & Co Profit irncipa~ and/or comtion mission Shares 200 500 200 350 150 100 200 50 $767.67 1,919.17 767.67 1,343.42 575.75 383.83 767,67 191.92 100 250 750 250 500 150 250 200 100 4,000 400 300 100 750 50 500 50 183.83 959.58 2,878.75 • 959.58 1,919.17 575.75 959. 58 767. 67 383. 83 15,353.33 1,535. 33 1,151. 50 383. 83 2,878. 75 191.92 1,919.17 91.92 900 600 900 2,400 250 400 151 200 1,800 150 150 130 50 150 20 50 500 100 3,454.50 2,103. 00 3,454.50 9, 212.01 959. 58 1,435.33 575. 75 767. 67 6,909.00 575. 75 575.75 498.98 191.92 575. 75 76.77 191.92 1,919.17 383.83 200 400 50 767.67 1,535.33 191.92 200 100 150 100 400 400 767.67 383.83 575.75 383.83 1,535.33 1,535 33 50 100 100 191.92 383.83 383.83 250 50 959.58 191.92 500 919.17 3,838.33 1,919.17 383.83 3,838.33 383.83 $383.83 1,000 500 100 1,000 100 100 200 100 200 100 100 767.67 183.83 767.67 383.83 383.83 1614 STOCK EXCHANGE PRACTICES 250,000 shares United States & Foreign Securities Corporation First Preferred Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks mailed to participants Dec. 21, 1924—Continued Name of participant OUT OF TOWN—continued San Francisco—Continued Geary, Meigs & Co _ E. T. Harper & Co ± _ Lieb, Keyston & Co M. P. Lilienthal Co __ Peirce, Fair & Co__ __ Edward Pollitz & Co George D. Roberts & Co Schwabacher & Co Shingle, Brown & Co Strassburger & Co _ Chas. Sutro_-._ San Jose: Lewis Miller Co Santa Barbara: Paul Bullis & Co___r Colorado Springs, Colo.: Hazelhurst, Flannigan & Co. Denver: Calvin Bullock _ Chicago, 111.: W. S. Aagard & Co ^ Ames, Emerich & Co Alfred L. Baker & Co _ Bard, Eseh & Co.. _ A. G. Becker & Co _. Belding, Boehmer & Co Katherine C. Bermingham _ _ __ Brokaw & Co _ PaulBuhlig _ Carman, Fox & Snider Ralph Chapman & Co J. L. Cooke & Co , F. A. Cuscaden _ Dangler, Lapham & Co__ Paul H. Davis & Co Dean, Onativia & Co _ _ Eastern Corporation C. E. Fauntleroy & Co L. B. Ferguson & Co Beulah R. Fiske _ _ Folds, Buck & Co., Inc Walter Freeman & Co Ralph A. Bard ___ _ H. T. Holz & Co. Hord, Fitzsimmons & Co Howe, Quisenberry & Co Lewis, Owens & Co Merrill, Lynch & Co Mitchell, Hutchins & Co National Repub. Securities Co Paine, Webber & Co C. L. Schmidt & Co Shapker, Stuart & Co ._. Standard Trust & Savings Bank L. Montefiore Stein _ _ _ Stein Bros. Paige & Co _ — Averill, Tilden & Co— Jacksonville: Dunlap, Russell & Co Peoria: The Eugene Osborn Co Springfield: Matheny, Dixon & Co LaPorte, Ind.: H. W. Fox .._ _._. Ashland, Ky.: Ashland National Co Lexington: Security Trust Co Louisville: Block, Fetter & Trost _ __. J. J. B. Hilliard & Son W. L. Lyons & Co _. James C. Willson & Co New Orleans, La.: Watson, Williams &Co Grand Rapids, Mich.: Grand Rapids Trust Co Duluth, Minn.: Edward F. Chapin & Co Duluth National Bank. _ Stanley Yonce ___ _ Do _ _ Philip L. Ray & Co _ Minneapolis: Gardner, Osburn & Co Lane, Piper & Jaffray Thayer-Beebe & Co Profit Participa- and/or comtion mission Shares 800 150 100 50 500 100 100 200 100 250 100 150 100 50 100 $3,070.67 575.75 383.83 191.92 1,719.17 383.83 383.83 767.67 383.83 959. 58. 383.83 575. 75 383.83 191.92 383.85 400 1,000 1,000 500 2,500 300 500 2,000 100 200 100 100 20 100 100 100 250 200 200 500 750 200 50 750 150 750 150 750 2,500 1,000 100 250 250 200 100 100 100 50 100 150 150 50 150 1,435.33 3,838.3a 3,838.33 1,919.17 9,595.83 1,151. 50 1,919.17 7,676.67 383.83 767.67 383.83 383.83 76.77 283.83 333.83 383.83 959. 58 767.67 767.67 1,919.17 2,878.75 767. 67 191.92 2,918.75 575.75 2,878.75 575.75 2,778.75 9, 515. 83 3,838.33 383.83 959. 58 959.58 767. 67 383.83 383.83 383.83 191.92 383.83 275. 75 575. 75 191. 92 575. 75 150 350 250 500 100 50 575. 75 1,343.42 959. 58 1,919.17 * 383.83 191.92 150 50 100 300 100 575.75 191.92 383.83 1,151.50 383.83 50 750 100 391.92 2,878. 75 1615 STOCK EXCHANGE PRACTICES 250,000 shares United States & Foreign Beowities Corporation First Preferred Stock Allotment Certificates, SynMcate. Date offered, Oct. 21, 1924, checks mailed to participants Dec. 21, 1924—Continued Name of participant OUT OF TOWN—continued St. Paul: Xalman, Gates, White & Co _. Grubbs, Booraem & Co Chas. H. F. Smith & Son St. Louis, Mo. Walker Hill, Jr. & Co John R. Longmire Potter, Kauffman & Co ___ Reinholdt & Co___ Smith, Moore & Co Mark C. Steinberg & Co Stix & Co Chattanooga, Tenn.: First Trust & Savings Bank Nashville: American National Co _ J. W. Jakes & Co _ Joe B. Palmer & Co _ _ Chas. Belson ___ Appleton, Wis.: First Trust Co _ .._ Green Bay: Peoples Savings & Trust Co Milwaukee: Dahindan-Schmitz-Platner Co First Wisconsin Co _ Partridge-Patmythes Co _ ___ Second Ward Securities Co _ R. H. Williams Co_ Neenah: The E. J. Lachmann Co _ Boston, Mass.: Blodget & Co Coburn, Kittredge & Co Collins, Spalding & Co 1 A. B. Conant & Co Curtis & Sanger Philip S. Davis & Co Dowling, Swain & Shea, Inc G. A. Fernald Co _ _ Flint, Wellington & Co ___i._._ — Long & Nash __ Minot, Kendall & Co _ _ Eugene F. O'Brien & Co Parkinson & Burr -. Pearson, Erhard & Co. Putnam & Storer__ Wm. A. Russell & Bro Stone & Webster Townsend, Anthony & Tyson B. F. White & Co Whitney & Elwell Waterbury: R. F. Griggs Co Providence: Davis & Davis Hutchinson & Co Stephen E. Hopkins C. A. Kilvert & Co Richard S. Moore & Co Pawtucket: H. H. Brooks Homer Gray___ _ Hartford: Tripp & Andrews New Haven: R. H. Hasset & Co 1 Chas. W. Scranton & Co f £ Winslow, Day & Stoddard Bridgeport: Hincks Bros. & Co C. H. Gilman & Co —E. B. Merritt & Co Portland: Porter, Erswell & Co. — Springfield: John Torrey Hawkins Philadelphia: Janney & Co _ Biddle & Henry Elkins, Morris & Co — West & Co _ Harrison & Co Harper & Turner Fitch, Crossman & Co -.. Profit Participa- and/or comtion mission Shares 100 150 150 $383.83 575. 75 575.75 100 200 200 100 1,000 350 350 50 383.83 767.67 767.67 383.83 4.338.33 1,343.42 1,343.42 191. 92 150 50 300 50 50 50 575.75 191.92 1,151.50 191.92 191.92 191.92 50 400 50 400 400 100 191.92 1, 535.33 191. 92 1,535. 33 1, 535. 33 383.83 200 500 200 300 500 75 200 750 300 300 200 600 2,200 900 200 500. 750 200 200 400 250 767.67 1,919.17 767.67 1,151. 50 1,919.17 287.88 767.67 2,878.75 1,151.50 1,151. 50 767.67 2, 303. 00 8.444.34 3,454.50 767.67 1,919.17 2,878.75 767. 67 767. 67 1, 535. 33 959. 58 200 350 75 500 450 767. 67 1, 343.42 287.88 1,919.17 1, 727.25 300 25 450 1,151.50 95.96 1,727.25 150 300 500 575.75 1,051.50 1,919.17 200 75 300 200 200 767.67 287.88 1,151.50 767.67 767.67 3,500 1,700 400 500 700 250 1,750 13,434.17 6.525.16 1,535.33 1.919.17 2, 686.83 959.58 6,697.08 1616 STOCK EXCHANGE PRACTICES 250,000 shares United States & Foreign Securities Corporation First Preferred Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks mailed to participants Dec. 21, 1924—Continued Name of participant OUT OF TOWN—continued Sam'l McCreery & Co T. Wister, Carter & Co Frazier & Co Nixon & Co., I n c . Wm. G. Hopper & Co Martin & Co Paul & Co-__ Cadbury, Ellis & Haines Lewis & Snyder _ _ Reed A. Morgan & Co. Rufus Waples & Co Edw. C. Rose & Co Stroud & Co.. _ M. F. Middleton & Co., Jr Kennedy & Co _ Wheeler & Co... F. P. Ristine & Co Wm. Marriott Canby Parrish & Co_— J. H. Crouse & Co Roland L. Taylor. Donald J. Smith & Co Lloyd & Palmer Walter Stokes & Co Reid, McClure & Co Drayton, Pennington & Colket. Chas. T. Brown JohnH. Mason H. B. Hagy. Wm. Jennings ± __ Equitable Trust Co Harry Bacharach Abm. Barker Mellor Total. Dilon, Read & Co., New York: Retail _ Boston Philadelphia Philadelphia special Chicago Chicago special, Pittsburgh Total- Profit Participa- and/or comtion mission Shares 1,000 500 400 100 1,000 350 250 100 250 100 100 100 1,800 100 50 100 100 100 50 250 1,000 100 100 150 100 250 100 150 250 100 1,500 400 100 1,919.17 1,535.33 383.83; 3,838.33 1, 343.42 959. 5& 383.83 939.58 383.83 383.83383.83 6,909.00191.92 383.8a 383.83 191.92* 959. 5& 3,838.33 383.83 383.8a 575.75 383.85 959.58 383.8a 575.75 959.58 383.8a 5,757.50 1, 535.33 383.83 637,951.49 22,472 6,724 17,881 1,100 20,000 8,430 5,848 93,833.00 28,100.94 74,971.18 2, 022.16 82,566. 67 33,217.14 24,750. 55 250,000 977,533.13 STOCK EXCHANGE PEACTICES WEDNESDAY, OCTOBER 4, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE, ON BANKING AND CURRENCY, Washington, D.G. The subcommittee met, pursuant to adjournment on yesterday, at 10 o'clock a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Glass, Adams (substitute for Barkley and proxy for Costigan), JSTorbeck, Townsend, and Couzens. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Read Co.; Root, Clark, Buckner & Ballantine, George H. Murphy of counsel, counsel for United States & Foreign Securities Corporation. The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora. TESTIMONY BESUMED OF CLARENCE DILLON, OF DILLON, BEAD &C0. Mr. PECORA. Mr. Dillon, if you would like, you might come up a little closer toward this end of the table. Mr. DILLON. I should be glad to do so because by reason of the unusual use of my voice on yesterday I am a little hoarse this morning. Mr. PECORA. All right. Did you have something you wanted to say before we began with the hearing? Mr. DILLON. Here arc some charts that were not physically attached to committee exhibit no. 2-A that we handed in on yesterday. They were loose, and if I might hand them in now I should be glad to do so. They are just charts referred to in that exhibit. Mr. PECORA. All right. Let me see them. Mr. DILLON. They are simply in connection with that exhibit, in regard to the security companies operations. They show the fluctuations in the stock-exchange operations. Mr. PECORA. Isn't that a fact made clear or alluded to in the textual part of your statement that was offered to the subcommittee on yesterday ? Mr. DILLON. That is true, but that statement refers to the charts. 1617 1618 STOCK EXCHANGE PRACTICES Mr. PECORA. It will be somewhat difficult to reproduce these graphs or charts in the printed record. And there is no question being raised as to the manner of operation of the portfolio of the investment trusts. So this would simply be, perhaps, a bit superfluous and unnecessary and would encumber the record, unless there is some special point you want to make with them. These charts are numerous, some 14 or 16 of them. You could tell the subcommittee through the medium of your oral testimony the salient features if you wanted to demonstrate them. Mr. DILLON. There are no salient features, but there are certain figures in that statement and reference is made in the statement to the charts. There is nothing else. The CHAIRMAN. YOU might say for the record orally what the charts show. Mr. DILLON. We are perfectly willing to drop that matter if you prefer. Mr. PECORA. I will look over these charts during the recess, and perhaps I can bring out the important features that you want brought out, by questions propounded to you. Mr. DILLON. They only show the changes in stock market prices. The management of the investment trust thinks there may be some advantage to them to have them in the record rather than just the averages. The CHAIRMAN. It is very difficult for the Government Printing Office to reproduce these graphs or charts. Mr. DILLON. Well, we are perfectly willing to have you handle them in any manner you like. Mr. PECORA. I will look them over during the recess. Mr. DILLON. All right. Mr. PECORA. NOW, Mr. Dillon, in offering to the public for subscription the 250,000 shares of the first preferred stock of United States & Foreign Securities Corporation, back in 1924: Who prepared or who caused to be prepared the circular or prospectus which accompanied that public offering. Mr. DILLON. That was prepared by Dillon, Eead & Co. No; I am wrong about that. That was prepared by the security company, but Dillon, Read & Co. organized the security company. Mr. PECORA. Which member was it who prepared it? In other words, was it prepared by a member of the personnel of Dillon, Eead & Co. Mr. DILLON. May I ask for the details? I do not remember that for it was nine years ago. Mr. PECORA. All right. Mr. DILLON. They will look that up and see if we have any records to show it. I do not think they are prepared by any one person. Mr. PECORA. TO what extent was circulation given in connection with this offer to the investing public of this prospectus or advertisement ? Mr. DILLON. The advertisement was made in the newspaper. I do not know which one, the New York Times, and Mr. PECORA. The prospectus? Mr. DILLON. The prospectus was used I think as prospectuses are usually used. STOCK EXCHANGE PRACTICES 1619 Mr. PECORA. Among whom were copies of the prospectus distributed? Mr. DILLON. I shall have to inquire. Mr. PECORA. All fight. Mr. DILLON (after inquiring of associate). We have no record of that. I .should say that they were distributed to that syndicate. Mr. PECORA. That is, to the participants in the selling syndicate? Mr. DILLON. I should assume that is so. Mr. PECORA. And not distributed to the general public? Mr. DILLON. By us, not to, the general public, no; excepting the people that bought stock. They saw the circular. Mr. PECORA. HOW can you say that the people who bought the stock saw the circulars? Mr. DILLON. Well, I would naturally assume that. Mr. PECORA. If the circulars as printed by Dillon, Eead & Co. were sent to the dealers, the 300 or more dealers who composed the selling syndicate ? Mr. DILLON. I assume that they used the circulars to sell the stocks. Mr. PECORA. YOU mean that they caused reprints to be made of the circulars for distribution among their clients and customers ? Mr. DILLON. That I don't know. Mr. PECORA. That is what I am trying to get at now, Mr. Dillon, what the general routine is by which these offerings are made to the public. Mr. DILLON (after conferring with associates). Mr. Pecora, I do not believe that there is a reprint. I think as a general rule the managers print a lot of these circulars and distribute them. Mr. PECORA. TO the selling syndicate, to the dealers ? Mr. DILLON. Yes. Mr. PECORA. DO you understand that to be the general routine or custom by which these offerings are made to the public ? Mr. DILLON. That is our general routine and custom. Mr. PECORA. Does that correspond with the routine and custom adopted by other investment bankers to your knowledge? Mr. DILLON. AS far as I know; yes. The CHAIRMAN. Was this advertisement published anywhere else except in New York —New York Times, for instance? Does it go to the other parts of the country? Mr. DILLON. I should think so, Senator. I will inquire as to where this particular one was. I think it was published in the principal cities, like Chicago, and so forth. Mr. PECORA. Published on more than one date? Mr. DILLON. NO ; I should think the advertisement appears ,on one day. It may have appeared on two days. Generally just once. Sometimes it appears morning and evening and sometimes evening and the following morning. Mr. PECORA. DO you get any correspondence from prospective purchasers based upon these published advertisements ? Mr. DILLON (conferring with associate). Very rarely, they say. Mr. PECORA. The advertisements and circulars are put out in the name of Dillon, Read & Co., are they not? Mr. DILLON. The circular; yes. 1620 STOCK EXCHANGE PRACTICES Mr. PECORA. And the advertisement? Mr/DILLON. The advertisement of that one. Mr. PECORA. SO that if a prospective investor wanted to learn something more about the security that you "are advertising and offering, the only person with whom he could communicate directly would be the dealer whose name appears on the circular or the advertisement as making the offering, would it not ? Mr. DILLON. N O ; on the circular I should think he would apply to the man who was offering it to him, to the dealer who was offering it. A person seeing an advertisement like that I should think would not know a dealer and he would naturally apply to Dillon, Read & Co. Mr. PECORA. From the fact that you had very little correspondMr. DILLON (interposing). As a rule, I should think a man would be much more apt to apply to his own dealer or broker, even though it was signed by Dillon, Read & Co. Mr. PECORA. I S it fair to conclude from that that in making an offering and distribution of a security of this kind or any other kind where a selling syndicate is organized, formed, by the originating group or issuer, that the actual retail sales are made to the public through the medium of the selling syndicate or the members of the selling syndicate? Mr. DILLON. I do not quite follow the question, but I think I can answer that in offering the security the sales are made through the selling syndicate. Mr. PECORA. And in this instance there has been introduced in evidence the list of the participants in the selling syndicate, this list of some three hundred or more dealers that was put in evidence yesterday ? Mr. DILLON. That is correct, the dealers, and in that list I think there are probably others that are not dealers. Mr. PECORA. Each one of those dealers, I presume, received a copy of the circular or prospectus that was put in evidence here yesterday relating to this offering? Mr. DILLON. I should assume so. Mr. PECORA. Was the dealer given originally any other information concerning the issue that wa(s being offered ? Mr. DILLON. That I don't know. Mr. PECORA. What is the custom and practice in your house in regard to that? Mr. DILLON. It is to give them the circular and any additional information that they may require or ask for. Mr. PECORA. But the additional information is not given except in response to questions or requests for such information coming from the distributing dealers ? Mr. DILLON. That is, information in excess of what we give them. Additional information would only come at their request. Mr. PECORA. When you organize a selling syndicate of the kind that was organized in connection with this offering back in 1924, how do you make up the membership of that selling syndicate ? Mr. DILLON. That is made up by our syndicate department. Mr. PECORA. By what process? What methods are used by them? We want to get the machinery. STOCK EXCHANGE PRACTICES 1621 Mr. DILLON. Yes. I am assuming this is the method because I am not familiar with just how they do it, but I think they keep records of dealers that we have done business with, and whenever we have a syndicate to be formed they go over all records and offer participations to such dealers as in their judgment would be interested in that particular security. Mr. PECORA. And the issuing house or the originating syndicate or group then determines the extent of participation that is given the dealers who are invited to join the selling syndicate? Mr. DILLON. Yes. Mr. PECORA. Where a dealer declines to accept a participation which has been offered him in one of these selling syndicates do you continue to keep his name on your lists for future offerings? Mr. DILLON. We do, Mr. Pecora. We allow a dealer to take what he likes, and if he doesn't like it he says, " Well, that particular security I don't like," or " I can't sell it," or " My market won't take it." We then offer him the next one. If he again declines a similar kind of security we probably realize that that kind of an issue he cannot use, but we do not hold that in any way against that dealer. Mr. PECORA. Does his name remain on your list of potential participants in other offerings ? Mr. DILLON. I should think it would remain there unless he repeatedly declined and we felt he was out of business. Mr. PECORA. DO you know what the general custom has been in the investment banking field generally with regard to that? Mr. DILLON. I don't know generally other than in our own business, but you do hear stories around that if a person does not take an offering they are offered less the next time or else they are dropped off, but I know of no instances of that. Mr. PECORA. Have you heard such stories ? Mr. DILLON. I have, sir. Mr. PECORA. Over a period of years ? Mr. DILLON. Yes, you hear that. Mr. PECORA. DO you think that might be an instance of where there is so much smoke there might be someflame? Mr. DILLON. Possibly, but I don't know of any such instances myself. Mr. PECORA. Then the dealers who are invited to participate in a selling group and do accept such invitation take the portion of the offering that is allocated to them by the originating group ? Mr. DILLON. Not always. Sometimes they ask for more and sometimes they take less. Mr. PECORA. But as a rule they take the share that is allocated to them ? Mr. DILLON. They accept what they get. Mr. PECORA. Yes. Mr. DILLON. But very often they ask Mr. PECORA. Yes; and they in turn for more. push the sale of those securities among their respective customers in their various communities? Mr. DILLON. They endeavor to sell them to their customers, yes. Mr. PECORA. Did you have much correspondence—when I say you, of course I mean your firm—either with investors who purchased 1622 STOCK EXCHANGE PRACTICES any of these first preferred shares in the United States & Foreign Securities Corporation or with any of the dealers whose participation in the selling syndicate you invited, with respect to this offering.? Mr. DILLON, (after conferring with associates). Well, I could not answer that without going back and looking up. I assume we had such correspondence as one might have with an issue of this kind. Mr. PECORA. AS a rule do you have much correspondence of that sort in connection with a new offering? Mr. DILLON, (after conferring with associates). I am trying to find put what that practice is. We do have a certain amount of correspondence with people from time to time, and they have questions to ask and want information. Mr. PECORA. I assume that in the general operation of the business ou have correspondence of that sort generally through the year; ut what I am trying to get at is this: When you make an offering of a new issue through the medium of organizing a selling syndicate composed o$ dealers throughout tjhe country do you get many requests either from the dealers or from prospective investors among the public asking for more information concerning the issue that is being offered than is contained in the prospectus or advertisement which is published at the time of the offering ? Mr. DILLON. I should think you would get some, but not a great deal, that would be my guess, Mr. Pecora. Mr. PECORA. NOW, from that fact is it a fair inference that the eneral public buying the issue or subscribing to it is guided more y advice or opinions expressed by the local dealer who might be a participant in the selling syndicate? Mr. DILLON. It would be hard for me to answer that categorically,, but I should think that a local investor would have confidence in his local dealer and would probably get such information as he wanted from his local dealer, and if the local dealer didn't have it then he would come to us for it. Mr. PECORA. IS it your experience that these local dealers except on rare occasions ask for additional information concerning an issue ? Mr. DILLON. I think that—I would not know that definitely. (Addressing an associate.) Do they? We often, they tell me, do get requests for additional information when it is a going business with a record, and they ask for information that we might not have had on the circular, but in a new company like this where there is no past record we probably have less of that than we do in an issue of a going concern. Mr. PECORA. IS it fair then to infer that in putting out these issues, distributing them among dealers, who in turn distribute to the public, the dealers who are invited to participate in the selling syndicate accept participation mainly because of their confidence in the issuing house or the originating group? Mr. DILLON. I think that is a fair assumption, I think that has a considerable influence on the dealer. Senator ADAMS. Mr. Dillon, in sending out offers, or rather per* haps requests for offers, to your outside dealers, do you send tele-^ graphic inquiries or by mail generally ? Mr. DILLON. We do both, Senator. I G STOCK EXCHANGE PRACTICES 1623 Senator ADAMS. For instance, with big issues such as this, what would be your practice, or what was your practice ? Mr. DILLON. The practice is to send a long telegram with an outline of that relative information and then you follow that up by mailing circulars and additional information. Senator ADAMS. What do you do in the way of allowing time for the local distributor to make up his mind to accept or reject your offer? Mr. DILLON. Sometimes he has very little time. We try to give him as much time as we can. Senator ADAMS. For instance, in an offer of this particular kind how much time was given ? Mr. DILLON. In this particular offer I should think he would have had more time than he has in others, because in this we had probably more time, as we were forming the company and the pressure was not there. Again, when you are buying an issue of securities from an outside company they do not like anything said about it until the deal is consummated, because they do not want it rumored that they are doing financing which they may not do. In those oases you sometimes have tiken your commitment and you send your telegrams out at once and want your answers right back. Senator ADAMS. Really, the time limit is reasonably short; you do not permit the dealer really to go out and find out whether he can sell or make the sales, but he has to practically commit himself if he cannot make a rather prompt sale ? Mr. DILLON. They do, I think, see whether they can make sales. I think that is their practice, probably. They do not have a great deal of time, because securities in the market normally sell very fast, that is the securities that we bring out. I mean we open our books in the morning and they are sold during the day, so that a man does not have a great deal of time. If an issue goes slowly then he has a great deal of time. Mr. PECORA. Those securities sell very fast principally because the machinery that is employed to distribute and sell them is geared to a high rate of speed ? Mr. DILLON. I think there is some justification in that assumption. When you use 360 dealers, for example, they do not have to take very many shares each to absorb your issue. Senator ADAMS. Mr. Pecora, I would not expect Mr. Dillpn to acquiesce, but I gather frequently the impression that this is just a last chance; this is the last thing; if you don't get right in you don't get it. Mr. PECORA. Mr. Dillon has answered some questions by me somewhat along that line suggesting some such thing, Senator Adams. I asked him what the custom was with regard to extending invitations to a dealer who has been invited to participate in one selling syndicate, if he has rejected that invitation whether he is invited to participate in other offerings in the future. Mr. DILLON. I think, Mr. Pecora, it would be desirable if you could give more time. I should like to see more time given because I should like to feel that the dealers around the country were more thoroughly familiar with their securities. 1624 STOCK EXCHANGE PEACTICES Senator ADAMS. But the speed with which the offerings are taken up indicates that there is a rather high-class and expert salesmanship at the issuing end ? Mr. DILLON. YOU might say that; but I would say that the way the business is done it is moved with great dispatch—the selling of it. You offer a dealer over the telegraph wire a certain amount, and you often say that the reply should be in by 12 o'clock noon the next day. This man has so many shares or so many bonds available to him until noon of the next day, and he must telegraph in by noon of the next day if he wants them. Well, there is pressure there for this man to answer, and it would be desirable if he could have more time I should think, in many instances. Does that answer your question, Senator? Senator ADAMS. Yes. Mr. PECORA. Unless a dealer who was invited to participate in a selling syndicate asks for additional information does he get any more information than that which appears in the prospectus or circular which has been sent to him, or which appears in the advertisement corresponding to the prospectus which might be published in his local paper ? Mr. DILLON. I think that is the information he gets as a rule, unless he requests more. Sometimes we send supplemental data on the industry as a whole. We sometimes have booklets or things of that kind. The CHAIRMAN. Dp you have many instances, Mr. Dillon, where these agents or participants agree to take a certain allotment and then fall down on that allotment, fail to keep up the payments? Do you have many instances of that kind? Mr. DILLON. Very rarely, Senator, very rarely. Because we know, from experience the people with whom we are dealing. We know their records over a period of time. When we know it has occurred, as it sometimes does, then those people are eliminated from the list. We generally know the standing and character of the people in the lists we use, so that it is very rare that any one does not carry through. Mr. PECORA. In putting out a new issue, Mr. Dillon, how many groups are organized as a rule to effect the distribution to the public of the issue ? Mr. DILLON. That varies. In certain securities that have a wellknown market, that sell very readily, you probably form the purchase group and then allow a selling commission on the sale. For securities where the risk is greater or the market not so well established or so certain you form intermediate groups. There would be the purchase group Mr. PECORA. That is called the original terms group? Mr. DILLON. The original terms group, yes. Then you would form what is generally called the banking group. They would take a commitment from the original group. Then you form after that the selling group, which in turn takes the commitment from the banking group. You often give the same men interests in the different groups; not always in the same amounts. If a man has a large financial responsibility but does not use as many bonds in the ultimate distribution you might give him a larger interest in the STOCK EXCHANGE PRACTICES 1625 banking group than you give him in the sellng group, and if it is the other way you sometimes give him a larger interest in the selling group than you give him in the banking group. Mr. PECORA. IS it usual in such operations for the banking house which organizes the original terms group to also have an interest in the subsequent groups between themselves and the purchasing public ? Mr. DILLON. Yes; they practically always have. The originating house would have an interest in the originating group and the banking group and the selling group. Mr. PECORA. Yes; so that the originating house participates in the commissions derived by each group in the process of selling to the general public? Mr. DILLON. By performing service in each group. Mr. PECORA. They act virtually as managers of the various groups, do they not ? Mr. DILLON. They usually act as the managers of the various groups. Mr. PECORA. Yes. Now, in passing the issue on from group to group the price is stepped up, is it not? Mr. DILLON. Yes. Mr. PECORA. And when it finally reaches the investing public they pay the highest price ? Mr. DILLON. That is correct. Mr. PECORA. What is the necessity, Mr. Dillon, for organizing so many intermediate groups between the originating group and the actual sale to the public, with all these different commissions that accrue, arise, and obtain? Mr. DILLON. Suppose that we are the originating group and we take a large commitment. There is time and uncertainty between that commitment and the ultimate distribution. We want to spread that risk. We want others to come in and share that responsibility with us. And we want to form that group quickly. So we go to people whom we know, people that we are in close contact with, and we say, " Here, we have this commitment. We will take a half a point, a quarter of a point, an eighth of a point ", as the case may be, " for originating profit, and now we are inviting you to come in and share the financial responsibility in the interim between this time and the time that we form our selling group or actually make the distribution ", and we pay them for taking that commitment, that payment depends upon the risk that they are taking. If it is something that moves more readily, we give them a smaller commission. If it is something where their risk is greater, we give them a larger commission. Does that answer your question ? Mr. PECORA. I t does. If there is anything more you want to say on that line, go ahead. Mr. DILLON. NO. I was simply elaborating on that line, because the size of the issues that a firm negotiates often exceeds the capital, for example, of that firm, and in ordinary business caution they would naturally want to form a group again to share that financial responsibility in the interim when they are forming the selling group. 1626 STOCK EXCHANGE PRACTICES Mr. PECORA. When a banker underwrites an issue with a view of passing it on either through his own immediate facilities or through the organization of intermediate groups to the investing public, is it the custom for the banker to actually underwrite the issue, that is to say, obligate himself by contract to take the issue himself until he has satisfied himself reasonably at least, that he can place it in .the market or pass it on to the investing public ? Mr. DILLON. If he did take such a commitment without knowing that I should think that he was not a prudent banker. Mr. PECORA. In other words, he would not be a prudent banker if he took any more risk than he actually had to ? Mr. DILLON. Yes; I think that is right. Mr. PECORA. And he seeks to minimize the risk by making sure, or making as sure as he possibly can in advance of his making his commitments that he can place the issue or dispose of it to the investing public ? Mr. DILLON. TO be just as sure as he possibly can under the circumstances. You are not at liberty often to go out and make a very general canvass, because the borrower does not like that. If you did go ahead and do that you would hurt his credit or his standing. So you are often compelled to take commitments before you know, as much as you would like to know . Mr. PECORA. A banker avoids that as much as possible ? Mr. DILLON. AS much as possible. And that is the reason that you keep your organization as well in touch with the markets as you can, so that you can minimize that risk. Mr. PECORA. NOW, of course, when the stage is reached where a banker has underwritten an issue and obligated himself legally to take the issue, the terms are fully agreed upon, of course? Mr. DILLON. At the time he takes his commitment ? Mr. PECORA. Yes. Mr. DILLON. I should think the terms would be to his satisfaction. Mr. PECORA. Yes. Are fully agreed upon? Mr. DILLON. Well, he must be satisfied with the terms as far as they have gone or the issue would not be taken. Mr. PECORA. Yes. In other words, before he obligates himself he knows what the spread is going to be—that has been fixed and determined by negotiation with the issuer—does he not? Mr. DILLON. Well, generally speaking, yes. Mr. PECORA. Yes? Mr. DILLON. But you might say to a borrower whom you have considered in high standing, " Yes, I will take the issue. Yes, I will do that." Now, that is a commitment on your part, though you might yet not have agreed definitely on just the price or on the exact terms, that might happen. Senator ADAMS. Mr. Dillon, in the case of issues such as your investment trusts of course you had no financial obligation, no commitment, because you were putting out an issue, you yourself were originating. That is, there was no obligation on your part, so that so far as they were commitments, you passed them out without making them yourselves? Mr. DILLON. NO ; that would not be correct, Senator, because if we sold one share of stock, or if any dealer sold one share of stock to any STOCK EXCHANGE PRACTICES 1627 one, that is sold on a prospectus with the complete set-up, and we are committed to go through with that set-up. Senator ADAMS. That is, you felt when you put out the $25,000,000 issue that you were obligated if you sold one share to take the remainder yourselves? Mr. DILLON. Oh certainly, certainly. You see we paid in the junior money. Then if you offer the senior security you must go through with it whether you sell it all or not. I mean, suppose you sold part of that; you could not say, "Now, we are not going to take all of this ", because you have represented to the men to whom you have sold the part what the ultimate set-up of the capitalization is going to be. Senator ADAMS. The obligation then arose by reason of representation, implied or expressed, to those who were purchasers of part of the issue ? Mr. DILLON. N O ; we had contractual obligations with the securities company. The letters were read in the record yesterday. Senator ADAMS. That is true, but, of course, the security company was your company and entirely subject Mr. DILLON (interposing). You mean might have been dissolved or something ? Senator ADAMS. Yes. Mr. DILLON. Well, I suppose a thing like that might have been possible if there had been no sales of securities; yes. Mr. PECORA. Let us take a concrete case if we can, Mr. Dillon, with a view of illustrating the routine employed by an underwriting banker. Let us assume, for instance, that a foreign government wants a loan. A banker loaning on that negotiates with the government to make the loan to it. The government agrees to issue its bonds, we will say, long term bonds, for the amount of the loan. Now, before the banker agrees to underwrite that issue he knows as a rule, does he not, that he can place those bonds in his market through the medium of bankers' groups and selling syndicates composed of dealers ? Mr. DILLON. He may not know it actually, but certainly in his judgment he feels convinced that he can. Mr. PECORA. Well, does he not as a rule obtain commitments from these distributing dealers before he actually commits himself to underwrite or to buy the bonds from the foreign government that is issuing them ? Mr. DILLON. Not necessarily from the distributing dealers, but I should think a prudent banker would from the banking group. Mr. PECORA. Well, from the banking group, and they, in turn, may get commitments from the members of the distributing syndicate? Mr. DILLON. Not necessarily, because the manager of the originating group is the manager of the banking group, and always forms the selling syndicate, and as a rule the banking group is formed before the selling syndicate is formed. Mr. PECORA. Well, conceivably no banker would underwrite a foreign issue unless he felt quite certain that he could sell it in his market? 175541—33—PT 4 7 1628 STOCK EXCHANGE PRACTICES Mr. DILLON. I should not think he would underwrite any issue unless he felt that, sir. Mr. PECORA. All right. Now in many of these issues the underwriting banker gets a spread varying from 4 to 8 or 9 points ? Mr. DILLON. From the price that you pay to the price that it goes ultimately to the public? Mr. PECORA. Yes. Mr. DILLON. That varies I should think, in the range you suggest. Mr. PECORA. From 4 to 8 or 9 points? Mr. DILLON. Well, I think 8 or 9 points is usual. I t occurs, when a security is new to the market probably. I should think as a rule it is not as high as that. Senator ADAMS. May I ask a question? The more risk that the investor takes the larger the commission that the distributor takes, I gather? Mr. DILLON. I should think the commission is commensurate with the risk. Senator ADAMS. But it is the risk of the ultimate investor; the ultimate investor takes the risk and the banker or distributor takes a larger commission in the instance where the investor takes a larger risk? Mr. DILLON. Senator, the banker does not get the commission on account of the risk or goodness of the loan. He gets his commission on account of the risk in the selling of the loan. He may be stuck with it and may not be able to sell it, and that is the basis for his commission. Senator ADAMS. But the fact is that the investor pays a larger spread on the less secure investment that he makes than upon the more secure investment? Mr. DILLON. 1 should not say that. I do not think the spread Senator ADAMS. Your 8 or 9 point spread is in the security which is unseasoned? Mr. DILLON. Yes; but it is, Senator, because of the uncertainty of your being able to sell the security. I t is the risk you take in the marketing. Not necessarily in the goodness of the security. Senator ADAMS. But the uncertainty of the sale depends upon the quality of the security itself, does it not? Mr. DILLON. I did not hear what you said, Senator. Senator ADAMS. I said that the question or the doubt, in greater or less degree, which may exist as to the salability depends certainly in part upon the quality of the security as having been seasoned or being new, or having elements of hazard involved in it ? Mr. DILLON. But the spread is not made on that basis. The spread that you take is not on the risk of the goodness of the loan. Your spread is based upon the work, upon the uncertainty, as to the ability to sell it. Because if you had any question of the goodness of the loan you would not make it at all; I mean a reputable banker would not. Senator ADAMS. There is a gradation in securities; some are better than others, necessarily. Mr. DILLON. Oh, yes; certainly. Senator ADAMS. NOW, is it not true that there is a bigger spread in those that are of the lower grade than those that are of the higher grade when they are distributed ? STOCK EXCHANGE PRACTICES 1629 Mr. DILLON. The difference in spread is in the salability rather than in the goodness of the security. Senator ADAMS. Yes; but there actually is the wider spread in the less attractive and less desirable security? Mr. DILLON. I do not like to keep saying it, but that is not the way we make the spread. Senator ADAMS. I know it is not the way you make the spread, but that is the way it happens to be when it comes to the ultimate purchaser ? Mr. DILLON. NO, sir; because sometimes the securities sold with the smallest spread prove to be the unhappiest investment. Mr. PECORA. They are the exception rather than the rule, are they not? Mr. DILLON. I would not like to be specific, but I think some of the greatest losses we have had in securities in the past few years have been in what we call the high-grade securities having small spread. There have been many disappointing investments in them. Mr. PECORA. HOW is the amount of spread determined in the first instance? That is to say, what factors are taken into consideration by the negotiating parties in fixing the spread ? Mr. DILLON. That is what the Senator is asking. Senator ADAMS. Yes. Mr. PECORA. Yes. Mr. DILLON. It is the risk we take in the selling of the security. We are buying that security. The risk we take in being left with those securities on our hands, our inability to sell them, that is how we fix our spread. Senator ADAMS. We had a gentleman before use here earlier in the year who illustrated some of his answers by reference to the medical profession. I wonder if the same illustration would apply here ? You know the surgeon is disposed to charge the patient more because of the greater seriousness of the operation; that is, the more hazard the patient takes the larger the surgeon's fee. Mr. PECORA. IS that a fair analogy? Mr. DILLON. NO; I should not say so, because if a banker were conscious that there was a risk in the goodness of the security he was selling to the ultimate investor, I do not think that banker ought to sell that security, no matter what his spread might be. Senator ADAMS. Of course, we are talking about the ones he is willing to sell. Mr. DILLON. If he thinks they are good, his spread is on the risk he takes in making sales. Senator ADAMS. But does not this follow, that there are other houses that will sell less desirable securities, what we might call second or third-grade securities, and you run into wider spreads in those cases? Mr. DILLON. I am glad you asked me that, Senator. Those of us that deal in the more seasoned securities, those of us that deal in securities of the higher qualities, as you might call it, are apt to be a little smug; we are apt to think that, taking our total issues, our record of mistakes is very small, and we take that as a virtue unto ourselves. As a matter of fact, I am not at all sure that the courageous financier who raises money for industries on securities such as we do not buy, and who raises money for industries where there are real 1630 STOCK EXCHANGE PRACTICES risks—I am not sure that he is not rendering just as great, if not a greater, service to the community and to his country as the smug, conservative bankers like ourselves. Take, for example, the automobile industry in your lifetime and in mine. We would have been " holier than thou " and would have said, " We don't sell that; that is a new industry. It is too speculative. We do not handle those securities." If you had relied on houses like ourselves you probably would not have had the automobile industry in this country. We would not have risked it, and we would have taken it upon ourselves as a virtue. There were men who would go out and take those risks and ask the public to give their money to a new industry that was risky, with the result that we do have a great industry grown up in this country which today, I think, is probably our greatest industry, and which with its affiliated industries, gives employment to many, many people. And we, the smug, conservative bankers, now are very pleased to handle automobile securities. Mr. PECORA. Once that safety has been established and the experimental stage passed? Mr. DILLON. Exactly We must not, in fairness, criticize the man who took the initial risks—although probably many went wrong. He is rendering a great service. The one thing we must be sure of is that when that security is offered, its nature is clearly stated, the risk in it, the fact that the investor may have a greater reward the greater the risk of loss. I, for one, am not willing to put on a lower plane than ourselves that financier who does take those risks, provided he states frankly and openly to the investors the nature of the investment, and I am not sure he is not rendering a greater national service than the smug fellows who sell the city bonds, first mortgage railroad bonds, and so forth. Senator ADAMS. All those bonds on which there are no defaults? Mr. DILLON. That is right. I do not think that is such a terrible word, Senator, because if we did not take risks we would not have had the country that we have. If there was not somebody who would take a risk, we should not have the automobile industry. We today are a bit smug. We would not handle airplane financing. We might not handle radio financing. I t is a new industry; but if every one took that attitude we should have no progress. Senator ADAMS. I am thinking about a fellow like Senator Townsend. He is the fellow that puts the money up and buys the security—rather than the fellow that persuades him to do it. That goes back to my illustration of the surgeon again. The banker is not supposed to be operated on. Mr. DILLON. That is another thing. In the selling of securities by a house like ours, a large percentage of our sales do not go to individuals. The great bulk of them go to institutions who are professional investors, who have departments and organizations to pass on investments—insurance companies, savings banks and institutions of that nature. They are the large buyers of securities. They make a research as they go into our indentures; they go very thoroughly into the matter. That is the bulk of the buyers of our securities, I should say—people of that nature. We are apt to think of the great buyers as individual investors. The great buyers of securities are STOCK EXCHANGE PRACTICES 1631 the institutions who are professional buyers. They get voluminous information on all issues. They even go over a lot of the work we have done ourselves. Senator ADAMS. It is a little bit surprising, is it not, that very frequently in recent years these careful buyers have made mistakes and have accumulated bonds that are now in default ? Mr. DILLON. I think they have gotten into the habit of relying on the larger banks; and I think some of the larger banks have become sellers of bonds rather than just advisers to the country banks. Senator ADAMS. The country banks are fully advised of that. I happen to be interested in a country bank. Mr. DILLON. That is right. I think that was probably one of the things that may have affected the advice that your correspondents may have given you—the mere fact that they may have had an affiliate selling securities. I think it would have been a help to you if there had been a statute requiring a bank each year to publish in detail its portfolio of investments, rather than just saying, " bonds ", so much, in the statement. If you had to publish the detail of what your bonds were, just that mere fact probably would have made your organization a bit more cautious, a bit more careful in scrutinizing the portfolio. Don't you think so ? Senator ADAMS. Of course, we have all accumulated a lot of experience. Unfortunately, my view of experience is that it is something that you get when it is too late to do you any good. Mr. DILLON. But let us try to use it not to do the same thing again. It is in that spiritSenator ADAMS. A lot of us have taken the pledge. Mr. DILLON (continuing). It is in that spirit that I am very happy to be here to answer your questions and to be of any help I can to see that we do not make the same mistakes twice. We have probably made as many as others have. I do not know anyone who has not made any. Mr. PECORA. With regard to the subject about which you last expressed your views, the advisability or desirability of banks publishing at regular intervals the contents of their portfolios, do you know of that having been done at any time in the past by any bank ? Mr. DILLON. NO ; I do not. Senator ADAMS. Insurance companies do that, do they Senator TOWNSEND. Some do; not all of them. Mr. DILLON (after conferring with associates). I am not? informed that the United States Trust Co. in New York does do that, but of their own initiative. They are the only ones that I know of. Mr. PECORA. DO you think that such a practice, if generally adopted by banks, would be helpful ? Mr. DILLON. I do. Mr. PECORA. Because it would serve to make banks and all others more careful and circumspect in their investments ? Mr. DILLON. I do. I think whoever is running that investment account, naturally if he has to come up with this portfolio to his president he would be a little more careful. If he has to go before his board he is still more conscious; and if he has to go before the public he naturally would use greater care, even though he thinks 1632 STOCK EXCHANGE PRACTICES he is using the greatest of care all the time. I think that is the ordinary human reaction. Senator ADAMS. In your investment trust did you publish the portfolio contents from time to time of the different trusts ? Mr. DILLON. We do so fully, and have right from the start, Senator. [After conferring with associates.] I am told that right in the beginning we did not, but soon after that we did; and at the time we did it there were certain suggestions that we, should not do it. Mr. PECORA. Coming from whom? Mr. DILLON. From various people; not only those interested in the trust, but from outsiders. Mr. PECORA. Can you give us an example? Mr. DILLON. I can give you an example of the sort of things they said; yes. Mr. PECORA. All right. Mr. DILLON. It was that if we published that portfolio it would just lead to a lot of trouble and wrangling, because in 1 year we might show we had stock of the X Y Bank or the X Y Company in such and such amounts, and the next time we published our statement it might show that the investment was materially reduced. Those people said it would have a bad effect, because people would think, " You are experts ", and if they saw you had gotten rid of a security they held that that would reflect unfavorably on the company, and we should have a lot of complaints and criticisms. As a matter of fact, we did not have that experience except in rare instances. Mr. PECORA. YOU think the sounder and safer policy from the public standpoint is for full disclosure to be made from time to time of investments contained in the portfolio, whether it be the portfolio of a bank or of an investment trust? Mr. DILLON. I should think it would give the public the maximum of information. I think that is the way to reestablish confidence; and I think probably our entire profession, if I may call it that, should feel that they should give the fullest information to the public. Mr. PECORA. When these suggestions, as you refer to them, were made to you with respect to publication of your portfolio in your reports to your stockholders, were they advanced to you with a view of deterring your investment trust from making such a publication ? Mr. DILLON. That might be the inference. They were certainly advanced to us, that we should stop and reconsider Mr. PECORA. Was it suggested that by your adopting that form of procedure you were establishing a precedent that was regarded unfavorably by bankers? Mr. DILLON. I should not want to say, by bankers; but we were establishing a precedent that might not be a wise practice. Mr. PECORA. Might not be wise for whom ? Mr. DILLON. For the people who issued the statement, I should think. Mr. PECORA. Not that it might not be wise for the investing public ? Mr. DILLON. NO. Mr. PECORA. AS a matter of fact, your opinion seems to be, as I have interpreted your words here, that such a thing is a wise and beneficial thing for the enlightenment of the investing public? STOCK EXCHANGE PRACTICES Mr. DILLON. It is. Mr. PECORA. Even 1633 though it might operate against the interests of the banker? Mr. DILLON. Personally I do not think it does operate against his interests. Mr. PECORA. But those were the suggestions made to you by others ? Mr. DILLON. That it might cause harm to the market in those securities, if the public saw that you owned them 1 year and did not own them the next. Mr. PECORA. It has not been your experience in conection with the publication of the portfolio of those investment trusts that those things have happened? Mr. DILLON. NO, sir; it has not. The result is that we have got a large list of satisfied stockholders, because they do know everything we do. They see a complete statement of our operations and a complete itemized list of our portfolio. Mr. PECORA. HOW frequently do you make those reports to your stockholders in the investment trust? Mr. DILLON. I think that portfolio is published once annually. I think the reports are made more often. The reports are semiannual, and the detailed portfolio annually. We are now considering giving the detailed portfolio quarterly, and we shall proceed to do that, I think, from now on. Mr. PECORA. While we are on that subject of making full disclosures of these facts to the stockholders, do you think that it would be in the public interest for corporations generally whose securities are distributed among the general public through listing and trading on the stock exchanges to issue to their stockholders reports of as complete a character as you have outlined here, at frequent intervals ? Mr. DILLON. YOU understand I give a large part of my time to those companies as well as to my firm. I am speaking now from the point of view of those investment companies which are large investors. There we often find that we cannot get sufficient of the right kind of information to allow us to form an intelligent judgment on this, that, or the other security. There are some securities that are even listed on stock exchanges that are widely dealt in concerning which we are unable to get the particular kind of information we want at the intervals that we would like to have it, in order to form a fair judgment. Mr. PECORA. And you have sought such information as a large stockholder in those corporations, have you? Mr. DILLON (after conferring with associates). Yes. There are specific instances where we have sought certain information, such as the gross sales of a company, where they said they felt it was not wise to give that out. Senator ADAMS. There are certain large organizations in the country that are so complicated and involved that no man has ever felt that he knew the inside of the story, are there not ? Mr. DILLON. We do not buy many of those securities. Senator ADAMS. But I say, there are some of those on the market, some stocks of that kind? Mr. DILLON. Probably. Senator ADAMS. YOU know that. 1634 STOCK EXCHANGE PRACTICES Mr. DILLON. I have not devoted my attention to that kind particularly, Senator. I think, Mr. Pecora, answering your question, that if corporations were required to give much more regular, frequent, and more detailed information, it would be highly desirable. Mr. PECORA. More detailed information of what kind? Mr. DILLON. Of every character. That would take some study, to make up just the points. Mr. PECORA. Just give us a comprehensive idea of what you have in mind. Mr. DILLON. I have in mind information of every nature—income accounts broken down into such details that you can see and know just where the income came from; gross sales in a way that you would know where they were made, whether they were increasing— every sort of information that you would have, practically, if you were operating that company, if you were sitting in its management. It would be a great help in forming your judgment. It would also give you a chance to form a true picture of the value of that security. You would not be so much affected by market quotations, by the public reaction to this and to that if you always had complete information of recent date. If your information is 8 or 9 or 10 months' old, you do not know what is going on; but if you can have that information quarterly, or, certain parts of it even monthly, I think it would be desirable. Mr. PECORA. Desirable to the general public and for the public interest ? Mr. DILLON. Yes; to the investor. Mr. PECORA. DO you think the dissemination of such information at frequent intervals, like monthly, would give the general public or that portion thereof which holds stock of corporations and whose securities are listed on the public exchanges, a body of knowledge, a mass of data, that would enable the investor to follow more accurately and more in conformity with the actual facts the intransic value of his investments ? Mr. DILLON. I should think that the more information he had, and the more regular the intervals, the better he would be able to form that judgment. My associates have just suggested that, of course, I do not mean a chemical company should give out secret formulas. Of course, I do not mean that. Mr. PECORA. In the light of your experience, Mr. Dillon, would you say that such a requirement imposed upon corporations whose securities are publicly listed would impose upon them any inconvenience or hardship ? Mr. DILLON. NO; I should not think it would. It might if you required too detailed or too frequent information—monthly, for example—but it certainly would not impose a hardship on them if it was at fair intervals of time, because they should have that information for themselves, for their own guidance, and I see no reason why it should not be given to the stockholders. Mr. PECORA. A stockholder, by virtue of being a stockholder, is, of course, a part owner of the corporation issuing the stock. Mr. DILLON. That is correct. STOCK EXCHANGE PRACTICES 1635 Mr. PECORA. And you think that the stockholders should have the advantage of such information currently supplied to them at frequent intervals. Mr. DILLON. I do think that. Mr. PECORA. What effect do you think that would have on market quotations ? Mr. DILLON. That is rather difficult to have an opinion on, but I should certainly think it would tend to steady those quotations, because if the investing public owning those securities had more detailed knowledge of the operations of the company, its profits and its progress, they would have fairer judgment themselves of the value of that security, and I should think it would tend to prevent the violent fluctuations that we have in securities from time to time. Whether it would prevent them I cannot say, but the tendency I should think, would be in that direction. Mr. PECORA. Would you say, as a matter of either observation or experience, that these violent fluctuations in the stock market are often the result of manipulation by pool operations ? Mr. DILLON. I think that is a difficult thing to say. By " pool" I suppose you mean a group of people buying and selling for profits, or to affect the market. Mr. PECORA. Mr. DILLON. Yes. That is very difficult to say, because unless the market is moving in the one direction or the other, it would be difficult, I should think, for any group to affect it artificially. But if the market is moving in one direction or another, I should think great activity in one security probably might make it move out of line with the market. Mr. PECORA, And quotations might be stimulated up or down by the operations of such a group. Mr. DILLON. That is possible. Mr. PECORA. Under existing conditions, so far as you know them, is there any way by which the investor could ascertain whether or not daily tradings in the stock of a corporation represent normal buying and selling, in a free and open market, or whether they represent, in part at least, the operations of a pool or syndicate? Mr. DILLON. I think that practically all the buying and selling is in a free and open market, but whether that buying and selling is being done by just a general scattered public or by the concentrated buying of a group, there is no way of knowing, that I know of. Mr. PECORA. Under those circumstances, would you say that it is possible for a group to manipulate prices, through their own buying and selling operations, so as to influence the general public either to buy or to sell at a given time ? Mr. DILLON. I do not think that is an easy thing to do. I think that has been done, and I think that is probably the object when those accounts are formed, but when you are accumulating stock, buying it, you have to have in mind always how you are going to sell it, and unless the market is moving with you, and the public have come in, I should think it would be a very difficult thing for that group to dispose of that stock afterwards. But if the market is moving in that direction, I should think a group like that might have a successful operation. 1636 STOCK EXCHANGE PRACTICES Mr. PECORA. DO not the operations of such a group have the effect, frequently, of stimulating the movement of the market? Mr. DILLON. In that particular security; yes. Mr. PECORA. IS it not possible, by that process, to create, temporarily, at least, false values through the medium of these market quotations ? Mr. "DILLON. YOU might stimulate prices rather than values. Mr. PECORA. By values I mean the values as represented in market quotations. I recognize that there is a distinction between value and market quotation. Mr. DILLON. Yes. Mr. PECORA. Mr. Dillon, in the portfolio of the investment trust called the United States and Foreign Securities Corporation, were there entered from time to time securities of companies in the issuance of which your firm, at some time or other, had been identified? Mr. DILLON. Yes. I think we bought some such securities from time to time. Mr. PECORA. Will you enumerate those securities as they occur to you now ? Mr. DILLON. I should have to look at the list (after conferring with an associate). Mr. Pecora, they say they think Mr. S. C. Ross of your staff has such a list that he made up, and I am willing to accept that, if you have it there, to save time. Mr. PSCORA. While they are looking that up, I will pass on to another subject. Mr. DILLON. Mr. Pecora, that would take a good deal of time, unless we can use the list you have, if you have one. Mr. PECORA. We can probably help you out with the information in the return to the questionnaire. The CHAIRMAN. Mr. Dillon, before you pass from this subject of giving information, which you think ought to be collected by corporations and given to their stockholders, for the benefit of their stockholders, largely, how about these organizations where the stockholders do not get a look-in, these trusts manipulated and managed by trustees? The stockholders have nothing to do with the management of the corporation. Mr. DILLON. I am not familiar with that sort of organization, Senator. You mean not a corporation ? The CHAIRMAN. Holding corporations, and corporations of that kind, operating where stock has been sold, and there are a large number of stockholders, but a few men, three or four, are the trustees, and they have power, as trustees, to manage and control the corporation without any regard to the stockholders. Mr. PECORA. Voting trustees ? The CHAIRMAN. Voting trustees. Mr. DILLON. There may be some particular condition or circumstance that makes that desirable. As a general practice I should think that would not be desirable. Mr. PECORA. What special circumstances, for instance, would in your opinion make that sort of thing desirable ? When I say " desirable " I mean from the standpoint of the investing public. Mr. DILLON. I cannot think of any at the moment, but there might be some particular situation where, xor a temporary period of time, it STOCK EXCHANGE PRACTICES 1637 might be desirable to have the control of stock vested in voting trustees for some particular reason at that time. Mr. PECORA. Where voting trust certificates are resorted to, to meet such special circumstances as you have in mind, do you think it fair to the investing public that tho,se voting trust agreements should be made for anything more that a short period of time ? Mr. DILLON. I think that would vary with the necessity of the situation. I do not think I could pass judgment Or express an opinion generally, because I do not know what particular situation they might be trying to handle, but I should not think they should be made to run for a longer time than is necessary to take care of the situation for which they were created. Mr. PECORA. There was some evidence introduced before this committee at one of its earlier sessions, as I recall it now, concerning a holding company which was organized, its stock issued and sold to the public, and listed on the public exchanges, which holding company acquired blocks of stock, principally of railroad corporations. The stock of this holding company, as I recall the evidence, was sold to the public, tied up in voting trust certificates that deprived the stockholder of any voice in the management of the company for a period of. 15 years. Can you conceive of any situation, Mr. Dillon, that would justify such a thing, from the standpoint of the investing public ? Mr. DILLON. I do not know the conditions surrounding the particular situation. Mr. PECORA. The issue I have in mind is the stock of the Pennroad Corporation. You are probably familiar with that in a general way. Mr. DILLON. I am familiar, in a general way, with the fact that the Pennsylvania Railroad did have such a company, but I was not aware of the fact that it was tied up with voting trust certificates, and I do not know the conditions which made that desirable. I am not familiar enough with that, Mr. Pecora, to express an opinion. Mr. PECORA. From the standpoint of your experience in the banking and investment field, can you conceive of any circumstances that would justify such a condition? Mr. DILLON. If I knew more about just what the Pennroad Corporation did, or why it was formed Mr. PECORA. It is a holding company which has acquired for its portfolio practically only railroad securities, and when it was launched and its stock issued and sold to the public, what were sold to the public were voting trust certificates. Mr. DILLON. What was the object in that? I do not know the detailed story or history of that company, so I hestitate to express an opinion about a specific case. Mr. PECORA. The object, perhaps, can best be told by those who were responsible for the creation of that condition. I am merely asking you, from the standpoint of your knowledge and experience in the banking and investment field, if you at this time can conceive of any circumstances that would justify a corporation in selling to the public millions and millions of dollars of its stock, but depriving the purchasers of that stock of any voice in the management or operation of the corporation for a period of perhaps 10 or 15 years. 1638 STOCK EXCHANGE PRACTICES The CHAIRMAN. The object and purpose of that, as It was given, was to centralize and concentrate the management in the hands of a few people. I think they had three trustees. Mr. PECORA. Three trustees, but they chose their own successors. It was a self-perpetuating body. The CHAIRMAN. A self-perpetuating body, to centralize the management of the corporation. Mr. DILLON. Without knowing the particular thing they were trying to accomplish, I do not feel that I can express an opinion. It sounds like an unusual arrangement. Mr. PECORA. I am not asking you to express an opinion, but I am asking you if you can conceive of any circumstances which, in your mind, would justify the issuance and sale of that sort of security to the investing public. Mr. DILLON. N O ; I cannot say why they did it, without knowing all the facts. Just as you ask me now, I see no reason for doing that, unless they had some reason about which I do not know. To have an opinion, I should have to know the whole subject, and what they were trying to accomplish. Mr. PECORA. Mr. Dillon, going back to the acquisition by Dillon, liead & Co. of the common stock of the United States & Foreign Securities Corporation, as brought out in the testimony yesterday, do you know whether or not any of the members of Dillon, Read & Co., subsequent to 1924, when this common stock was acquired, disposed of any portion of their holdings? Mr. DILLON. Ye,s. Mr. PECORA. When did that happen ? Mr. DILLON. There were some few sales in 1928, but I think the ones you are referring to were in 1929. Mr. PECORA. Did you have anything to do with any- of those transactions personally ? Mr. DILLON. NO ; I did not. Mr. PECORA. DO you know which of your associates did have? Mr. DILLON. Mr. Christie is familiar with it, as he handled the question in our office. Mr. PECORA. Then I will ask, Mr. Chairman, that we suspend the examination of Mr. Dillon at this point and proceed with the examination of Mr. Christie. Mr. Dillon, however, is not excused thereby from further attendance. I shall probably call you back to the stand later. The CHAIRMAN. IS Mr. Christie present? Mr. CHRISTIE. Yes, sir. The CHAIRMAN. YOU will please be sworn. You solemnly swear that you will tell the truth, the whole truth and nothing but the truth, regarding the matters now under consideration by the committee, so help you God. Mr. CHRISTIE. I do. TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OF THE FIRM OF DILLON, READ & CO., NEW YORK CITY Mr. PECORA. Mr. Christie, what is your full name and what is your address ? Mr. CHRISTIE. Robert E. Christie, Jr. My business address is 28 Nassau Street. STOCK EXCHANGE PRACTICES 1639 Mr. PECORA. Your residence? Mr. CHRISTIE. My residence is at Scarsdale, N.Y. Mr. PECORA. Are you a member of the joint stock company called Dillon, Bead & Co.? Mr. CHRISTIE. Yes, sir. Mr. PECORA. HOW long have you been connected with it? Mr. CHRISTIE. I have been connected with Dillon, Read & Co., and its predecessor, William A. Eead & Co., since July 1919. I have been a member of the association since January 1, 1927* Mr. PECORA. Also a stockholder and as a member ? Mr. CHRISTIE. NO, sir. I am not a stockholder. I have an interest in the profits, but I am not charged with the losses, and in addition to that I have a salary. Mr. PECORA. YOU know a corporation called the United States & Foreign Securities Corporation, do you not? Mr. CHRISTIE. I do. Mr. PECORA. YOU heard the testimony given by Mr. Dillon, the preceding witness, with respect to that corporation, its organizations and operations, before this committee ? Mr. CHRISTIE. Yes, sir. Mr. PECORA. Are you an officer of the United States & Foreign Securities Corporation ? Mr. CHRISTIE. Not now. Mr. PECORA. Have you been Mr. CHRISTIE. Yes, sir. Mr. PECORA. What office or in the past? offices have you held in that corporation ? Mr. CHRISTIE. I believe I held several at different times. I should have to look at the dates in order to see. The testimony yesterday, I believe, showed that I was the treasurer. Mr. PECORA. At one time. Mr. CHRISTIE. At one time; and probably the original treasurer. I think I was the treasurer at the time the corporation was formed. Mr. PECORA. What other offices have you held in that securities corporation ? Mr. CHRISTIE (after conferring with an associate). I was vice president of the United States & Foreign Securities Corporation from January 14, 1926, to December 10, 1930. I was treasurer from October 10,1924, to May 12, 1925. I was also assistant treasurer for a while, from May 12, 1925, to June 17,1926. Mr. PECORA. Were you also a member of the board of directors of that securities corporation at any time? Mr. CHRISTIE. From May 28, 1925, to July 13, 1925, I was a director, and again from March 2, 1927, to May 10, 1927. I believe that is all. Mr. PECORA. Are you familiar with the factual circumstances under which the capital stock, consisting of first preferred, second preferred and common stock of this United States & Foreign Securities Corporation, was issued and sold to the public? Mr. CHRISTIE. I am familiar with that in a general way. I heard Mr. Dillon's testimony yesterday, and according to that testimony I took part in some of those papers that were put in evidence yesterday. I am familiar with it in a general way; yes, sir. 1640 STOCK EXCHANGE PRACTICES Mr. PECORA. Well, as a result of the transactions whereby the capital stock of that Securities Corporation was disposed of, Dillon, Read & Co. or its associates acquired a large block of this stock, didn't they, the common stock? Mr. CHRISTIE. That is right. Mr. PECORA. W e r e a n y °f those shares of common stock actually acquired by you in the transaction ? Mr. CHRISTIE. By me personally? Mr. PECORA. Yes. Mr. CHRISTIE. None at that time. I did not acquire any stock in that company until January of 1927. Mr. PECORA. And when you acquired it in January of 1927, did you acquire it in the open market, or how ? Mr. CHRISTIE. NO, sir. I bought it from some of our associates. Mr. PECORA. From associates of Dillon, Eead & Co. ? Mr. CHRISTIE. Yes, sir. Mr. PECORA. HOW many shares did you buy ? Mr. CHRISTIE. Ten thousand shares—no; wait a minute. I am sorry. It was 5,000 shares. Mr. PECORA. Was that sold to you by your associates composing the legal entity of Dillon, Eead & Co., or by them as individuals? Mr. CHRISTIE. By them as individuals. Mr. PECORA. Did you or any of your associates in the firm of Dillon, Bead & Co. thereafter sell any of those shares of common stock in the open market? Mr. CHRISTIE. Yes; I sold part of mine. Mr. PECORA. Did you make that sale as a member of a joint or syndicate account that was formed in order to effect those sales and which was managed by the brokerage firm of Dominick & Dominick ? Mr. CHRISTIE. Yes, sir. But I think your previous question, perhaps, I answered too quickly. I think you asked me if Mr. PECORA (interposing). If you want to modify your answer^ you may do so. Mr. CHRISTIE. I think you asked me if I sold in the open market, or used some qualifying phrase. The sales were made through the account that you now refer to, to Dominick & Dominick. There was a group of ten or eleven of us, I think, that sold our stock to Dominick & Dominick. Mr. PECORA. Who composed that group of ten or eleven persons? Were they all associates of Dillon, Read & Co. ? Mr. CHRISTIE. Yes; they were all associates of Dillon, "Kead & Co. Mr. PECORA. Did they include all of the associates of Dillon, Read & Co., or only some of them? Mr. CHRISTIE. N O ; only some of them. My recollection is that there were about seven, including Mr. Dillon and some others, who did not sell any stock. Mr. PECORA. Can you give me the names of those who did sell through the medium of this joint or syndicate account that was managed by Dominick & Dominick? Mr. CHRISTIE. Yes, sir. Mr. PECORA. All right. Mr. CHRISTIE. There were two accounts through which stock was sold, both through Dominick. The names I have before me were STOCK EXCHANGE PKACTICES 1641 people who sold stock through both. That is, I think they were in both accounts, but of that I am not positive. Those names were Mr. C. N. Miller, Mr. H. G. Biter, I I I , Mr. W. Wilcox, Jr., Mr. B. H. Bollard, Mr. E. J. Bermingham, Mr. Deane Mathey, Mr. W. A. Phillips, The Beekman Co., Ltd., Mr. B. 0. Hayward, W. A. Bead, and myself. The CHAIRMAN. Making how many shares? Mr. CHRISTIE. The total number of shares that were sold through these two accounts was—I am told that the total amount was 74,198 shares. Mr. PEOORA. In both accounts? Mr. CHRISTIE. That is right. Mr. PECORA. Or in only one of them ? Mr. CHRISTIE. That is the total number that were sold to Dominick & Dominick. This group of gentlemen sold slightly more than that, but this is the amount sold to Dominick & Dominick. The CHAIRMAN. What price did they get for it ? Mr. CHRISTIE. The average price was 53.188. Senator TOWNSEND. Was that the total number of shares the group held? Mr. CHRISTIE. NO, sir. That was just a part of what they held. The CHAIRMAN. What had they paid for this stock? Mr. CHRISTIE. Well, I am not sure what all of their costs were. You had the cost of some of it in the testimony yesterday, and other stock was acquired later on, andMr. PECORA (interposing). Was that the stock that was purchased or acquired originally at 20 cents a share ? Mr. CHRISTIE. I believe that some of that stock was the original stock that had that nominal value or price placed upon it of 20 cents a share. Mr. PECORA. Didn't all of it come out of the block of 500,000 shares that wer^Tso acquired by the associates of Dillon, Bead & Co. in October of 1924? Mr. CHRISTIE. I believe that all of this stock might be traceable back to that block of 500,000 shares, because the other block of 250,000 was kept intact and is still kept intact. But I can only speak for myself. I bought stock, as I have said, in 1927, and that stock cost me $10 a share. Mr. PECORA. YOU bought that stock from your associates? Mr. CHRISTIE. That is right. Mr. PECORA. Associates in the firm of Dillon, Bead & Co.? Mr. CHRISTIE. That is right. Mr. PECORA. NOW, the stock that went into this syndicate account managed by Dominick &> Dominick was all stock that came from the block of 500,000 shares which was sold by the United States & Foreign Securities Corporation in 1924 upon its organization, to associates of Dillon, Bead & Co. for an aggregate consideration of $100,000, or 20 cents a share, wasn't it? Mr. CHRISTIE. It was from the 500,000 shares which were a part of the whole original operation of the issuance of the 750,000 shares to Dillon, Bead & Co. and the individual associates of Dillon, Bead &C 1642 STOCK EXCHANGE PRACTICES Mr. PECORA. YOU say it was a part of the whole. Wasn't it a separate part or a distinct part rather, or a step in the entire transaction ? Mr. CHRISTIE. The letters that you referred to yesterday, and which went step by step, showed the mechanics of the way that was carried out, that it was a separate step, although we naturally considered the 750,000 shares of common and the second preferred as one package, for which was paid $5,100,000. Mr. PECORA. But the 500,000 shares that were specifically mentioned in one or more letters that were put in evidence here on yesterday went not to Dillon, Kead & Co. as a separate legal entityy but were distributed in various proportions among the different associates of Dillon, Kead & Co., weren't they? Mr. CHRISTIE. Correct. Mr. PECORA. And it was that block of 500,000 shares that was separately paid for in the aggregate sum of $100,000 by the personal check of Mr. Horner, one of Dillon, Kead & Co. associates, wasn't it ? Mr. CHRISTIE. That is right. The CHAIRMAN. HOW much of those 74,198 shares was yours? Mr. CHRISTIE. TWO thousand nine hundred shares of it. That 2,900 shares is my part of a total of 81,552 shares rather than the 74,198 figure that you have, Senator Fletcher. Mr. PECORA. Are you familiar with the circumstances under which this joint or syndicate account was organized and formed some time in 1928, with Dominick & Dominick as managers, to sell this stock? Mr. CHRISTIE. Well, in 1928, in the fall of that year, either November or December. So far as I know, it was no joint account; the word has slipped me that you used to describe the account; but that account Dillon, Read & Co. had no interest in. So that account was not a joint account, nor did those individuals have a joint account, except that they granted options to the firm of Dominick & Dominick at the end of 1928. Mr. PECORA. Some time at the end of 1928, you say, some options were given by individual members of Dillon, Read & Co., who owned portions of this 500,000-share block; is that right? That-some time in the latter part of 1928 such options were given to Dominick & Dominick. Mr. CHRISTIE. Yes; previous to that, some time, as I say, in the fall of 1928—I would not be sure of the month—Dominick & Dominick came to us and told us that they had made a study of various investment trusts Mr. PECORA (interposing). When you say " they came to us",, whom did they come to ? Mr. CHRISTIE. They came to one of our partners. Mr. PECORA. Were you present? Mr. CHRISTIE. I do not remember whether I was present at the original conversation or not, but Mr. PECORA (interposing). Were you present at any of the conversations that led up to the formation or granting of this option? Mr. CHRISTIE. I think I was. Mr. PECORA. From your own personal knowledge, tell what you know about the conversation that led to the granting of those options, to Dominick & Dominick. STOCK EXCHANGE PRACTICES 1643« Mr. CHEISTIE. Well, my recollection is that Dominiek & Dominick came to us and said that they had made a study of various investment trusts, and that they liked United States & Foreign Securities Corporation; that they would like to be able to sell stock of that corporation to their clients and, naturally, at the same time they would like to be able to do it so that they could make something out of it. And they wanted to know if we had any stock that they could sell. Mr. PECORA. Did they say how they expected to make some money in any such transaction? Was it through earning the usual commissions by a broker, or was it through a participating interest? Mr. CHRISTIE. I believe that their idea was that they would buy a quantity of the stock at some price below the market. Mr. PECORA. From whom? Mr. CHRISTIE. Well, they wanted to know if they could buy it from us. And that was done, I am quite clear, partly through me^. at least I checked with our firm, and the firm had no stock for sale, and we told them so. Neither did any company that was* associated with us. Some time later, how much later now I could not recall, but I should imagine perhaps a week or so, they came back and were still insistent, or quite desirous of being able to get the stock to distribute, and asked us if we thought any individuals would be willing to sell any stock. At that time, to the best of my recollection, I personally checked with other members of the firm, with the result, as I said a minute ago, that some 7 or 8 partners were not desirous of selling any stock; and those 10 or 11 names that I have read oft were willing to sell portions of their stock. In my own case that stock represented a substantial amount of what little I was worth, and for the sake of diversification I was willing to sell a part of my stock. So that some time in December of 1928 options were given to the firm of Dominick & Dominick. There was a series of options, the first part starting in December of 1928, covered 30,000 shares of stock. As I remember it, the first lot was 10,000 shares at 4 7 ^ , and the second lot was 10,000 shares at 50, and the other lot was 10,000 shares at 55. Mr. PECORA. What was the date of that option agreement? Mr. CHRISTIE. What was what? Mr. PECORA. The date of that option agreement. Mr. CHRISTIE. The first option was dated December 20. Mr. PECORA. December 20, 1928? Mr. CHRISTIE. Yes. Mr. PECORA. At that time on what exchange were the shares of the United States & Foreign Securities Corporation listed? Mr. CHRISTIE. I believe they were listed on the New York Curb Exchange. I think they may have been also listed in Boston, but I am not sure about that. Mr. PECORA. What period of time was consumed in the conversations that Dominick & Dominick had with you and your associates that resulted in this option? Mr. CHRISTIE. I should think several weeks. Mr. PECORA. Several weeks. Dominick & Dominick was a firm of stock brokers, members of the New York Stock Exchange and the New York Curb Exchange? 175541—33—PT 4 8 1644 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. They are a well-known stock exchange firm, Mr. PECORA. And you say that it was one of their representatives that came to you initially or came to your associates initially and .discussed with you the desirability of entering into a market operation involving purchase and sale of the common stock of this investment trust? Mr. CHRISTIE. NO.; I didn't say that. Mr. PECORA. IS that a fair statement to make ? Mr. CHRISTIE. I do not think that is a fair statement, necessarily. Mr. PECORA. Just what did Dominick & Dominick propose to you and your associates that they would do or would like to do with you? Mr. CHRISTIE. I am clear that they came to us. Their approach was naturally to see if they could get any stock or if they could -get options on any stock. As I said, the first time that they did that we told them that we had no stock, that there was no stock for sale. Later on, on checking with individual members of the firm, these options that you speak of materialized out of those conversations. Mr. PECORA. Well now, you simply said they came to you and asked you if you had stock for sale, you told them there was no stock for sale, but later on you checked up and you found that some of your associates would be willing to part with some of their individual holdings. That was not the substance of the conversations that led to the granting of this option on December 20, 1928, was it? Mr. CHRISTIE. Most of the balance of the conversation had to do with their trying to convince us as individuals that they should be allowed to have some stock to distribute to their customers, to sell to their customers. They felt that our stock was selling out of line with other investment trusts. Mr. PECORA. By that do you mean that they said they thought this common stock was selling below its value, its market value ? Mr. CHRISTIE. Only in relation to other securities. This investment trust at that time, I don't remember the exact book value of it, was selling at perhaps twice or less than twice its book value whereas many other securities were selling at a much higher ratio, perhaps two, three times their book values. Mr. PECORA. Did you find as a result of those conferences with Dominick & Dominick that they had a better knowledge of the value of this stock of the corporation that your firm organized and of which you were an officer? Mr. CHRISTIE. A better knowledge than who? Mr. PECORA. Than yourselves, than you had, for instance? Mr. CHRISTIE. NO, sir. Mr. PECORA. They didn't tell you anything concerning the value of your stock which you didn't really know, did they ? Mr. CHRISTIE. NO. Mr. PECORA. AS a matter of fact, didn't you feel you knew more about it than they did ? Mr. CHRISTIE. Probably. Mr. PECORA. HOW do you account for Dominick & Dominick coming to you with such a proposition in the first instance ? Mr. CHRISTIE. Well, I account for that by the fact that Dominick & Dominick are a large firm, with a great many clients, and that STOCK EXCHANGE PRACTICES 1645 they are continuously looking for securities which they can recommend to their clients. They study the merits of a particular security and its market price in relation to the price of similar securities on the market, and in that field they probably know more than we do. They were looking for a stock which they felt would be worth more as time went on and which, at the same time, could be purchased by them, partly, at least, in bulk, at a price slightly below the market. They could offer such a stock to their clients at the market with some profit to themselves and with confidence that their clients would also make a profit. Now, the stock of this company did not have a very broad distribution. Ordinarily, in my opinion, a better market condition exists— I don't mean by that necessarily a, better market as to price—if a .stock is held by a large number of people. A stock has a better market if it is known favorably and people have had good experience with it over a period of years. This is of importance even to the holder of a stock who may think he is never going to sell it, because he cannot tell what circumstances may arise which would cause him to change his mind. Mr. PECORA. NOW, let's see if we understand you: Dominick & Dominiek came to you in the first instance, said they had made a study of the stock of this company, the United States & Foreign Securities Corporation, felt that it was selling out of line in the open market at that time by comparison with similar stock of other investment trusts, and also said to you that they felt that they could recommend it to their customers and that their customers if they acted upon their recommendation would be entitled to make a profit. Is that in substance what Dominick & Dominick told you ? Mr. CHRISTIE. That is in substance my recollection of it; yes, sir. Mr. PECORA. Dominick & Dominick does a commission business, doesn't it, in the exchange ? Mr. CHRISTIE. I believe so. Mr. PECORA. Whatever sales they made of stock which was obtained by them through the medium of this option that was given to them following these conversations by you and your associates were made on the exchange, weren't they? Mr. CHRISTIE. That I don't know. I don't know what they did with the stock, naturally. Mr. PECORA. Didn't they sell in the open market and through the medium of the exchange ? Mr. CHRISTIE. That I don't know. I believe you have a record of that. Mr. PECORA. Can you tell us whether or not they did by the charges they made ? Mr. CHRISTIE. If I had bought the stock from them as an individual, or any individual had bought it from them, I could tell from the slips whether or not Dominick & Dominick were acting as agent or principal, and the commission would disclose whether or not the stock had been bought on the exchange or direct. Mr. PECORA. YOU know that Dominick & Dominick is a brokerage firm and not dealers in securities ? Mr. CHRISTIE. I know they are. Mr, PECORA. They are commission brokers, aren't they? 1646 STOCK EXCHANGE PRACTICES'- Mr. CHRISTIE. I believe that they are largely & stock exchange* firm, but they have also done an investment business for years. Mr. PECORA. Are you familiar with the ledger account on thebooks of Dominick &> Dominick covering this syndicate account inUnited States & Foreign Securities Corporation ? Mr. CHRISTIE. The ledger account of Dominiek & Dominick's ? Mr. PECORA. Yes. Mr. CHRISTIE. NO, sir. Mr. PECORA. I show you this photostat copy of what purports tobe a letter addressed to Messrs. Dillon, Read & Co. by Dominick & Dominick under date of December 20, 1928. Will you be good enough to look at it and tell us if you recognize that as being a true and correct copy of the option agreement that you have referred to ? Mr. CHRISTIE (after examining document). Shall I give this to* the reporter, Mr. Pecora? Mr. PECORA. First answer the question as to whether you recognize that and identify it as being a true and correct copy of the so-called: " option " that you and your associates gave Dominick & Dominick. Mr. CHRISTIE. That is right. Mr. PECORA. I offer it in evidence and ask that it be spread on the record. The CHAIRMAN. It may be received in evidence and spread upon the record. (Option agreement between Dillon, Read & Co. and Dominick &: Dominick, dated December 20, 1928, was?y thereupon designated " Committee Exhibit No. 9, October 4, 1933 , see p. 1688.) Mr. PECORA. The option agreement reads as follows: Dated December 20, 1928: UNITED STATES & FOREIGN SECURITIES CORPORATION COMMON STOCK (NO PAR VALTJEL) Messrs. DILLON, READ & Co., 28 Nassau Street, New York City. DEAR SIRS : We wish to confirm that, in consideration of the formation by u» of an account, of which we shall be the managers with full discretionary powers, you hereby extend to us for and on behalf of such account, options to purchase from you an aggregate of thirty thousand (30,000) shares of United States & Foreign Securities Corporation common stock at prices and under conditions as follows: You will sell to us at any time or times, prior to the close1 of business February 20, 1929, all or any part of ten thousand (10,000) shares of the above stock at $47.50 a share in such amounts and at such times as we may call it; Provided we exercise our rights as managers to purchase all of the stock optioned to us at $47.50 a share, you will thereupon immediately extend to us the right to purchase from you, all or any part of ten thousand (10,000) shares additional of such stock at $50 a share, in such amounts and at such times as we may call it, within a period of 2 months from the date of the completion of our call of the entire amount of stock optioned us at $50 a share. Provided we exercise our right as managers to purchase all of the stock: optioned to us at $50 a share, you will thereupon immediately extend to us the right to purchase from you, all or any part of ten thousand (10,000) shares additional of such stock at $55 a share, in such amounts and at such times as we may call it, within a period of 2 months from the date of the completion of our call of the entire amount of stock optioned us at $50f a share. During the period in which these options exist you agree to loan us at our call, all or any part of twenty thousand (20,000) shares- of stock, a t the then prevailing market price. STOCK EXCHANGE PRACTICES 1647 Stock borrowed ©r called by us shall be deliverable upon one day's notice ^against payment of the amount due. It is understood that until all of these options have either been exercised or have lapsed, you have the right to place stock privately but that you will exercise your best efforts to prevent such stock from coming into the market. If it should be necessary, however, for you to dispose of stock in the market, _you agree to give .us 5 days notice before doing so. If the above is in accordance with your understanding, please so confirm by signing and returning to us the duplicate of this letter. Very truly yours, DOMINICK & DOMINICK. Confirmed and agreed to: DILLON, READ & 0®. Now, as you heard me read this so-called " option agreement " Mr, Christie, doesn't it strike you as being nothing more nor less than an agreement under which a pool for the buying and selling of this ^common stock was formed and agreed to be operated and conducted by Dominick & Dominick as managers thereof ? Mr. CHRISTIE (after conferring with associates). In the first place, I would like toMr. PECORA (interposing). Now, Mr. Christie, was it really necessary for you to get advice or confer with one of your associates ^before you can answer that question? Mr. CHRISTIE. NO. I didn't start the conference. Senator GLASS. I submit that the witness has a right to start a conference just as much as you have to confer with your associates. Mr. PECORA. I am not objecting to it; I am simply wondering if it was necessary for this witness, in view of his experience. Senator GLASS. Well, do you put it on the record, Mr. Pecora, whether it is necessary for you to confer with your accountants here ? Mr. PECORA. I do not think the situation is analogous, Senator 'Glass. Senator GLASS. It makes a difference from whom it comes. Mr. PECORA. All right, but if it is necessary for this witness with his experience to get advice and assistance from anyone else in order to answer that question I think the committee ought to know it. Senator GLASS. YOU ought to get it if it is necessary, and if it is necessary for you after 2 months of investigation to confer with your .associates here, you should put that on the record just as much as this. We ought to be fair all the way through. Mr. PECORA. I do not think the position of counsel and that of witnesses are analogous or comparable in any way. Senator GLASS. I think the truth is the truth whether it comes from a witness or whether it comes from your clients. Mr. PECORA. I have not objected, Senator Glass, to the witness getting the benefit of that assistance if he needs it, but I want to find out if he needs it. Senator GLASS. Well, the assumption is that he would not get it if he did not need it, or that you would not get it if you did not need it from your associates here. Mr. PECORA. I need all the assistance I can possibly get, Senator Glass, from my associates or any other persons, in the handling of this task, and I am glad to get it at any time. Senator GLASS. Well, I assume the witness is too. The CHAIRMAN. Let us see what the question is. Do you object to answering the question? 1648 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. Not at all, Senator. The CHAIRMAN. Let us go on and answer it. Mr. CHRISTIE. The question was, was it necessary Senator GLASS (interposing). And get all the information you want from your associates too. I shall insist upon that. Mr. CHRISTIE. It was not necessary, Mr. Pecora, for me to confer before answering your question. As I said a minute ago, I did not turn for any help or for a conference, but I don't mind making it clear on the record that the suggestion was that the fact that that letter was addressed to Dillon, Head & Co. should be made clear because of the fact that the options referred to covered stock that belonged to these individuals. As a matter of convenience the transaction was handled in the name of Dillon, Eead & Co. We had a memorandum account which your investigators have which shows the detail of how all the transactions were carried on our books. Mr. PECORA. Whose convenience was served by handling the transaction in the name of Dillon, Eead & Co., whereas it really was a transaction involving individual interests of some of the associates of Dillon, Eead & Co. ? Mr. CHRISTIE. I should say it was the convenience of those individuals. Mr. PECORA. Well, how was that convenience served by putting a transaction on paper and in the agrements in the name of Dillony Eead & Co. if it was not a Dillon, Eead & Co. transaction ? Mr. CHRISTIE. The firm of Dominick & Dominick otherwise would have had letters from 10 or 11 individuals covering their own separate stock. Mr. PECORA. They were dealing with the stock of these 10 or 11 separate individuals and not with the stock of Dillon, Eead & Co. as an entity, weren't they ? Mr. CHRISTIE. That is right. Mr. PECORA. HOW was the convenience of anybody served them by putting the transaction in the name of Dillon, Eead & Co.,, winch actually was not a party to it? Mr. CHRISTIE. It seemed to me much simpler to have one letter cover it. It was easier to handle in our account. Mr. PECORA. Was this account entered as a Dillon-Eead transaction on the books of Dillon, Eead & Co? Mr. CHRISTIE. I do not believe so. You have the ledger account^ and I think you will find that it showed clearly what individuals put the stock in and then the distribution of the proceeds later on. Mr. PECORA. Who agreed to the proposal embodied in this option agreement which has been offered in evidence and marked " Exhibit 9 " of this date in behalf of Dillon, Eead & Co. ? Look at the signature reading " Dillon, Eead & Co.," and tell us whose handwriting; it is in. Mr. CHRISTIE (after examining document). I am not sure nowy Mr. Pecora, whose firm signature that is. It was one of sav associates, one of our members. Mr. PECORA. Don't you recognize the handwriting of that signature ? Mr. CHRISTIE (after showing document to associates and conferring). It is a signature 4 or 5 years old, and I am just not sure wha STOCK EXCHANGE PRACTICES 1649 signed it. I am sure that some member of the association signed it. It is a firm signature. Mr. PECORA. YOU mean it is a signature of a member of thefirm?" Mr. CHRISTIE. Yes. Mr. PECORA. Or rather written by a member of thefirm? Mr. CHRISTIE. That is right. Mr. PECORA. YOU cannot tell us whose handwriting it is? Mr. CHRISTIE. I am sorry, sir, I cannot. Mr. PECORA. Will you pass it around among such of your associates as are gathered about you and see if you can get some enlightenment on that from any one of them ? Mr. CHRISTIE. Apparently it has been circulated. (Exhibit 9 was thereupon circulated among various persons present.) Mr. CHRISTIE. Mr. Pecora, there is no question about disclaiming that as the firm signature, but as to which of possibly 17 or 18 members at that time signed that name at this time—apparently a good many of us have looked at it and nobody Mr. PECORA. Nobody recognizes it as their handwriting? Mr. CHRISTIE. NO one is willing to say whose it is. Senator GLASS. Whether it is one member of the firm or another,. it is the firm's responsible signature, isn't it ? Mr. CHRISTIE. That is right, Senator; yes. Senator GLASS. The firm is responsible for it? Mr. CHRISTIE. Yes, sir. Mr. PECORA. It was not intended to make the firm responsible as a party to this agreement, was it, by those who negotiated it? Mr. CHRISTIE. It was clear to the firm just what was being done. There were some members of the firm who were not willing to sell any stock. When this was being done it was perfectly clear, as you say—an obligation on the firm to carry that out, but it was done as a matter of convenience to keep this account for these 10 or 11 men, whatever it was, together in one account; that was done in correspondence in the name of Dillon, Read & Co. Mr. PECORA. Tell us this, Mr. Christie, please. At the time that Dominick & Dominick made this proposal to you and some of your associates in Dillon, Eead & Co. to grant them this option, was the matter discussed among all of the associates of Dillon, Read & Co. with the view of finding out if the firm wanted to give such an option ? Mr. CHRISTIE. At the first instance when they first approached us—you say whether it was taken up with all of the members ? Mr. PECORA. Was it discussed as a proposition or proposal for and on behalf of the firm? Mr. CHRISTIE. Yes. Mr. PECORA. By all of the members of thefirm? Mr. CHRISTIE. That I could not say. Mr. PECORA. Well, you said that 10 or 11 of the members of the firm were agreeable to granting an option of some kind to Dominick & Dominick, and 7 or 8 of the others were not. Now was there a discussion of the matter among the members of the firm when Dominick & Dominick first came to you with this proposal for am option? 1650 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. There were at least two distinct proposals. One, that Dillon, Eead & Co. grant some options on some stock. That was declined. To the best of my recollection this other idea that some individuals might be willing to sell was not brought up or was not thought of at that time. And at a later date when we were approached again my recollection is that the suggestion came from them as to whether or not there would not be individuals, or whether "we knew or could find out where any stock might be obtained or for sale. At that time a careful survey was made and different individuals were asked whether or not they individually cared to sell ;any stock. That consideration was entirely separate and distinct from the first approach, which was as to the firm. Mr. PECORA. Well now, when the first proposal which related to the firm giving this option to Dominick & Dominick was first made to you by Dominick & Dominick was it discussed by thefirm? Mr. CHRISTIE. Yes. Mr. PECORA. Were all the members of the firm consulted about it ? Mr. CHRISTIE. That I could not say. Mr. PECORA. When you say it was discussed by the firm do you mean to indicate that all of the members of the firm discussed it, considered it, and rejected it as a firm proposition? Mr. CHRISTIE. N O ; because some were out of New York. Mr. PECORA. At that time the firm of Dillon, Read & Co. as a separate legal entity apart from its individual members, did have 250,000 shares of the common stock of this corporation, did it not? Mr. CHRISTIE. Well, in round figures that is approximately correct, Mr. PECORA. Yes. And Dominick & Dominick's proposal to get an option from the firm of Dillon, Read & Co. covering 30,000 or more shares could have been agreed to by the firm as a separate legal entity and the requirements of stock under the option made by them from this block of 250,000 shares, could it not? Mr. CHRISTIE. Well, to have given any options out of the 250,000 shares that you refer to naturally would have meant disposing of some of the stock of those individuals who did not want to have their own holdings reduced. I told you a few minutes ago that Mr. Dillon and several other stockholders were not willing to sell any of their stock. Mr. PECORA. Was this discussed with Mr. Dillon at the time? Mr. CHRISTIE. That I do not remember. I should imagine so. Mr. PECORA. Can you not tell us whether or not it was ? Mr. CHRISTIE. NO ; I can not. Mr. PECORA. He is the head of thefirm? Mr. CHRISTIE. Right. Mr. PECORA. The firm of Dillon, Read & Co. had 250,000 shares of this stock, apart from the 500,000 shares that had been distributed iiinong the individuals who composed the firm, did it not ? Mr. CHRISTIE. That is right. Mr. PECORA. And this request of Dominick & Dominick for an option covering 30,000 shares of that stock could have been agreed to by the firm of Dillon, Read & Co. out of the 2-50,000 shares that it held? Mr. CHRISTIE. It could have been. Mr. PECORA. It could have been? Mr. CHRISTIE. Yes. STOCK EXCHANGE PRACTICES 1651 Mr. PECORA. And Dominick & Dominick's original proposal to you was that the firm of Dillon, Bead & Co. do that very thing, was it not? Mr. CHRISTIE. AS I remember it, it was. Mr. PECORA. NOW, was that taken up by the members of the firm and considered as a business proposition made to the firm and disposed of accordingly? Mr. CHRISTIE. That is my recollection; yes. You are asking me about conversations and happenings of several years ago, so that I am trying to be careful in my testimony, that I tell you that to the best of my knowledge and recollection. Mr. PECORA. Then to the best of your knowledge and recollection the proposal of Dominick & Dominick was presented to the members of the firm, considered by them as a firm, and rejected? Mr. CHRISTIE. Eight. Mr. PECORA. All right. Then Dominick & Dominick learned somehow or other that 500,000 shares of this same common stock were owned in various amounts and varying amounts by the individual members of the firm, or some of them ? Mr. CHRISTIE. Well, I would not know whether they learned about the 500,000 shares or not. They came back with the suggestion that there might be individuals who would have stock, and would they be willing to sell? Mr. PECORA. Well now, was that taken up as a proposition of the firm, or was it taken up among the various individual members ? Mr. CHRISTIE. Among the various individual members. Mr. PECORA. Who canvassed the situation among the various individual members at that time for the purpose of ascertaining how many of them were willing to enter into such an option agreement with Dominick & Dominick? Mr. CHRISTIE. I think I did. Mr. PECORA. Did you then speak to all of the members of the firm about it? Mr. CHKISTIE. I think so. Mr. PECORA. Are you sure you did? Mr. CHRISTIE. Well, I hope so. I think they all should have been told of the suggestion that had been made and that they should all have the same opportunity to either reject it or to go along with any one who was selling stock. I have no tabulation or no* record to show whether I overlooked one or not. I do not suppose that I did. Mr. PECORA. Did you overlook the head of the firm at that time r do you think ? Mr. CHRISTIE. Not if he were in New York. Mr. PECORA. DO you recall whether or not you actually consulted the head of the firm ? Mr. CHRISTIE. No; I do not recall. Mr. PECORA. NOW, when the firm which, as you say met and considered the original proposal of Dominick & Dominick that the firm of Dillon, Bead & Co. give to them an option agreement covering 30,000 shares of this stock, turned down the proposal, for what reason did they turn it down as a firm ? Mr. CHRISTIE. I think that the controlling reason was that we considered the stock primarily as that 250,000 shares; in as much 1652 STOCK EXCHANGE PRACTICES as the balance of the stock belonged to these individuals they were free to do with that as they chose, and that the firm did not want to sell any of that stock. Mr. PECORA. But for what reason? What reason was advanced upon which the firm's determination was eventually based not to part with any of that block of 250,000 shares that was in the firm name ? Mr. CHRISTIE. In the first place some of the stockholders—or rather, some of the members who had a very substantial interest in that block were unwilling to sell any of their stock. That, in itself, it preclude selling out of that block of stock, because, as I said, they would reduce their holdings and their interest in that situation if stock was sold out of that block. Mr. PECORA. Were Dominick & Dominick told after the rejection of the proposal which they made to the firm, that individiial members of the firm had large holdings of this common stock in their individual capacity as distinguished from their position as members of the firm of Dillon, Eead & Co. ? Mr. CHRISTIE. Not as far as I know. They may or may not have been told. But I do not recall telling them. Mr. PECORA. The fact that these 500,000 shares were originally acquired in various proportions by individual members of the firm of Dillon, Eead & Co. back in October 1924 was not publicly known, was it? Mr. CHRISTIE. Well, it was publicly known that the 750,000 shares had gone to Dillon, Eead & Co. and its associates. I think that was very generally known. Mr. PECORA. IS it not a fact that the circular and advertisement which accompanied the offer of the first preferred stock to the public merely said in that respect that Dillon, Eead & Co. had purchased for $5,000,000 the 50,000 shares of the second preferred stock, and that 750,000 shares of the common stock would go to Dillon, Eead & Co. and to the organizers, without disclosing the identity of the organizers ? Mr. CHRISTIE. Unless you want me to refer to the circular to testify in some detail as to that language—as I recall it the circular we put in evidence yeterday substantially had the description that you have given. The CHAIRMAN. Would it have made any difference to Dominick & Dominick whether the stock that they were attempting to acquire came out of the 250,000 shares that Dillon, Eead & Co. owned, or out of the other 500,000 shares? Mr. CHRISTIE. I should not think it would make the slightest difference. The CHAIRMAN. It would not have made any difference to them whether it came out of the 250,000 shares or out of the 500,000 shares that the individuals owned ? Mr. CHRISTIE. I cannot see, Senator, what difference it would make to them where the stock came from. The CHAIRMAN. The fact is that the control of 750,000 shares, three fourths of the shares issued, would give a great opportunity, would it not, for manipulation in case one desired to do that ? STOCK EXCHANGE PRACTICES 1653 Mr. CHRISTIE. I do not quite follow that, Senator. Do you mind if I have the stenographer read that question ? The CHAIRMAN. If one concern owns and controls three fourths of the capital issue of the common stock of the corporation, does not that ownership give a power for manipulation of the market that otherwise would not exist ? Mr. CHRISTIE. Well, rather indirectly, I think. Only because the balance that is outstanding is perhaps relatively small. If they want to buy stock and have it go up, they know exactly how much they would" have to buy, if they have to buy at all, to put it up. Whereas if it was the other way around, the threat of the majority of the stock going on the market naturally is pretty indefinite as to what might happen. Senator ADAMS. Mr. Christie, in the letter which made up this option there was an agreement to keep the stock, so far as they could, off the market. That is, your group—whether it was Dillon, Read & Co. or individual members of the group—Dillon, Eead & Co. signed the option agreement to do their best to keep the stock off the market. They reserved the right to make private sales, but agreed to not put it upon the market, with the idea, of course, of protecting the market for Dominick & Dommiek. So that the fact that Dillon-Kead held the large block and agreed to keep it off was a very material circumstance in preserving that market ? Mr. CHRISTIE. Quite. And that intention was expressed in that letter. The CHAIRMAN. In other words, only one quarter of the stock, .25 percent of it, was in the hands of the public? Mr. CHRISTIE. That is right. The CHAIRMAN. All the rest of the stock was in your hands ? Mr. CHRISTIE. Yes. Senator ADAMS. But the letter was intended to obligate Dillon, Head, as a concern, to keep stock off the market, as well as the individuals, was it not? Mr. CHRISTIE. That is right. But that was a very obvious and a very easy intention to comply with inasmuch as those members who were not included in this transaction did not want to sell any of their «tock in any event, and to a large extent still hold that stock. Senator ADAMS. At the same time, Mr. Christie, it did not require the unanimous consent of the stockholders and associates of Dillon, Read in order for your company to sell. That is, you formed a joint stock association, and if your managing group, your officers, saw fit to sell it would not make any difference that some stockholder or some member did not want to sell; that would not preclude a sale. You made the statement a while ago that the fact that some members did not want to sell would preclude the company from making the l Mr. CHRISTIE. N O ; but when you have the situation where the head of your firm and some of your principal executive officers are those •who do not want to sell, that is rather controlling. Senator ADAMS. But if Mr. Dillon had decided that he wanted to sell, the fact that some other member did not want to sell, would not have prevented the sale from being made ? 1654 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. Well, technically no. But I think that we try to run our picture and we do run it so that if there is any great difference of opinion the stock would not be sold. I think Mr. Dillon: would be very much influenced by Senator ADAMS. But it does not require a unanimous verdict in every case in order to do business? Mr. CHRISTIE. It does not. Mr. PECORA. Mr. Christie, do you recall what the market quotation was for this stock on the date of this option, namely, December 20,1928? Mr. CHRISTIE. I can tell you I think in a minute. It was around $54 a share, I am told. Mr. PECORA. That was the open market quotation on the Exchange, it then being listed on the New York Curb Exchange, was it not? Mr. CHRISTIE. What is that ? Mr. PECORA. Around $54? Mr. CHRISTIE. Yes. Mr. PECORA. In this option agreement you and those of your associates comprising ten or eleven in number who agreed, although in the name of Dillon, Read & Co., to give this option to Dominick & Dominick, undertook to deliver 10,000 shares of your holdings to Dominick & Dominick at any time between December 20, 1928, and February 20, 1929, at the price of $47.50 a share, which was considerably below the then market, did you not ? Mr. CHRISTIE. On the first block of 10,000; shares at that price— there were three Mr. PECORA. But I will take them up one after the other. Mr. CHRISTIE. The average of all of them was a little over 50. Mr. PECORA. I am taking them up as the contract itself was made out. You agreed, first, to sell Dominick & Dominick any or all of 10,000 shares between December 20, 1928, and February 20, 1929, at the price of $47.50 a share, did you not ? Mr. CHRISTIE. That is right. Mr. PECORA. And when you made that agreement,, the public market quotation was around $54 a share? Mr. CHRISTIE. That is right. Mr. PECORA. What prompted you and your associates who agreed to this option to enter into it, in view of the fact that you could havesold such of your holdings as you wanted to sell on the open market for considerably more than the option price to Dominick & Dominick? Mr. CHRISTIE. YOU refer, and I have no objection to it, to taking the option step by step. There are other factors, however. The three options involved would total 30,000 shares at prices which I believe averaged something a little over 50. They were a consideration. In other words, Dominick & Dominick were not talking about taking an option of 10,000 shares at $47.50, and that is all. They were talking about 30,000 shares, 10,000 shares at $47.50, which ran for 2 months, with another option that they could take up or which would run for 2 months beyond the time they exercised the* first option, and then the third step, with another 10,000 shares at $55 running 2 months beyond the exercise of the second option. That is as I reqall that. Mr. PECORA. This option was split up into three parts. On the first part you agreed to sell to Dominick & Dominick 10,000 shares STOCK EXCHANGE PRACTICES 1655 between December 20, 1928, and February 20, 1929, for $47.50 per ishare. In the second part you agreed to deliver to Dominick & Doininick on their call another 10,000 shares within the next 2 months period from February 20, 1929, to April 20, 1929, for $50 a share; and the third part of the option agreement called for your delivering to Dominick & Dominick within the next 2 months period, namely, from April 20, 1929, to June 20, 1929, another 10,000 shares at $55 a share. That is correct, is it not ? Mr. CHRISTIE. NO. I think that is only assuming that they did mot exercise the options until the last day of each option. Mr. PECORA. That is assuming that they exercised their options within the prescribed periods of time ? Mr. CHRISTIE. Well, at the maximum amount of the time. Mr. PECORA. Yes. Mr. CHRISTIE. I would appreciate it if you would correct me, but :as I remember that letter, if they exercised the first option on January 20 instead of on February 20, the period of the second option would have been from January 20 to March 20 instead of the particular months that you put into your question. Mr. PECORA. But the option gave them the right to call for the ;stock, for the first 10,000 allotment, gave them the right to call for it, during all of the 2 months period? Mr. CHRISTIE. That is right. Mr. PECORA. And with regard to the second block of 10,000 shares, the option likewise gave them the right to call for that and draw it down from the associates who entered into this agreement, in another two months time f rom the date of the exercise of the previous option ? Mr. CHRISTIE. Eight. Mr. PECORA. And the agreement with respect to the delivery to them of the third block of 10,000 shares again gave Dominick & Dominick .2 months' time within which to exercise that portion of the option, did it not? Mr. CHRISTIE. That is right. Mr. PECORA. SO it was possible for Dominick & Dominick in exercising this option to draw down these 30,000 shares over a full period of 6 months' time from the date of this option agreement ? Mr. CHRISTIE. That is right. Mr. PECORA. And you and your associates obligated yourselves by this agreement to sell and deliver to Dominick & Dominick an aggregate of 30,000 shares over a period of possibly 6 full months' time from December .20, 1928, at prices averaging below what was the market price for this stock on the public exchange on December 20, 1928, when this agreement was entered into. Is not that correct? Mr. CHRISTIE. The .average was slightly below the market at that time; yes. Mr. PECORA. It was several points below; not slightly below. Mr. CHRISTIE. Three or four points below. Mr. PECORA. That is not a slight difference, is it—3 or 4 points? Where the security is selling for around $50, is that a slight difference ? Mr. CHRISTIE. With the stock selling around 50, it is 6 percent. I do not know who is to decide whether it is slight or great. The :stock was selling around about 54 at that time, and these options averaged a little over 50. 1656 STOCK EXCHANGE PRACTICES' Mr. PECORA. What were the considerations that prompted yon to enter into this option agreement ? Mr. CHRISTIE. The considerations that prompted me personally to enter into it were that I had more of that particular stock than I had of any other stock, and the stock was, I think, about one third of the total amount that I had, and I thought that I would be willing to sell a part of it for the sake of diversification. Mr. PECORA. YOU could have sold it on the open market for your own account? Mr. CHRISTIE. I could have; but up to that time it had not occurred to me to do it. We got together with our associates and talked it over. Those of us that did go in felt this was a perfectly proper thing for us to do. It was our stock to do with as we pleased^ and we felt that, as a group, it was not harmful to any of our associates, and if we wanted to sell it to Dominick & Bominick by giving them options slightly below the market, as you say Mr. PECORA. NO ; I didn't say " slightly below the market." That is what you said. Mr. CHRISTIE. I beg your pardon. Senator GLASS. AS a matter of fact, is not the plainer and shorter answer that you wanted to make money ^ and that that is what all of these things are done for ? Mr. CHRISTIE. I wanted to sell that stock, Senator Glassv Senator GLASS. YOU wanted to make money on it? Mr. CHRISTIE. Not to make money on it. I had a profit in it at the time; but the sale of the stock was more for the purpose of diversification than it was to register the profit that I had at that time. Senator GLASS. YOU did not mind making money ont your diversification, did you? Mr. CHRISTIE. I have never minded making money. Mr. PECORA. HOW many shares of your own personal holdings- did you put into this option agreement? Mr. CHRISTIE. I think it was 2,900 shares. Mr. PECORA. Mr. Christie, if you had wanted to sell for the purpose of making a profit these two thousand-odd shares of your1 personal holdings that you put into this option agreement, you could have sold it at that time in the open market for a good deal more than the price you were getting over a six months period of time under this option agreement, could you not?' Mr. CHRISTIE. It does not necessarily follow. I might have. The fact that the stock, you say, was selling at 54 would indicate that there were orders in the market to buy my stock, and if I wanted to disregard my associates or sell ahead of them, perhaps 1 could have gotten 54 for it; I cannot tell. Mr. PECORA. Was there any understanding of an informal or other character among the associates not to part with any of their individual holdings without the knowledge and consent or approval of the others? Were you bound together by any such understandings either express or implied? Mr. CHRISTIE. NO. I think a few had sold previous to this time* Mr. PECORA. Without consultation with the associates^ Mr. CHRISTIE. I think so. STOCK EXCHANGE PRACTICES 1657 Mr. PECORA. They felt free to do it and they were free to do it,, were they not ? Mr. CHRISTIE. Yes; they were free to do as they pleased. Mr. PECORA. And you were free, if you wanted to sell 2,000 shares at a price on the open market that would have given you a profit, to make such a sale, were you not ? Mr. CHRISTIE. Yes. Mr. PECORA. If you were willing to put these two thousand and odd shares of yours into this syndicate arrangement in order to make a profit, why didn't you sell them directly and individually in the open market at the time when the stock was selling for $54.50? Mr. CHRISTIE. I don't know. Perhaps I should have. Senator GLASS. I S it not a fact that when a pool handles stock through a responsible stock brokerage concern they are more apt to get a better price for it than otherwise ? Mr. CHRISTIE. In this case our price was not dependent upon what they did with the market. Our price was fixed by theses options. Senator GLASS. But they were willing to take that option because they could operate a pool and sell the stock, were they not? Mr. CHRISTIE. If we had made that kind of Senator GLASS. I am asking questions now that I do not know anything about, and there is scarcely a member of this committee,, not more than one, that knows a thing in the world about what Mr. Pecora wants to prove here—the thing which I have protested against from the first. The committee ought to know exactly what he is asking so that they may intelligently ask questions. And while I am firing off now, I would like to ask Mr. Dillon if he would feel that he could morally or legally repudiate that proposition [handing a paper to Mr. Dillon]. Mr. DILLON. NO ; that is an obligation of Dillon, Bead & Co. Senator GLASS. Exactly. It doesn't make any difference who signed it; it is Dillon, Eead & Co. Mr. DILLON. It does not make any difference whose stock it was. It is Dillon, Read & Co.'s obligation to deliver the stock to Dominick & Dominick under the terms of that letter. Senator GLASS. SO far as I am concerned, it is not necessary for me to put on record my opposition to pools. We long ago disclosed the fact that many of them were conducted in a rascally way, that they employed specialists, or when they did not employ specialists, they employed the specialists' way, and they conduct them in a rascally way, and I am opposed to pools. I would break them up if I could do it; and I think I could if they would let me do it. I do not mean, if the pools would let me $o it, but if Congress would legislate sanely. But I would like to know what all this is about. Mr. DILLON. This letter, Senator Glass Senator GLASS. I do not want to come in here like an idle spectator and sit around the table and not know what is going on, not know what is attempted to be proved, and whether it is something that might be corrected by legislation or that could not be corrected by legislation. 1658 STOCK EXCHANGE PRACTICES Mr. PECORA. Senator, I outlined to the members of the subcommittee in charge of this investigation, at an executive session which was called by its chairman and which was attended by all of the members, with the exception of yourself, yesterday morning, in advance of the public hearing. Senator GLASS. I was not in town yesterday morning, but I was :in town on Monday. Mr. PECORA. I was in town on Monday and I had a 2-hour talk with the chairman of the committee. Senator GLASS. YOU did not have it with me and did not have it ,at an executive meeting of the committee. Mr. PECORA. That was held yesterday morning. Senator GLASS. If you will examine the records of the committee you will see that a textual resolution is there requiring that counsel shall come beforehand and state to the members of the committee what it is he proposes to prove, whether it is something that may be corrected or not; and that ought to be done, Mr. Pecora. It ought to be done in justice to the members of the committee. The members of the committee ought not to sit around here in utter ignorance as .any spectator here, as to what is going on and what you expect to prove. Mr. PECORA. I have on every occasion when I was so requested, come on here and consulted with members of the committee and apprised them of the work that the investigating staff was doing. The CHAIRMAN. The meeting of the subcommittee was called on yesterday morning for that purpose. Mr. Pecora was here and attempted to comply with the resolution. The Senator from Virginia had an election in his State and could not be present, but the subcommittee was called regularly. Senator GLASS. I asked my colleague on the right here, who is a lawyer, if he knew what all this was, and he did not know. Mr. PECORA. I did not understand that it was expected that I was going to place before the executive meeting all of the evidence that I had been collecting and was going to introduce at the public hearing. That would have involved a duplication of time and work. Senator GLASS. YOU should not impute any such nonsense as that to me, Mr. Pecora. Mr. PECORA. YOU say you do not understand what the evidence is that is being introduced. You could not have understood it in that way unless I had given it all to you beforehand, which I do not think you had in mind my doing. Senator GLASS. My understanding is a little superior to your •imagination. I could have understood if you had come before the (Committee and told us just exactly what you proposed to do. Mr. PECORA. I did that yesterday morning, sir, in executive session called by the chairman of the committee, which I attended. I was responsible for my own attendance at that executive session and for no other individual's, and I accepted my responsibility. The CHAIRMAN. Let us go on. Senator GLASS. I intend to insist upon carrying out the order of the committee made at the largest meeting of it that has been held, and that is that counsel shall explain to the committee in executive session just what he proposes to adduce. STOCK EXCHANGE PRACTICES 1659 Mr. PECORA. I did that yesterday morning, sir, and I placed some emphasis on the very evidence that is now being adduced. Senator GLASS. Yes. Well, I unfortunately was not there. Mr. PECORA. I hope the Senator does not hold me responsible for that. The CHAIRMAN. It is -now 1 o'clock, and we will take a recess until 2 o'clock. (Whereupon, at 1 p.m., a recess was taken until 2 p.m.) AFTERNOON SESSION The subcommittee reconvened at 2:10 p.m., Wednesday, October 4,1933, at the expiration of the noon recess. The CHAIRMAN. The committee will come to order. Proceed, Mr. Pecora. TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OP THE FIRM OF DILLON, READ & CO., NEW YORK CITY—RESUMED Mr. PECORA. Mr. Christie, you will probably recall that just prior to the taking of recess today I asked you a series of questions with a view to finding out from you why you did not sell your two thousand-odd shares of the common stock of the United States & Foreign Securities Corporation which you put into this option arrangement with Dominick & Domiftick in the open market, and thereby have obtained a price for them higher than that which you were to receive under this option agreement. , I do not recall that you have as yet answered that question specifically. Will you do so please? Mr. CHRISTIE. Yes, sir. I remember you asked me that question, and I think I said I might halve sold my own stock, if that were all that had been involved, on the market at a higher price than the option price, but this was a grouping of some associates of mine, with a total of 30,000 shares, which obviously, if just thrown on the market, would not have been sold, probably, at the quoted price at that date. Mr. PECORA. I think you did make one answer to the question, the substance of which was that it did not occur to you to sell your two thousand and odd shares in the open market. Was that the only reason why you did not so dispose of them in the open market? Mr. CHRISTIE. NO ; I meant by that that I had not been selling any stock up to that time, and had not offered it 100 shares at a time, or piecemeal, and that frankly I had not decided to sell any of it until a number of us in this group decided to sell together. Mr. PECORA. YOU know what is meant by the term " pool operation " as applied to stockmarket activities, do you not? Mr. CHRISTIE. I do not know that I could give a very good definition of it. Mr. PECORA. YOU know what is conveyed by the use of that term, do you not? Mr. CHRISTIE. TO me it sounds like some kind of a joint market operation, buying and selling securities. 175541—33—PT 4 9 1660 STOCK EXCHANGE PRACTICES Mr. PECORA. YOU have heard the term " pool activities " or " pool operation" applied to stockmarket transactions, have you not? Mr. CHRISTIE. Yes; I have. Mr. PECORA. What do those terms convey to you—referring to what kind of an operation ? Just tell us in your own way. Mr. CHRISTIE. Well, I believe that they might work either with the idea of distributing stock or of accumulating stock. Mr. PECORA. And unloadiiig it at a higher price ? Mr. CHRISTIE. Or distributing or selling it at a higher price. Mr. PECORA. YOU have heard of pool manipulations, have you not? Mr. CHRISTIE. Yes; I have heard of them. I am not familiar enough with them, though, to describe them. Mr. PECORA. AS one engaged in the business of investment banking, I presume you frequently read the financial pages of the daily press. Mr. CHRISTIE. Yes. Mr. PECORA. Particularly in the city of New York, Mr. CHRISTIE. Yes. Mr. PECORA. Don't you come across, very, very frequently, references to pool operations and pool manipulations in referring to stockmarket activities? Mr. CHRISTIE. Yes. Mr. PECORA. What do those terms mean to you when you read them? Mr. CHRISTIE. AS a matter of fact, they mean very little to me. # They do not interest me. Mr. PECORA. DO you think the financial writers who employ them are using terms that are enigmas to bankers ? Mr. CHRISTIE. NO, sir. I do not have any reaction when I read that in the newspaper at all. Mr. PECORA. What do they mean to you when you read in the financial pages of the press of the activities or operations of pools in the stock market? For instance, you sometimes read, do you not, that a pool is operating in the stock of the ABC Company, do you not? Mr. CHRISTIE, Yes. Mr. PECORA. What does Mr. CHRISTIE. It means that me&n to you ? that some group of individuals are buying and selling that stock, and are active in the purchase and sale of it. Mr. PECORA. Where such pool operations are so referred to, you know, do you not, that those pool operations are usually conducted by those who compose the pool, on the basis of their having for their benefit in such operations an option agreement with the owners or holders of large blocks of the stock that they are dealing in, so that they know at any time during the pool operation that they can depend upon the delivery to them of a certain number of shares of that stock? Mr. CHRISTIE. I am not at all familiar with the mechanics of any pool operations. I should assume that they might either buy stock and accumulate stock for the pool, or they might do it by way of an option. Mr. PECORA. They frequently do it by means of an option. Mr. CHRISTIE. I assume so. Mr. PECORA. Given to them by holders of sufficiently large blocks of the stock to protect them in their pool operations. STOCK EXCHANGE PRACTICES 1661 Mr. CHRISTIE. Very likely. Mr. PECORA. Having in mind the letter which has been put in evidence here, known as " Committee's Exhibit 9 ", and which constitutes the option agreement that was entered into by you and your associates who were participants therein, with Dominick & Dominick5 would you say that this letter indicates that Dominick & Dominickhad formed a pool to buy and sell the common stock of the Unitedl States &> Foreign Securities Corporation at the time this optiom agreement was made? Mr. CHRISTIE. N O ; I would not say that that indicated that they were necessarily going to carry on any pool operation. In the conversation that led up to it, as I said this morning, a good deal of emphasis was put on the fact that they had a large clientele that they would like to distribute this kind of stock to. We were not— that group of individuals were not participants in the account of Dominick & Dominick. Our sole participation in that business waa the granting of those options. Mr. PECORA. Why were you willing to tie up your stock in this; kind of an option agreement for a period of possibly 6 months ? Mr. CHRISTIE. SO as to have a better opportunity of distributing the total amount of 30,000 shares. Mr. PECORA. But you at that time had not been especially anxious to sell any of your holdings, as I understood your testimony this morning. Mr. CHRISTIE. That is right. Mr. PECORA. What do you think the interest of Dominick & Dominick was in seeking to get you people to enter into this option agreement with them ? What do you think they were trying to do ? Mr. CHRISTIE. SO that they could carry on a transaction profitably to them. Mr. PECORA. HOW would they be enabled to carry on such a transaction on a profitable basis, as distinguished from buying and selling; or trading in the open market? Mr. CHRISTIE. With these options they were protected at the price of the options, so that any sales that they made at a price above that would represent their profit. Mr. PECORA. Did it not all indicate that they were managing or conducting a pool operation? Mr. CHRISTIE. On the basis of that letter, I do not think that that necessarily indicates that they were, although whether they did or not I do not know. Mr. PECORA. Well, let us see. In the opening paragraph of the letter they say to you as follows : "We wish to confirm that in consideration of the formation by us of an account of which we shall be the managers with full discretionary powers, yoj* hereby extend to us, for and on behalf of such account, options to purchasefrom you an aggregate of 30,000 shares of United States & Foreign Securities Corporation common stock at prices and under conditions as follows." From that, am I justified in inferring that in the course of the conversations which Dominick & Dominick had with you and your associates preliminary to the making of this option agreement, they informed you that they had formed or were going to form an account of some kind, of which they were to be the managers with full discretionary powers ? 1662 STOCK EXCHANGE PEACTICES Mr. CHRISTIE. That is right. In the formation of that account, we knew that they had other houses associated with them in the account. Mr. PECORA. Did they tell you for whose benefit they were forming and were going to operate this account ? Mr. CHRISTIE. It would naturally be for their benefit. Mr. PECORA. For whose benefit? Mr. CHRISTIE. For the participants in their account. Mr. PECORA. Did they tell you who those participants were ? Mr. CHRISTIE. I don't believe so. ]\lr. PECORA. Was it of any interest to you to know who they were? Mr. CHRISTIE. NO. The CHAIRMAN. Did they have any other Mr. CHRISTIE. That I do not know. Mr. PECORA. YOU knew, did you not, as stock in the corporation ? an officer of the United States & Foreign Securities Corporation at the time of the granting of this option to Dominick & Dominick, that 250,000 shares of the common stock of that corporation had been distributed to the general public back in October 1924 in connection with the purchase by the public of the 250,000 shares of the first preferred stock of this corporation? Mr. CHRISTIE. I knew about the 250,000 shares that you speak of. Whether the dates we had this morning regarding the time I was an officer of the corporation coincided with the date of this option, I do not remember. At the beginning of your statement you asked me if I knew that, being an officer at the time the option was granted. I am not sure whether I was an officer at that time or not. Mr. PECORA. YOU had been an officer prior to December 20, 1928, had you not ? Mr. CHRISTIE. That is right. Mr. PECORA. And you were familiar with all the facts and circumstances surrounding the organization and flotation of the stock of the United States & Foreign Securities Corporation back in 1924. Mr. CHRISTIE. Yes, sir. Mr. PECOBA. And that information included the information that 250,000 shares of the common stock had been issued to the public that subscribed for the 250,000 shares of first preferred stock. Mr. CHRISTIE. Eight. Mr. PECORA. That made available for open-market operations a substantial block of this common stock, did it not? Mr. CHRISTIE. TWO hundred and fifty thousand shares. Mr. PECORA. Yes. Do you know of any reason why Dominick & Dominick could not have purchased the 30,000 shares that are covered by this option agreement in the open market, in view of this .floating supply of 250,000 shares that was available? Mr. CHRISTIE. N O ; no reason. Mr. PECORA. From the fact that they came to you and your associates, comprising a small group of individuals, and sought this kind of an arrangement to enable them to purchase at fixed prices, over a period of 6 months, possibly, 30,000 shares of this stock, would you not say that they were organizing a pool operation ? Mr. CHRISTIE. I would say that if they were going to go in and offer to buy the 30,000 shares in the market, they would not know at what price they might be able to get it. They might get just a STOCK EXCHANGE PRACTICES 1663 few thousand shares, not enough to distribute to their clients, and they probably would not be interested in that sort of thing, so they came to us to see if they could get a sizeable block of stock, which was this 30,000 shares. Mr. PECOKA. YOU see, from the terms of this option agreement, the period of operation or management of this account referred to in this letter was possibly 6 months. Mr. CHRISTIE. That is right. Mr. PECORA. That was a pretty substantial period of time to accumulate in the open market 30,00 shares, was it not? Mr. CHRISTIE. Oh, yes; but the 6 months' time was the time within which they wanted to both buy and sell. Mr. PECORA. Both accumulate and unload; is that right ? Mr. CHRISTIE. And distribute. Mr. PECORA. When you say "distribute" you are using it in the same sense in which I am using the term " unload ", are you not ? Mr. CHRISTIE. Very likely; to get out of it at a profit. Mr. PECORA. Just a difference of terminology. The CHAIRMAN. Was this stock listed on the New York Stock Exchange at that time ? Mr. CHRISTIE. It is now, Senator Fletcher. Mr. PECORA. It was not then. Mr. CHRISTIE. It was not then. It was listed some time the following year. Mr. PECORA. It was listed on the Curb. Senator ADAMS. May I ask if you can give me, in a very rough way, what the requirements are for listing on the Curb Exchange? I am thinking of the number of stock certificates and the number of stockholders you have to have. What are those requirements, generally ? Mr. CHRISTIE. I am afraid I could not give you a very accurate idea of it. Mr. DILLON. I think it requires that a certain percentage of the total issue of stock must be outstanding and distributed. For example, if I owned 100 percent of the stock, I could not list it on the Curb. If I owned 90 percent, I probably could not. There is some point there. Senator ADAMS. What is the approximate figure ? Mr. DILLON. I think the so-called Big Board, the regular stock exchange, requires a broader distribution for listing than the Curb does. I am not sure what the Curb requirement is. I know it cannot be more than 25 percent, because this was listed, and there was only 25 percent in the hands of the public. Senator ADAMS. Did your organization make the application for listing ? Mr. DILLON. NO. The company must make its own application. The United States & Foreign made the application. Mr. PECORA. Mr. Christie, can you tell us the reason for including in this option agreement the following provision, which I will now read to you therefrom: " During the period in wliich these options exist you agree to loan us, at our call, all or any part of 20,000 shares of stock at the then prevailing market price." 1664 STOCK EXCHANGE PRACTICES What was the reason for the inclusion of that ? Mr. CHRISTIE. In this account that Dominick & Dominick had with some other firms, if they were going to sell stock to their clients, they would use the stock that they would borrow from us against delivery of that stock. That, I believe, would be a protection to them should the stock be sold back by their clients. If they bought it back, or the sale was canceled, they would then not be long the stock, because they used borrowed stock to make the delivery; and also, if the stock, for any reason during the period during which they had itoptioned, might sell lower, they could buy the stock in the market and make a larger profit, and return the borrowed stock to us. Mr. PECORA. That is to say, it indicated to you that, among other things, the managers of this account—we will abandon for the time being the. word " pool "—contemplated making some short sales, and in order to have stock available to cover those short sales without making it necessary for them to go into the open market and cover, they provided for this arrangement under which they could borrow from you 20,000 shares for such covering purposes. Mr. CHRISTIE. Yes, sir. It would be clear that they could do that, and I think it was later extended to the whole 30,000. Mr. PECORA. I S it not clear to you that that is what they had in mind by the inclusion in this option agreement of these provisions to which I have just called your attention? Mr. CHRISTIE. I think that is a fair statement. Senator ADAMS. They could have borrowed the stock and made the sales without exercising any of the options. Mr. CHRISTIE. Yes. Senator ADAMS. If it were just a matter of the disposal of this option stock, why would it be necessary for them to have arrangements with other brokerage or stock-selling houses, which I understand they had? Mr. CHRISTIE. Why they invited other people to join with them in this ? Senator ADAMS. YOU said there were others operating with them when they came to you to get this option. Mr. CHRISTIE. Yes; and the letter said that they were forming an account of which they were to be the managers. Why it was necessary to do that, I am sure I do not know. It probably made a broader operation. They probably had more people talking this stock to their customers all at the same time than if they undertook it alone. Senator ADAMS. It would obviously indicate that it was not merely to be sold on the market. That is, it involved the aid of other institutions. Mr. CHRISTIE. Yes, that is right. Senator ADAMS. And possibly the other institutions were to buy as well as to sell. Mr. CHRISTIE. It might very well be. They do not say how many, and the letter does not indicate how many people they had in their account. At least they had other people associated with them. Senator ADAMS. It would be possible for someone who had a misunderstanding as to what a pool might be to think that a pool was going to do a reasonable amount, not of manipulating, but of buying and selling to maintain a market. STOCK EXCHANGE PRACTICES 1665 Mr. CHRISTIE. That is right. Mr. PECORA. Let one read this other provision to you from this so-called " option " agreement. It is understood that until all of these options have either been exercised or have lapsed, you have the right to place stock privately, but that you will exercise your best efforts to prevent such stock from coming into the market. What would you say was the reason for the inclusion of that particular provision in this option agreement ? Mr. CHRISTIE. Well, if they were offering this stock to their customers at the then market price, which was slightly above this option price, and if we were to offer a substantial amount of additional stock on the market, it might naturally spoil that market, the supply being greater than the demand, and knock it below the option price, so that they could not do anything with this account. Mr. PECORA. Then, by virtue of this provision that I have just read to you, they were assuring themselves, so far as it was possible for them so to do, that in their market operations which they were going to manage for the benefit of this so-called " account", they were not going to be disturbed by owners of the stock, such as yourself, interfering with their market operations by putting your own stock through the market. Mr. CHRISTIE. That is right. Mr. PECORA. In other words, to that extent they were seeking to dam up the normal, natural flow of these securities in the public market, were they not? Mr. CHRISTIE. AS far as we were concerned, and this large block of stock, that is what they were trying to do, obviously. Mr. PECORA. And that is the purpose that is always sought to be attained in the operation of pools, is it not ? Mr. CHRISTIE. Well, that is a generalization. As I say, I hesitate to comment on pool operations because I have never run one, and I am not a specialist in pools. It would seem, however, to be a reasonable precaution that anyone would take if he wanted to work and distribute a stock. Mr. PECORA. AS a result of the conduct of operations by this account, or in behalf of this account, in the manner that was indicated to you by the terms of this option agreement, that that account was to be operated, do you, Mr. Christie, think it was fair to the general investing public to enter into such an arrangement with the managers of this account? Mr. CHRISTIE. Well, I think it was perfectly fair to the holders of the other 250,000 shares of preferred stock to grant these options and to be willing to hold the stock off the market, according to the provisions of that letter as they required of us. Mr. PECORA. TO what extent did you bind yourselves by this agreement to withhold your stock from t l ^ market? Weren't you interfering with the operation of the normal law of supply and demand? Mr. CHRISTIE. Not necessarily, Mr. Pecora. We were only binding ourselves. Senator ADAMS. Mr. Pecora, it was more a case where they were taking unfair advantage of the law of supply and demand, wasn't it? Senator GLASS. Well, do you know of anybody today in the Government who is not taking unfair advantage of the law of supply and demand ? 1666 STOCK EXCHANGE PRACTICES Mr. PECORA. Senator Glass, the reason I am asking these questions is that I have read the testimony given before this committee, in hearings held last year, and it was contended that the stock exchange affords a market for the free and open buying and selling of securities, and that usually the prices of securities are fixed in obedience to the law of supply and demand. I t seems to me here we may have some definite proof of circumstances, in regard to this transaction at least, where somebody sought to interfere with that natural law of supply and demand. Senator GLASS. But what I asked you was: If you know of any government official or agency which is not now undertaking to interfere with the law of supply and demand. [Laughter.] Mr. PECORA. Well, Senator Glass Senator ADAMS (interposing). Aren't they, rather, interfering with the supply rather than interfering with the law ? Mr. CHRISTIE. Our interest was only in the granting of these options. And the options were not harmful to us, and I could not see that they would be harmful to the 250,000 shares that you spoke of as being outstanding. If there was at all any interference with the law of supply and demand it was on the side that I should think would work to the benefit of the holders rather than in any way against them. Mr. PECORA. It might work to the benefit of the holders, but do you think it would work to the benefit of an investor going into the market at that time and purchasing this stock ? Wouldn't he be buying in a market where prices were fixed not in response to the natural law of supply and demand but under circumstances where that price is interfered with because of interference with the natural law of supply and demand? Mr. CHRISTIE. Well, it was only interfered with to the extent that we were not going to dump any more of our stock on the market, which we probably would not have done anyhow. Those 250,000 shares were still there, there was still an available supply there, and if anything was added to it through these operations we did not take away from any of the available supply that did exist. Mr. PECORA. DO you know how many shares were actually traded in by this account referred to in this option agreement of December 20, 1928? Mr. CHRISTIE. NO ; I do not. Mr. PECORA. Didn't you ever learn from Dominick & Dominick how many shares were actually traded in both on the buying and the selling side? Mr. CHRISTIE. NO, sir; I never learned that. Mr. PECORA. Did you ever learn from them the profits realized by the participants in that account as a result of that operation? Mr. CHRISTIE. N O ; I never did. Mr. PECORA. DO you know now long the operation of the account lasted under this option agreement? Mr. CHRISTIE. Well, I have the record of the date on which they exercised their options, and I think there were some additional options granted, and they ran I suppose for several months. They formed a second account along in June or July of 1929, and I think this account ran right up to that account, and the second account went on through. STOCK EXCHANGE PRACTICES 1667 Mr. PECORA. This account was in operation for a period of about 6 months ? Mr. CHRISTIE. Yes, sir. Mr. PECORA. DO you know the total number of shares of the account traded in? Mr. CHRISTIE. NO ; that information I do not have. Mr. PECORA. Don't you know it was considerably more than 30,000 shares which were embodied in this option agreement ? Mr. CHRISTIE. Well, we granted them additional options, and they took down additional stock. So I know it was over 30,000 shares. Mr. PECORA. What was the total amount of the shares which you and your associates actually delivered to Dominick & Dominick for the purpose of the operation of this account under this option agreement or any supplemental agreements that followed? Mr. CHRISTIE. By the use of the words " supplemental agreements ", do you still mean this first account? Mr. PECORA. This first account; yes. This one based upon the option agreement of December 20, 1928. Mr. CHRISTIE. Mr. Pecora, I am told that during the first account the total options granted to them was 40,000 shares, but that the total amount they took down under those options in the first account was 25,000 shares. Then they ran into the second account. Mr. PECORA. DO you happen to know what the total volume was of transactions on the New York Curb Exchange during the period of time covered by the operation of this account; namely, from December of 1928 to June of 1929? Mr. CHRISTIE. NO. Mr. PECORA. In the common shares of the United States & Foreign Securities Corporation? Mr. CHRISTIE. NO ; I do not think I know that. Mr. PECORA. Well, for your information and subject to correction by you if you wish to seek means of confirmation of this information, a compilation of statistics made by members of the investigating staff of the committee shows that the total volume of trading during that period of time on the New York Curb Exchange in this security was 145,800 shares, both on the buying and on the selling side, and that the account operated by Dominick & Dominick was responsible for trading to the extent of 129,650 shares in that period of time, and that about 48 percent of the entire volume of the trading on the New York Curb Exchange was by Dominick & Dominick. Now, does that information, assuming it to be correct, accord with your general recollection? Mr. CHRISTIE. Well, I have no recollection of the activity in the market at that time, but I am perfectly willing to accept those figures compiled by your people. Senator ADAMS. Mr. Pecora, you speak of trading on both the buying and selling sides of the market. Mr. PECORA. Yes; the total number of shares traded in. Senator ADAMS. Well, let us say that there are 100 shares traded in. You do not mean 100 shares bought and 100 shares sold, do you? Mr. PECORA. NO. 100 shares traded represents 100 shares bought and sold. 1668 STOCK EXCHANGE PRACTICES Senator ADAMS. Then if 100 shares are sold and bought it would show up as 200 shares traded in. Mr. PECORA. The figures would be shown on both the selling and buying sides. Senator ADAMS. Then in the case of a total of 145,000 shares traded in, if this one concern had dealt in 129,000 shares, quite necessarily they had purchased a great many shares ? Mr. PECORA. Yes. Senator ADAMS. Because there could have been only about seventyodd thousand shares sold. Mr. PECORA. Unless they were doing both buying and selling themselves. Senator ADAMS. If their transactions represented 129,000 shares out of a total of 145,000 shares traded in, it could be only half of the 145,000 shares. Senator GLASS. Mr. Chairman, it has been developed over and over again in these hearings that that is exactly what they do. They buy their own shares and they sell their own snares. All those pools do that in order to control the market. Mr. PECORA. Senator Glass, the reason I am trying to put on the record through the medium of the testimony of this witness, plus the documentary evidence that we have here, the information celled for in the question, is to give a concrete example of the formation and operation of such a pool account. The CHAIRMAN. Well, of course, the manager of a pool will offer certain stock and the price will go down as a result of such sale, and then he will come in and buy and will push the price up. Senator GLASS. Oh, well, you have abundant testimony of concrete examples of that having been done over and over again. The CHAIRMAN. Mr. Christie, did you sell all of your individual holdings to Dominick & Dominick? Mr. CHRISTIE. NO ; I did not. The CHAIRMAN. YOU had some left? Mr. CHRISTIE. Yes, sir. The CHAIRMAN. YOU and your friends and associates in this transaction with Dominick & Dominick did not dispose of all the stock that you had as individuals ? Mr. CHRISTIE. NO. The total of this first account that is under discussion now was 25,000 shares, which they bought in that account. And then they had a second account, which I imagine Mr. Pecora will bring up in order to carry this complete story through, which will come in. In the whole account we sold, I think, 74,000 shares, the figure that you had this morning, to Dominick & Dominick. This account which Dominick & Dominick ran we had no interest in and had no first-hand knowledge of as to how they did it or what the volume was. I take it that the tabulation which Mr. Pecora has is the total of the daily sales as reported on the exchange. Mr. PECORA. Yes; as reported on the exchange. Mr. CHRISTIE. And then it is doubled so as to make purchases and sales, and does not include the 25,000 shares that Dominick & Dominick bought from us. The CHAIRMAN. It only refers to transactions on the exchange. STOCK EXCHANGE PRACTICES 1669 Mr. PECORA. Those sales did not go through the exchange, did they? Mr. CHRISTIE. NO. Mr. PECORA. That is why they are not included in the volume of trading. The volume of trading I am referring to is open market trading. Mr. CHRISTIE. But you also gave a figure—and I am not disputing any of it but am only trying to get a clearer picture of what you mean—of the account traded in, and I assume that included the 25,000 shares? Mr. PECORA. NO. Mr. CHRISTIE. It was without that, then. Mr. PECORA. Yes. Senator GLASS. Let me ask you this question for my own particular information, though any other member of the committee with nv) consent may make use of it. What percentage of the people who trade on the stock market actually know the true financial status of your company or of any other company in the matter of the stocks in which they trade? Mr. CHRISTIE. Well, this particular stock was the stock of the United States & Foreign Securities Corporation. It is an investment trust, and the testimony this morning—and I am saying this, Senator Glass, because I am not sure that it was not before you came in, and I think it was—this investment trust publishes annually a complete list of its holdings, and a complete statement. It also publishes semiannually a statement of its general operations and income account. Mr. Dillon also testified this morning that Senator GLASS (interposing). That I know. I am not suggesting that you have been guilty of any concealment. I am trying to test the intelligence of people who gamble in stocks on the stock exchange. [Laughter.] Senator ADAMS. Senator Glass, let me cite a little experience of my own—and I do not want this placed on the record. (Thereupon there was some little discussion off the record.) Senator GLASS. Four years ago I suggested putting a United States Government tax on stocks that are clearly in the gambling category rather than in an investment category, but everybody in Congress got frightened to death because of the statements and claims made by brokers and stock speculators. And Mr. Untermyer tried the same thing in New York the other day, and the stock exchange proposed to move the whole dad bum caboodle over to New Jersey, and very likely they would have moved over to New Jersey, but they bluffed him out of his position, and he recanted, and there you are. But if they had done it here in Congress they would not have had anywhere to move. The CHAIRMAN. They might have gone to Canada, they say. Senator GLASS. Well, I would rather they would be in Canada than ruining all of us in this period of distress that we have had, and that is what brought it on. And if Canada wants to be ruined, why, that will be Canada's affair. Mr. PECORA. AS I recall the testimony before this committee last year the officials of the New York Stock Exchange disclaimed that 1670 STOCK EXCHANGE PRACTICES responsibility, disclaimed any responsibility on the part of the exchange for gambling operations. I fully agree, Senator Glass, with your views in respect to that. And in that connection I recall testimony given here last June by Mr. Taplin, who stated, as I remember it, that in his opinion not one investor in a thousand knew anything at all about the security that he traded in. The CHAIRMAN. Those are really not investment trades, but speculation and gambling. Senator GLASS. Well, gentlemen, I am tired of making this hearing interesting. I have to go to see a doctor. The CHAIRMAN. We are sorry to see you go, Senator Glass. Mr. PECORA. Mr. Christie, shortly after the completion oi the operation of this first account that was managed by Dominick & Dominick, a second option agreement was entered into with Dominick & Dominick by you and your associates, was there not ? Mr. CHRISTIE. Yes; that is right. Mr. PECORA. And this second option agreement was dated June 22, 1929, wasn't it? Mr. CHRISTIE. Well, I would have to see. Mr. PECORA. I show you what purports to be a photostatic copy of a letter addressed to Messrs. Dillon, Bead & Co. under date of June 22, 1929, signed by Dominick & Dominick, and I ask you if you recognize that as being a true and correct copy of a letter addressed to Dillon, Read & Co., by Dominick & Dominick on that date. Mr. CHRISTIE (after examining photostat). On June 22, 1929; yes. Mr, PECORA. I offer that letter in evidence and ask that it be spread on the record of our hearings. The CHAIRMAN. It will be received and made a part of the record by the committee reporter. (A photostat of a letter dated June 22, 1929, addressed to Dillon, Read & Co., and signed by Dominick &> Dominick was marked " Committee Exhibit No. 10, Oct. 4,1933 ", and will be found where read by committee counsel during the afternoon's hearing. (See p. 1675.) Mr. PECORA. NOW, Mr. Christie, before I go into the details of the account carried under this second option agreement, let me ask you how much in the aggregate you and your associates received from Dominick & Dominick for the 25,000 shares of stock that you delivered to them under the terms of this first option agreement, dated December 20, 1928. Mr. CHRISTIE. I will have to look that figure up for you. Mr. PECORA. All right. The CHAIRMAN. While Mr. Christie is looking up that data, Mr. Dillon, may I ask your judgment as to what proportion of a stock ought to be offered to the public over and above what is controlled by some one concern before it is listed on a stock exchange? What would be your estimate about that? Mr. DILLON. I think the New York Stock Exchange have a definite and adequate ruling on that, but I am not familiar with just what the proportions are. THE CHAIRMAN. I was trying to get your judgment about that matter. For instance, it does not seem to me that the New York STOCK EXCHANGE PRACTICES 1671 Stock Exchange ought to list this stock at all when only 25 percent is held by the public and 75 percent by one interest. I do not know what their rule is, but I was seeking to get your idea about a percentage that would be reasonable and fair. Mr. DILLON. I think there is general distribution. I do not know as they have that much, but I can find what the rule is and will be glad to give you my opinion of their rule. The CHAIRMAN. Very well. Mr. CHRISTIE. Mr. Pecora, I seem to be delayed in order to get the exact amount, but the average price of that 25,000 shares was about 49. That would make it about $1,225,000 as the proceeds of the 25,000 shares. Mr. PECORA. NOW, the exact figure which I have and which we have compiled from your own records is $1,229,125. That would seem to be right, wouldn't it? Mr. CHRISTIE. Yes, sir. Mr. PECORA. And you are willing to accept that figure subject ta any correction that you may see fit to make subsequently ? Mr. CHRISTIE. Right. Mr. PECORA. That is, 25,000 shares that were sold by yoti and your associates for an aggregate of $1,229,125 came out of the block of 500,000 shares, and hence cost your associates upon their original acquisition of these shares at the rate of 20 cents a share the aggregate sum of $5,000, didn't they ? Mr. CHRISTIE. It cost my associates originally 20 cents, as you say. It cost some of us, as I told you this morning, in my own casey $10 a share. Mr. PECORA. NOW, we will proceed to a consideration of the second account under this option agreement of June 22, 1929, which has been marked in evidence as exhibit 10. Prior to the making of this option agreement of June 22, 1929, I assume there were further conversations between Dominick & Dominick or their representatives with you and your associates with respect to the subject matter of this option agreement? Mr. CHRISTIE. Yes, sir; that is right. Mr. PECORA. What was the general substance of those conversations, please? Mr. CHRISTIE. AS I recall it, the first account that had options granted to the extent of 50,000 they had Mr. DILLON. Forty. Mr. CHRISTIE. Forty thousand I think was the maximum amount at any one time, but there were some overlapping options. At any rate, the maximum was 40,000 and they exercised 25,000. So there were conversations about the options as they came due or were renewed or changed, and the options on 15,000 shares expired, and then there were preliminary conversations about the letter which is exhibit 10*Mr. PECORA. Well, is that all they said ? Mr. CHRISTIE, This was a different account, in that Dillon, Ke&d & Co. had a participation, a 25-percent interest in this account. Mr. PECORA. In the course of the conversations that immediately preceded and led up to this option agreement of June 22, 1929, were any references made to the listing of this stock on the New York Stock Exchange ? 1672 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. That I don't remember. There may well have been, but I don't remember it. Mr. PECORA. DO you recall when the common shares of the United States & Foreign Securities Corporation were listed on the New York Stock Exchange ? Mr. CHRISTIE. Early in July 1929. Mr. PECORA. July 5, 1929, wasn't it? Mr. CHRISTIE. One of my associates says July 5 and the other one says July 9. July 5. Mr. PECORA. July 5,1929. Was anything said in the conversations that preceded the making of this option agreement of June 22, 1929, about having this stock listed on the New York Stock Exchange ? ' Mr. CHRISTIE. There may well have been, Mr. Pecora, but I do not believe the conversations were had with me. I have no recollection of them. They might have been with one of my associates. Mr. PECORA. What prompted the United States & Foreign Securities Corporation to list its stock on July 5, 1929, on the New York Stock Exchange ? Mr. CHRISTIE. I do not believe I can answer that question. I don't know. Mr. PECORA. Who made the application for the listing? Mr. CHRISTIE. I suppose that the company did. Who for the company I do not know. Mr. PECORA. Who attended to the formalities of it? Who actually attended to the formalities of it ? Mr. CHRISTIE. I think I could tell that by referring to the application for listing or asking the company to refer to the listing application, that might show that. I do not know. Mr. PECORA. Who made the compilation of the statistical data that was required by the New York Stock Exchange be inserted in the listing application? Mr. CHRISTIE. That I don't know. Mr. PECORA. Wasn't it done in the office of Dillon, Eead & Co., Mr. Christie? Mr. CHRISTIE. That I don't know. The company did it. Mr. PECORA. DO you know who would know that? Now, you were an officer of the investment trust. You were also an associate of Dillon, Eead & Co. Can't you tell us? Mr. CHRISTIE. I don't think I was an officer of the company on this date. I might have been. I had been. Mr. PECORA. YOU had been prior thereto one of its executive officers ? Mr. CHRISTIE. I had been; yes. I could find out, I should think, yho made that application blank up if you would like to have that information here. Mr. PECORA. We know that the application must have been made in the name of the United States & Foreign Securities Corporation. Mr. CHRISTIE. That is right. Mr. PECORA. Because the rules of the stock exchange required the application to be made by the corporation seeking to list its securities on that board? Mr. CHRISTIE. Right. STOCK EXCHANGE PRACTICES 1673 Mr. PECORA. NOW, who were the individuals, or from whose personnel did they come, who actually obtained and supplied to the New York Stock Exchange the statistical information required to be set forth in the application for listing ? Mr. CHRISTIE. Well, the United States & Foreign Securities Corporation, and their accountants, I think, were Price, Waterhouse & Co. Senator ADAMS. Mr. Christie, did the United States & Foreign Securities Corporation maintain an independent office of its own, or were its affairs looked after on the part of the offices of Dillon, Read & Co.? Mr. CHRISTIE. At that time I think it had an independent office at Newark. Mr. PECORA. That was just a formal office, wasn't it? Mr. CHRISTIE. Books and records were kept there. Mr. PECORA. But the active operations of the company did not proceed from the Newark office, did they? The board meetings were held there for technical purposes, weren't they? Mr. CHRISTIE. I think that you will find from the dates that I gave this morning that I was not officially connected with [addressing associates] was I? I didn't think that I was an officer of the security company at that time. I didn't take any part in preparing those listing applications. Mr. PECORA. Will you be good enough to confer with your associates now and then inform us one of them among those present who is better qualified to answer the questions along this line that I am now addressing to you? Mr. CHRISTIE. Regarding the listing application of the stock on the stock exchange? Mr. PECORA. Yes. Mr. CHRISTIE (after conferring with associates). Mr. Pecora, the listing application was apparently prepared by the firm of Root, Clark, Buckner & Howland. Mr. PECORA. That is a firm of attorneys, isn't it? Mr. CHRISTIE, For the United States & Foreign, and Price, Waterhouse & Co. prepared the financial statement and audit of the books, so the counsel for the company tells me. Mr. PECORA. Who furnished the statistical information or the data from which the information was gathered and compiled by PriceWaterhouse & Co. do you know? Mr. CHRISTIE. Counsel for the company say that the books were furnished by Price, Waterhouse & Co. and that they compiled all the information to fulfill the requirements from the records of the company. Mr. PECORA. Can you give us the reasons for causing this to be listed on the New York Stock Exchange at this time ? Mr. CHRISTIE. N O ; I could not do that, Mr. Pecora. Mr. PECORA. The listing application, a copy of which I have before me, recites among other things that at that time you were vice president of the United States & Foreign Securities Corporation. Mr. CHRISTIE. Yes, sir. Mr. PECORA. That does not Mr. CHRISTIE. NO, sir. conflict with your recollection, does it? 1674 STOCK EXCHANGE PEACTICES Mr. PECORA. Well now, in view of the fact that you were vice president, do you recall any discussion by the officers or board of the United States & Foreign Securities Corporation at which there was considered the question of listing its stock on the New York Stock Exchange ? Mr, CHRISTIE. N O ; I do not. Mr. PECORA. DO you recall ever participating in any such discussion? Mr. CHRISTIE. NO, sir. (Conferring with associates.) I am advised that there was a directors' meeting at which listing was taken up and approved. Mr. PECORA. Can you tell the committee what advantages, if any, accrued to the corporation from having its securities listed on the New York Stock Exchange? Mr. CHRISTIE. Well, I think that it naturally gives a broader market to list it on the New York Stock Exchange. This also, I think, was one of the first investment trusts that were admitted to the New York Stock Exchange. I think that it was one of the first investment trusts to be listed on the stock exchange, and there was a certain amount of distinction to have the listing committee go over all that and pass on it and have it listed. That and the broader market are the only things that occur to me at the moment. Mr. PECORA. AS a matter of fact, the open market operations in the stock of this company while it was listed on the stock exchange were not of any large volume outside of the volume that evidenced itself during the operation of this first account by Dominick & Dominick? Mr. CHRISTIE. Your figures of the volume on the New York Curb Exchange for the 5 or 6 months preceding this showed a substantial trading in substantially all of it. Mr. PECORA. Forty-eight percent of which Dominick & Dominick were responsible for, weren't they? Mr. CHRISTIE. That is right, according to your figures, which I . have accepted, with the exception that I have no knowledge of my own of the Dominick volume. Mr. PECORA. NOW, when this second option agreement wTas entered into were you informed by Dominick & Dominick who the participants were in the account referred to in this second option agreement? Mr. CHRISTIE. I do not believe so, except that we were to have 25 percent interest. Who the other participants were I do not recall. Mr. PECORA. TO that extent this second option agreement differed from the firist option agreement, didn't it ? Mr. CHRISTIE. That is right. Mr. PECORA. That under the second option agreement you and your associates who were to supply 20,000 shares to Dominick & Dominick under the terms of this second option agreement were to have a participation of 25 percent in the profits of the account if any accrued? Mr. CHRISTIE. The participation of the 25 percent was taken as a firm and the individuals that granted the option were the same group of individuals that supplied stock in the first account. STOCK EXCHANGE PEACTICES 1675 Mr. PECORA. I want to read for the information of the committee the text of the second option agreement, on the letterhead of— DOMINIOK & DOMINIGK, 115 Broadway, New York, June 22, 1929. UNITED STATES & FOREIGN SECURITIES CORPORATION COMMON STOCK (NO FAR! VALUE)—TRADING ACCOUNT Messrs. DILLON, BEAD & Co., Nassau and Cedar Streets, New York City. DEAR SIRS: We are forming an account on the basis of twenty thousand (20,000) shares for the purpose of dealing in common stock of United States & Foreign Securities Corporation (a Maryland corporation). We shall be the managers of the account with full discretionary powers as such and shall participate in it. As managers, we have obtained, for and on behalf of the account, options to purchase all or any part of nineteen thousand one hundred and ninety-eight (19,198) shares of said common stock of the United States & Foreign Securities Corporation at $52 a share, such option to continue in full force and effect for a period of 60 days from this date. The account will terminate at the close of business August 21, 1929, but we as managers reserve the right to extend it for a period of 60 days or to terminate it at any earlier date in our discretion. As managers, we shall have the sole management and entire conduct of the business and affairs of the account, with all the usual powers, including the right on behalf of the account to make or procure loans and to pledge the obligations of the account participants therefor, to pay all commissions and expenses of every nature, and for the account to purchase, sell, sell short, repurchase, resell, or hold shares of the common stock of the United States & Foreign Securities Corporation, to such an amount, at such prices and in such manner as we may deem advisable, and generally to act in all respects as in our opinion may be to the best interests of the account; provided only that the account shall at no time be short or own or be committed for an amount of stock in excess of twenty thousand (20,000) shares. Notwithstanding our relations as managers, we shall enjoy as participants in this account— I like the use of the verb " enjoy." all the rights and benefits and be subject to all the liabilities hereby respectively granted to and imposed upon other participants. We shall in no way be liable for any error of judgment or mistake of law on fact, or failure of any party contracting with us to live up to his agreement, nor shall we be liable except for our own failure to exercise good faith. The failure of any participant to adhere to the terms of this agreement shall in no respect relieve the other participants from their account obligations. It is understood that this agreement shall bind and benefit the several parties and their respective heirs, executors, administrators and assigns. At our option as managers, each participant shall take up and pay for in full, or margin to our satisfaction his pro rata share of stock held by the account and shall meet his other account obligations, if any, upon call by us. Stock so taken up during the life of the account shall be for carrying purposes only and shall be subject to call by the account managers at any time. No partnership relations shall arise herefrom. At the expiration of the account, we as managers shall distribute the stock and/or cash remaining in our hands among the participants pro rata in the proportion which the number of shares of their respective participations bears to twenty thousand (20,000) shares. The participants shall share pro rata in the said shares and in the profits or losses of the account after allowing for all expenses incurred by the managers, and the apportionment and distribution of the said shares, profits or losses, shall be conclusive upon the participants. As compensation for our services in forming and managing this account, we shall receive a sum equivalent to 10% of the net profit. We shall also receive the usual commissions on purchases and sales of stock made for the account. 175541—33—PT 4 10 1676 STOCK EXCHANGE PKACTICES In accordance with the understanding between us, we have reserved for you in this account a, participation of 5,000 shares, or 25%. Please confirm your acceptance of this participation by signing and returning to us the enclosed duplicate of this letter. Very truly yours, DOMINICK & DOMINICK, Managers. Confirmed and accepted: DILLON, READ & Co. Mr. PECORA. I noticed, Mr. Christie, you were following me while 1 was reading this exhibit. I presume I read it correctly? Mr. CHRISTIE. Yes. Mr. PECORA. Did you follow me by means of another photostatic copy of this exhibit? Mr. CHRISTIE. Yes. Mr. PECORA. DO you recognize the handwriting of the signature reading " Dillon, Read & Co." at the lower left-hand corner of this letter? Mr. CHRISTIE. That letter was signed by Mr. E. M. Shedden. Mr. PECORA. Who? Mr. CHRISTIE. Mr. E. M. Shedden, who has the power to sign. Mr. PECORA. E. M. Shedden? Mr. CHRISTIE. Yes. Mr. PECORA. I S he a member of the firm of Dillon, Eead Mr. CHRISTIE. NO ; but he has the power to sign. Mr. PECORA. Was this agreement actually entered into & Co. ? as a firm transaction and obligation by the legal entity known as Dillon, Eead & Co.? Mr. CHRISTIE. Yes. Mr. PECORA. Why did Dillon, Eead & Co. as a legal entity go into the second operation or option agreement when it was unwilling to go into the first one as a legal entity ? Mr. CHRISTIE. Well, the extent of their interest in this was the 25 percent interest in the account which they went into with the hope of making a profit. The 19,198 shares—I think it is—that the account as a whole got options on, is still the stock of those same individuals that sold the 25,000 shares in the first account. Mr. PECORA. That is, the 19,198 shares referred to in this option agreement were likewise shares owned by the various individuals who went into the first option agreement? Mr. CHRISTIE. That is correct. Mr. PECORA. None of the shares in the name of the legal entity known as Dillon, Eead & Co. went into this second option agreement? Mr. CHRISTIE. None. That letter, as I read it, is not the option agreement. You see, that is confirming really the formation of the account and confirming the 25 percent interest in the account. There is another letter that covers the option on the 19,198 shares. Mr. PECORA. Have you got a copy of that letter? Mr. CHRISTIE. I have a copy of it here if you like to have it. Mr. PECORA. Will you kindly produce it? Mr. CHRISTIE, This seems to be a very poor photostat. It is a photostat of a carbon. The type was not very clear. Mr. PECORA. What is that? STOCK EXCHANGE PKACTICES 1677 Mr. CHRISTIE. I say it is a hard copy to read. It is a photostat of a carbon copy, apparently made on a typewriter on which the type was not very sharp. Mr. PECOKA. Mr. Christie, I show you what purports to be the photostatic copy of a letter addressed to Messrs. Dillon, Read & Co. by Dominick & Dominick, under date of June 22, 1929. Will you please look at it and then tell us if you can identify it as a true and correct copy of such a letter, and then tell us whether that letter constitutes the so-called " option " agreement that you have just referred to? Mr. CHRISTIE. Yes; that is right. Mr. PECORA. I offer it in evidence and ask that it be spread on the record. The CHAIRMAN. It may be admitted in evidence as Committee Exhibit No. 11 and spread on the record. (Photostatic copy of letter from Dominick & Dominick to Dillon, Read & Co., dated June 22,1929, was received in evidence and marked " Committee Exhibit 11 of October 4, 1933.") Mr. PECORA. It is on the letterhead of Dominick & Dominick, and reads as follows: NEW YORK, June 22, 1929, UNITED STATES AND FOREIGN SECURITIES COLORATION COMMON STOCK (NO PAR VALUE) Messrs. DILLON, READ & Co., 28 Nassau Street, New York City. DEAR SIRS : We wish to confirm that, in consideration of the formation by us of an account, of which we shall be the Managers with full discretionary powers, and in which we may participate, you hereby extend to us, for and on behalf of such account, an option to purchasce from you all or any part of nineteen thousand one hundred and ninety-eight (19,198) shares of common stock of United States and Foreign Securities Corporation at $52 a share, said option to remain in full force and effect for a period of 60 days from this date. During the existence of this option agreement, you agree to loan us, at our call, from time to time all or any part of 19,198 shares of stock at the then prevailing market price. Stock called or borrowed by us shall be deliverable upon one day's notice against payment of the amount due. Please confirm that the above is in accordance with the understanding between us by signing and returning to us the duplicate of this letter. Very truly yours, DOMINICK & DOMINICK. Confirmed and agreed t o : DILLON, READ & Co. Mr. PECORA. NOW, from the two documents that have last been offered in evidence, namely, committee exhibits 10 and 11, would you say that the account referred to in these two exhibits was a pool account or a basis for a pool operation? Mr. CHRISTIE. Both accounts were similar. I would not say that they did not form the basis of a pool nor would I say that they clearly were a pool. I mean that a " pool " is so vague—the term— that I hesitate to make any definite statement about it. Mr. PECORA. I notice that in connection with the documentary evidence relating to the first option agreement the option agreement 1678 STOCK EXCHANGE PRACTICES gave Dominick & Dominick the right to borrow from you and your associates up to 20,000 shares, although the agreement gave them the right to buy from you at the prices fixed in the agreement 30,000 shares. But I notice in this exhibit no. 11 that Dominick & Dominick are given the right to borrow the full amount of the shares that you had agreed on the same day to deliver to them at $52 a share, namely, 19,198 shares. What was the reason for that Mr. Christie? Mr. CHRISTIE. Well, I thought that the first option- that started off with their right to borrow 20,000 shares out of the 30,000 was later amended so that they could borrow the entire amount of the 30,000 shares. Mr. PECORA. Well, from that circumstance would you say that it was evidence of the fact that Dominick & Dominick in the operation of this account, either the first or the second one, were merely going to conduct trading operations that might not necessarily involve actual delivery of the sales? Mr. CHRISTIE. Oh, well, any sales that they made they would have to make delivery of. They were undoubtedly going to use the borrowed stock to make delivery on sales that they made whether they were what you call trading sales or any other kind of sales. Mr. PECORA. I notice in the exhibit marked " Exhibit No. 10 " which relates to this second option agreement, Dominick & Dominick as managers of the account referred to therein are specifically given the right, among other things, on behalf of the account to purchase sell, sell short, shares of the common stock of this investment trust. Was a similar right given to them in the first account ? Mr. CHRISTIE. I do not remember that language in the first account. However, the reason for that would be that we were not participants in the first account so that we did not receive a letter corresponding to that letter. That is a general trading account letter that gives the managers very broad powers and relieves them of a lot of liability, and defines how much your participation is and how much profit they are going to take as managers of the account. And any other general terms provided in the account. Mr. PECORA. Well, in the light of the provisions embodied in the agreements with respect to the second account—and I am referring now particularly to exhibit no. 10—would you say that the trading account to be conducted by Dominick & Dominick as managers, was of the character that would stamp the transactions and the operation of such trading account as gambling transactions, using that term as Senator Glass used it a few minutes ago ? Mr. CHRISTIE. Senator Glass said a good deal about that. I though that the exhibit was no. 11. Is that not the number of it ? The trading account ? Mr. PECORA. Exhibit no. 10. Mr. CHRISTIE. But the one that confirms our participation in the account. Mr. PECORA. And establishes and fixes the rights, duties and privileges of Dominick & Dominick as managers of the account, and the powers that they may exercise thereunder as such managers. Mr. CHRISTIE. And gives the managers the power to make any kind of a transaction that they want to. STOCK EXCHANGE PRACTICES 1679 Mr. PECORA. Yes; whether to buy or to sell or to sell short. Mr. CHRISTIE. Yes, sir. Broad trading Mr. PECORA. Broad trading privileges, were they not, including the conduct of transactions that might be characterized as gambling transactions, as distinguished from investments ? Mr. CHRISTIE. I suppose so. Mr. PECORA. IS that a fair inference ? Mr. CHRISTIE. I suppose so. Senator COUZENS. Would you consider those operations as constructive ? Mr. CHRISTIE. The history of this transaction, Senator, was that this house and the other houses associated with it were going to distribute this stock to their clients. -They claimed to have made a thorough study of investment trusts, and they thought that they could sell this stock to their clients, make some money themselves by doing it, and they thought that the stock, in view of all the conditions, was cheap and that they might make some money for their customers. Senator COUZENS. Well, is that a constructive operation for a concern that is engaged in the investment trust business to diversify the investments of small investors and protect their interests? Would you call that a constructive job for a trustee such as you were, under the circumstances? Mr. CHRISTIE. Well, the trust was not involved in this. These sales Senator COUZENS, Oh, no. I do not like that quibbling about the trust. Mr. CHRISTIE. I do not mean to quibble with you, sir. But I thought you were out when this started. These were sales that were made by a group of 10 or 11 individuals of a part of their stock, some of whom had acquired it in 1927, and it was their own stock that they were selling this way. It was not stock offered or new stock offered by the trust, nor was it the firm stock of Dillon, Eead & Co. Senator COUZENS. NO; but the same group of men was charged with the very great responsibility of handling millions and millions of the public's money and to invite small investors who were not able to make their own investments or diversify their securities. You were engaged in a speculative short selling operation, which hardly seems the ethical thing for trustees to do. Mr. CHRISTIE. Well, we were participants in this account and had the power to do all these things that you say. Senator COUZENS. And yet you were trustees for millions and millions of the public's money. Mr. CHRISTIE. But I do think you should note the distinction between this stock that belonged to these individuals who had bought it some time ago and were free to do as they pleased with it. It was not stock that was held together as a trust. Senator COUZENS. Yes; and yet you went on and did not pay any dividends on this stock at any time. You did not pay any dividends then and have not paid any dividends since, as I understand it? Mr. CHRISTIE. On the common stock? Senator COUZENS. Yes. 1680 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. NO. It was the policy of the company only to pay dividends on the common stock if the earnings from the capital invested was sufficient to pay the dividends on the first and second preferred, and if anything was left over, and that had not been true. Senator COUZENS. Well, you had that inside information. You knew that you had accumulated $10,000,000 out of this undertaking and then went and invested it in a second-class security in another investment trust, and all this time you were posing to the public as good trustees for some $90,000,000 of their money. What I am trying to bring out is whether that was what you men from Wall Street think is good ethics. Mr. CHRISTIE. Well, that $10,000,000 in the second trust—the United States & International Investment Corporation—I think had been put in slightly before this stock was sold. Had it not [addressing his associates] ? Mr. PECORA. The Senator's question was not directed specifically to that phase of it. As I understand it, it was directed to getting from you your opinion as to whether or not in view of the trusteeship that you occupied toward the shareholders of the common stock of the investment trust you think it was ethical to participate in this trading account, which included short selling ? Mr. CHRISTIE. Well, I do not think that the participation in the trading account had any effect on the handling of the funds of the trust, Mr. PECORA. Was it not calculated to have an effect on the public market quotations for the common stock of the investment trust ? Mr. CHRISTIE. Not to put it down. It was contemplated to distribute that stock, have more stockholders, and this firm of Dominick & Dominick, and probably people associated with them, had a great many clients, and they thought that they were bringing to the attention of those clients a good investment when they offered this stock to them. Mr. PECORA. Who were the clients that Dominick & Dominick were seeking to serve in this account ? Do you know who they were ? Mr. CHRISTIE. N O ; I do not. I know that they did have a big clientele. Their primary interest was to run this account and make some money, of course. Senator COTJZENS. YOU admitted a while ago that it was not the policy of the company to pay dividends on the common stock, and yet you are unloading on the public the common stock at prices which you hope eventually to still raise, knowing all of the time from the inside as operators of this trust that it was not the policy to pay any dividends. I do not care much about those legal ethics that you lawyers keep talking about. I am talking about the general public, which has a right, it seems to me, to rely upon men of integrity to protect their trust and not to engage in these operations. Mr. CHRISTIE. Well, this company had a policy of making available to its stockholders very complete information. That was available to the stockholders. There was no attempt to conceal it. Senator COUZENS. When you created this pool and this short-selling arrangement, and all other tricks of the trade, you did not tell the public, as I recall the testimony, that you had adopted a policy of not paying any dividend on this common stock. STOCK EXCHANGE PRACTICES 1681 Mr. CHRISTIE. NO. This operation was conducted by another firm in which, it is true, we participated at this time, and it was in 1929, and the trust was formed in 1924. A part of this common stock had been distributed to some of the individuals as distinct from Dillon, Eead & Co. Some of those individuals had that stock. If they withdrew they either still had that stock or they could sell it. But the obligation of the management of that fund was not affected whether I have it or some other person has some of that common stock, as far as I see it. Senator COUZENS. That is where you and I see differently, because you had inside information as to the policy when you were selling this stock. Mr. CHRISTIE. I do not believe so. Senator COUZENS. Well, you said the company had adopted a policy of not paying any dividends on the common stock, and still you were creating a market for it, knowing well there were no contemplated dividends to be paid upon it. That is the kind of thing that I think the public ought to know about. Mr. CHRISTIE. Most of these people, as far as I know—I feel fairly sure that the people who sold the stock at that time only sold a part of their stock. It was a very limited number of our associates that did it. We did it as individuals and not as a firm. Senator COUZENS. But still, individuals go to make up the firm. You cannot segregate your responsibility, it seems to me, as a member of the firm and as an individual. You are responsible for the firm's conduct and its reputation. At least, I think the public has a right to assume that, whether you do or not. The CHAIRMAN. Why didn't you sell all the stock you had ? Did Dominick & Dominick want to buy more than these agreements provided for, and were you unwilling to sell any more ? Mr. CHRISTIE. I was unwilling to sell any more, Senator Fletcher. The CHAIRMAN. What is the process of borrowing stock? I mean, what actually takes place ? If Dominick & Dominick would come to you and say, " I want to borrow 20,000 shares of stock ", what took place? What did they give you in place of the stock? Mr. CHRISTIE. When they borrow stock like that they pay whoever lends the stock the market value of the stock at the time they borrow it. In other words, they would give us a check equivalent to the market value of the stock that they borrow at the time they borrow it, and then when they return the stock we give them back an amount equal to that. The CHAIRMAN. What is the use of their borrowing stock if they have got to give their check for it ? They could go out and buy it. Mr. CHRISTIE. Because they can get their money back when they return the stock; and if they bought it and any change takes place in the market, they might lose. Senator ADAMS. HOW much of a charge is made on the lending of stock ? Mr. CHRISTIE. On these transactions there was no charge at all. Senator COUZENS. What is the ordinary charge ? Mr. CHRISTIE. The charge varies. It is a market that we do not ever take any part in. Sometimes stocks are loaned at a premium. It depends on supply and demand pretty much. 1682 STOCK EXCHANGE PRACTICES Senator ADAMS. Regardless of the ethics of the transaction, if one were looking for an investment, you would suggest, for the firm of Dillon, Eead & Co., that he had better inquire of those who sold their stock rather than those that held it ? Mr. DILLON. I should ,say so. Mr. PECORA. YOU are a member of the Investment Bankers Association of America, are you not? Mr. CHRISTIE. Yes, sir. Mr. PECORA. And an officer of it ? Mr. CHRISTIE. I have been a governor of it for 3 years. Mr. PECORA. And you are slated to be its next president, are you not? Mr. CHRISTIE. I have been nominated for the next presidency. Mr. PECORA. By the regular nominating committee of the organization? Mr. CHRISTIE. By the governors. Mr. PECORA. The annual election is to be held some time next month, is it not? Mr. CHRISTIE. At the end of this month or the 1st of November. Mr. PECORA. And you are the only candidate for the office of pre,sident for the ensuing year ? Mr. CHRISTIE. SO far I am; yes, sir. Mr. PECORA. DO you anticipate any independent Mr. CHRISTIE. NO. Mr. PECORA. I take it from the circumstance that candidacies? this responsible organization of bankers thinks enough of your capacity to make you president of the organization for the coming year that you are not entirely unsophisticated in the ways of Wall Street. That is not a violent assumption, is it? Mr. CHRISTIE. I think someone else should judge of that. Mr. PECORA. We recognize your modesty. When Dominick & Dominick formed this second account giving 25 percent participation therein to your firm and arranged with you and your associates as individual owners of common stock of the investment trust whicK was to be the subject of market operations of this account, they also arranged, in addition to that, an option through you and your associates to have these 19,198 shares delivered at a definite, fixed price set forth in the option agreement. They were also to have the right to borrow all of that stock from you and your associates for purposes of their market operation, were they not? Mr. CHRISTIE. Yes, Mr. PECORA. Why sir. was it necessary to give them the right to borrow the stock which they had contracted to buy from you at $52 a share ? Mr. CHRISTIE. Well, those were the terms of their agreement, and the same reasons applied to that as applied to the first account. Mr. PECORA. In the face of those terms of this agreement, do you still maintain that the primary purpose of Dominick & Dominick was to acquire stock for distribution to their clients, or do you really think that they were operating a pool account to manipulate the prices of the security through the medium of their trade on the stock exchange ? STOCK EXCHANGE PRACTICES 1683 Mr. CHRISTIE. I think there was no question that their primary object was to trade in the stock to make money. Mr. PECORA. Apart from the question of distributing the stock to their clients? Mr. CHRISTIE, I know that they did anticipate, and I assume that they did distribute stock to their clients in addition to whatever trading they did. Mr. PECORA. If they really wanted to apply 19,198 shares of stock for distribution to their clients, what occasion was there for giving them the right in this agreement to sell short up to the full amount of the 19,198 shares that you and your associates agreed to deliver to them ? Mr. CHRISTIE. I think they had a right to sell short the whole 20,000 shares. Mr. PECORA. Yes; I know that. Mr. CHRISTIE. Not limited to the 19,000. Mr. PECORA. There is such a small difference between the two amounts Mr. CHRISTIE. That was the usual provision in a trading account; and in any event, Dominick & Dominick in that letter from them to us—those are the provisions and the things they ask for. Mr. PECORA. YOU agreed by affixing the signature of your firm by way of confirmation and assent to their proposal and offer, did you not? Mr. CHRISTIE. Yes. Mr. PECORA. SO thereby you would make it your contract as well ? Mr. CHRISTIE. We had no objection to accepting that contract on those terms, and thereby we did consent to their provisions. Mr. PECORA. At the time you agreed to do this you were not only a stockholder iii your individual right in this investment trust; you were not only a member of the firm of Dillon, Read & Co. who were the managers of this investment trust, but you were also an officer of the investment trust, were you not? (Witness confers with associates.) Mr. PECORA. I will show you the list of July 1929, which recites you as being its vice president. Mr. CHRISTIE. Yes, sir. Mr. PECORA. DO you think it was fair or ethical for you, under those circumstances and in view of these relations that you bore to this investment trust, to lend yourself to an agreement with a firm of brokers under which they could, in the exercise of their sole discretion, sell the stock of this corporation short ? You agreed to loan them the stock in the event that they needed it to cover those short sales ? Mr. CHRISTIE. This provision for short sales was the usual provision in a trading account. Mr. PECORA. Whether it was the usual provision or not, the unqualified right was given to Dominick & Dominick as the managers of this account, to sell short, if necessary, in the exercise of their sole discretion, was it not? Mr. CHRISTIE. Yes. [Conferring with associates.] Mr. PECORA. May I interrupt just a moment? Mr. Christie, the question that I have asked you calls for your individual judgment 1684 STOCK EXCHANGE PRACTICES and opinion. I notice that you have been conferring with your associates. I want to get your individual judgment or opinion on this specific matter. Mr. CHRISTIE. Yes; I appreciate that. Mr. PECORA. Uninfluenced by the judgment or opinion of any of your associates. Mr. DIIXON. May I correct you ? I was not suggesting the answer. Mr. PECORA. I was not accusing you, sir. Won't you, Mr. Christie, give me your individual opinion about that? Mr. CHRISTIE. I am trying to visualize whether or not I did participate, which I do not think I did. I participated individually only to the extent of putting up the stock, the firm had the participation as an identity in the trading account, the terms of which are general; to have power to buy, sell, trade in and sell short, if necessary, and to borrow stock. I do not assume that it was at all contemplated selling the stock short. In any event, the participation account was one thing which Dillon, Bead & Co. had, I as an individual only put up part of the 19,198 shares, which was optioned to the account. Senator COUZENS. May I ask you whether in your new capacity as head of the Investment Bankers Association you will approve of such practices as that among the investment bankers? Mr. CHRISTIE. I am not head of it. Senator COTTZENS. We assume that you are not going to have any independent candidates, and that you will be. Let us say that you do become head of the Investment Bankers Association; would you as the leader of that association approve of this practice among investment bankers? Mr. CHRISTIE. YOU mean, the practice of having a trading account at all? Senator COUZENS. Selling short, the loaning of stock, and so on. Mr. CHRISTIE. In the first place, of course, I would very much prefer not to make any campaign or statements before I am elected to that office, because I have not been, as yet; and ordinarily that association acts after consultation with the board of governors, and their opinions are not the opinions of just one individual, but they are carefully considered opinions of a number of gentlemen in the business. Senator COUZENS. If you were head of it you would be influential, I assume, in the policies of the association ?' Mr. CHRISTIE. I hope that when I am head of it neither the association nor I individually will sponsor any policies that you or this committee would consider unethical; and I should prefer not to give Senator COTJZENS. Assuming that I wanted to take the advice of the Investment Bankers Association which you freely give out to the public and to your investors, I should like to know whether I should take that advice based on the hearings here as to what the policy of the Investment Bankers Association has been or will be. Mr. CHRISTIE. The Investment Bankers Association is concerned primarily with the purely investment business. We are discussing a trading account and stock listed on the stock exchange. I hardly think it would be a proper subject that would come before the Investment Bankers Association. STOCK EXCHANGE PEACTICES 1685 Senator COUZENS. But if the members of the Investment Bankers Association approve of this sort of policy which you have been conducting here as an individual and as a member of Dillon, Read & Co., I perhaps would hesitate to invest my money in anything you recommended if you were going to play with it that way. The CHAIRMAN. I S the Investment Bankers Association interested very largely in opposing the Securities Act ? Mr. CHRISTIE. In opposing it? The CHAIRMAN. Yes. Mr. CHRISTIE. NO ; I don't think so. The CHAIRMAN. Have they not been opposing it? Mr. CHRISTIE. Certainly not. The CHAIRMAN. Did they not oppose the passage of the act? Mr. CHRISTIE. They were interested and felt that some of the provisions should have been made different; but I know that they are heartily in accord with the principles of the bill and what is behind it, and certainly we want to see the safeguards that that bill undertakes to set up for the investor The CHAIRMAN. Are they trying now to promote amendments to that act ? Mr. CHRISTIE. NO. Mr. PECORA. Mr. Christie, all told, how many shares of common stock of the United States & Foreign Securities Corporation were traded in through the medium of these two accounts that were managed by Dominick & Dominick ? Mr. CHRISTIE. HOW many did Dominick & Dominick trade in ? Mr. PECORA. Yes. Mr. CHRISTIE. There, again, I Mr. PECORA. Well, how many would have to of the shares traded in by Dominick & Dominick for the purposes of those two accounts came from you and your associates in Dillon, Read & Co. ? Mr. CHRISTIE. That figure I have: 74,198. I spoke of that this morning. Does that agree with your figures ? Mr. PECORA. What was the total consideration that was received by you and your associates for the stock which entered into these two accounts? Mr. CHRISTIE (after conferring with associates). It was about $4,000,000, Mr. Pecora. Mr. PECORA. And that was for 74,198 shares ? Mr. CHRISTIE. That is right. Mr. PECORA. And those 74,198 which were sold by you and your associates through these two accounts for an aggregate of about $4,000,000 were out of a block of 500,000 shares originally acquired by individual members of Dillon, Bead & Co. for 20 cents a share, or for a total of less than $15,000, in 1924? Mr. CHRISTIE. Some of them had changed hands in between 1924 and 1929. Mr. PECORA. But they had only changed hands among the associates of Dillon, Read & Co. ? Mr. CHRISTIE. Yes; that is right. Mr. PECORA. During the operation of these two accounts by Dominick & Dominick did you and your associates who were participants 1686 STOCK EXCHANGE PRACTICES in those accounts also sell through your own facilities and agencies other shares of this common stock? Mr. CHRISTIE. Yes; there were some sales. Mr. PECORA. During the period of time covered by the trading in these two accounts what was the total number of shares of the common stock of the United States & Foreign Securities Corporation which you and your associates disposed of either through the medium of the two accounts or by sales in the open market ? Mr. CHRISTIE. Up to what date would that be, Mr. Pecora? Mr. PECORA. Well, up to—the first account ran from December 1928 to June 1929. The second account dated from June 22, 1929, and continued for about 2 months. Mr. CHRISTIE (after conferring with an associate). I am not sure,. Mr. Pecora, that our figures coincide exactly with the same datesy but the total Mr. PECORA. Approximately what was the total in that approximate period of time? Mr. CHRISTIE. The total amount that was sold during the period of those two accounts and possibly a few days after—a month or so afterward, perhaps the grand total of that was about 120,000 shares, which includes these two accounts. Mr. PECORA. Yes. Mr. CHRISTIE, SO that I think there are about 50,000 shares outside of the Dominick & Dominick account—46,000 and some. Mr. PECORA. The figures we have compiled from your records would show that during this approximate period of* time covered by the life of these two accounts, and perhaps a, month in addition to that, you and your associates, who, as individuals, owned some of this common stock for which the corporation originally received 20 cents a share, disposed of 120,552 shares. Mr. CHRISTIE. That sounds right. Mr. PECORA. That is about correct, is it ? Mr. CHRISTIE. Yes. Mr. PECORA. And 74,198 shares of that total were disposed of through the medium of these two accounts operated by Dominick & Dominick; is that correct? Mr. CHRISTIE. And Mr. PECORA. And the balance, or a little less than 50,000 shares, were disposed of by you and your associates in open-market transactions, is that correct? Mr. CHRISTIE. That is right. Mr. PECORA. What was the average price received by you and your associates, or, rather, if you can give us the total consideration you received for the sale of the 120,552 shares in this period. Mr. CHRISTIE. The total consideration was somewhere around $6,000,000. I have the exact figure here. Mr. PECORA. It is nearer $7,000,000, is it not? Let me give you the exact figure as we have compiled it—$6,843,380.66. Mr. CHRISTIE. That is right, Mr. Pecora. Mr. PECORA. That is about right, is it? Mr. CHRISTIE. The average is around 56. Mr. PECORA. If my calculations are correct, the 120,552 shares which you and your associates individually sold in this manner dur STOCK EXCHANGE PRACTICES 1687 ing this period of time were sold for an aggregate of $6,843,380.66, and the corporation, this investment trust, received only $24,110.40 for the stock when it issued it in 1924. That is at the rate of 20 cents a share. Mr. CHRISTIE. May I confer? Mr. PECORA. Yes. Are my figures correct, Mr. Christie? Mr. CHRISTIE. Yes. The figures, I think, are right, Mr. Pecora, but, as you have said, I would like to be clear that this group of individuals did not all have a cost of 20 cents a share. Some of them had changed, and had a higher cost. Mr. PECORA. I said it was stock that originally was issued by the investment trust for 20 cents a share, and the persons to whom it was originally issued were all associates of Dillon, Read & Co. That is correct, is it not? Mr. CHRISTIE. Yes. At the time that was issued, the stock was worth less than 20 cents a share. That was the nominal price for it. Mr. PECORA. Are you trying to tell us now that the associates of Dillon, Eead & Co. consciously paid more than they thought the stock was worth when they bought it for 20 cents a share ? Mr. CHRISTIE. I have not finished, Mr. Pecora. It was clear that when they did take the stock at a cost of 20 cents, the company, when it started, had no book value for that common stock. There was the $1,000,000 that had come out of the first preferred Mr. PECORA. YOU mean by that that the associates or the members of Dillon, Read & Co. in 1924, when they bought these 500,000 shares of this common stock for $100,000, or 20 cents a share, had any misgivings as to whether or not they were taking a risk in buying that stock for 20 cents a share ? Mr. CHRISTIE. NO ; I did not say that, Mr. Pecora. I just wanted to make it clear Mr. PECORA. I know you did not say that, but is that the thought you mean to convey to the committee ? Mr. CHRISTIE. NO; that is not the thought at all. I wanted to convey that that stock was bought with the second preferred for the $5,100,000, and actually the 20 cents is a mere nominal assigned valuation, Say it cost nothing, if you will, but in August 1929, which is nearly 5 years later, the company had a book value back of that stock of around $48 a share, so that the picture had changed, and this stock that was sold at an average of 56 was quite a different stock in value than it was 5 years earlier. Mr. PECORA. We know that; but the figures which I embodied in my previous question are correct, to the following effect, that the 120,552 shares which you and some of your associates in Dillon, Read & Co. sold to the public through the medium of these two accounts conducted by Dominick & Dominick, as well as through the medium of individual sales made in the open market for a total consideration of $6,843,380, was stock which cost those associates, or those of them who got the stock upon its original issue in October 1924, the sum of $24,110.40, at the rate of 20 cents a share. Mr. CHRISTIE. Up until just the very end—where you said that some of those associates paid 20 cents a share, that was correct. Just .at the very end of your statement, I think, where you say it cost 1688 STOCK EXCHANGE PRACTICES those associates that total amount of 20 cents times that, that is not technically correct, but I gather that what you mean is that that stock goes back to the original stock that had this nominal valuation placed upon it. The CHAIRMAN. He means an original cost of 20 cents. Mr. PECORA. Exactly. That is what I said. Mr. CHRISTIE. Quite right. Mr. PECORA. The cost when originally issued. The CHAIRMAN. YOU paid as high as $10 for some of yours, and sold it at 53. Mr. CHRISTIE. That is right. I paid $10 for all of mine, Senator. Mr. PECORA. All these sales were made after the stock was listed on the New York Curb Exchange, were they not ? Mr. CHRISTIE. Yes; that is right. Mr. PECORA. The stock was not listed on the New York Curb Exchange until sometime in February 1928. Does that accord with your recollection? Mr. CHRISTIE. May I check that date? Mr. PECORA. Yes. Mr. CHRISTIE. I think it was quite a little while before the account was formed. Mr. PECORA. The specific date being, as I have it, February 8, 1928. Mr. CHRISTIE. I think that is correct. Mr. PECORA. I think, Mr. Chairman, we might take a recess now until tomorrow. The CHAIRMAN. The committee will take a recess now until 10 o'clock tomorrow morning. We will continue the session tomorrow until 1:30 tomorrow afternoon. We will not have any afternoon session. (Thereupon, at 4:10 p.m., Wednesday, October 4, 1933, the subcommittee adjourned until 10 o'clock the following morning.) COMMITTEE EXHIBIT NO. 9, OCTOBER 4, 1933 UNITED STATES AND FOREIGN SECURITIES CORPORATION COMMON STOCK (NO PAR VALUE) DOMINICK & DOMINICK, 115 Broadway, New York, December 20, 1928. Messrs. DILLON, READ & Co., 28 Nassau Street, New York City, We wish to confirm that, in consideration of the formation by us of an account, of which we shall be the managers with full discretionary powers, you hereby extend to us for and on behalf of such account, options to purchase from you an aggregate of thirty thousand (30,000) shares of United States and Foreign Securities Corporation Common stock at prices and under conditions as follows: You will sell to us at any time or times, prior to the close of business February 20, 1929, all or any part of ten thousand (10,000) shares of the above stock at $47.50 a share in such, amounts and at such times as we may call it; Provided we exercise our right as managers to purchase all of the stock optioned to us at $47.50 a share, you will thereupon immediately extend us the right to purchase from you, all or any part of ten thousand (10,000) shares additional of such stock at $50.00 a share, in such amounts and at such times as we may call it, within a period of 2 months from the date of the completion of our call of the entire amount of stock optioned us at $47.50 a share. Provided we exercise our right as managers to purchase all of the stock optioned to us at $50.00 a share, you will thereupon immediately extend us the DEAR SIRS : STOCK EXCHANGE PRACTICES 1689 right to purchase from you, all or any part of ten thousand (10,000) shares additional of such stock at $55.00 a share, in such amounts and at such times as we may call it, within a period of 2 months from the date of the completion of our call of the entire amount of stock optioned us at $50.00 a share. During the period in which these options exist, you agree to loan us at our call, all or any part of twenty thousand (20,000) shares of stock at the then prevailing market price. Stock borrowed or called by us shall be deliverable upon 1 day's notice against payment of the amount due. It is understood that until all of these options have either been exercised or have lapsed, you have the right to place stock privately but that you will exercise your best efforts to prevent such stock from coming into the market. If it should be necessary, however, for you to dispose of stock in the market, you agree to give us 5 days' notice before doing so. If the above is in accordance with your understanding, please so confirm by signing and returning to us the duplicate of this letter. Very truly yours, DOMINIOK & DOMINIGK. Confirmed and agreed t o : DILLON, READ & Co. STOCK EXCHANGE PEACTICES THURSDAY, OCTOBER 5, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C, The subcommittee met, pursuant to adjournment on yesterday, at 10 a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams (substitute for Barkley and proxy for Costigan), Norbeck, and Goldsborough (substitute for Townsend). Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Bead & Co.; Root, Clark, Buckner & Ballantine, George H. Murphy of counsel, counsel for United States & Foreign Securities Corporation. The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora. Mr. PECORA. Mr. Christie, will you resuriie the stand ? TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OF THE FIRM OF DILLON, READ & CO., NEW YORK CITY—Resumed Mr. PECORA. In the course of your examination yesterday afternoon, Mr. Christie, you probably will recall that you testified, in substance, that between December of 1928 and August or September of 1929, you and certain of your associates in the firm of D'.llon, Bead & Co., through the medium of two market operations managed by Dominick & Dominick, sold an aggregate of 74,198 shares of the common stock of United States & Foreign Securities Corporation. Do you recall your testimony in that respect? Mr. CHRISTIE. Yes, sir. Mr. PECORA. YOU further testified, in substance, that in addition to the sale of those shares of that stock, you and those same associates also sold through other channels than Dominick & Dominick accounts, an aggregate of 46,354 shares of that same common stock. Do you recall your testimony to that effect? Mr. CHRISTIE. Yes, sir. Mr. PECORA. NOW, I want to ask you, Mr. Christie, through what channels you and your associates effected the sales of the 46,354 shares of that common stock. 175541—33—PT 4 11 1691 1692 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. That total of forty-six thousand and odd shares was, I believe, all sold through Dillon, Read & Co. Mr. PECORA. TO or through them? Mr. CHRISTIE. Through them. Mr. PECORA. Sold through Dillon, Eead & Co. as a separate legal entity, or were they sold to Dillon, Eead & Co. as a separate legal entity ? Mr. CHRISTIE. I suppose technically they were probably sold to Dillon, Eead & Co. and by Dillon, Eead & Co. to others. Mr. PECORA. HOW were the transactions involving the sale of forty-six thousand and odd shares entered on the books of Dillon, Eead & Co. ? As a sale through Dillon, Eead & Co. or as a sale to Dillon, Eead & Co.? Mr. CHRISTIE. I believe they were entered on this memorandum account that was kept for the group of individuals as going out of that account and into the securities account on the books of Dillon, Eead & Co., and from that account to the purchasers. Mr. PECORA. DO you mean by the term " to purchasers " that they were sold to customers of Dillon, Eead & Co. ? Mr. CHRISTIE. Yes, sir. Mr. PECORA. NOW, will you please give the subcommittee in concise fashion the general course of that transaction, or of those transactions, that embodied the sale by you and your associates of those forty-six thousand and odd shares ? Mr. CHRISTIE. I believe that those sales took place toward the end or during the period of the second account of Dominick & Dominick that you discussed yesterday. Mr. PECORA. That is, the account that was formed on June 22, 1929? Mr. CHRISTIE. Yes; that is right. At that time, as you will recall, there was a great activity in the stock market generally; a demand for stocks, and our organization was receiving a good many requests for United States & Foreign Securities Corporation stock. Our Mr. PECORA (interposing). Just a moment. Do you attribute the unusual increase in the activity of that common stock in the market to the operations of Dominick & Dominick as managers of the first account ? Mr. CHRISTIE. Well, I shouldn't think that it could be distinguished at that time from the general activity that was present in all securities. Mr. PECORA. But, Mr. Christie, we have seen from evidence that was presented here on yesterday, the most of which came from you, that during the course of the operation of the first account by Dominick & Dominick, which commenced on or about December 20, 1928, and continued until some time in June of 1929, the total trades in that stock on the public exchange amounted to around 145,000 shares, of which approximately 90 percent went through Dominick & Dominick. Mr. CHRISTIE. Yes; I recall that, sir. Mr. PECORA. DO you think that that trading conducted by Dominick & Dominick for that first account was a material factor in STOCK EXCHANGE PRACTICES 1693 producing or inducing this increased demand from the public for the common stock of that investment trust ? Mr. CHRISTIE. Well, that no doubt had some effect in creating more interest in the stock. Mr. PECORA. Yes. Now, will you go ahead and resume your naration of the general routine of the transactions by which you and your associates during the life of those two accounts sold forty-six thousand and odd shares of your stock ? Mr. CHRISTIE. When I stopped I had said that our sales people were receiving a good many requests for the stock, and at that time we had had no stock that we could sell to them, although we were having a good many requests from them for the privilege of confirming stock. I think perhaps they knew that people could buy the stock from other investment houses, that possibly were in this other account, but as to that I do not know. In any event we had those requests and orders coming in, that we had not been filling up to that time, and we just put them on the exchange. For that reason we allowed the balance of those 120,000 shares, which is the forty-six thousand and odd shares referred to, to be confirmed and sold on those orders that we were receiving. And my opinion is that substantially more than the amount that was confirmed could have been sold just on orders that came in at that time. That was all during that period of the great activity in stocks generally., Mr. PECORA. The firm of Dillon, Read & Co. had no membership on any public exchange, had it ? Mr. CHRISTIE. NO. Mr. PECORA. Nor did any associate or member of the firm have a membership on any stock exchange ? Mr. CHRISTIE. NO. The CHAIRMAN. At what price did you sell these 46,000 shares— average price? Mr. CHRISTIE. I am not sure I have that readily, but it can be easily figured out [conferring with associates]. Mr. PECORA. Mr. Christie, I do not want to interrupt you Mr. CHRISTIE. I think they are trying to figure out that average price. Mr. PECORA. If you want to finish your conference, all right. Mr. CHRISTIE. We have not that separately. If your investigators figured it separately, I should be glad to accept their figures. Mr. PECORA. Mr. Christie, do I understand you correctly to this effect, that during the life of these two accounts operated by Dominick & Dominick the firm of Dillon, Read & Co. received requests from various customers to sell to them shares of the common stock of this investment trust ? Mr. CHRISTIE. That is correct; yes, sir. Mr. PECORA. And that those requests in the aggregate required the sale and delivery to those customers of Dillon, Read & Co. of shares aggregating 46,354? Mr. CHRISTIE. That is correct, sir; yes, sir. Mr. PECORA. A S a matter of fact, were not those requests for those shares from the customers of Dillon, Read & Co. for a much larger amount than forty-six thousand and odd shares ? 1694 STOCK EXCHANGE PRACTICES Mr. CHRISTIE. Yes. I meant to make that clear when I said that I thought we could have confirmed a very much larger amount had it been available, which, I think, answers your question. Orders were in excess of that amount. Mr. PECORA. DO you know the aggregate amount of shares that were purchased from Dillon, Read & Co. during that time by its own customers ? I mean shares of this common stock. Mr. CHRISTIE. In addition to the 46,000 that might have been ? Mr. PECORA. Yes. Mr. CHRISTIE. I am not sure about that. Mr. PECORA. It was something in excess of 11,000 adidtional, was it not? Mr. CHRISTIE. Yes, sir; that is right. Mr. PECORA. And from what sources did Dillon, Read & Co. obtain the 11,000 addtional shares that were needed to fill the demands or requests or transactions of its customers? Mr. CHRISTIE. Those 11,000 shares were purchased from Dominick & Dominick account—the second account of Dominick & Dominick. Mr. PECORA. Can you tell the committee why that was done instead of having the associates who individually participated in the Dominick & Dominick accounts supply that stock to Dillon, Read & Co., out of their individual holdings? Mr. CHRISTIE. Yes, I think I can. The 120,000 shares on our memorandum account that we kept for those individuals were really divided into 2 accounts: 1 that covered the 2 Dominick accounts and the other the balance of the stock. Participation by these associates in these two accounts varied. That is, for example, as to some of the individuals, all of the stock they sold went through the Dominick accounts, and the balance went through Dillon-Read, and there were some individuals who decided to sell some of their stock either towards the end of the second Dominick account or after the Dominick account. Which, I am not quite clear. But the reason for taking back 11,000 shares from Dominick & Dominick was that at the time the 11,000 shares were purchased there was not sufficient stock available from these individuals to confirm these sales. Is that clear? Mr. PECORA. Those individuals owned, among themselves, large blocks of this common stock to an amount greatly exceeding 46,000 or 11,000 shares, did they not? Mr. CHRISTIE. That is right; but it was not for sale. Mr. PECORA. Was it held back from the market because of any agreement on the part of these individual owners, either among themselves or with Dominick & Dominick or any other entity ? Mr. CHRISTIE. NO. It just was not for sale; that is all. Mr. PECORA. Why was it not for sale ? Mr. CHRISTIE. They did not want to sell it. Mr. PECORA. YOU were one of the participants in that account, were you not? Mr. CHRISTIE. That is right. Mr. PECORA. Why did you not want to sell more shares than your holdings ? Mr. CHRISTIE. The amount that I sold was all I wanted to sell, and I have not sold any since. I do not know any other explanation or reason to give you, sir. STOCK EXCHANGE PRACTICES 1695 Mr. PECORA. The stock which was furnished to Dillon, Eead & Co. as an entity by you and your associates to enable Dillon, Eead & Co. to fill the orders they received from their customers was not purchased through open market transactions, was it? Mr. CHRISTIE. Our stock? Mr. PECORA. Yes. Mr. CHRISTIE. It came out of that original stock. Mr. PECORA. I mean the transaction whereby Dillon, Eead & Co. acquired those forty-six thousand odd shares did not go over the exchange ? Mr. CHRISTIE. With the exception, I think, of some small amount, 2,700 shares, or some small block. Mr. PECORA. But in general they were not negotiated through the exchange ? Mr. CHRISTIE. NO. Mr. PECORA. They were transactions had directly between those individual associates of Dillon, Eead & Co. and their firm as an entity? Mr. CHRISTIE. Yes. Mr. PECORA. Was there any reason why those sales were not made through the exchange? Mr. CHRISTIE. Except that the orders came direct to us. We were not members of the exchange, and they were confirmed directly to customers. Mr. PECORA. Your firm often receives orders from customers for stock which your firm has to go out in the open market to buy, does it not? Mr. CHRISTIE. That is right. Mr. PECORA. Was there anything to prevent your firm from filling those orders through purchases which it could have made in the open market? Mr. CHRISTIE. NO. Mr. PECORA. DO you know why that was not done in this instance ? Mr. CHRISTIE. Because this stock was available for sale directly to customers. Mr. PECORA. SO were the 11,000 shares available if you cared to part with them, were they not? Mr. CHRISTIE. That is right. The 11,000 shares were a part of the stock that had been optioned to Dominick, and we simply took that back from Dominick. Mr. PECORA. Was the acquisition of the 46,000 shares which Dillon, Eead & Co. made from its individual associates, including yourself, for the purpose of filling orders of their customers, made in the fashion in which you have described, rather than in open market transactions, in order not to interfere with the market activities in the stock, at that time, of Dominick & Dominick? Mr. CHRISTIE. NO, not at all. They were made largely after that account was closed. Mr. PECORA. DO you know for how many years you served as a member of the board of directors of the United States & Foreign Securities Corporation? Mr. CHRISTIE. We had those dates yesterday, I believe. Mr. PECORA. Are you a director of that corporation now ? Mr. CHRISTIE. NO, sir. 1696 STOCK EXCHANGE PRACTICES Mr. PECORA. HOW long is it since you ceased being a director ? Mr. CHRISTIE. We are looking that data up, I have forgotten the year. Mr. PECORA. While your associates look up those dates, let me ask you this. During the time, whether it was a short time or a long time, that you were a director of this investment trust, did you attend with regularity the meetings of its board of directors ? Mr. CHRISTIE. I am sure the minutes would show. Mr. PECORA. What is your personal recollection about it ? Mr. CHRISTIE. My recollection is that I was a director for only a very short time. Mr. PECORA. Well, during that period of time did you attend with regularity the meetings of its board of directors? Mr. CHRISTIE. I think so. I think there were very few meetings. Mr. PECORA. Did the board hold meetings at regular intervals ? Mr. CHRISTIE. I was a director from March 8, 1925, to July 13, 1925—less than 2 months in the first case; and then I was on the board again, from March 2, 1927, to May 10, 1927—another period of about 2 months, Mr. Pecora. Mr. PECORA. Was it customary for the board to hold meetings at stated intervals or periods ? Mr. CHRISTIE. I don't remember that, sir. Mr. PECORA. DO you recall attending any meetings of the board of directors ? Mr. CHRISTIE. I remember attending directors' meetings; yes, sir. Mr. PECORA. I am referring, of course, to this investment trust. Mr. CHRISTIE. It seems to me that I attended directors' meetings, but this was quite some time ago, and the records will show definitely whether or not they had meetings during that 2 months and whether I attended them. Mr. PECORA. Upon whose judgment did this investment trust buy securities for its portfolio ? Mr. CHRISTIE. On the judgment of the board of directors. Mr. PECORA. DO you recall at any meetings of the board of directors that you attended, participating in any discussions which led to a decision respecting the making of investments for the portfolio of the trust? Mr. CHRISTIE. I am sorry, but I do not specifically remember any meeting during that short time. I would be glad to refer to the records and see if I did attend them or not. I am told I attended one in each period of 2 months. Mr. PECORA. DO you recall that at either of those meetings you participated in any discussion with your fellow members of the board at which decisions were arrived at respecting investments for the portfolio of the investment trust ? Mr. CHRISTIE. I have no recollection of the meetings at all. Senator ADAMS. It is barely possible that the record itself would not be conclusive that you were there. Minutes are frequently written up in lawyers' offices reciting attendance, and then they are signed. Mr. CHRISTIE. NO ; I hardly think so. They would show, I think, who was present and who was absent. STOCK EXCHANGE PRACTICES 1697 Mr. PECORA. Was there any subcommittee of the board of directors vested with special responsibility for determining the investments to be made for the portfolio ? Mr. CHRISTIE. I do not believe so; but that I do not remember. The CHAIRMAN. Was there any resolution of the board of directors on that subject? It seems to me you could supply that information from your records. Mr. CHRISTIE. Yes; we could, Senator. I should be glad to look it up. Mr. PECORA. Were investments for the portfolio of the investment trust frequently made? Mr. CHRISTIE. There, again, my position on that board for those two short periods Mr. PECORA. Perhaps you can tell us that from any knowledge you gained by virtue of your having served for several years as vice president of the investment trust. Mr. CHRISTIE. Well, your question was: Did they make investments frequently? I should certainly say they did, at times more than others. Mr. PECORA. DO you know whose judgment dictated the investments that were made, whether you would know it from sitting on the board of directors or from your service as vice president of the company? Mr. CHRISTIE. Both from my service as an officer of the company and the short time I was on the board, and from the general knowledge and impression that I have of the conduct of the trusts, I should say that the board of directors were the controlling factor in the investments that that company has made. Mr. PECORA. Where were the meetings of the board of directors of the company held ? Mr. CHRISTIE. They have been held quite frequently at the office of the president, a.t no. 1 Wall Street, and at times in our office. Mr. PECORA. Where was the active office of the corporation ? Mr. CHRISTIE. At the present time ? Mr. PECORA. NO ; during the activities from 1924 to 1929 and 1930. Mr. CHRISTIE. I think it has been changed several times. There was a time that it was in Chicago, and then later on I think it moved to Newark. Just when that took place I would have to look up, if you wanted the details, or if there were any other changes; but at the present time it is in Newark. Mr. PECORA. The investments for the portfolio of the investment trust were made from time to time and not at stated periods, were they not ? Mr. CHRISTIE. That is right; yes, sir. Mr. PECORA. Whenever an investment was made it was not necessary to call together the board of directors for the purpose of having their judgment recorded, was it? Mr. CHRISTIE. Not always. The executive officers might make purchases, but the transactions were always reported to the next board meeting, and if there were things that needed to be put up to the board for consideration, I believe the custom was to have the board then consider them. 1698 STOCK EXCHANGE PRACTICES Mr. PECORA. The general routine was for the executive officers to exercise their judgment with regard to the investments to be made for the account of the portfolio and to report how they exercised that judgment in that respect to the board of directors at following meetings ; is that correct ? Mr. CHRISTIE. I would not say that that was generally the method. I thought you asked me if that sometimes was the method. But the records would show. Mr. PECORA. Can you testify what the method generally followed was? Mr. CHRISTIE. A combination of both; the executive officers buying between meetings of the board and the board coming to its decisions at its own meetings. Mr. PECORA. AS a vice president or the vice president of this investment trust, during the years you served as such did you recommend to the investment trust any investments, which recommendations were followed ? Mr. CHRISTIE. I might very well have. I do not recall any specific instances. Mr. PECORA. YOU would not say that you were one of the executive officers who, in the general routine of his duties, made investments for the account of the portfolio ? Mr. CHRISTIE. NO. Mr. PECORA. Who were the executive officers who ordinarily did that? Mr. CHRISTIE. Mr. Tracy has been the president, now, for quite a few years. Mr. PECORA. By mentioning his name in answer to my question do you mean to imply that he was the executive officer who was most active in that respect ? Mr. CHRISTIE. I think so. Mr. PECORA. Did you say Mr. Tracy's office was at no. 1 Wall Street? Mr. C&RISTIE. His personal office is at no. 1 Wall Street. Mr. PECORA. The corporation did not have its offices there, did it ? Mr. CHRISTIE. NO. Mr. PECORA. Am I correct, then, in assuming that Mr. Tracy was engaged in business enterprises of his own, separate and distinct from this investment trust of which he was president ? Mr. CHRISTIE. AS far as I know, Mr. Tracy's entire activities have to do with investments not only of this company, but he is interested in one or two other investment funds. I do not know of any other business that he carries on. Mr. PECORA. What are the other companies in which he is interested? Can you mention one or two of them? Mr. CHRISTIE. That I would have to ask him. The only one I remember is called, I think, the American & European Securities Co. Mr. PECORA. HOW about the Louisiana Land Corporation? Mr. CHRISTIE. Oh, yes; I think he is at present perhaps president of that. Mr. PECORA. DO you know anything about that company? Mr. CHRISTIE. N O ; I know that there is such a company. STOCK EXCHANGE PRACTICES 1699 Mr. PECORA. DO you happen to know that securities of that company were in the portfolio from time to time of this investment trust? Mr. CHRISTIE. Yes. Mr. PECORA. Did you as a director or vice president or other officer of this investment trust ever give your approval to the purchase of those securities for the portfolio of the investment trust? Mr. CHRISTIE. I do not recall that. I would have to look up the record on that, sir. Mr. PECORA. The witness who preceded you at these hearings before the committee, Mr. Clarence Dillon, was interrogated, as I recall, with respect to the formation of the second investment trust, some time in 1928; the investment trust I refer to being called the United States & International Securities Corporation. Did you hear the testimony given by Mr. Dillon before this committee day before yesterday on that subject? Mr. CHRISTIE. Yes, sir. Mr. PECORA. He was then asked, among other things, particularly, as I recall it now, by Senator Couzens, what reason there was at that time that Dillon, Read & Co. caused this second investment trust to be organized with a capital of $60,000,000 to engage in the same kind of business as the first investment trust which was still functioning. Do you recall those questions? Mr. CHRISTIE. Yes. Mr. PECORA. Can you give any reason, based upon your personal knowledge, for the organization of that second investment trust by United States & Foreign Securities Corporation ? Mr. CHRISTIE. Well, as I remember it, Mr. Tracy, the president of the United States & Foreign Securities Corporation, thought it was a desirable thing to do and that the United States & Foreign Securities Corporation could have further diversification through that second trust; and my principal recollection is that Mr. Tracy and the board thought it was a desirable thing to do. Mr. PECORA. What reasons did they advance ? Mr. CHRISTIE. That I do not recall. I don't believe I was a director at that time. Mr. PECORA. The formation of this second investment trust in 1928 was one of the major operations of your firm that year, was it not? Mr. CHRISTIE. It was one of our issues in that year; that is right. Mr. PECORA. And a rather important one, was it not ? Mr. CHRISTIE. Yes. Mr. PECORA. The organization of an investment trust with a capitalization of $60,000,000 is not an everyday happening, even in your firm, is it ? Mr. CHRISTIE. Sixty millions? Mr. PECORA. Yes. Mr. CHRISTIE. Sixty millions is right, I Mr. PECORA. That was not an everyday am toljd. occurrence, even for your firm, was it ? Mr. CHRISTIE. NO ; it was not. Mr. PECORA. Can you recall what reasons were advanced at any conference among the members of the firm of Dillon, Read & Co. which commended to their judgment the organization of this second 1700 STOCK EXCHANGE PRACTICES investment trust in 1928 when they knew that the first investment trust which they caused to be organized in 1924 was still actively functioning? Mr. CHRISTIE. The first investment trust at the time of the organization of the United States & International was making a very splendid record. Its securities were advancing in value and its book value was increasing, but it had 6 percent preferred stot^k. The United States & International had 5 percent preferred stock available for the second preferred, and that seemed, at the time at least, a safe margin. That excess income would be available for dividends on the second preferred, together with the common that the United States & Foreign had. They thought it was a good investment. That the 5 percent preferred stock, like the 6 percent preferred of the first investment trust, was a good investment to sell and to offer to our clients. Mr. PECORA. The first investment trust was conducted and operated for the benefit of its stockholders, was it not, primarily? Mr. CHRISTIE. Yes, sir. Mr. PECORA. The public subscribed 25 to 30 million dollars with which the first investment trust was launched, did it not? Mr. CHRISTIE. Yes; and they were stockholders. Mr. PECORA. DO you know of any reason why those stockholders were not given the benefit of increased activities and operations through the medium of additional capital? Mr. CHRISTIE. Whatever benefit would come, would come to the first trust and to its common stock by this investment in the second. I do not quite follow you to see what other arrangement or earnings or rights might have been given to stockholders that would have been any more advantageous than this investment in the United States & International. Mr. PECORA. Under its charter the ftrst investment trust is empowered and authorized to conduct any or all kinds of business which the second investment trust is authorized to conduct? Mr- CHRISTIE. I believe so. Mr. PECORA. These two investment trusts were practically operated by the same individuals, were they not? Mr. CHRISTIE. The directors were different in both companies. I think Mr. Dillon was on both companies, and I think perhaps one other—no; just Mr. Dillon. Otherwise the boards were different. Mr. PECORA. Did not both companies have the same president ? Mr. CHRISTIE. Mr. Tracy was president and a member of the board. Mr. PECORA. Were there any directors of the two trusts in common ? Mr. CHRISTIE. I think, just Mr. Tracy and Mr. Dillon, as I recall it. Mr. PECORA. Were you ever an officer or director of the United States & International Securities Corporation? Mr. CHRISTIE. May I look that up ? Mr. PECORA. Yes. Mr. CHRISTIE (after conferring with associates). According to this record Mr. Pecora, I was never a director. I was^vice president from October 29,1928, to December 8, 1930. Mr. PECORA. I understand that the present directors of the United States & International Securities Corporation are as- follows: STOCK EXCHANGE PRACTICES 1701 Matthew C. Brush, Clarence Dillon, Charles Hayden, J. H. Hillman, Jr., Dean Mathey, Ernest B. Tracy, and Edward G. Wilmer. Does that accord with your present knowledge, Mr. Christie? Mr. CHRISTIE. I think that is right. Mr. PECORA. Who is Matthew C. Brush, if you know? Mr. CHRISTIE. I think he is president or chairman of the board of American International Co.. Mr. PECORA. He is well known as a big stock-market operator, is he not ? Mr. CHRISTIE. I do not know that. He is a well-known man, though. Mr. PECORA. YOU do not know that among his major activities are stock-market operations ? Mr. CHRISTIE. This company of his is an investment company, the American International. Mr. PECORA. Don't you know that the testimony he gave before this committee on that very subject during the year 1932 Mr. CHRISTIE. I never read his testimony, sir. Mr. PECORA. If you will take my assurance for it, the testimony shows his own admission to be that he is quite an operator on the stock market. Mr. CHRISTIE. All right. Mr. PECORA. Who is Mr. Charles Hayden, another one of the gentlemen on the board of directors of the United States & International Securities Corporation? Mr. CHRISTIE, Mr. Charles Hayden is a member of the firm of Hayden, Stone & Co. Mr. PECORA. IS that a stock-brokerage firm ? Mr. CHRISTIE. A member of the stock exchange and other exchanges; yes, sir. Mr. PECORA. It is a very active stock-brokerage firm, is it not? Mr. CHRISTIE. It is one of the large firms. Mr. PECORA. And in addition to handling a stock-brokerage commission business they are also interested in the issuance of securities, are they not ? Mr. CHRISTIE. They have an investment department or division. Mr. PECORA. Ariel the investment department or division of their business is a very large department, is it not? It forms a large part of their business? Mr. CHRISTIE. I have no knowledge of what percentage it is, or even relatively. Whether it is relatively large in their own organization or not, I would not have knowledge. I know from my knowledge of the investment banking business that Hayden, Stone & Co. are substantial dealers in investment securities. Mr. PECORA. During ordinary business hours you live and breathe in the atmosphere of the financial district of New York City, do you not? Mr. CHRISTIE. That is right. Mr. PECORA. Don't you know, from your years of habitation down there, that Hayden, Stone & Co. have a very big and active securities department ? Mr. CHRISTIE. Yes; I know they have had a very fine one for a number of years. 1702 STOCK EXCHANGE PRACTICES Mr. PECORA. Mr. Hayden, as a member of this firm of Hayden, Stone <& Co., was one of the gentlemen who, by virtue of his being on the board of directors of this second investment trust, was in a position to pass judgment on the investments to be made by that trust for its portfolio, was he not? Mr. CHRISTIE. That is right. Mr. PECORA. SO was Mr. Brush. Mr. CHRISTIE. That is right. Mr. PECORA. AS an investment banker, Mr. Christie, do you think that is an ethical practice ? Mr. CHRISTIE. Absolutely. I think Mr. Hayden has very broad knowledge of conditions generally. He serves on a great many boards of directors, and is a very active, well-posted gentleman, and I think that his knowledge and help are really very worth while. Mr. PECORA. I am not disputing his knowledge; but it is a fact, is it not, that as a member of the firm of Hayden, Stone & Co. he frequently is very much interested in promoting enterprises in which his firm has an active interest ? Mr. CHRISTIE. Yes, he is. Mr. PECORA. DO you think that a member of the board of directors of an investment trust which invests moneys obtained by it from the investing public should be one who also, apart from his relationship to the investment trust, is interested in the flotation of securities generally? Mr. CHRISTIE. I think it depends largely on the individual situation. I feel sure, in the first place, that Mr. Hayden's firm would be careful and use their best judgment in anything that they originated; and in the second place I feel sure that Mr. Hayden would not recommend the purchase of a security by an investment trust on whose board of directors he served, just because his own firm had originated the issue or was originating the issue. Mr. PECORA. DO you recognize the existence of a temptation dangling before a person in that position Mr. CHRISTIE. In any event, his judgment would have to be Mr. PECORA (continuing). To have the investment trust acquire securities of an enterprise in which he might %be interested as a promoter ? Mr. CHRISTIE. In any event, if one director made such a recommendation his judgment would be subject to check by the other directors, who would be capable of considering the suggestion on its own merits, and in their own judgment. Mr. PECORA. Did you ever hear of any controversies amongst various members of the board of directors of either of these investment trusts with regard to the kind of investments they should make ? Senator ADAMS. Mr. Christie does not remember who sat on the board of directors. Mr. DILLON. He attended only two meetings. Mr. CHRISTIE. I was only on the board of directors of the first company for a few months, 5 or 6 years ago. Senator ADAMS. I was commenting on the fact that the directors apparently do not have a very clear recollection of what took place. Mr. CHRISTIE. After 4 or 5 years STOCK EXCHANGE PRACTICES 1703 Mr. PECORA. Let us see, Mr. Christie, just what the atmosphere was that surrounded Mr. Hayden. As a director in this investment trust he was charged with the duties and responsibilities of a trustee toward the stockholders of the investment trust, to see that wise and sound investments were made in securities with the moneys of the stockholders poured into the investments. Mr. CHRISTIE. That is right. Mr. PECORA. AS a member of the firm of Hayden, Stone & Co.? which had a large securities department, and which included the business of issuing and selling securities, he was interested in furthering and facilitating the profitable conduct of the business of that firm of Hayden, Stone & Co., was he not? Mr. CHRISTIE. That is right, yes. Mr. PECORA. Don't you think that that placed him, at times, under a temptation—I am not suggesting that he yielded to it, but don't you think at times that placed him under a temptation whereby his judgment, as a trustee or director of the investment trust, might unconsciously become warped, and he might be induced to favor the purchase of securities sponsored by his private firm? Mr. CHRISTIE. I think that that is a question of Mr. Hayden's character. Mr. PECORA. Apart from his character, apart from the personality involved, I am looking at the elements in the situation. Mr. CHRISTIE. I really do not see any conflict there, when you consider the man's experience and his ability to consider the problem that he has before him in the light of his obligation and his duty. I appreciate and grant that he has two interests, that of the investment trust and that of his own company. Senator ADAMS. YOU would not see any impropriety in Mr. Hayden sitting on the board and recommending the purchase of securities which his firm was issuing ? Mr. CHRISTIE. Not at all. Senator ADAMS. The courts do not agree with you on that. Mr. PECORA. I do not think the courts generally agree with a man filling such a dual role. The CHAIRMAN. Your position is that the board of directors of the investment trust would have to pass upon it; but suppose that the board of directors of that trust were composed of men in a like situation to that of Mr. Hayden. Then they could trade among themselves as to what would be suitable, and what not, to the sacrifice of the interests of the investment trust. Mr. CHRISTIE. YOU might very well, I suppose, have a set-up within a board that would work as you suggest, Senator Fletcher. The other point, that Senator Adams brought out, was that I think very often that a man in that position might really know all about some situation, some company, some industry, because of some other position that he might have. Senator ADAMS. That is one of the objections to it. Mr. CHRISTIE. It might work either way; but it also has possibilities for good. That is what I meant to say in answer to your question. I do not deny that it might work the other way. Mr. PECORA. DO you happen to know whether or not, as a matter of fact, the United States & International Securities Corporation did, 1704 STOCK EXCHANGE PRACTICES at various times while Mr. Hayden was one of its directors, purchase securities sponsored by his firm or issued by his firm ? Mr. CHRISTIE. I do not know that. I would have to go through their transactions, or have some one check them to find that out. There, again, if your investigators have some particular case, I will be glad to accept their finding. Mr. PECORA. Who is Mr. J. H. Hillman, Jr., another one of the gentlemen now on the board of directors of the United States & International Securities Corporation? Mr. CHRISTIE. Mr. J. H. Hillman is in Pittsburgh. I think he has a company of his own, J. H. Hillman & Co.; he is also president of one of the banks there, I think. Mr. PECORA. Engaged in what kind of business ? Mr. CHRISTIE. The J. H. Hillman Co. is a coal and coke company. The proper name of the company, I am told, is the J. H. Hillman Coal & Coke Co. Mr. PECORA. Mr. Dean Mathey Mr. CHRISTIE. Mr. Hillman is also chairman of the board of the Peoples Trust & Savings Bank in Pittsburgh. Mr. PECORA. Who ? Mr. Hillman ? Mr. CHRISTIE. Mr. J. H. Hillman. Mr. PECORA. Mr. Dean Mathey, another director of this investment trust at the present time, is one of the partners of Dillon, Eead & Co. Mr CHRISTIE. That is correct. Mr. PECORA. Mr. Tracy is the same gentleman to whom you referred a little earlier in this hearing. He is the president of this investment trust, as well as president of the first investment trust. Mr. CHRISTIE. He is the president. Your mentioning Dean Mathey reminds me that we found out that it was Dean Mathey who signed the firm signature four or five years ago that could not be recognized yesterday morning. Mr. PECORA. On the option agreements given to Dominick & Dominick under date of December 20, 1928? Mr. CHRISTIE. That is right. Mr. PECORA. Who is Edward G. Wilmer, who now is a director of the United States & International ? Mr. CHRISTIE. Edward G. Wilmer is retired, not active in business. Mr. PECORA. Did he have any affiliations at any time with Dillon, Eead & Co.? Mr. CHRISTIE. Yes. He was associated with us for a while. I do not remember for how long a period, but for some time he was associated with us. Mr. PECORA. Can you tell this committee how the securities purchased by the United States & International Securities Corporation were acquired for its portfolio account? I mean by that, upon whose judgment were those securities purchased, Mr. CHRISTIE. Exactly similar to the United States & Foreign; the same kind of discussion and operation. Mr. PECORA. May I ask that we suspend with the examination of this witness at this time, so that we may call Mr. Tracy? The CHAIRMAN. Mr. Christie, before you leave, did Dillon, Read & Co, retain three fourths of the capital stock of this second trusty as they did in the case of the first trust ? STOCK EXCHANGE PRACTICES 1705 Mr. CHRISTIE. NO. Dillon, Read & Co., Senator Fletcher, had no interest in the second trust at all. The first trust, the United States & Foreign Securities Corporation, had the interest in the second trust, not Dillon, Read & Co. The CHAIRMAN. The first trust took three fourths of the common stock of the second ? Mr. CHRISTIE. The first trust, the United States & Foreign, put up the $10,000,000 for the second preferred of the United States & International, and got the second preferred and two thirds of the authorized common stock of the United States and International. Mr. PECORA. Let us get that set up correctly. The first trust was the United States & Foreign Securities Corporation. Mr. CHRISTIE. That is right. Mr. PECORA. That was organized with a capital of $30,000,000, which was raised by the sale of $25,000,000 worth of first preferred stock to the public, and the sale to Dillon, Eead & Co. of $5,000,000 of second preferred stock. Is that right, Mr. Christie ? Mr. CHRISTIE. The first trust had $25,000,000 first preferred, and the $5,000,000 second preferred, and 1,000,000 common shares. Mr. PECORA. The first preferred was purchased by the public for $25,000,000, was it not? Mr. CHRISTIE. In the form of allotment certificates that carried a share of common stock with each share of preferred. Senator ADAMS. May I ask a question right there ? In connection with this allotment, I wish you would check this simple bit of mathematics. With each $100 that was invested in the first preferred went one share of common stock. Mr. CHRISTIE. That is right. A purchaser could not buy a share of preferred alone. The original stock was issued in the form of allotment certificates, as you say. Senator ADAMS. But when a man put $100 in the first preferred, he got one share of the common stock. Mr. CHRISTIE. That is right. Senator ADAMS. Accepting your theory that the entire 750,000 shares of common stock went for the $5,100,000, for each $100 that was put into the second preferred, you got 15 shares. In other words, $100 in second preferred got 15 times as much common stock as $100 in the first preferred. Mr. CHRISTIE. That is right, because the $5,000,000 second preferred was junior money to the first. Senator ADAMS. If the second alternative were true, that the 500,000 shares of common were bought for $100,000, rather than as a part of the general purchase, in that case $100 would have bought 500 shares of the common stock. Mr. CHRISTIE. Well, but naturally no one was going to buy a share of second preferred with one share of common and pay $100 for it, the same price as a share of first preferred. Senator ADAMS. I am merely trying to get the mathematics of it. Fifteen times as big a share in the profits of the concern went to $100 in second preferred as compared with $100 in the first preferred. Mr. CHRISTIE. After the first preferred got their dividends. In. other words, the junior position must be kept in mind. 1706 STOCK EXCHANGE PRACTICES Senator ADAMS. I am talking about the profits. There was 15 times as large a share of the profits of the concern that went to $100 invested in second preferred, as compared with $100 invested in first preferred. Mr. CHRISTIE. I do not think that is the same way as Senator ADAMS. I S that the fact? Mr. CHRISTIE. I do not think so. Perhaps I do not quite follow your mathematics, but after the dividends on the first and second preferred, then anything after that goes 75 percent to the holders of the second preferred, wo will say, and 25 percent to the first preferred. Senator ADAMS. I am getting back to the fellow who had $100, and who bought first preferred. He got his 6 percent dividend, if it was earned. Mr. CHRISTIE. First. Senator ADAMS. Then, if the second dividend was earned, he got the share which one share of common stock gave him. For $100 invested in second preferred, when the preferred dividends of both classes were paid, he had 15 shares of common stock, so that he got 15 times as much, in addition to his 6 percent. Mr. CHRISTIE. I think that that is 15 times Senator ADAMS. The second preferred put up one fifth as much money, did it not, $5,000,000 as against $25,000,000? Mr. CHRISTIE. That is right. Mr. DILLON. May I clear this up for you ? Senator ADAMS. There were 750,000 shares, on your theory, that went to the second preferred, as against 250,000 to the first; in other words, 15 times as much per dollar. If you put it on the basis Mr. Pecora is disposed to contend, that the 500,000 of common stock was bought for $100,000, in accordance with the literal interpretation of your records, then the man who put $100 there got 500 times as much m common value as the man who put his $100 into first preferred. Mr. DILLON. Senator, may I clear it up for you ? I think I can, Senator ADAMS. Certainly. It is quite clear. Mr. DILLON. The set-up is this. The $25,000,000 of the first preferred was sold as first preferred stock, on which the holders got 6 percent interest, cumulative, each year it was earned. Senator ADAMS. And all they had a chance to get back was the 6 percent and the profits on 250,000 shares of common. That was their share in the general investment. Mr. DILLON. May I just finish ? Senator ADAMS. Yes. Mr. DILLON. Then we represented to our clients that we were going to be in control of this company and manage it, which I think is the reason they bought the stock. I do not believe our clients would put in $25,000,000 and buy first preferred stock in an investment trust with just an investment trust set-up. The fact that Dillon, Eead & Co. were going to take the responsibility was an important factor. It showed on the prospectus that we were sponsoring it, and that the control rested with us, and our clients for that reason said " Yes; we would like to invest money at & percent." In addition to that, we said to our clients "We are going further. We will put in $5,000,000 of our own money, junior to you, so STOCK EXCHANGE PRACTICES 1707 that if there is any loss in this company we will suffer it ourselves for the first $5,000,000." Then if we had sold first preferred, which was our original intention, and we had taken simply $5,000,000 of common stock, there would have been no confusion whatever. As to the $25,000,000 of the preferred which our customers took, we represented that we were going to have the control of this company and were going to manage it. We said " In addition, we are going to put in $5,000,000 of our own money, junior to yours and we take the junior position." If that were all, then you would have had a simple thing, and we should not even be discussing it. But in addition to that we thought " if this thing is successful beyond our expectations, and we get better than 6 percent, let us give our clients something more than that.'* So we changed the set-up, and we had $5,000,000 of second preferred. We then created a common stock to represent the equity behind the preferred stocks, and said: "All right. The first preferred fellows are to get a quarter of that common, so that if we do better than we expect, we shall give our clients not only six percent, but an additional 25 percent in whatever we do make over and above the 6 percent dividends on the 2 classes of preferred stock." On our part, there were reservations as to whether we could earn 6 percent year in and year out on the preferred stock. It has not been easy. It has required a great deal of attention and care, but we have been able to do it, and that preferred stock money is still intact. On our junior preferred stock money we have not had our full 6 percent dividends. With the market of 1929 running away, high prices were reported for this common stock, which had no value when we started. In fact, that stock was worth $1,000,000 less than nothing. Senator ADAMS. $900,000. Mr. DILLON. $900,000 less than nothing. It is true that over a period of a few years we had accumulated a surplus of some $48,000,000, which gave that common stock a value of $48,000,000 on account of the way the market was running. Senator ADAMS. I am not questioning that situation, that you put your own money in, $5,000,000, as security behind the first preferred, but I was merely reducing it to mathematics for my own information. You would also have 15 times as much in prospective profits for that money, as compared with what the investor was getting. Mr. DILLON. We could have taken 100 percent. We could have taken all that profit. We could have bought all the common stock for $5,000,000. Senator ADAMS. DO you remember what Lord Clive said ? " When I consider my opportunities I marvel at my moderation." [Laughter.] TESTIMONY OF ERNEST B. TEACY, NEW Y0KK CITY The CHAIRMAN. YOU solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee. So help you God. Mr. TRACY. I do. 175541—33—PT 4 \t 1708 STOCK EXCHANGE PRACTICES Mr. PECORA. Mr. Tracy, if you have any difficulty hearing me, will you be good enough to indicate it, and I will raise my voice. What is your full name? Mr. TRACY. Ernest B. Tracy. Mr. PECORA. Where do you live ? Mr. TRACY. My residence is 720 Park Avenue, New York. Mr. PECORA. Where is your office or place of business? Mr. TRACY. Number 1 Wall Street, New York. Mr. PECORA. Are you engaged in any business for your own individual account at that address ? Mr. TRACY. My business consists chiefly in the management of investment funds, and I also have been in the securities business. Mr. PECORA. Are any of the investment funds to which you have just referred the funds of corporations, or are they private funds? Mr. TRACY. They are funds of corporations. Mr. PECORA. HOW many such corporations do you manage? Mr. TRACY. I am president of another company, aside from the United States & Foreign, and the United States & International, known as the American & European Securities Co. Mr. PECORA. IS that an investment trust? Mr. TRACY. Yes, sir; and I am on the board of several others. Mr. PECORA. Investment trusts? Mr. TRACY. Yes, sir. Mr. PECORA. Are these other investment trusts, upon the boards of which you sit, in any way related with either the United States & Foreign Securities Corporation or the United States & International Securities Corporation? Mr. TRACY. In no way connected with them. Mr. PECORA. And, as president or manager of those other investment trusts, I assume that you receive a salary commensurate with your office and duties? Mr. TRACY. NO. I have, stock in the American and European Securities Co. Mr. PECORA. Are you its principal stockholder ? Mr. TRACY. N O ; I am not the principal stockholder, I believe. I am a large, substantial stockholder. Mr. PECORA. Are you at the present time the president of the United States & Foreign Securities Corporation ? Mr. TRACY. I am, sir. Mr. PECORA. When did you become its president? Mr. TRACY. The end of 1927, as I remember it.. Mr. PECORA. That corporation, as you probably know, was organized in October 1924. Mr. TRACY. Correct. Mr. PECORA. Did you have any connection with that corporation^ either as an officer, director, or stockholder, prior to the time that you became its president in 1927? Mr. TRACY. Not to my recollection. Mr. PECORA. At whose request did you become president of that corporation in 1927 ? Mr. TRACY. I was a director earlier in the year. I was elected to the board in the spring of 1927. STOCK EXCHANGE PRACTICES 1709 Mr. PECORA. When you were chosen president in 1927, of this first investment trust, the United States & Foreign Securities Corporation, who first proposed to you that you become its president? Mr. TRACY. AS I remember, it was discussed at- board meetings and I was asked whether I would accept the presidency. Mr. PECORA. By whom ? Mr. TRACY. Mr. Dillon. Mr. PECORA. Who preceded you as president ? Mr. TRACY. Mr. Joy was chairman of the board. I will have to look up and see who was president. [After conferring with associates.] E. J. Bermingham. Mr. PECORA. Mr. Bermingham was a partner of the firm of Dillon, Read & Co. at that time, was he not? Mr. TRACY. I believe he was. Mr. PECORA. Have you served continuously since 1927 as president of the United States & Foreign Securities Corporation? Mr. TRACY. I have. Mr. PECORA. And have been a member of the board of directors during all that time ? Mr. TRACY. I have. Mr. PECORA. Are you also connected, either as an officer or director, with the investment trust known as the United States & International Securities Corporation? Mr. TRACY. Yes, sir. I am president and director. Mr. PECORA. When did you become president of that corporation? Mr. TRACY, Shortly after it was organized. Mr. PECORA. It was organized in 1928. Mr. TRACY. Yes. Mr. PECORA. And you have been its president continuously since that time ? Mr. TRACY. Continuously since that time. Mr. PECORA. Are you also a stockholder of that corporation ? Mr. TRACY. NO, sir. Mr. PECORA. What did you say? Mr. TRACY. A stockholder of the United States & International? Mr. PECORA. Yes', sir. Mr. TRACY. I am not. Mr. PECORA. Have you ever been? Mr. TRACY. I have not, to my knowledge. Senator ADAMS. Are you a stockholder in I do not think so. the United States & Foreign ? Are you a stockholder in the earlier company ? Mr. TRACY. NO, sir; I am not. The CHAIRMAN. DO the laws permit a man who is not a stockholder in a corporation to be elected as its president? I presume they do, but usually the requirement is that the president be a stockholder. Mr. TRACY. Yes, sir; the law permits it, but I have options on some stock, Mr. Chairman. Mr. PECORA. Mr. Tracy, during the times that you have been president of the United States & Foreign Securities Corporation and the United States & International Securities Corporation, I under- 1710 STOCK EXCHANGE PRACTICES stand you have also been, and still are, either an officer or a directory, or a large stockholder, in other investment trusts. Mr. TRACY. Correct. Mr. PECORA. Have you given us the names of all these other investment trusts? Mr. TRACY. HOW many have I given? Mr. PECORA. YOU have given us only one. Mr. TRACY. I am told I have mentioned only the name of the American & European. I am also a director of the Societe Financiere Franco Suisse. Mr. PECORA. Any other financial corporation? Mr. TRACY. The Illuminating & Power Securities Corporation. Mr. PECORA. Any other? Mr. TRACY. The Electrical Securities Corporation and the Public Utilities Corporation. Mr. PECORA. Will you continue the enumeration of such other corporations as you have been connected with during the times you have been president of these two investment trusts the main subject of the present inquiry? Mr. TRACY. Investment corporations or Mr. PECORA. Investment corporations, yes. Mr. TRACY. Those are the only investment corporations that I recall. Mr. PECORA. HOW about the Commercial Investment Corporation? Mr. TRACY. The what, sir? Mr. PECORA. The Commercial Investment Trust Corporation?' Mr. TRACY. I am not on that board. Mr. PECORA. Are you a large stockholder in it ? Mr. TRACY. Commercial Investment Trust? Mr. PECORA. Yes. Mr. TRACY. NO. Mr. PECORA. Are you a stockholder of any size in it? Mr. TRACY. In the Commercial Investment Trust? Mr. PECORA. Yes. Mr. TRACY. NO. Mr. PECORA. Are you in any other investment corporation? Mr. TRACY. DO you mean have I stock in any other investment corporation ? Mr. PECORA. Yes, sir. Mr. TRACY. Yes. I have some stock in the Societe Financiere Franco-Suisse. And I may have some stock in some others. Mr. PECORA. Their names do not occur to you now ? Mr. TRACY. I have some stock in the Atlas Corporation. Mr. PECORA. That is an investment trust, is it not? Mr. TRACY. Yes, sir. Mr. PECORA. I presume you receive a salary as president of the United States & Foreign Securities Corporation? Mr. TRACY. NO, sir; I do not. Mr. PECORA. YOU never have? Mr. TRACY. Never have. Mr. PECORA. DO you receive a salary as president of the United States & International Securities Corporation? Mr. TRACY. NO, sir; I do not. STOCK EXCHANGE PRACTICES 1711 Mr. PECORA. YOU never have? Mr. TRAOY. NO. I have options. Mr. PECORA. Sir. Mr. TRACY. I have some options on stocJK. Mr. PECORA. Well, what compensation do you receive in any form whatsoever for the services: you render as the president of these two investment trusts, the United States & Foreign Securities Corporation and the United States & International Investment Corporation? Mr. TRACY. I expect to receive my compensation when the company makes money. When I exercise my warrants and receive an income on them. Senator ADAMS. These options are of somewhat indefinite) duration ? Mr. TRACY. Why, the original option, Senator, was so much per year cumulative to buy stock at $25 a share. And they ran for 5 years. And then they were extended for another 3 years. Senator ADAMS. YOU did not exercise your options? Mr. TRACY. NO, sir; I did not. Mr. PECORA. The duties that you discharge as president of both of these investment trusts are of a highly responsible character, are they not? Mr. TRACY. Certainly. Mr. PECORA. And they require a great deal of your time and attention to attend to ? Mr. TRACY. I spend most of my time in these two companies' affairs. Mr. PECORA. DO you discharge those duties from your own office at No, 1 Wall Street? Mr. TRACY. Well, I would not say that; no. Mr. PECORA. From what office or headquarters do you discharge your responsible duties as president of these two investment trusts? Mr. TRACY. The only office that the company has is in Newark. Mr. PECORA. Well, that is only an office that is maintained for nominal purposes, is it not ? Mr. TRACY. NO ; that is the office of the company, Mr. Pecora. To take care of all the details and operations of the company. Mr. PECORA. HOW large a personnel does the United States & Foreign Securities Corporation maintain at that Newark office? Mr. TRACY. I think 10 or 12 employees. Something like that. I do not know the number exactly. Mr. PECORA. HOW frequently do you find it necessary to go to that office in the discharge of your duties as president ? Mr. TRACY. I have not kept a record of the number of times I have been there. Mr. PECORA. Well, without being exact about that, give us an approximation. Mr. TRACY. I go over there fairly frequently. Mr. PECORA. What do you mean by that? Once a week? Mr. TRACY. No; I go over when the occasion arises, when the need arises. Mr. PECORA. Do those occasions arise on an average of once a week? Mr. TRACY. NO. Mr. PECORA. Not Mr. TRACY. NO. as often as that? 1712 STOCK EXCHANGE PRACTICES Mr. PECORA. Once a month? Mr. TRACY. Well, I might go over there at times once a month. Sometimes I might go over more frequently. Mr. PFCORA. When were you last over there? Mr. TRACY. I should say about 2 weeks ago. Mr. PECORA. During the current year, will you tell us, approximately how many times you have found it necessary in the discharge of your duties as president of the United States & Foreign Securities Corporation to attend to its business affairs at its Newark office? Mr. TRACY. Well, Mr. Pecora, I do not have to go over there to form an opinion as to what securities we want to buy. Now, that is my chief duty, to follow the investments of the company. I do not have to go to Newark and sit down there to decide whether the security is good or bad. Mr. PECORA. DO you collaborate with other officers and directors of that company in determining the investments that are made for the account of that company ? Mr. ^TRACY. Always. Mr. PECORA. With whom do you so collaborate ? Mr. TRACY. I collaborate with all of the directors. I get in touch with them very frequently between meetings. Mr. PECORA. DO the board of directors of that company have meetings at regular or stated times ? Mr. TRACY. AS a rule we have monthly meetings. Mr. PECORA. Once a month? Mr. TRACY. Yes, sir. The CHAIRMAN. Where does the board meet ? Mr. TRACY. AS a rule at 28 Nassau Street, Senator. Mr. PECORA. DO you mean by that that the board of directors as a rule meets in the office of Dillon, Read & Co. ? Mr. TRACY. AS a rule they meet there, yes. I t is the most convenient place for them to meet. Mr. PECORA. Have you, during the current year, attended with regularity the meetings of the board of directors of the United States & Foreign Securities Corporation? Mr. TRACY. I think I have with great regularity. Mr. PECORA. Have those meetings always been attended with regularity by all the other directors? Mr. TRACY. I think the directors attend with great regularity. And I see them frequently between meetings; telephone them; get their opinion on various investments. Mr. PECORA. Whose opinion, as a rule, prevails with regard to the selection of investments that are made for the account of this investment trust? Mr. TRACY. The majority of the board. Mr. PECORA. Which member of the board has made the most recommendations for such investments since you have been president of it? Mr. TRACY. Well, that would be pretty hard to say. I have made a great many and the other directors have made a great many. Mr. PECORA. DO you know any director that has made more than you have? Mr. TRACY. Well, I have not kept any record of that, Mr. Pecora. STOCK EXCHANGE PRACTICES 1713 Mr. PECORA. I know that, but I mean from your general knowledge and recollection. Mr. TRACY. At every meeting the directors are given the financial statement of the company, the statement of cash, the securities owned. They are asked to go over them and make any criticism or recommendations or suggestions for change in securities, and there is a general discussion that everybody takes part in. Mr. PECORA. Well, I know that that is the ordinary routine. I am asking you particularly, however, with respect to the making of recommendations for the investment of the funds of the investment trust in securities. Now I asked you: Do you know of any director or officer who has made more such recommendations than you have ? Mr. TRACY. Well, I haven't any record. I do not keep a pencil record of that. Mr. PECORA. Will you please draw upon your general recollection about that? Mr. TRACY. I do not want to guess upon that thing, Mr. Pecora. I think all of the directors have contributed to the success of this company by their recommendations and judgment. They have all been active. Mr. PECORA. YOU know—because if I correctly understood your testimony you have already so indicated to us—that you as president have made many recommendations Mr. TRACY. A great many, yes. Mr. PECORA. (continuing). For the investment of the funds of this investment trust, which were followed? Mr. TRACY. Correct. Mr. PECORA. DO you know any other officer or director of that company since you have been its president who has made more such recommendations than you have? Mr. TRACY. Well, I do not want to guess as to whether any director has made more. I have made a great many. Mr. PECORA. Well, give us your best recollection on that. Mr. TRACY. And other directors have made a great many recommendations, Mr. Pecora. Mr. PECORA. Are you unwilling to give us your best recollection as to whether or not any other officer or director has made more recommendations than you have ? Mr. TRACY. Mr. Pecora, I want to render you every service at my command, and I want to do the same to the committee, but I cannot be expected to guess at something of that kind. Mr. PECORA. I am not asking you to guess. I am asking you to give us your best recollection. Mr. TRACY. I do not remember whether one of the directors made more recommendations than the other ones. I know that they all made recommendations. Mr. PECORA. AS a matter of fact, the most of the investments that are made and have been made in behalf of this investment trust since you have been its president have been made not at meetings of the board of directors but in an informal way, have they not? Mr. TRACY. A great many of them. Mr. PECORA. And those recommendations have been carried out and afterward reported formally to the board of directors? Mr. TRACY. A great many of them. 1714 STOCK EXCHANGE PRACTICES Mr. PECORA. That has been the usual procedure, has it not? Mr. TRACY. Well, the usual procedure—we would discuss various industries and financial conditions. We discuss, for instance, the oil industry and decide whether that offers a good field for investments at that time. And then we decide to buy certain oil stocks. And recommendations are made by the board, and then those orders are executed, and they are reported at the next meeting. Mr. PECORA. What is the largest single investment that has been made for the portfolio of this investment trust upon your personal recommendation ? Mr. TRACY. I should say of our present holdings it would be the American Gas & Electric Co. Mr. PECORA. Well, do not confine yourself to your present holdings. I am referring to the operations of this investment trust during the time that you have been its president. Mr. TRACY. Well, I should say American Gas & Electric Co., or in the old days Consolidated Gas. Mr. PECORA. Did I understand you to say in the earlier part of your testimony that you were connected with the American Gas & Electric Co. in, some capacity or other ? Mr. TRACY. I did not say that, but I am a director of the American Gas & Electric Co. Mr. PECORA. Also a stockholder of it? Mr, TRACY. Yes; I am a stockholder. Mr. PECORA. I S that an industrial corporation or to investment trust? Mr. TRACY. NO, sir. Mr. PECORA. Or is it a holding Mr. TRACY. That is one of company ? the largest public-utility holding companies. Mr. PECORA. Are there any of the securities of the American Gas & Electric Co. now in the portfolio of United States & Foreign Securities Corporation? Mr. TRACY. I will have to look that up. Excuse me a moment. Mr. PECORA. Will you please do so. Mr. TRACY. Yes. Senator ADAMS. While that is being looked up may I ask you a question, Mr. Tracy? May I just recur to this option matter for a moment, if you do not mind? Mr. TRACY. Yes, sir. Senator ADAMS. DO you mind telling us the number of shares covered by these yearly options? Mr. TRACY. I have an option on 15,000 shares, Senator, at 25. Senator ADAMS. That is for each of these years ? Mr. TRACY. NO, that is the total amount. From the United States & Foreign Securities Corporation 3,000 shares a year, at 25, over a 5-year period. Making a total of 15,000. I have the right to take them up year by year if I wanted to, or they could accrue or accumulate over that 5-year period. Senator ADAMS. From whom does that option run ? Mr. TRACY. From the United States & Foreign Securities Corporation to me. Senator ADAMS. The United States & Foreign Securities Co. does not own any of the common stock, does it? STOCK EXCHANGE PRACTICES 171 & Mr. TRACY. Yes, sir. As I remember it, it bought it in the open market and gave me an option on it. Senator ADAMS. And the same general situation as to the International Securities Corporation? Mr. TRACY. In the International I have an option on 5,000 shares of United States & Foreign common stock. Making a total of 20,000 between the two companies, at $25. Senator ADAMS. And that would increase from year to year as you go on? Mr. TRACY. NO, sir; it increased up through the 5-year period, and then the directors extended it for another 3 years. Senator ADAMS. SO that your opportunity to profit out of increased price is the allurement that is held out to you for carrying this burden ? Mr. TRACY. That is right. Senator ADAMS. But at the present time it is not an especially profitable option? Mr. TRACY. NO. And I never sold any of my options. I find, Mr. Pecora, that we have 24,181 shares of American Gas & Electric common stock in the United States & Foreign Securities. Mr. PECORA. In the United States & Foreign Securities Corporation ? Mr. TRACY. Yes, sir. Mr. PECORA. HOW many have you, if any, in the portfolio of the United States & International Securities Corporation ? Mr. TRACY. Twenty-one thousand one hundred and twenty nine. Mr. PECORA. Mr. Tracy, I have before me what purports to be a copy of the report and accounts of the United States & Foreign Securities Corporation as of December 31, 1932, made by Price, Waterhouse & Co.; and among other things it indicates that as of that date there were in the portfolio of the United States & Foreign Securities Corporation 23,241 shares of the common stock of American Gas & Electric Co., at a book value of $1,099,037.56. Does that conform to your recollection of the fact ? Mr. TRACY. I will have to check that. (After doing so.) That is correct. Mr. PECORA. Yes. What is meant by the term " book value " as applied here? Mr. TRACY. Cost. Mr. PECORA. That is synonymous with cost? Mr. TRACY. Yes. Mr. PECORA. Cost price ? Mr. TRACY. Cost price. Mr. PECORA. The term " cost price " is very often used to indicate something other than book value, is it not ? Mr. TRACY. Well, that is what we paid for the stock. Mr. PECORA. That does not answer my question, Mr. Tracy. Senator ADAMS. DO you continue to carry the book value of the security at its original cost notwithstanding it may have very greatly depreciated ? Mr. TRACY. Yes; but in figuring up our balance we take market or cost, whichever is lower. We give both figures in our report. We give total market value and total cost. 1716 STOCK EXCHANGE PRACTICES Mr. PECORA. I S it not a fact, Mr. Tracy, that in the terminology of the financial world the term " book value " frequently refers to something other than cost as applied to a security? Mr. TRACY. I am not a bookkeeper, Mr. Pecora, or an accountant. Mr. PECORA. I have not asked you bookkeeping phraseology, but in the terminology of the financial world is not the term "book value " very frequently used to denote something other than cost? Mr. TRACY. Yes. The CHAIRMAN. Have not the earnings something to do with the book value? Mr. TRACY. Earnings ? The CHAIRMAN. Yes. Mr. TRACY. I do not think so, Senator. Senator ADAMS. Book value is determined by those who set up the books—that is the company. The company might pay a thousand dollars for a security and they might put it down at a book value of $900 or at a book value of $1,100. That is an arbitrary value that the company or the owner puts on his own books. Mr. TRACY. Yes. Senator ADAMS. The market value is determined by somebody ^Ise, and may be quite different, and the cost price may be different. Mr. TRACY. Yes. Senator ADAMS. If you are buying securities from a fire insurance company, for example, you would not merely take the statement of that company and look at the book value. That does not answer your question, does it, as to what it is worth ? Mr. TRACY. It does not. Mr. PECORA. Book value is a variable term or amount, is it not? In other words the book value of a security changes from time to time depending upon the earnings of the corporation issuing the security, does it not? What is your answer? Mr. TRACY. AS a general rule our book value is cost value, Mr. Pecora. Mr. PECORA. I know that. You have already told us that. But I want to get from you a statement based upon your own knowledge as to whether or not book value as commonly used denotes something entirely different from cost when applied to securities. Mr. TRACY. Not necessarily. I would not say that; no. Mr. PECORA. The cost price of a security never changes, does it? I mean if you have purchased for a certain amount a certain security the price you pay is its cost price at all times regardless of its book or market value, is it not ? Mr. TRACY. The cost is cost; yes. Mr. PECORA. Yes; you use the term in this report of the portfolio of your investment trust of book value to indicate cost, do you not? Mr. TRACY. Yes. Mr. PECORA. IS that not apt to convey a wrong impression to the average analyst of these reports ? Senator ADAMS. Permit me to interrupt just a moment, Mr. Chairman. I think we would be very glad to have these gentlemen who are sitting behind the witness furnish information when it is requested, but their views or answers to questions asked of the witness •as to his own judgment or opinion are not quite what we are seeking STOCK EXCHANGE PRACTICES 1717 for. Any time we want information that these gentlemen have we will put them on the stand and I know they will be very glad to testify, but I think it is an annoyance to the witness to keep telling him all the time what he knows about it when no one else can know what he thinks. That is merely a suggestion. Mr. PECORA. I will ask the reporter to read the pending question. (Thereupon the following was read by the reporter as above recorded:). Mr. PEICOEA. * * * You use the term in this report of the portfolio of your investment trust of book value to indicate cost, do you not? Mr. TBAOY. Yes. Mr. PEOOBA. IS that not apt to convey a wrong impression to the average analyst of these reports? Mr. TRACY. I think our report is very complete. I do not think that it would mislead an analyst. I think they are very complete, Mr. Pecora. It has always been a practice to publish everything we own sincei I have been connected with the company. Mr. PECORA. What do you ordinarily understand to be implied by the term " book value " as applied to securities. Mr. TRACY. Cost as a rule. Mr. PECORA. Cost? Mr. TRACY. Yes. Mr. PECORA. DO you think that cost and book value are synonymous terms generally and so understood by the public? Mr. TRACY. I think in investment companies as a rule, yes. All an analyst has to do is to take the list of securities and the market. Mr. PECORA. The book value given in this report made by Price, Waterhouse & Co. as of December 31, 1932, for the twenty-three thousand odd shares of American Gas & Electric Co. common stock which it had in its portfolio on that date, is $1,099,037.56, and I notice that the market value of that stock as of that date is given as $708,850.50. Do you know what the market value of that stock is ? Mr. TRACY. Yes. The quotation in the market. Mr. PECORA. Well, do you know what the market value of that stock is today? Mr. TRACY. I can find out for you approximately. Mr. PECORA. All right. Mr. TRACY. I am told it is around $23 or $24 a share, Mr. Pecora. Mr. PECORA. That would bring this total of market value to considerably less than seven hundred and eight thousand odd dollars, would it not ? Mr. TRACY. I will accept your statement for that; yes. The CHAIRMAN. DO you sell those securities, Mr. Tracy, yourself? Mr. TRACY. NO, sir; I would not. The CHAIRMAN. N O ; but does the company go on now from time to time and sell those securities? Mr. TRACY. Out of our portfolio? The CHAIRMAN. Yes. Mr. TRACY. I hope we will keep the American Gas & Electric, Mr. Chairman. The CHAIRMAN. Yes; but you may from time to time, just as the board of directors determine, sell securities? Mr. TRACY. Oh, certainly. 1718 STOCK EXCHANGE PRACTICES The CHAIRMAN. Or sell at any time ? Mr. TRACY. Yes. The CHAIRMAN. YOU are not obliged to carry them for any definite time? Mr. TRACY. We are not obliged to carry anything. Senator ADAMS. Mr. Tracy, the corporation holds 15,000 shares, I see, of the United States & Foreign Securities Co. That was to cover your option? Mr. TRACY. Yes. Senator ADAMS. That is carried at a market value of a dollar, and carried at a book value of $375,000. Mr. TRACY. That is what it cost. Senator GOLDSBOROTJGH. Mr. Pecora, as I understand your line of questioning you think it is better that these statements should show three columns: Cost, book, and market? Mr. PECORA. I do not see the occasion for showing book value. But it certainly ought to show cost and designate it as cost. Not as book value, which in my opinion, despite the superior knowledge and experience of the witness is somewhat misleading. The other is a less misleading term. Mr. TRACY. Mr. Pecora, I would like to submit our annual report to the Senators here, and I think that would give you an idea of how that is stated very clearly. It is not misleading as to what the difference between cost and market is. Mr. PECORA. I was going to introduce that in evidence anyway at the proper time. Senator ADAMS. YOU do not need to have any certified public accountant tell us that these days. Mr. TRACY. NO ; I know that, but we state it very clearly. The CHAIRMAN. This seems to be a good place to take a recess until tomorrow morning at 10 o'clock. I hope we will be prompt in attendance so we can go ahead promptly at that time. (Thereupon at 12 o'clock noon, Thursday, Oct. 5,1933, an adjournment was taken until 10 a.m. the next day, Friday, Oct. 6, 1933.) STOCK EXCHANGE PEACTICES FRIDAY, OCTOBER 6, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommitee met, pursuant to adjournment on yesterday, at 10 o'clock a.m., in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams (substitute for Barkley and proxy for Costigan), Norbeck, and Couzens. Present also: Ferdinand Pecora, counsel to the commitee; Julius Silver and David Saperstein, associate counsel to the commitee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Read & Co.; Koot, Clark, Buckner & Ballantine, George H. Murphy of counsel, counsel for United States & Foreign Securities Corporation and United States & International Securities Corporation; Patrick J. Hurley and Charles M. Travis, counsel for Associated Gas & Electric Co. The CHAIRMAN. The subcommittee will come to order. Mr. Pecora, you may proceed. Mr. PECORA. Mr. Tracy will resume the stand. TESTIMONY OF ERNEST B. TRACY—Resumed Mr. PECORA. Mr. Tracy, will you tell us Mr. TRACY (interposing). Mr. Pecora, for the record I have a list of present and former directors of both of the investment companies, with a list of all directors' meetings and the names of the directors who attended those meetings. I should like to submit these to you. Mr. PECORA. Very well. Let me see them. Mr. DILLON. Mr. Pecora, before you start out on your examination might I say a word ? Mr. PECORA. Certainly. Mr. DILLON. The other day when we were discussing the advisability of banks publishing their portfolios of investment securities, you were asking if I knew of any institution that did so, and I mentioned one. This morning I received from Mr. Frew, chairman of the Corn Exchange Bank Trust Co., New York City, his statement. His is a commercial bank, and is the only one I know of than does it. I thought you and the gentlement of this subcommittee might be interested in looking at his statement, because it does cover the point you were discussing. 1719 1720 STOCK EXCHANGE PRACTICES Mr. PECORA. I think it might be well to offer that in evidence for the enlightenment of the subcommittee. The CHAIRMAN. Let it be received and made a part of the record. (The statement dated February 1, 1933, of the Corn Exchange Bank Trust Co., was marked " Committee Exhibit No. 12, October 6, 1933," see p. 1764.) Mr. PECORA. I also offer in evidence,, Mr. Chairman, the list of present and former directors of the United States and International Securities Corporation, which has just been produced by Mr. Tracy; and also as a part of the same exhibit a compilation of the meetings of the board of directors of the United States and International Securities Corporation, showing the dates thereof and the names of the directors present at such meetings. The CHAIRMAN. Let it be received and made a part of the record. (A statement of present and former directors of United States & International Securities Corporation was marked "Committee Exhibit No. 13, October 6, 1933," see p. 1769.) Mr. PECORA. I also offer in evidence a list produced by Mr. Tracy, purporting to show present and former directors of the United States & Foreign Securities Corporation, together with a statement showing the dates of the various meetings of the Board of directors of that corporation, and with the names of the directors who attended such meetings. The CHAIRMAN. Let it be received and made a part of the record. (A statement of present and former directors of United States & Foreign Securities Corporation was marked " Committee Exhibit No. 14, October 6, 1933," see p. 1771.) Mr. PECORA. Mr. Tracy, have you by any chance with you a copy of the report and accounts of the United States & International Securities Corporation as of December 31, 1932, purporting to have been prepared by Price, Waterhouse & Co. ? Mr. TRACY. I will have to see whether we have that. [After consulting an associate] Yes; I have a copy of that. Mr. PECORA. Will you kindly turn to the tabulation at the end of the report, which is entitled " United States & International Securities Corporation, Securities Owned December 31, 1932." Mr. TRACY. I have it before me. Mr. PECORA. NOW, under the caption " Railroad stocks " of that tabulation do you find an entry indicating that on December 31, 1932, there was an item in the portfolio of the United States & International Securities Corporation of 45,000 shares of the common stock of the Chicago, Rock Island & Pacific Railway Company? Mr. TRACY. I do. Mr. PECORA. TO which there was ascribed a book value in this report of $5,566,366.99, and a market value of $151,875? Mr. TRACY. I do. Mr. PECORA. Are you familiar with the transaction or transactions whereby this investment trust, of which you were the president, acquired those 45,000 shares of that railroad stock at what is denominated in this report as a book value of over &y2 million dollars, but which, according to your testimony on yesterday, means the cost price to the investment trust? STOCK EXCHANGE PRACTICES 1721 Mr. TRACY. Correct. We bought it in the open market. Mr. PECORA. YOU bought it in the open market? Mr. TRACT. TO the best of my recollection, yes. [After consulting an associate.] Well, some of it we bought from the United States & Foreign Securities Corporation. Mr. PECORA. And that is the other investment trust ? Mr. TRACY. Correct. Mr. PECORA. That had you as its president while you were president also of this United States & International Securities Corporation? Mr. TRACY. That is right. Mr. PECORA. Over what period of time were the transactions had by which the United States & International Securities Corporation acquired in the aggregate those 45,000 shares of the Chicago, Rock Island & Pacific Railway Co. stock at a cost to it of over 5y2 million dollars ? Mr. TRACY. Well, I will have to look that up, Mr. Pecora. I do not carry that in my mind. Mr. PECORA. All right. Mr. TRACY. I am sorry for the delay, but we have had so many transactions that I cannot keep them in my mind. Mr. PECORA. All right. You may look it up. Senator COUZENS. While you are looking up that data let me ask: What were the circumstances by which one of these investment trusts bought Chicago, Rock Island & Pacific Railway Co. stock from the other trusts? Mr. TRACY. Well, I will have to look up that data for you. Senator Couzens. I am getting that now. Senator COUZENS. I was not asking the date but was wondering what the circumstances were that induced one trust to buy that stock from the other trust. Mr. TRACY. Well, if you will permit me to get the data I may be able to answer your question more intelligently. Senator COUZENS. All right. The CHAIRMAN. In other words, Senator Couzens, the two trusts were practically doing the same kind and character of business; and Dillon, Reed & Co., too, were doing the same kind of business. Senator COUZENS. And Dillon, Read & Co. controlled both of them. Mr. PECORA. And one was buying securities from the other. Mr. TRACTS I am told that we purchased about half of that in December of 1929. Mr. PECORA. About half of the 45,000 shares of the Chicago, Rock Island & Pacific Railway Co. in December of 1929 ? Mr. TRACY. I am so informed. Mr. PECORA. That was at a time when the stock market had generally undergone an upheaval and was still in the throes of it, wasn't it ? Mr. TRACY. I t had certainly undergone an upheaval, but I might say that Senator COUZENS (interposing). When was the other half purchased ? Mr. PECORA. Yes. I was just going to ask that question. 1722 STOCK EXCHANGE PRACTICES Mr. TRACY. Seventeen thousand shares, Senator Couzens, were bought from the United States & Foreign Securities Corporation. The balance of the stock was bought over a period of time. We will have to go to our books in order to get all of that for you. Senator COUZENS. When were the 17,000 shares bought from the other trusts? Mr. TRACY. In December of 1929. Senator COUZENS. And at what price? Mr. TRACY. I am told that they were purchased at a price of $111.84, which was the market price of the date when they were purchased. Senator COUZENS. In other words, in December of 1929 that was the market price ? Mr. TRACY. That was the market price then. Senator COUZENS. And do you recall the circumstances of the transfer or sale from one trust to the other of those shares ? Mr. TRACY. Well, it is pretty hard, Senator Couzens, to recall the reasons for either the sales or the purchases made. We have made a great many hundreds of them. But as a rule Senator COUZENS (interposing). Well, this was rather an intercompany sale, wasn't it? Mr. TRACY (continuing). As a rule and practice, all purchases and sales were passed on by the board of directors of the companies. Mr. PECORA. But, Mr. Tracy, you attended the meetings of the boards at which those sales and purchases were approved ? Mr. TRACY. I attended meetings very regularly, but I would have to look it up to see whether I attended those particular meetings or not, but believe I did. Mr. PECORA. Didn't you testify here on yesterday to the effect, in substance, that the customary procedure followed by these two investment trusts for the making of those investments was for the executive officer to make the purchase in the exercise of his best judgment, and thereafter report it to the board of directors at its ensuing meeting? Mr. TRACY. Well, Mr. Pecora Mr. PECORA (continuing). And then get a ratification and approval of it by the board ? Mr. TRACY. I think you misunderstood me, Mr. Pecora. Mr. PECORA. Possibly I did, and if I have misunderstood you, I want to get the fact correctly on the record in a way that there can be no misunderstanding. Mr. TRACY. That has been done frequently, but as a rule we discussed at board meetings the type of securities that we would buy, and the type of industry in which we would invest. We would have those looked into and would say: Let us invest so much money in the oil industry and the rails, and would compare this railroad with another one and would buy the one that looked cheapest. Mr. PECORA. YOU say you would have them looked into. Who would look into them ? Mr. TRACY. A service corporation that we had Mr. PECORA (interposing). What is the name of it? Mr. TRACY. The Keswick Corporation. STOCK EXCHANGE PRACTICES 1723 Mr. PECORA. DO you know anything about the Keswick Corporation ? Mr. TEACY. I certainly do. Mr. PECORA. I,sn't that a corporation wholly controlled by Dillon. Eead & Co. ? Mr. TRACY. It is not. Mr. PECORA. Isn't it a corporation with offices adjoining the offices of Dillon, Eead & Co., and access to which may be had through an inside door leading from the office of Dillon, Eead & Co.? Mr. TRACY. Yes; the offices are in the same building as the offices of Dillon, Eead & Co., and one can get through by going through an outside passage to the offices of the Keswick Corporation. That is true of a great many buildings. Mr. PECORA. HOW familiar are you with the organization and conduct of this Keswick Corporation ? Mr. TRACY. The Keswick Corporation is a service corporation to do our research work, look over statistical reports, make examinations for us, interview officials of companies and get figures that may not have been published, if we want to get any very recent information about an industry, and they make their reports to us. They are used generally as a convenience to the company in any way that I can use them. Senator COTJZENS. What company? Mr. TRACY. The Keswick Corporation. Senator COUZENS. But what company uses the Keswick Co.? Mr. TRACY. United States & Foreign Securities Corporation and United States & International Securities Corporation, for which I may be acting. Senator COUZENS. And also Dillon, Eead & Co. ? Mr. TRACY. Not to my knowledge. Senator COUZENS. YOU do not know that Dillon, Eead & Co. uses this Keswick Corporation? Mr. TRACY. Not to my knowledge. Mr. PEOORA. When was this Keswick Corporation organized, if you can tell us ? Mr. TRACY. I will have to look up that date. Mr. PECORA. Perhaps I can help you when I suggest the date March 27,1930. Mr. TRACY. That is correct. Mr. PECORA. Did the Keswick Corporation, for the United States & International Securities Corporation in December of 1929 make research and investigation of the railroad security that we have been discussing and which was purchased by the United States & International to the extent of over 5y2 million dollars ? Mr. TRACY. Yes, sir; it did. Mr. PECORA. HOW could it have done so if it was not incorporated until March of 1930? Mr. TRACY. Wait. What date did you say? December of 1929? Mr. PECORA. Well, you told us that 41,000 of those 45,000 shares had been acquired in December of 1929, if I correctly understood your testimony. Mr. TRACY. That is correct. The Keswick Corporation was not formed then. 175541—33—PT 4 13 1724 STOCK EXCHANGE PEACTICES Mr. PECORA. Who made the research at that time that guided the directors of the investment trust in making those investments ? Mr. TRACY. There was a very elaborate report made by Coverdale & Colpitts, consulting engineers, who specialized in railroad work, on the Chicago, Rock Island & Pacific Railroad. It was most favorable, I might say. Senator COUZENS. Have you any record of how many times their surveys have been wrong? Mr. TRACY. Of how many times they have been wrong? Senator COUZENS. Yes. Mr. TRACY. I think anybody has been wrong who made predictions in 1929. If there are any that were not I should like to meet them. Senator COUZENS. I know something about Coverdale & Colpitts. or whatever the name is, and how long have they been in business, may I ask. Mr. TRACY. That I would have to find out. Senator COUZENS. For a great many years, haven't they? Mr. TRACY. I think for a great many years. Senator COUZENS. IS there a record as to their predictions of earning power of corporations and how often or whether generally they have been accurate? Mr. TRACY. That I would not like to give you an opinion on offihand, but their estimates conform pretty well with the opinions of the usual statistical services at that time. If you will go back you will find that people like Moody were recommending Rock Island. Standard Statistics were recommending Rock Island. Not that we were taking their recommendations, but I just give you that as a parallel. Everybody thought railroad securities were a good purchase in those days. Senator COUZENS. Previous to that time, how long experience had you had with this firm of Colpitts & Co. ? Mr. TRACY. I think they had done work for—I don't know. I personally am not an expert on railroad securities. Senator COUZENS. YOU do not know what the general record of this company is, then? Mr. TRACY. N O ; I do not, Senator, but I know that they have a good reputation. Senator COUZENS. Among whom? Mr. TRACY. Among people that I know. I have never heard anybody say anything unfavorable about Colpitts & Co. Senator COUZENS. Well, of course, you can have a good reputation for making reports Mr. TRACY (interposing). I am not talking about that; I am talking about being honest. I thought that was what you had in mind, Senator COUZENS. About what? Mr. TRACY. About being honest in their dealings. Senator COUZENS. I have not made any charges that they were dishonest; no. The CHAIRMAN. Were the Van Sweringens interested in this Chicago, Rock Island & Pacific road ? Mr. TRACY. I beg your pardon ? The CHAIRMAN. Were the Van Sweringens interested in that road ? Mr. TRACY. Not to my knowledge; no. STOCK EXCHANGE PRACTICES 1725 Mr. PECORA. Before we leave the Keswick Corporation, Mr. Tracy, do you know what its capital structure is ? Mr. TRACY. I will have to look that up. It is merely a service corporation. There is not any mystery about it. Mr. PECORA. Who caused it to be organized ? Mr. TRACY. We did. Mr. PECORA. And who were its officers? Are its officers former employees and attaches of the two investment trusts of Dillon, Read &Co.« Mr. TRACY. Yes; they are. Senator NORBECK. Pardon me, Mr. Chairman. I am confused. I thought the witness testified they did not control them, and he is now testifying that they did. Am I right or did I misunderstand you ? Mr. TRACY. The Keswick Corporation ? Senator NORBECK. Yes. Mr. TRACY. NO ; we were responsible for the forming of the Keswick Corporation. We wanted them to be a statistical corporation that could be used to look up things of that kind. Senator NORBECK. I am referring now to an answer you made previously. Did you deny that they were controlled by you or did you not when you were asked the question ? I am trying to get the facts here. If the witness testifies both ways it is pretty hard for me to get them. Mr. TRACY. I just want to have what the question is. Senator NORBECK. I will waive it. Go ahead. Mr. TRACY (after conferring with an associate). Oh, no; not controlled by Dillon, Read & Co. I misunderstood you. It was formed by the investment company. Mr. PECORA. YOU mean United States & Foreign Securities Corporation and the United States & International Securities Corporation? Mr TRACY. Yes; they were responsible for forming it. Mr. PECORA. They were responsible for forming it? Mr. TRACY. Yes. Mr. PECORA, Are its officers and directors, or do its officers and directors, include former employees of the two investment trusts that you have mentioned, as well as Dillon, Read & Co. ? Mr. TRACY. They include, yes, former employees of the investment trust, and I think former employees of Dillon-Read. Mr. PECORA. And the office of this Keswick Corporation is at what address ? Mr. TRACY. It is on Cedar Street. Mr. PECORA. What is the number ? Mr. TRACY. I cannot give you the number, but I know how to get there. It is the first door on the—I don't go by numbers on Wall Street. I go by familiar signs. Mr. PECORA. HOW does the public get there ? Mr. TRACY. I should think they go through there Mr. PECORA (interposing). Through the Cedar Street entrance to the building ? Mr. TRACY. I should think they would go through Mr. PECORA (interposing). And when you get there how do you reach the Keswick offices ? Do you go through this interior passageway running between the offices of Dillon, Read & Co. and the Keswick Corporation ? 1726 STOCK EXCHANGE PRACTICES Mr. TRACY. Why, I go whichever is the most convenient way for me to go. If I am coming from Wall Street I would go into Cedar Street. If I was coming over from Broadway or uptown I would probably go through the office of Dillon-Read. Whichever is most convenient, that is the way I go. Mr. PECORA. Does this Keswick Corporation do any research to any extent for others than these two investment trusts of which you were president? Mr. TRACY. Yes; I believe they do. Mr. PECORA. TO any extent? Mr. TRACY. Well, I don't know how much they do. I know they do a great deal of work for us—the investment companies. I don't know how much they do for other people. Mr. PECORA. DO you know the capital structure of the Keswick Corporation ? Mr. TRACY. I can give it to you. Mr. PECORA. If you will. (Mr. Tracy conferred with associates and examined documents.) Senator COTTZENS. While you are looking that up, may I ask what is the basis of compensating this research corporation by these two securities trusts? Mr. TRACY. We own some stock in that. Senator, and we pay them, I think—pay the monthly fee for it. Senator COUZENS. Pay them a monthly fee? Mr. TRACY. It is simply a convenience—research organization to do the research work—take all the burden off me that I can put on them. Senator COTTZENS. Yes; but I am wondering why the investment trusts do not employ these men themselves. I just don't get the connection. Mr. TRACY. With the thought that it is perhaps better to have a separate organization. Senator COUZENS. AS a matter of convenience ? Mr. TRACY. For instance, we have two different boards, two different companies. Now, employing men in one company and employing the same men in the other company is not as satisfactory as putting them into a different organization as a matter of convenience, for following records, accounting, the statistical services, the newspapers, and doing all that kind of work. For instance, we put some men to work on the X company. Who are we going to charge that to, this company or the other? It is just a matter of convenience. It is purely a service company. It is not anything of any significance. It is to help us do our work intelligently, that is all. There is no mystery about it at all. Mr. PECORA. DO you know anything about the personnel of the Keswick Corporation, this organization, that you and. your fellow directors use to help you reach a judgment or conclusion about the investments you should make for the investment trusts ? Mr. TRACY. Yes; I do. Mr. PECORA. What do you know about it? Mr. TRACY. Well, I know them very well. Mr. Frank I have known, the president, known him for a number of years; and Mr. Mtze. Those are the two gentlemen that I come in contact with that I use. STOCK EXCHANGE PRACTICES 1727 Mr. PECORA. What position does Mr. Frank hold with the company? Mr. TRACY. He is the president. Mr. PECORA. And prior to his becoming president of the Keswick, what was his relation, either to United States & Foreign. Securities Corporation or the United States & International Securities Corporation or Dillon, Read & Co.? Mr. TRACY. Why, he was in those companies. Mr. PECORA. In what capacity? Mr. TRAOY. In the statistical end, doing the same kind of work he is doing now. Mr. PECORA. When you say in the statistical end, do you mean that he was in the accounting department or bookkeeping department? Mr. TRACY. Research. For instance, here is Mr. Frank—I say, " Mr. Frank, will you please try to get me all the information you can get me about that oil corporation?" Mr. PECORA. That simply represents statistical information that he would collect from sources where such data -was to be found? Mr. TRACY. He would have charge of getting that information. He was also at that time a vice president of the United, States & Foreign. Mr. PECORA. NOW, have you informed yourself concerning the capital structure of the Keswick Corporation? Mr. TRACY. There are 500 shares of $100 par value, $50,000. Mr. PECORA. HOW were those shares distributed ? Mr. TRACY. I will just look that up for you. Mr. PECORA. See if this statement which I will now embody in my question refreshes your recollection concerning that: 125 of these shares owned by the United States & International Securities Corporation; 125 owned by United States & Foreign Securities Corporation; 50 shares held in the name of the Oakmont Corporation; 50 shares in the name of the New Eastern Corporation; 50 shares in the name of the Surrey Corporation; 50 shares in the name of the Brighton Corporation; and 50 shares in the name of the Bristol Corporation ? Mr. TRACY. That is correct. Mr. PECORA. We see from those that the two investment trusts that we are inquiring about owned half and do own half of the only outstanding capital stock? Mr. TRACY. That is right. Mr. PECORA. And the other half is owned by five other corporations in equal proportions of 50 shares apiece ? Mr. TRACY. I am told that is right, yes. Mr. PECORA. NOW, do you know anything about those five other corporations, each of which owns 50 shares of this research institution ? Mr. TRACY. I have heard about them frequently. Mr. PECORA. Aren't they corporations that are virtually the personal property of certain individuals who are members of the firm of Dillon, Read & Co.? Mr. TRACY. I know they are connected with Dillon, Read & Co. I don't know what the ownership is. 1728 STOCK EXCHANGE PRACTICES Mr. PECORA. Well, it is a fair statement, isn't it, to say that half of the capital stock of this Keswick Corporation is owned by the two investment trusts and the other half is owned by the five corporations who represent interests of Dillon, Read & Co. or their respective or individual associates or partners? Mr. TRACY. Yes; those companies are all identified with Dillon, Read & Co. This company was not organized for that purpose. It is simply a service corporation, a matter of convenience. Mr. PECORA. NOW, let us get back to the report made by Price, Waterhouse & Co. of the condition of the United States & International Securities Corporation as of December 31, 1932. The CHAIRMAN. Before you get to that may I ask Mr. Tracey what was the book value of this stock which one investment company sold to the other investment company in December 1929? You sold it at 111, I believe. What was the book value? Mr. TRACY. I will get that for you, Mr. Chairman. Senator NORBECK. Mr. Chairman, may I ask a question about something I do not understand. I just want to ask the witness. The findings of this research corporation which has been discussed here at length become part of the information given to the public as to the value of these securities that you people offer for sale, do they not? Mr. TRACEY. We do not offer any securities. It supplies us with certain information on which we base our judgment, whether we sell or buy, whether we will buy or will not buy it or sell it. Senator NORBECK. When you say sell it, you sell it to whom? Mr. TRACY. Sell it on the market. Senator NORBECK:. And then you say you don't offer anything to the public. You know, you confuse me with your statements. Mr. TRACY. It is in the open market. Senator NORBECK. But when you sell it you sell to the public, don't you? Mr. TRACY. We sell on the stock exchange. Senator NORBECK. Yes. Now, I am asking the question. You evaded it entirely. I asked you whether the certification of this research corporation which seems to be an instrument of your own— they have certain findings, and are they used as a certification of the value or condition of this stock when it is offered ? Mr. TRACY. We do not offer it. Senator NORBECK. YOU say " offer "—well, when it is sold. Mr. TRACY. May I give you an illustration ? Senator NORBECK. Yes; most certainly. Mr. TRACY. For instance, they will come into us and say, "We don't like the trend of the earnings of a certain railroad ", and we will look those over and decide that they should be sold. For instance, Canadian Pacific Railroad; we will give an order to the broker to sell that Canadian Pacific Railroad. We simply sell it on the exchange. We do not offer it to the public. You understand that, don't you, Mr. Pecora, the way that is done? That is all we were doing. Mr. PECORA. I don't think the Senator is addressing himself to what you think he is. Mr. TRACY. I beg your pardon. STOCK EXCHANGE PRACTICES 1729 Mr. PECORA. I think Senator Nbrbeck and ISenator NORBECK (interposing). Are talking about two different matters. Mr. PECORA. Are talking at cross-purposes. You don't understand what the Senator has in mind. Mr. TRACY. I don't think I do. I was trying to give an illustration of what I understood the Senator to mean. Mr. PECORA. Let us get back to the portfolio of the United States & International Securities Corporation as of December 31, 1932. It appears from this report that on that date there were 45,000 shares of the common stock of the Chicago, Eock Island & Pacific Eailway Co. in the portfolio, doesn't it? Mr. TRACY. The report of the United States & International Corporation of December 31, 1932? Mr. PECORA. Yes. Mr. TRACY. Forty-five thousand shares. Mr. PECORA. And those shares cost the investment trust five million five hundred and sixty-six thousand and odd dollars ? Mr. TRACY. That is right. Mr. PECORA. And that on December 31, 1932, those shares had a market value of only $151,875? Mr. TRACY. I am sorry to say that is correct. Mr. PECORA. SO there was a depreciation there of very nearly $5,400,000? Mr. TRACY. Yes. The CHAIRMAN. NOW you can answer the question I put to you, I take it? Mr. TRACY. I have here the book value of the Rock Island on the United States & Foreign Securities Corporation's books when it was sold, which was $119.64, according to the information that I have. I think that is correct. Senator COUZENS. May I ask you at that point, where it is you get that book value? Who did you get it from? Mr. TRACY. That is cost. Mr. PECORA. That is the term, Senator, that they use for " cost." Senator COTTZENS. Yes; but I thought the chairman asked for the book value of the stock on the books of the railroad. The CHAIRMAN. NO ; I was talking about the cost. Senator COUZENS. Oh, I misunderstood. Mr. PECORA. The testimony yesterday shows that what has been denominated as the book value was the cost price. Senator COXJZENS. Yes; I understand now. I thought the chairman was trying to .find out what the book value of the stock was on the books of the railroad company. You don't have that, do you ? Did your investigators or research men attempt to find out what the book value was on the books of the railroad at the time this investigation was made? Mr. TRACY. Yes. As I remember, the report of Coverdale & Colpitts, it was considerably over $125 per share. I know that, taking the Interstate Commerce Commission's valuations, it was more than that. I don't know how much more, but that is my recollection, Senator. Mr. PECORA. What I want to find out is if these 45,000 shares of the Chicago, Eock Island & Pacific Railroad were acquired during 1730 STOCK EXCHANGE PRACTICES the year 1932 by this investment trust or whether the acquisition of those 45,000 shares covered a much longer period of time. Mr. TRACY. I will have to check that up. I hope you will excuse me, but there have been so many of these transactions that I cannot possibly keep them all in mind. Mr. PECORA. I understood you to say a little while ago that more than half of the 45,000 shares were purchased for the portfolio of the United States & International Securities Corporation in December 1929. Mr. TRACY. I think you misunderstood me, Mr. Pecora. There were 17,000 shares purchased in December 1929. Mr. PECORA. Was that the first time that that stock, any of that stock, had been purchased for the portfolio of the United States & International Securities Corporation? Mr. TRACY. I would like to check that. [After conferring with associates.] I think the balance of the stock, Mr. Pecora, was purchased from July 1929 on. I will have to look up the details of the purchases for you. As I remember it, we began buying it in July 1929. Mr. PECORA. Have you before you a report that shows the portfolio of the United States & International Securities Corporation as of December 31, 1929? Mr. TRACY. I will see whether I can get one. [After a pause.] I have before me the report of the United States & International Securities Corporation securities owned December 31, 1929. Mr. PECORA. DO you find any entry therein relating to the holding of any common stock of the Chicago, Rock Island & Pacific by your investment trust as of December 31, 1929 ? Mr. TRACY. Yes, sir. Mr. PECORA. HOW many shares? Mr. TRACY. They owned 41,400 shares, at a cost of $5,186,946.99. Mr. PECORA. NOW, were all of those 41,000-odd shares purchased between July 1929 and the end of that year ? Mr. TRACY. NOW that I will have to look up for you again, Mr. Pecora. I cannot remember the dates of purchases of all of these transactions. We have thousands of them, and I hope you will excuse delay in looking them up. [After conferring with associates.] I am told that they haven't got them here. They will have to go back and look it up on the ledgers for you—unless you have it. Mr. PECORA. All right. Let me ask you: You gave some date in July 1929 a few moments ago in one of your answers. Was that date intended to indicate the date of the transaction whereby the United States & International Securities Corporation acquired some 11,000 shares of the common stock of the Chicago Rock Island & Pacific? Mr. TRACY. I don't remember the circumstances under which I gave that date. Mr. PECORA. YOU recall that you did refer to a date in July 1929 a few minutes ago? Mr. TRACY. I believe I did, but I don't know in what connection, Mr. Pecora. If you will refresh my memory Mr. PECORA. Were you the president of the United States & International Corporation in July 1929? Mr. TRACY. Was I president of it ? Yes. STOCK EXCHANGE PRACTICES 1731 Mr. PECORA. YOU were president practically at the inception of that corporation in 1928? Mr. TRACY. Yes. Mr. PECORA. DO you recall what discussion you had with any of your fellow directors on the board of the United States & International Securities Corporation leading to the decision to invest moneys of that investment trust in common stock of this railroad company? Mr. TRACY. There was a discussion practically at every directors' meeting and at a lot of the officers' meetings with regard to the purchase of railroad securities, because at that time, Mr. Pecora, it seemed to the board that they afforded the best opportunities for investment. Industrials were selling on a return basis of about 1 percent, utilities 2 percent, and railroads afforded the highest yield. We had to get something that would give us a yield. Mr. PECORA. NOW, Mr. Tracy, the fact is that according to your testimony on December 31, 1929, there was in the portfolio of the United States & International over $5,000,000 worth of the common stock of the Chicago, Eock Island & Pacific Eailroad Co. ? Mr. TRACY. That is right. Mr. PECORA. That is, when I say over $5,000,000 worth I mean cost. Mr. TRACY. Cost; yes. Mr. PECORA. Costing that much ? Mr. TRACY. That is right. Mr. PECORA. That is a very large investment to make in a single security, isn't it? Mr. TRACY. It is a fairly large investment; yes. Mr. PECORA. DO you recall any larger investment in any one security that was made by this investment trust at any time? Mr. TRACY. Well, now, I would have to go back and look that up. Yes; I see one here that is larger. Mr. PECORA. Well, we have looked into that. Perhaps I can refresh your recollection, and I call Mr. TRACY (interposing). I see one that is larger right here, the St. Louis & San Francisco. Mr. PECORA. Yes; the St. Louis & San Francisco Eailway Co.? Mr. TRACY. That is correct. Mr. PECORA. In the common stock of which your investment trust invested $5,820,983.39 up to December 31, 1932; is that right? Mr. TRACY. $5,820,983.39. Mr. PECORA. These two securities, namely, the Chicago, Eock Island & Pacific Eailway Co. common stock and the St. Louis & San Francisco Eailway Co. common stock, are the two classes of securities in which your investment trust made its largest investments, are they not ? Mr. TRACY. Well, they were among the largest. If you have looked it up, I will take your word for it. Mr. PECORA. Won't you please run your eye now down the list of the portfolio of the United States & International Securities Corporation as of December 31, 1932? Mr. TRACY. Yes; that was. Mr. PECORA. They are the largest? Mr. TRACY. Correct. Mr. PECORA. And by far the largest, are they not ? Mr. TRACY. Yes, they are by far the largest. 1732 STOCK EXCHANGE PRACTICES Mr. PECORA. The next largest security in which you invested represented an investment of less than $2,000,000, didn't it ? Mr. TRACY. That is correct. Mr. PECORA. NOW, in view of the fact that your investment trust invested over $5,566,000 in the common stock of the Chicago, Rock Island & Pacific Railway Co. and over $5,820,000 in the common stock of the St. Louis & San Francisco Railway Co., would you say that you and your fellow members of the board on this investment trust gave any special attention to either of those securities before you made these large investments therein ? Mr. TRACY. Yes; I should say we did. Mr. PECORA. Yes. Now, do you recall, in view of that fact, what discussion you had with your fellow directors on the matter of making those investments? Mr. TRACY. Yes, sir; we had reports made on both those railroads by Coverdale & Colpitts. Mr. PECORA. Yes. Mr. TRACY. Both of which were favorable. Mr. PECORA. Yes. Mr. TRACY. If you will look back even to the service manual of those days you will find that Moody recommended Frisco in October 1929. Mr. PECORA. Yes. Mr. TRACY. YOU will find that the Standard Statistics and Moody's both recommended the purchase of Rock Island throughout that period. Senator ADAMS. Mr. Tracy, may I ask you the question, you were here the other day when Mr. Dillon was explaining the fundamentals of the investment trust, were you not ? Mr. TRACY. I have been here; yes. Senator ADAMS. AS I recollect it, he said it was to afford the opportunity to the small investor to secure the diversification which he could not secure in his own individual purchases. How do you reconcile that theory of the operation of an investment trust where you put 40 percent of the money contributed by the first preferred stockholders into two stocks ? Mr. TRACY. They were large investments, Senator, yes, but we exercised Senator ADAMS (interposing). They did not follow the principle of diversification, did they ? Mr. TRACY. We exercised great care, we thought, and investigated those two companies thoroughly. Senator ADAMS. But didn't you use as the basis for the formation of the investment trust the very argument that any man might make mistakes in one or another, so that the thing to do was to distribute them ? I think that was Mr. Dillon's argument; so that a man might make a mistake, but if you distributed it as widely as you could you avoided that great hazard. Now you ran right into the hazard that you organized the institution to avoid. Mr. TRACY. We did run into that hazard, but it was not 40 percent, Senator. Senator ADAMS. Well, there was nearly $11,000,000, wasn't there, in these two companies ? STOCK EXCHANGE PRACTICES 1733 Mr. TRACY. Out of a 60,000,000 corporation. Mr. PECORA. Over 11,000,000. Senator ADAMS. This was not the Foreign Securities? Mr. TRACY. International. Senator ADAMS. International—then, I will have to reduce my figures to 20 percent. The CHAIRMAN. This was the second one. Mr. PECORA. Thirty-three and one third would be more accurate, Senator. Senator ADAMS. It is still very liberal. Mr. TRACY. Eleven million out of sixty. Senator ADAMS. Are those two corporations allied in their operations, the Frisco and Rock Island? Mr. TRACY. They have an interchange of freight and freight service and everything of that kind. Senator ADAMS. They are not part of the same sort of allied railroad structure? Mr. TRACY. NO ; not by any means. I think the Southern Pacific's report of 1930 or '31 disclosed the fact that they had purchased a lot of Frisco that cost them 130, which we did not know anything about when we bought it. Apparently they thought well of it also at that time. Senator ADAMS. That is the real point. Mr. TRACY. We believed it was a good investment. That is why we went into it. Senator ADAMS. But you were saying to the general public " You are apt to make mistakes, and the thing to do is to secure diversification. Don't put too many of your eggs in one basket. We will take care of that, and see that they are properly distributed." Mr. TRACY. We had a lot of cash on hand, Senator. We had a lot more money coming that was due on the allotment certificates. I do not know whether you remember the yield that you could get on investments in that period. Senator ADAMS. Yes. I know. Mr. TRACY. All the directors felt that railroads offered the best yield, the best return commensurate with safety, which one could put his money into at that time. We made a very intensive study of the railroads. We had a number of reports on other railroads that we did not go into. Senator ADAMS. YOU yielded to the same temptation that Mr. Dillon was speaking of the other day. I think he almost pictured himself as a " mossback " in investment circles. He said that they would not yield to the temptation to get high yields, and yet instead of avoiding that, you did yield to the temptation of high yields. Mr. TRACY. We had to invest our money to yield better than 5 percent, because that is what we had to pay our stockholders. Senator ADAMS. But you were advising purchasers to avoid that very thing. Mr. TRACY. Our object was to look for safety first, Senator. Senator NORBECK. They did not prove safe. Mr, TRACY. NO. Senator COUZENS. May I ask 1734 STOCK EXCHANGE PRACTICES Senator NORBECK. This advice you were giving turned out to be rather unreliable, did it not? Mr. TRACY. I do not think anybody foresaw the conditions. Senator NORBECK. You have the faculty of answering some question that nobody asks you. Mr. PECORA. Mr. Tracy, to follow up Senator Norbeck's inquiry as to whether or not these two railroad stock investments proved safe, let me ask if it is not a fact, according to your own portfolio statement, that the 49,100 shares of the common stock of the St. Louis & San Francisco Eailway Co. which were in the portfolio of the United States & International Securities Corporation on December 31,1932, and which had been acquired at a cost to that investment trust of $5,820,983.39, had, on December 31, 1932, a, market value of only $42,962.50. Mr. TRACY. I will accept your statement on that, without even looking it up. Those railroads are both in receivership. Mr. PECORA. DO not accept my statement. So long as you have your own documents before you Mr. TRACY. Of course, we have had a big loss in it. Mr. PECORA. Are the figures I have quoted correct figures? Mr. TRACY. We have a tremendous loss in those—a complete loss, you might say. They are both in receivership. Senator COTJZENS. May I ask the date of those Coverdale & Colpitt,s reports, when you used their reports as a guide in purchasing those securities ? What are the dates of those reports ? Mr. TRACY. I will have to rely on my memory, but they were some time in the summer of 1929. Mr. PECORA. Were they in July 1929 or thereabouts ? Mr. TRACY. I know they were in the summer of 1929. Mr. PECORA. DO you know, further, that in July 1929 Dillon, Eead & Co. and the United States & International Securities Corporation formed a pool or joint or syndicate account to trade in the common stock of the Chicago, Rock Island & Jacific Eailway Co., on a 50-50 basis, as between these two participants? Mr. TRACY. I am informed that we formed an account at that time with Dillon, Eead & Co. to acquire stock in the market. That was our object in going into it. Mr. PECORA. Did you, at about the same time—and when I say " you ", I mean the United States & International Securities Corporation—form a similar joint account with Dillon, Eead & Co., on a 50-50 basis, to trade in the stock of the St. Louis & San Francisco Eailway Co.? Mr. TRACY. AS I recall, we formed an account to purchase stock in the market; yes. Mr. PECORA. Who were the managers of both those accounts? Mr. TRACY. I will have to look that up for you. Senator COUZENS. Some "wise guys" must have been unloading on them all that time. There is no question about that. Mr. TRACY. The joint railroad account, to purchase railroad securities, was formed in July 1929. Mr. PECORA. Can you give the specific date? Mr. TRACY. July 13. Mr. PECORA. When were the operations of those two joint accounts terminated ? STOCK EXCHANGE PRACTICES 1735 Mr. TRACY. I am told on November 9,1929. Mr. PECORA. Was it not November 12, 1929? Mr. TRACY (after conferring with an associate). According to our records, November 9,1 am told. Mr. PECORA. Three days difference does not matter very much. The CHAIRMAN. Who was the manager of these accounts ? Mr. TRACY. It was a joint management. Mr. PECORA. Are you sure it was a joint management? Mr. TRACY. I am so informed. I will check it again (after conferring with an associate). Yes; I am told it was a joint management. The CHAIRMAN. Who composed it? Mr. PECORA. Dillon, Read & Co. and the investment trust, in equal shares. Each had a 50 percent interest. Mr. TRACY. We wanted to buy railroad securities. We formed this account with Dillon, Eead & Co. to buy railroad securities. They wanted to buy railroad securities also. The CHAIRMAN. Had these roads, at that time, obtained loans from the Reconstruction Finance Corporation, do you know ? Mr. TRACY. I do not think the Reconstruction Finance Corporation was in existence. Senator COUZENS. It was not organized until 1932, Senator. Mr. PECORA. Let me, for your possible information, Mr. Tracy, state that we submitted a questionnaire to Dillon, Read & Co. which, among other things, called for information as to any pools, joint accounts, syndicates, or trading accounts in stocks in which Dillon, Read & Co., or its agencies or representatives participated, and of which Dillon, Read & Co. were managers; and that in their answer to that part of our questionnaire Dillon, Read & Co. informed us in writing—and I have the specific writing before me—that this joint account which was formed on July 13, 1929, and terminated on November 12, 1929, to deal in the stock of the Chicago, Rock Island & Pacific Railway Co., was one of the joint accounts which they managed. Mr. TRACY. According to my recollection, Mr. Pecora, no securities could be bought in that joint account without the consent of both Dillon, Read & Co. and the investment trust. They could not buy anything in that account without our consent, and we could not buy anything in the account without their consent. Mr. PECORA. Who gave the consent on behalf of the investment trust to any transactions for either one of those joint accounts? Mr. TRACY. The board decided what we would buy. Mr. PECORA. Did you, as president, have active participation in the discussions that led to these transactions ? Mr. TRACY. Indeed, I did. At a lot of the officers' meetings we discussed that at great length. Mr. PECORA. Was this an open-market trading account? Mr. TRACY. It was to acquire stock in the open market. Mr. PECORA. TO buy and sell? Mr. TRACY. TO acquire stock. That was our object. It was to acquire stock in railroads, to make investments in railroad securities. Mr. PECORA. Let us confine ourselves, for the time being, to the joint account that was formed between Dillon, Read & Co. and the 1736 STOCK EXCHANGE PRACTICES United States & International Securities Corporation on July 13, 1929, to acquire common stock of the Chicago, Eock Island & Pacific Kail way Co. Who put up the funds with which that joint account was operated? Mr. TRACY. The United States & International Securities Corporation, to the best of my information. Mr. P:ECORA. Put up all the funds? Mr. TRACY. Put up all the funds. Mr. PECORA. And Dillon, Eead & Co. had a half interest in any profits ? Mr. TRACY. Correct; or losses. Mr. PECORA. Or losses. Do you think that was a proper function for an investment trust to undertake ? Mr. TRACY. That is a very usual thing to do. Mr. PECORA. DO you think it is a proper function, apart from its being usual? Mr. TRACY. I do not think there is any harm in it at all. Mr. PECORA. DO investment trusts commonly advertise to the investing public that among the transactions in which they engage with the moneys subscribed by the investing public, are joint accounts with others in market operations in securities ? Mr. TRACY. I do not know that they advertise that, no; but that is nothing unusual, to go into an account of that kind. I can explain it to you if you would like to have me do so. Mr. PECORA. I wish you would give me a complete explanation of it. Mr. TRACY. If my memory serves me correctly, we had at that time something like $15,000,000 in cash, and about $22,000,000 that was due on the allotment certificates. We were very long on cash, and my recollection of the deal was that we said we would put up the money, and we charged interest at the rate of 5% percent, which was more than enough to cover our earnings on the preferred stock, which were 5 percent. There is nothing unusual about that kind of an operation, provided you know the credit of the people you are doing business with. I would not think of going out and investing our money on a joint account with somebody that did not have the proper credit. Senator COTJZENS. Why was a joint account necessary? Why could you not do it yourself ? Mr. TRACY. Dillon, Eead & Co. also wanted to buy railroad securities at that time. We discussed it at great length in the officers' meetings and directors' meetings. We have officers' meetings once a week, and sometimes more frequently, which all the directors are invited to attend if they want to, at which we discuss things informally. Most of the directors turn up for those meetings if they can. 'Dillon, Eead & Co. wanted to buy railroad securities, also. Senator COUZENS. Did they want to buy them for their own account ? Mr. TRACY. For their own account; and we decided to do this thing jointly, so that we would not compete with each other in the market. Senator COUZENS. Did you yourself ever own any of the common stock of either of those railroads ? Mr. TRACY. NO, I did not. STOCK EXCHANGE PRACTICES 1737 Senator COUZENS. DO you know of any of your individual officers or directors that owned any stock in the Eock Island or the Frisco ? Mr. TRACY. I cannot give you a definite answer on that. Senator COUZENS. I just asked you if you knew. Mr. TRACY. I think that Charles Hayden was chairman of the board of the Eock Island, if I remember correctly. Mr. PECORA. Mr. Charles Hayden is one of the gentlemen whom you mentioned yesterday as a director of this investment trust. Mr. TRACY. Yes. Senator COUZENS. Let him complete his answer. I would like to have him answer what he knows about that, first. Mr. TRACY. I do not think any of the others were on the Rock Island. Senator COUZENS. Were any of them on the Frisco ? Mr. TRACY. I think Mr. Ecker was on the Frisco. Senator COUZENS. When you purchase these stocks and when they are transferred to your name is there any means of finding the source of the stocks, that is, from whom they were transferred Mr. TRACY. I do not think so. Senator COUZENS. I know nothing about these operations, so I may be asking some very foolish questions. I was wondering if there was any way of finding out who owned this stock that was apparently unloaded on you. Mr. TRACY. I am told the market went up after we bought these securities. Senator COUZENS. Obviously the seller of those stocks did not think so much of them, or they would not be unloaded in such large quantities, would they? Mr. TRACY. I do not know who you mean might have been unloading. Senator COUZENS. Selling, if you like that word better. Mr. TRACY. Somebody must have sold them if we bought them. Senator COUZENS. Certainly. I wonder why they were selling, if the outlook was so good. I was just trying to get the mental reaction of the man who would sell these stocks, and who would sell at that time, when the reports were so good. Mr. TRACY. If you go back and review Moody's and Standard Statistics, you would be very much surprised to see the records they made in those days. Mr. PECORA. Mr. Tracy, what individuals among the personnel of the United States <S International Securities Corporation participated, in behalf of that corporation, in the management of this joint account in the shares of the Chicago, Eock Island & Pacific Eailway Co.? Mr. TRACY. The purchases were reported at the meetings as they were made at our weekly meetings and directors' meetings. Mr. PECORA. IS that the extent to which your investment trust participated with Dillon, Eead & Co. in the management of this account ? Mr. TRACY. We followed the transactions and the purchases which were made qn the stock exchange, Mr. Pecora. Mr. PECORA. YOU have told me that this joint account was managed by Dillon, Eead <fc Co. and the investment trust. 1738 STOCK EXCHANGE PRACTICES Mr. TRACY. Correct. Mr. PECORA. The investment trust is a corporation and its acts are committed through the medium of individuals who are officers, directors, or employees. Who were those individuals who, in behalf of this corporation, participated in the management of this joint account with Dillon, Eead & Co. in 1929? Mr. TRACY. I am told that th§ United States & International made both those purchases, and Mr. Frank, who was then in the employ of the company, attended and took care of most of those purchases. Mr. PECORA. IS Mr. Frank here now ? Mr. TRACY. I believe he is. Mr. PECORA. Where is he ? Mr. TRACY. There he is right there [indicating]. Mr. PECORA. If he will remain in attendance, we may call him as a witness later. When that joint account was terminated, on either November 9 or November 12,1929, in the stock of the Chicago, Rock Island & Pacific Railway Company, were there any profits or losses to the syndicate managers ? Mr. TRACY. There must have been losses, because the market went down. I will get the exact figures. Senator COTTZENS. Losses to whom? Mr. TRACY. There must have been book losses, because the market had quite a tumble between October 1 and November 9. Senator COUZENS. Who suffered the losses, those in the joint account? Mr. TRACY. Yes; there must have been losses. I am just looking that up, Senator. Senator COTTZENS, In the joint account? Mr. TRACY. Yes. Senator COTTZENS. We know it was a loss to the investment trust, but was there a loss in the joint account? Mr. TRACY. Certainly. The account was formed to share the profits equally, and the loss equally. Senator COUZENS. If you went out and bought the stock, and turned it in to the investment trust at the price you paid for it. how would there be any profit or loss ? You must have been selling and buying, and all that sort of thing. Mr. PECORA. It was a trading account, was it not ? Mr. TRACY. Mr. Pecora, when the account was terminated, I am told that there was a loss of approximately $2,300,000, which was shared equally between the two groups, the United States & International Securities Co. and Dillon, Read & Co. Mr. PECORA. Those losses occurred as the result of market operations in the stock of the railroad companies. Mr. TRACY. Yes, sir. Mr. PECORA. HOW many shares Mr. TRACY. They only bought stock, Mr. PECORA. They only bought? Mr. TRACY. Bought. Senator COTTZENS. When they bought, to whom did they turn it over? When this joint operation bought stock, to Whom did they deliver the stock? STOCK EXCHANGE PRACTICES 1739 Mr. TRACY. It was delivered to the United States & International Securities Corporation for carrying purposes. We carried it all, put up the money and carried it all, and all the securities were delivered to us, at the market price. Senator COUZENS. Will you explain to me how a loss occurred ? Mr. TRACY. When the account was terminated, Senator, on November, we took the market prices as of that date, and the difference between the cost and market as of that date, showed a loss to the joint account of $2,300,000. The account was terminated, and each one took their proportionate share of the securities. Each took half. Senator COUZENS. They did not deliver them to each as they were accumulated by the joint account? Mr. TRACY. NO. The United States & International kept all the securities. We were putting up all the money, and we kept all the securities that were bought in the joint account. Senator COUZENS. YOU delivered half of them in November to Dillon, Bead & Co.? Mr. TRACY. That is right; against cash. Senator COUZENS. That loss was, then, the difference in the market between the date of purchase and the date of settling up the account, is that correct? Mr. TRACY. YOU see, we put up all the money to buy these securities. Then we charged the account 5% percent interest. We kept all the securities. When the account was terminated we delivered half the securities to Dillon, Kead & Co., against which they paid us cost. Senator COUZENS. Cost at what time? Mr. TRACY. Cost during the period in which the securities were bought. We bought some in July, some in August, and some in September, and when the account was terminated it showed a loss of $2,300,000. Senator COUZENS. What did the market price as of November 9, when the account was terminated, have to do with it? What did that have to do with it if you took them over at cost ? Mr. TRACY. We took ours over, but we charged Dillon, Eead & Co. their share of the cost, you see, of what they stood us in the account. Senator COUZENS. YOU did not turn them over to Dillon, Read & Co. at cost, then, did you? You turned them over to Dillon, Head & Co. as of the market, November 9,? Mr. TRACY. NO. We turned them over at cost to the account. Senator COUZENS. I may be dumb. I do not see where there is any profit or loss in it, if you turned them over at cost. Mr. TRACY. That loss represents the difference between cost and market at that time. We delivered the securities to Dillon, Eead & Co. Senator COUZENS. At what price? Mr. TRACY. And they paid for them at the price they cost the syndicate, you see? Senator COUZENS. Yes. Mr. TRACY. The securities at that time were worth $2,300,000 less than they had cost the syndicate> 175541—33—PT 4 14 1740 STOCK EXCHANGE PRACTICES Senator COUZENS. Yes; but you have had no loss if you turned them over at cost. You did not turn them over at the market. If you turn a thing over at cost, how can there be a loss ? Mr. TRACY. They paid us cost. It was an unrealized loss. We gave them the securities. Senator COUZENS. They did not pay you what they cost you? Mr. TRACY. Yes. They paid us exactly what we paid for them. Senator COUZENS. I may be dumb, but I do not see how there can be a loss. Mr. TRACY. There was an unrealized loss. Senator COUZENS. What do you mean by an unrealized loss ? Mr. TRACY. When the account was terminated we delivered half the securities to Dillon, Bead & Co. at the cost of those securities to the syndicate. At that time the market price of those securities showed a loss of $2,300,000. The loss was there whether it was realized or not. You could have bought, at the market price, at $2,300. 000 less, as of the date of closing of the account, but that had been bought during the period ahead of that. Senator COUZENS. Yes; but you speculated on what the market would be when the joint account was closed, did you not? Mr. TRACY. We thought it was going up, naturally, or we would not have gone into it. Senator COUZENS. What became of this loss when it was not a realizable loss? What did you do with the loss when it was not realized ? Mr. TRACY. We kept our securities. Senator COUZENS. What difference did it make to Dillon, Eead & Co., if they were to share in the cost price? If they were to pay cost, where was the loss? There was a potential loss if you had attempted to sell them, but, as you did not sell them Mr. TRACY. We did not sell ours. Senator COUZENS. SO, how was there a loss, if you did not sell them? Mr. TRACY. It is a potential loss for us, and would so show on our annual report, that they cost us so much, and the market value would be so much. Senator COUZENS. What happened with that transaction of the $2,300,000 potential loss? What did you do with that? How was that potential loss handled ? Mr. TRACY. Our share of the securities would go on our books at cost to us. Senator COUZENS. Yes. Mr. TRACY. And in our annual report we would show those securities at cost. In the next column we would show the market value, so that anybody taking that report would see that they cost us so much, and they are worth so much, which is so much less. Senator COUZENS. And so, in so far as your half is concerned, you had a loss of $1,150,000. Mr. TRACY. Half of $2,300,000. Senator COUZENS. Between what you had paid for them and what the then market was. Mr. TRACY. Yes. STOCK EXCHANGE PRACTICES 1741 Senator COUZENS. That $1,150,000 would be, I assume, a potential loss to Dillon, Read & Co. Did you pay them for that loss? Mr. TRACY. Certainly not. Senator COUZENS. Where was the loss, then ? Mr. TRACY. That was just a potential loss to Dillon, Read & Co. That was a book loss. Senator COUZENS. SO, there were no cash transactions with respect .to that loss ? Mr. TRACY. Not at the closing of the syndicate; no, sir. Senator COUZENS. At any other time? Mr. TRACY. Dillon, Read & Co. subsequently sold those securities, I think, and then they must have registered an actual loss oh them. Senator COUZENS. SO that there was only a potential loss, and not a real loss. Mr. TRACY. AS of the date of closing, if the market had gone up again, there would not have been a loss. The CHAIRMAN. The account was not terminated by the sale of these securities, but by distribution. Mr. TRACY. Distribution. Each took half of the securities. The CHAIRMAN. There was not any actual sale of them. Mr. TRACY. NO ; each took half the securities, and each paid half the amount of the cost. Senator COUZENS. When you entered into the trading arrangement, you had an understanding that you were to share the profits and losses ? Mr. TRACY. Yes. Senator COUZENS. I still cannot get through my mind how there was any profit or loss, if it was done at cost. You admit in your testimony that it is only a potential loss, so there was no real profit and loss in the transactions if it was all done on a cost basis. Mr. TRACY. Not in that syndicate, Senator. If we had sold the securities belonging to the syndicate, we would have shared the actual loss. Senator COUZENS. But the syndicate did not sell any. Mr. TRACY. NO. Senator COUZENS. The syndicate only bought. Mr. TRACY. Yes. Senator COUZENS. SO there was no real profit and Mr. TRACY. NO ; a book loss. Senator COUZENS. But you did contemplate, when loss at all. you entered into the trading agreement, that you might sell as well as buy. Mr. TRACY. There might be a loss. Senator COUZENS. Through selling and buying. Mr. TRACY. Yes. Senator COUZENS. Did the trading arrangement sell short at all? Mr. TRACY. NO. Senator COUZENS. They did not sell at all, at any time? Mr. TRACY. Not to my knowledge. Senator COUZENS. They only bought. Mr. TRACY. The simple purpose of forming it was to acquire the railroad securities, that was all. 1742 STOCK EXCHANGE PEACTICES Mr. PECCXRA. Have you the minute book of the United States & International Securities Corporation covering the period between July 1929 and the 1st of January 1930? Mr. TRACY. December 1, 1930? Mr. PECORA. January 1,, 1930. Mr. TRACY (after conferring with associates). I have it here. Mr. PECORA. Will you kindly look through the minute book for that period of time and see if you find an;y entries therein relating , to the investment trust's going into this joint account with Dillon, Bead & Co.? Mr. TRACY. No; I do not find any reference to it, but I know it was gone into at great length during the months of May and June and up to the middle of July. I went away about the middle of July. Mr. PECORA. DO you find any entries in the minutes of any meeting of the board of directors of your investment trust for the months of May or June that relate to this joint-account venture? Incidentally, while you are looking at it you need not confine yourself to any period of time. Look through the minute book and see if you can point out any entries therein relating to this joint account. Mr. TRACY. No; I do not see any until you get over to September 9. Mr. PECORA. But this joint account, you say, was formed on July 13? Mr. TRACY. That is correct. Mr. PECORA. And the decision then had been made on behalf of your investment trust to go into this joint account some time before July 13? Mr. TRACY. Yes. It was discussed at all of the officers' meetings held during that period. Mr. PECORA. Did you not record in your minutes of the meetings any references at all to decisions by which the investment trust entered into a joint-account operation involving millions of dollars? Mr. TRACY. Apparently it is not recorded. Mr. PECORA. IS that the way these minutes were kept generally ? Mr. TRACY. We never recorded sales until after they were made. Mr. PECORA. What was the purpose of keeping minutes of meetings of the board of directors and failing to include any mention in those minutes of discussions which led to the making of important decisions by the board of directors? Mr. TRACY. It is not customary in any companies that I am connected with to put into the minutes all the things you discuss, Mr. Pecora. Mr. PECORA. Even such important items of discussion as one involving an investment of several millions of dollars? Mr. TRACY. NO. Mr. PECORA. What are the minutes good for, then ? Mr. TRACY. They record what you have done. Mr. PECORA. After it has been done, some report is made to the board of directors and such a report is entered in the minutes? Is that the way these minutes were kept? Mr. TRAQY. It is the usual thing to discuss what you are going to do. When it is done, it is recorded in the minutes. STOCK EXCHANGE PRACTICES 1743 Mr. PECORA. The decision to enter this joint account must have been reached prior to July 13, 1929? Mr. TRACY. Certainly. Mr. PECORA. Was the .making of that decision, whenever it was made, recorded in the minutes? Mr. TRACY. We did not have any meeting in the summer of 1929. I t was recorded at the first meeting held after that. Mr. PECORA. At what meeting or meetings of the board of directors of your investment trust did they reach the decision to enter into this joint-account operation with Dillon, Read & Co. that involved an investment of several millions of dollars on behalf of the investment trust? Mr. TRACY. It was probably decided at one of the officers' meetings. Mr. PECORA. But not at a directors' meeting? Mr. TRACY. It had been discussed, as I have told you, Mr. Pecora. Mr. PECORA. I am not asking you now about an entry of a discussion in the minutes, but about the making of the decision. Mr. TRACY. It is not recorded until the meeting that was held on Septebmer 9. Mr. PECORA. Will you produce the minutes of the meeting in September 1929, in which you say that for the first time there is any mention at all of this transaction ? Mr. TRACY. I have them here. They are in the treasurer's report. Mr. PECORA. Will you let me look at those minutes, please? Mr. TRACY. Certainly [handing book to Mr. Pecora]. The treasurer's reports are part of the minutes and attached to them. Senator COUZENS. Eead them out loud so that we can all hear. Mr. PECORA. Will you kindly show me where, in the minutes of the board of directors of your investment trust, of the meeting held on September 9, 1929, there is any reference to this joint account or to any transactions had in its name ? Mr. TBACY (reading) : The chairman presented to the meeting financial re- ports of the treasurer of the corporation covering the transactions of the corporation during the months of June, July, and August 1929. Here [indicating] is the report of the transactions entered into by the officers of the corporation, June 8 to June 30, 1929; the purchase of the Chesapeake & Ohio Railway Co. stock Mr. PECORA. Just get down to the transactions relating to this. Mr. TRACY. All right. The last half of the month of July, Florida Power & Light; International Telephone & Telegraph Co., Chicago, Rock Island & Pacific, 5,000 shares; 10,000, Pennsylvania; 30,000, Frisco; 10,000 Southern Pacific; 10,000, Southern Railway; odd amounts of Seaboard bonds and notes. Mr. PECORA. According to the minutes of the meeting of the board of directors of your investment trust held on September 9, 1929, and to which you have directed my attention in answer to my previous question, the directors present at that meeting were as follows : Clarence Dillon, Charles Hayden, Dean Mathey, J. W. McConnell, and Ernest B. Tracy. You acted as chairman of the meeting, and Mr. Frank acted as secretary of the meeting and kept the minutes. Is that the Mr. Frank to whom you made reference earlier 1744 this morning? poration ? STOCK EXCHANGE PRACTICES Is that the man connected with the Keswick Cor- Mr. TRACT. Yes. Mr. PECORA. Mr. Mathey, whose name I have mentioned, is one of the partners of Dillon, Read & Co., is he not? Mr. TRACY. That is correct. Mr. PECORA. NOW, you have called my attention to the following entry appearing at page 161 of your minute book, relating to the meeting of that date, September 9, 1929, which reads as follows: The chairman presented to the meeting financial reports of the treasurer of the corporation covering the transactions of the corporation during the months of June, July, and August 1929. A discussion of these reports and of the securities held by the corporation then ensued. Thereupon, on motion, duly made and seconded, it was unanimously resolved that the reports of the treasurer of the corporation covering the transactions of the corporation during the months of June, July, and August 1929, copies of which have been submitted to this meeting, and all of the transactions set forth therein, hereby are in all respects approved, ratified, and confirmed. Embodied in the minutes of the meeting of September 9, 1929, you called my attention to certain reports purporting to have been made to the board by the treasurer of the investment trust and in which mention is made that at certain times certain shares of the Chicago^ Eock Island & Pacific Railway Co. had been acquired ? Mr. TRACY. That is right. If that is what it says there, that is right. Mr. PECORA. The references in those reports of the treasurer to the acquisition of any securities of the Chicago, Rock Island & Pacific Eailway Co., as far as I can find them, are contained at page 173 of this minute book, and show the acquisition of 5,000 shares of Chicago, Eock Island & Pacific Eailway common stock at $135.23, or a total of $676,137.50; and that those purchases were made through G. N". P. Murphy & Co. Also at page 175 of the minute book is a statement embodied in the report of the treasurer that 19,900 shares of the common stock of the Chicago, Eock Island & Pacific had been acquired at $138.39, for a total of $2,753,962.50 Senator COTJZENS. From whom did they purchase those? Mr. PECORA. It does not say, Senator. Mr. TRACY. It was purchased through the account. Mr. PECORA. In the first instance the information embodied in the treasurer's report shows the firm of brokers through whom the 5,000 shares were acquired, but the entry relating to the acquisition of the 19,900 shares does not appear to give the name of the broker through whom the purchase was made. Mr. TRACY. I think where it shows the broker's name is where it is applied to the account. I think you will find it shows it. Mr. PECORA. What did you say ? Mr. TRACY. I believe you will find the purchase against the broker's name there Mr. PECORA. I have just found this reference now, Senator, and I am going to read it. It appears at page 174 of the minute book and is contained in one of the reports submitted by the treasurer, and it reads as follows [reading] : 6. The United States & International Securities Corporation and Dillon, Read & Co. entered into an agreement to establish a joint railroad securities trading account, the funds for which to be provided for by the United States & STOCK EXCHANGE PRACTICES 1745 International Securities Corporation, taking as reimbursement 5 ^ percent interest on the daily balances, the profits or losses of this account to be shared equally by each participant. As agreed upon, the following securities were purchased, totaling $10,891,578. Then in the list that follows that statement appear, among other things, these entries, which I shall specifically read, because I propose to make it the subject of further examination. Nineteen thousand nine hundred shares Chicago, Rock Island & Pacific Railway Co. common at $138.39—$2,753,962.50. Thirty thousand shares St. Louis & San Francisco Railway Co. common at $130.58, a total of $3,917,525. One hundred sixty-nine thousand shares of Seaboard Air Line Railway Co. at 45.77—no; these are bonds, $169,000 par value. Mr. TRACY. I think it is only fair to read the whole list, giving all the securities, because that was the joint account and we were buying railroad .securities at that time. Senator COUZENS. Have we any copy of the joint agreement that was entered into ? Mr. PECORA. I am going to ask the witness for that as soon as I get through examining him about this minute book, Senator. Mr. TRACY. There are a lot of others contained in that; and I think, in fairness, they all ought to be read. Mr. PECORA. All right. I will read them all. I have already referred to the Chicago, Rock Island & Pacific and the St. Louis & San Francisco common. The entry further shows that there had been purchased for this joint account— Ten thousand shares of Pennsylvania Railroad Co. capital stock at 98.41, a total of $984,000. Ten thousand shares Southern Pacific Co. capital stock at 144.91, a total of $1,449,000. Ten thousand shares Southern Railway Co. at 159.77, a total of $1,597,000. $169,000 par value of bonds of the Seaboard Air Lines Railway, 5 percents, due in 1949, at $45.77, a total of $77,350.50. $106,000 par value of Seaboard Air Line Railway 5 percent bonds maturing in 1949 at $46.86, a total of $49,667. $89,000 par value of Seaboard Air Line Railway Co. first and consolidated 6 percent bonds maturing in 1945, at $69.93, a total of $62,235.50. The CHAIRMAN. HOW were those purchases made? Mr. TRACY. In the open market, Mr. Chairman. Mr. PECORA. YOU have heretofore, told us with respect to the acquisition, through the medium of this joint account, of common stock of the Chicago, Rock Island & Pacific Eailway Co., that the joint account in question was an account formed to acquire the stock— am I correct in that? Mr. TRACY. TO purchase railroad securities. Mr. PECORA. And you have also told us in the course of your testimony this morning similarly with respect to the acquisition of the shares of the common stock to the acquisition of the shares of the Common stock of the St. Louis & San Francisco Railway Co. Am I correct in that, too? Mr. TRACY. I believe you are, sir. Mr. PECORA. At page 174 of this minute book the reference, which I have read into the record therefrom, is made to this joint account as a joint railroad securities trading account. Was this joint railroad securities trading account that your investment trust entered into with Dillon, Read & Co. a trading account in all that that 1746 STOCK EXCHANGE PRACTICES term implies, or was it merely an account that was formed to enable the participants simply to acquire railroad issues? Mr. TRACY. The object of the account, Mr. Pecora, was to purchase railroad securities. Mr. PECORA. Why was it styled a trading account if that was the object? Mr. TRACY. At that time, I cannot tell you that; but the object of the account was to buy railroad securities. Mr. PECORA. Then the name given to that joint account, namely, joint railroad securities trading account, was perhaps a misnomer? Mr. TRACY. I do not think the words " trading account" had the stigma attached to them at that time that has been developed since. Mr. PECORA. Whether it had a stigma at that time, a trading account in 1929 meant the same thing as a trading account in 1933, did it not ? Mr. TRACY. It was formed for the purpose of buying railroad securities. Mr. PECORA. We know that; you have told us that. But why was it called a trading account if it was formed only for the purpose of acquiring securities and not selling them. Mr. TRACY. We might have decided to sell some securities. Mr. PECORA. What was the decision that was reached pome time prior to July 13, 1929, by the board of directors of your investment trust with respect to going into any kind of a joint account with Dillon, Read & Co. ? Mr. TRACY. We wanted to buy railroad securities. Mr. PECORA. Not to sell them? Mr. TRACY. NO. Mr. PECORA. Just to buy? Mr. TRACY. Yes; we wanted to acquire them. Mr. PECORA. When, in pursuance of that judgment or decision, your company went into a joint trading account with Dillon, Read & Co., was there a departure, by so doing, from the decision that the board had arrived at regarding the purposes of this account? Mr. TRACY. None. The purpose of the officers was to acquire railroad securities, and we acquired them. The CHAIRMAN. When the account was terminated, Mr. Tracy, how was the adjustment made? Did Dillon, Read & Co. take an equal number of shares of this stock and the investment company an equal number of the shares? How did you agree among yourselves as to the division of the stock that you had acquired? Mr. TRACY. It was a 50-50 basis. The CHAIRMAN. Each stock? Mr. TRACY. Yes, sir. Senator COUZENS. I think the copy of the agreement entered into is the best evidence. Mr. PECORA. Will you produce the original or a true copy of the agreement entered into between your investment trust and Dillon, Read & Co. by which this joint account was created? Mr. TRACY. I have before me one of the originals. Mr. PECORA. Will you produce it, please? (Witness produced a paper which he handed to Mr. Pecora.) STOCK EXCHANGE PRACTICES 1747 Mr. PECORA. YOU say it is one of the originals. Do you mean it is a duplicate original? Mr. TRACY. Yes. Mr. PECORA. I offer it in evidence and ask that it be spread upon the record. Mr. TRACY. I would rather not have it marked up, because it is our file copy. Mr. PECORA. The marking is not going to damage it, is it ? Putting an exhibit number on it will not damage it. (The document referred to, dated July 13, 1929, headed "Thirty Million Dollar Eailroad Securities Joint Account", was received in evidence as Committee's exhibit no. 15.) Mr. PECORA. The exhibit produced by the witness, which has been marked " Committee Exhibit 15 ", of this date, is a carbon copy, is it not? Mr. TRACY. Yes. Mr. PECORA. A typewritten carbon? Mr. TRACY. Yes. Mr. PECORA. And it reads as follows. [Reading:] THIRTY MILLION DOLLAR RAILROAD SECURITIES JOINT ACCOUNT, My 13, 1929. DILLON, READ & Co., New York, N.Y. DEAR SIRS: Referring to the above account which is being formed today to buy and/or sell and/or trade in the common and/or preferred stocks and/or bonds of various railroads, subject to the condition that the account shall never be committed at any one time in a net amount exceeding $30,000,000, long or short, we beg to confirm the participation of $15,000,000 allotted to you in this account. The account is to terminate October 15, 1929, unless sooner dissolved by mutual agreement, and may be extended by mutual consent. The account shall be under the joint management of Dillon, Read & Co. and the United States & International Securities Corporation. Purchases and/or sales for the account are to be approved by both parties. Participants will share pro rata, that is, in the proportions which their respective participations bear to the total participations in the account in the profits, losses and expenses of the account, and at the termination of the account will be entitled to receive their respective pro rata shares of any ass'ets then remaining in the account in the form in which the same then exists, less their respective pro rata shares of the charges to the account. We will carry for the account all of such stock and/or bonds which the account is long at an interest rate of 5% percent. If at some future time all or part of any of the securities long in the account be turned over to a new company, it is our understanding that you will be given an opportunity to make an offering of the securities of such company and for doing so will be entitled to reasonable compensation. Kindly confirm your acceptance of the participation allotted you by signing the attached copy of this letter and returning it to us. Yours very truly, UNITED STATES & INTERNATIONAL SECURITIES CORPORATION. Then there is a blank, a space, and vice president. In the lower left-hand corner is the word "Accepted ", and a signature reading " Dillon, Bead & Co., July 13,1929." Mr. PECORA. This agreement, or the agreement evidenced by this letter, Mr. Tracy, relates to a pretty large account, does it not? Mr. TRACY. I would call it a pretty large account. Mr. PECORA. One to which your investment trust was committing itself to the extent of as much as $15?000,000? 1748 STOCK EXCHANGE PEACTICES Senator COTJZENS. Committed itself to $30,000,000 as a matter of fact. Mr. PECORA. Yes. Committed itself to $30,000,000; that is, committed itself to furnish the funds up to the amount of $30,000,000, but its participation therein for its own account was not to exceed $15,000,000. As I have been examining you this morning, Mr. Tracy, along this line, I noticed that almost in every instance before you answered the question you had a whispered conference with a young man who is now seated at your right. Who is that young man? I do not recognize him. Mr. TRACY. He is Paul Nitze. Mr. PECORA. Who is he ? What is his relationship to your investment trust? Mr. TRACY. He is vice president of the Keswick Corporation. Mr. PECORA. I have no objection to your getting any information or advices that you want to get from any of your associates to enable you to answer any question that I put to you, but I do now want to ask you Mr. Tracy—you are president of this investment comporation—if you need to confer with Mr. Nitze or anybody else in order to enable you to answer my question ? Mr. TRACY. Well, when I do, Mr. Pecora, I will ask that you be kind enough to let me confer with him. There are questions of details. Mr. PECORA. There will be no objection to your conferring with him. Mr. TRACY. All right. If I need any information with regard to specific purchases and sales and details that I cannot carry in my head I will make the request of you, if you will be kind enough to let me do it. Mr. PECORA. NOW do you need any information from Mr. Nitze or anybody else in order to enable you to answer questions relating to the making of this joint account agreement of July 13, 1929? Mr. TRACY. I will have to find out first what you are going to ask me about it. Mr. PECORA. I propose to ask you a number of questions with respect to the making of this agreement. Do you feel that you have sufficient personal knowledge of all the circumstances surrounding the making of this agreement that you do not have to have advices and information from any of your associates? Mr. TRACY. I think I know a great deal about it; yes. Mr. PECORA. Well, let us see how much you know about it first. Mr. TRACY. YOU might ask me the question, Mr. Pecora, but I may have to refresh my knowledge of it. Mr. PECORA. Yes. Do you acknowledge that the making of this agreement of July 13, 1929, by your investment trust with Dillon, Bead & Co. involved a business transaction of considerable moment and consequence to the investment trust ? Mr. TRACY. It did. The operation was of large magnitude. Mr. PECORA. DO you know any other single agreement touching upon any of the business operations of your investment trust that exceeded this agreement in magnitude ? Mr. TRACY. I do not. STOCK EXCHANGE PRACTICES 1749 Mr. PECORA. In view of that fact, Mr. Tracy, will you be good enough to tell this committee if you can why there is absolutely no mention in the minute book of your investment trust of the making of this agreement at the time it was made or at the time the decision to enter into it was made ? Mr. TRACY. I think I told you before, Mr. Pecora, that this matter was discussed at the directors' meetings, at officers' meetings; I discussed it outside of the meetings with different directors, and we came to the conclusion—the board—that railroad securities offered the best field for investment on earnings, market basis, on yield basis, and we decided to look into the railroads. We spent money on reports not only on the Eock Island, the Frisco, the Denver & Rio Grande Western, the Chicago Great Western, but one or two other roads, and as the result of all those deliberations we decided to buy railroad securities. And that is the method that we employed. That is our usual form of reporting operations to the board. But everyone on the board knew about that account. There was not anybody that did not know it. Mr. PECORA. What reason was there for not mentioning somewhere in the minute book of your board the fact that the board had committed itself to a joint account involving a potential liability of $30,000,000? Mr. TRACY. I do not know. As I told you, everybody on the board was familiar with that, and the details of it, and our reasons for going into it. It was unanimous. We were not trying to hide anything from anybody. Every director knew everything that we were doing. Mr. PECORA..I have not used any such term as " h i d e " anything. I am simply trying to get from you some explanation of why it was not mentioned. I t might have been an oversight for all I know. I do not say that you were trying to hide something, but I am trying to get your own reason or explanation for the absolute absence from the record of the minutes of your board meetings held at any time prior to and up to July 13, 1929, of any reference to this transaction involving potentially a 30-million-dollar commitment by your company. That is what I am trying to find out. Mr. TRACY. There was no reason that I know of. It was not usual, for us to put those things in our minutes, Mr. Pecora. But I come back and tell you again that all of them had hashed over this thing, had discussed it ; had talked about it, had discussed railroads, had reports made of it, and it was the unanimous opinion of the board that railroad securities offered the best field for investment at that time. Mr. PECORA. What do you regard as the primary function served by the keeping of minutes of meetings of boards of directors? Mr. TRACY. TO record what you have done. Mr. PECORA. Exactly. Mr. TRACY. And I think everything is recorded in there. All the purchases that we have made. Mr. PECORA. Well, you made purchases after you made decisions to purchase ? Mr. TRACY. Yes. 1750 STOCK EXCHANGE PRACTICES Mr. PECORA. The important thing is the making of the decision, is it not, because without the decision the purchase does not subsequently follow ? Mr. TRACY. NO; it does not. Mr. PECORA. Why do you not put in your minutes, or cause to be put there, the important decisions that the board makes with regard to the contemplated purchase of securities? Mr. TRACY. Well, it is not customary—I am on a number of boards—to record any transactions until they are reported. Mr. PECORA. If you were asked at any time and place to say, under oath, at what meeting of the board of directors the final decision was arrived at to enter into this joint-account agreement of July 13,. 1929, would you be able to answer on the basis of your personal recollection ? Mr. TRACY. NO. Mr. PECORA. DO you know any of your fellow directors who would be able to answer such a question on personal recollection? Mr. TRACY. NO. But what I can tell you and what they could tell you is that we had discussed this thing for months. We had gone into the railroad securities, we had looked into railroads, we had looked into everything else, and we decided to acquire railroad securities because Mr. PECORA. YOU cannot tell us when you reached that decision and when you actually embodied such a decision in a written agreement which bears a definite date? The fact of the making of that written agreement at the time it was made is not mentioned in the minutes anywhere ? Is that not the situation ? Mr. TRACY. That is right. It is not. But the purchases are recorded, and the amounts. The CHAIRMAN. But the agreement contemplates not only acquiring securities but selling them. Mr. TRACY. Well, that is the usual form, Mr. Chairman, when that account was formed to purchase railroad securities. Mr. PECORA. Then if it was formed solely to purchase railroad securities for the benefit of the account, and it had only two participants, namely, Dillion, Read & Co. and your investment trust, why was the agreement so drawn as to confer upon the managers of this account the right not only to purchase but to sell; the right not only to buy long but to sell short ? Mr. TRACY. That is the usual form, Mr. Pecora. Mr. PECORA. Who prepared this usual form? Do you find it in any textbook on forms ? Mr. TRACY. NO ; I do not think you do. Mr. PECORA. Well, who prepared this usual form ? Mr. TRACY. I will find out for you if you wish. Mr. PECORA. Please. Mr. TRACY (after conferring with his associates). I do not know who wrote that, and they do not seem to be able to tell me. But that is the usual form whenever an account is formed to buvJ and sell. Mr. PECORA. DO you know who signed that contract or that agreement of July 13, 1929, in behalf of your company? STOCK EXCHANGE PRACTICES 1751 Mr. TRACT. NO. I will try to find out for you. Do you know who signed it (addressing his associates) ? I will have to look that up. Mr. PECORA. All right. Now, Mr. Chairman, I notice the time is 12:15 p.m., and as I recall it, it was the purpose of the committee to adjourn early today. In view of that, and in view of the fact that I notice in this room the presence of Hon. Patrick J. Hurley who I know desires to make some statement to the committee respecting a matter that is before the committee or is to come before the committe, may I suggest that we suspend the examination of this witness at this time and ask Mr, Hurley to address the committee if he desires to do so. The CHAIRMAN. Will that be agreeable to you, Mr. Tracy ? Mr. TRACY. Yes, sir. The CHAIRMAN. We will suspend the examination of Mr. Tracy, then, for the present. Our purpose is to adjourn, when we do adjourn, until Tuesday. Then, Mr. Tracy, we will not resume with you until 10 o'clock on Tuesday. We are going to adjourn now until 10 o'clock next Tuesday. Mr. PECORA. Mr. Chairman, will you request that all witnesses now under subpena, whether they have already been called to testify or not, return under that subpena on Tuesday morning ? The CHAIRMAN. All witnesses who have been subpenaed will be present Tuesday at 10 o'clock. (Thereupon, the examination of Mr. Tracy was temporarily discontinued until 10 a.m. the following Tuesday, October 10, 1933.) The CHAIRMAN. Before Mr. Hurley takes the stand I wish to make this statement for the record. The committee wishes to express its regret because of the illness of Senator Glass and his enforced absence. I have just received this memorandum with reference to Senator Glass' illness and I will ask that it be placed in the record at this point. (The memordandum referred to is as follows:) OCTOBER 6, 1933. Senator Glass wishes Senator Fletcher to know that he is confined to his bed under the care of a physician and trained nurse, and that this illness has prevented him from attending the sessions yesterday and today. RixEfY SMITH, Secretary. * The CHAIRMAN. We will now ask Mr. Hurley to take the stand. You wanted to ask Mr. Hurley some questions, Mr. Pecora? Mr. PECORA. NQ. I think Mr. Hurley has indicated to me that he has some statement to make to this committee, or some application to address to it. The CHAIRMAN. Are you appearing as counsel, Mr. Hurley? Mr. HURLEY. Yes, sir. The CHAIRMAN. Not as a witness? Mr. HURLEY. Not as a witness. The CHAIRMAN. There is no need for you to be sworn, then. You may proceed with any statement you desire to make, Mr. Hurley. 1752 STOCK EXCHANGE PRACTICES STATEMENT BY HON. PATRICK J. HURLEY I N BEHAIF OF THE ASSOCIATED GAS & ELECTRIC CO. Mr. HURLEY. Mr. Chairman and members of the committee, my appearance before this committee in behalf of the Associated Gas & Electric Co. is primarily for the protection of the rights of approximately 350,000 citizens throughout the country who have invested in its securities. As we understand it, the committee desires to present to the public a true statement of the methods employed in issuing the securities of the company. We feel that the best interests of the security holders will be promoted by the conducting of the entire proceedings in public. With that in view, the company has for itself and all its subsidiaries presented willingly all of its records to Mr. Pecora and his agents. The books and records of the company and its subsidiaries are and will continue to be available to Mr. Pecora and this committee. The affairs of the company have been fully investigated by the Federal Trade Commission. That commission recently published a report of its investigation (S. Doc. 92, pt. 45, 70th Cong., 1st sess.). The frank cooperation of the corporation was commended by the chief counsel for the Federal Trade Commission in the public record referred to at page 837, as follows: Mr. HEAI*Y. I think it appropriate for me to say at this time, at least, I desire to say on behalf of myself and Dr. Walker, the chief economist, and also on behalf of the Commission, that we appreciate the cooperation which we have had from the Associated Gas & Electric Co. in our work and in Mr. Nodder's work of preparing and presenting this report for the record. I am moved to say that the company has not refused us any information which the representatives of the Commission deemed material and pertinent under the resolution and statute that we work under. Commissioner MCCULLOCH. It is very appropriate that that acknowledgment should be made on the record. Now, are you ready for adjournment? The Associated Gas & Electric Co. is the largest independent utility holding company in the United States. By that I mean that it is controlled by its management and not by banks or banking connections generally referred to as Wall Street. There are undoubtedly large interests who would like to see this company dismembered, even though it were necessary to force it into receivership to do so* Unquestionably a receivership would be destructive to the best interests of hundreds of thousands of security holders throughout the United States. In addition to this, so-called " chiselers " have formed and attempted to form committees ostensibly to serve the security holders but actually to profit by the distress that this can bring to the security holders of this corporation. As evidence of this I would like to call the attention of the committee to the fact that one of these so-called " security protective committees " has attached to its circulars which have been sent out to dealers the following statement: Until further notice the sum of $6, which is approximately 4 percent of the current market value, will be allowed and paid to investment dealers who are active, for each debenture deposited through them, to cover their cost of assisting debenture holders in depositing with this committee, the same to be payable immediately upon satisfactory proof of deposit. Necessarily this very high cost of procurement of depositors must be charged together with all other expenses against the security holders. STOCK EXCHANGE PRACTICES Senator COUZENS. DO you mind an interruption, Mr. Mr. HURLEY. NO, sir. Senator COUZENS. What is the purpose of collecting 1753 Hurley ? these securities? Mr. HURLEY. They state that they are collected by a protective committee for the protection of the security holders. I have here a complete "record of the advertising campaign conducted in the papers and the advertisement itself. Senator COUZENS. I would like to have that placed in the record. The CHAIRMAN. It may be marked as an exhibit and spread upon the record. (Advertising matter of the Debenture Holders' Protective Committee was marked " Committee Exhibit No. 16, October 6, 1933," see p. 1775.) Senator COUZENS. Why did they need protection? That is what I wanted to know. Mr. HURLEY. I think possibly that in the case of a company with far-flung interest that is under investigation, in these times wheni taxes have been increased, cost of operations increased, and the income on the commodity reduced, there is a chance to break the company down. Senator COUZENS. What do you mean by that? That they are in default on their securities? Mr. HURLEY. I mean to say that throughout the depression this company has paid interest to date and is still paying interest. Senator COUZENS. SO you have no securities in default? Mr. HURLEY. AS I understand, there are none in default. I am advised this morning that the interest is all paid to date. Senator COUZENS. I want to get this straight, because it is not usual to form bondholders committees or security holders committees until there is a default. Mr. HURLEY. I am pointing to this, Senator, because it is very unusual, and it is an attack upon what I conceive to be the fundamental rights of persons who have invested in these securities to prepare for themselves a competence for illness or old age, and I am calling it to the attention of the committee because it is an attack upon the rights of these investors throughout the United States. May I proceed? Senator COUZENS. Yes. Mr. HURLEY. An investigation of this nature must necessarily bring forth those who will attempt to profit by any distress caused to the investors. I do not see that the committee can in any way prevent this, but I do want to call attention to the fact that it is taking place. The press recently has carried quite generally a story to the effect that Mr. Pecora has said that the Associated Gas & Electric Co. is " a corporate labyrinth resembling the Insull group in structure and formation." No statement that has been made could be more damaging to the welfare of the investors of this company. The Insull situation has come to have a specific derogatory meaning in the public mind. Without referring to questions of fraud or mismanagement, it means a bankrupt situation. I feel certain 1754 STOCK EXCHANGE PRACTICES that such a comparison would not have been made by Mr. Pecora after he had completed this investigation. Let us look for a moment to the differences between this situation and the Insull situation, to which Mr. Pecora likens it. The Insull holding company situation was built up largely on thin equities with large amount of underlying securities held by the public. These equities were freely pledged as collateral for the bank loans which the companies were unable to pay, resulting in the foreclosure of the loans. The earnings of the holding companies were in large part based on intercompany profits on the sales of properties and securities, which could not continue to be shown when the depression came. These are the things which caused the collapse of the Insull structure. The policies of the Associated management have been exactly the opposite. The Insull organization on the advent of the depression was immediately unable to pay the interest upon its securities; in contrast, the Associated Gas & Electric Co. has continued to pay the interest on its securities throughout the depression. The condition of the company under the present investigations and attacks from without together with increased taxes and the increased cost of compliance with the provisions of the N.R.A. is raising the cost of operation of the company at a time when rates are actually being reduced. I agree with Mr. Pecora that there are complexities in the corporate organization. That must necessarily be so when it is understood that the company operates in 26 States of the Union, in Canada, and in the Philippine Islands; but his attention should also be called to the great strides the company has made in simplifying the corporate structure. Since 1922, 216 corporations have been eliminated by the Associated System in simplifying its corporate structure. For the information of the committee, I will hand Mr. Pecora, if he desires to have it, a statement of the corporations actually eliminated from the system during this period. The process of simplification is still going on. As I said in the beginning, I am appearing here primarily in the interest of the people throughout the country who have invested in these securities, in a hope that we may be able to work constructively together to save those investors. I said also in the beginning that the books of the Associated and its subsidiary companies are now and will continue to be at the disposal of Mr. Pecora and this committee. Mr. Pecora has asked for the private books of private concerns owned or controlled by Mr. H. C. Hopson. I am not attorney for Mr. H. C. Hopson. Senator COUZENS. Who is Mr. Hopson? Mr. HURLEY. Mr. Hopson is executive vice president of the company. Senator COUZEN. That is, the holding company? Mr. HURLEY. Yes, sir. The CHAIRMAN. He really has the management of the company? Mr. HURLEY. Yes. The CHAIRMAN. And its affairs? Mr. HURLEY. Yes, sir. Senator COUZENS. Has he been here right along during this investigation ? Mr. HURLEY. NO, sir. STOCK EXCHANGE PRACTICES 1755 Mr. PECORA. I have never laid eyes on him, Senator Couzens. Senator COUZENS. DO you know where he has been ? Mr. HURLEY. I know where he is now. Senator COUZENS. I S he here in the room? Mr. HURLEY. NO. There is a vice president here in the room now. Senator COUZENS. Where is Mr. Hopson? Mr. HURLEY. Mr. Hopson is in Chicago. Senator COUZENS. Has he been active in the affairs of the company during this year? Mr. HURLEY. NO, sir. He has been ill part of the time. I might say this: There is some one here who will say to the committee that Mr. Hopson is available, and when I finish this you will find that he is available at any time the committee wants him, and has been for any public hearing that was desired. Mr. Pecora has asked for the private books of the private concerns owned or controlled by Mr. H. C. Hopson. I am advised, however, that the confidential records of clients and others, not concerned with the Associated Gas & Electric Co., are in the H. C. Hopson & Co. records. While Mr. Hopson has every desire to cooperate, yet he feels that he should not be compelled to disclose the confidential records of disinterested parties. He has stated that he will submit himself and his books to this committee, but as a matter of protection for himself it should be under proper subpena and with the understanding that he is not voluntarily divulging confidential records of others which do not have a direct or indirect bearing on any matters pertaining to this investigation; and that he will be allowed to appear before this committee in person, with his books. As this committee probably knows, the Associated Gas & Electric Co. is at present time undergoing recapitalization. Half truths and rumors may become public before the true facts as stated by the managers in public hearing to the committee, and in such event it will be exceedingly damaging to the welfare of the security holders. My purpose in appearing before you gentlemen is to get a statement before you of those salient facts, and to present ourselves so far as the Associated Gas & Electric Co. is concerned without any qualifications whatever, to this committee. The CHAIRMAN. Has the Federal Trade Commission investigation been completed, Mr. Hurley? Mr. HURLEY. I understand so, although I think the question of the findings is not fully agreed to by Mr. Pecora, However, he may speak for himself on that. It was my understanding that it had been completed, and here was the conclusion of the document thanking the company for its cooperation. Mr. PECORA. Mr. Hurley, may I ask if you know what is the date of the report of the Federal Trade Commission's examination ? Mr. HURLEY. I haven't the date here, but it is Senate Document 92, part 45, Seventieth Congress, first session. Mr. PECORA. Perhaps if you would confer with Mr. Travis, who is a New York attorney and who I see is sitting alongside you, he might confirm what I understand to be the fact, that this report was made and dated as of some time in 1929. Mr, TRAVIS. I believe it was December 31, 1929, and accountants are now bringing it down to date. 15541—33—PT 4 15 1756 STOCK EXCHANGE PRACTICES Mr. PECORA. And} the examination has been going on for some time past on behalf of the Federal Trade Commission to bring that down to date. Mr. TRAVIS. Yes, sir. Mr. PECORA. But the report referred to by Mr. Hurley, in what I believe was his prepared statement, as I noticed he read it, is one that was made as of December of 1929. Is that correct, Mr. Travis ? Mr. TRAVIS. That is the way I understand it. Mr. PECORA. That is my understanding, too. Mr. HURLEY. I say this to Mr. Pecora, that this morning, when this was handed to me, I labored under the impression that that was more recent and that it was the conclusion of the present hearing. But we are in agreement on that now. Mr. PECORA. I think, Mr. Hurley, I have what I understand to be the facts, that your professional services were retained by your client in this matter only last Sunday. Mr. HURLEY. Yes, sir. Mr. PECORA. But, necessarily Mr. HURLEY (interposing). In fact, later than that. Mr. PECORA (continuing). But you could not have had what might be regarded by any stretch of imagination a reasonable time in which to inform yourself by your own processes, of the facts. Mr. TRAVIS. Of course, I should like to say Mr. PECORA (continuing). And you, Mr. Hurley, have had to rely, quite necessarily in the circumstances, upon a statement of facts given to you by others. I believe that is a correct statement, isn't it, Mr. Hurley? Mr. HURLEY. Of course, I have had very little time to examine the records of the company. However, I believe that I have made to the committee a correct statement of the situation as it now confronts you. Mr. TRAVIS. Might I just say, in order to attempt to make this matter perfectly clear Mr. PECORA (interposing). You might just put your full name on the record, and your relationship to the Associated Gas <& Electric Co. STATEMENT OF CHARLES M. TRAVIS, OP THE LAW FIRM OF TRAVIS, BROWNBACK & PAXSON, COUNSEL FOR THE ASSOCIATED GAS & ELECTRIC CO. Mr. TRAVIS. My name is Charles M. Travis, of the firm of Travis, Brownback & Paxson, counsel for Associated Gas & Electric Co. Senator COUZENS. Might this matter about chiselers be placed in the record? Mr. HURLEY. Yes. I don't know whether I gave it to you. And do you want this in the record or not? This was connected with a press release. Senator COUZENS. I think he has already read that, Mr. Pecora. Mr. PECORA. NO doubt that might go in, if Senator Couzens desires it. Senator COUZEN. Well, if that is a press release I don't know that Mr. Pecora has seen that. Mr. PEboRA. Then that has already been made public, through the press, as you say it has been furnished to the press. STOCK EXCHANGE PRACTICES 1757 Senator COUZENS. I should like an opportunity to look over those papers that have to do with the so-called " chiselers." Mr. PECORA. I believe the committee reporter has it and will hand it over to Senator Couzens for his inspection. Senator COUZENS. YOU may go right ahead, Mr. Pecora, so far as I am concerned. The CHAIRMAN. Mr. Travis, you may now proceed with your statement. Mr. TRAVIS. I thought there might be a little misunderstanding in regard to the Federal Trade Commission investigation. While the accounting period for which the report was made ended December 31, 1929, the public hearings before the Commission are of a very much more recent date, and the statement which Mr. Hurley quoted was at a public hearing, I believe, within the past year. The CHAIRMAN. DO you represent the Associated, Mr. Travis ? Mr. TRAVIS. I represent the Associated Gas & Electric Co. The CHAIRMAN. HOW long have you been representing them? Mr. TRAVIS. I have been doing legal work for that company, I suppose, for 10 years. The CHAIRMAN. Proceed, Mr. Pecora. Mr. PECORA. May I ask Mr. Travis if he will be good enough to tell the committee from his personal knowledge when Mr. Hopson left the New York offices of the Associated Gas & Electric Co.; when he was last there ? Mr. TRAVIS. Well, I went away from New York, I think it was, on the 17th of August, for a short vacation. Mr. Hopson was there at that time. I heard after I returned, which was a few days after Labor Day, that he had left a few days after I went away, and I have since been informed that he went away on the doctor's orders, that he had high blood pressure, and while he was away in Kentucky Mr. PECORA (interposing). Where did he go, Mr. Travis? Mr. TRAVIS. I could not tell you from my own knowledge where he went. Mr. PECORA. Well, from any information that you have where did he go ? Mr. TRAVIS. I understand that he started in to make a tour of some of the properties. Mr. PECORA. DO you mean an automobile tour ? Mr. TRAVIS. Yes; an automobile tour. Mr. PECORA. At a time when he was ill and suffering from high blood pressure? Mr. TRAVIS. Yes. Mr. PECORA. Has he returned to the office of the company in New York at any time since he left some time in August? Mr. TRAVIS. N O ; he has not. Mr. PECORA. Have you been in touch with him daily? Mr. TRAyis. No. Mr. PECORA. Since he left the New York office of the company on this automobile tour? Mr. TRAVIS. NO ; I have not, Mr. Pecora. Mr. PECORA. Have you tried to get in touch with him daily or frequently during that time? 1758 STOCK EXCHANGE PRACTICES Mr. TRAVIS. I have not tried to get in touch with him frequently, but I have tried to get in touch with him on several occasions. Mr. PECORA. And were you able to do so? Mr. TRAVIS. On several occasions I was able to do so. Mr. PECORA. YOU know that representatives of the investigating staff of this committee, since the middle of August, or, that is, from a date somewhat prior to that time, have made very, very frequent efforts by inquiring at the New York office of the Associated Gas & Electric Co. for information concerning the whereabouts of Mr. Hopson, to get in touch with him, and that they never were able to get any such information? Mr. TRAVIS. Well, I was not aware that they had made inquiries as to his whereabouts until within the past 2 weeks or so. Senator COTJZENS. Where did Mr. Hopson go after he made an inspection of the plants? Mr. PECORA. DO you know whether Mr. Hopson actually made an inspection of the plants on this automobile tour? Mr. TRAVIS. I understand that he was down in Bowling Green, Ky., which is the center of the Kentucky-Tennessee properties; that he was taken ill there with intestinal influenza and was ill for some days. That as soon as he was able to get out he went to Chicago to be there with his sister who was at that time in Chicago. Senator COUZENS. Has he been there continuously since i Mr. TRAVIS. He has been there 'continuously. Mr. PECORA. HOW long has Mr. Hopson been in Chicago ? Mr. TRAVIS. I do not think I am able to answer that question^ Mr. Pecora. Mr. PECORA. I had a conversation with you in the office of the committee in New York a week ago today, didn't I, Mr. Travis ? Mr. TRAVIS. Yes, sir. Mr. PECORA. At that time you came up to the office in response to a telephone conversation or request from me, did you not? Mr. TRAVIS. Yes, sir. Mr. PECORA. Would you mind giving the committee the substance of the conversation you and I then had about Mr. Hopson's whereabouts and our inability to get in touch with him either directly or through his office? Mr. TRAVIS. The first or the second conversation ? Mr. PECORA. Well, we only had one on Friday, didn't we, and we had another one the next day, last Saturday. But I am referring now to the first one, on Friday, and we only had one conversation on Friday. Mr. TRAVIS. Well, Mr. Pecora stated to me that he thought he had been very patient with Mr. Hopson, that he had tried, or that Mr. McEldowney had tried some time before that to get the books, or had asked for the books of H. C. Hopson & Co., and that they had not then been able to get the books; that Mr. Pecora thought there had been unnecessary delay, that he thought Mr. Hopson was not cooperating in the matter, and that he was forced to insist that Mr. Hopson either let Mr. McEldowney examine the books or be advised where he was so that he might be served. Mr. PECORA. Did I indicate how long I had been trying to establish contact with Mr. Hopson, either directly or through his office, but had been unable to do so ? STOCK EXCHANGE PRACTICES 1759 Mr. TRAVIS." I think you said about 4 weeks. Mr. PECORA. I said it was at least 4 weeks, didn't I ? Mr. TRAVIS. I think so. Mr. PECORA. And did I also say to you, among other things, that the day before our conversation Mr. McEldowney, who is one 01 the examiners on the staff of the investigators for the committee, had reported to me that Mr. Shields, who I understand is a member of the bar and an associate of yours, is he not? Mr. TRAVIS. NO ; he is not an associate of mine. Mr. PECORA. Well, he is a member of the bar and in your office, as I understand. Mr. TRAVIS. NO ; he was in Mr. Hopson's office at that time. Mr. PECORA. Well, that Mr. Shields had said to Mr. McEldowney the day before I had this conversation with you, last Friday, that he (Mr. Shields) deplored very much the fact that we had been unable to get in contact with Mr. Hopson, either directly or through his office, because he (Mr. Shields) felt certain that if Mr. Hopson knew that I wanted to get in communication with him that Mr. Hopson would immediately make himself available. Do you remember my saying something like that to you in that conversation ? Mr. TRAVIS. I remember your saying something about what Mr. Shields had said but do not remember the details. Mr. PECORA. DO you remember my further saying to you in our conversation of last Friday, in substance, that Mr. Shields' statement seemed incredible to me, but that I was willing to give him the benefit of any doubt that might exist in my mind concerning its credibility, and hence in view of the fact that he said that Mr. Hopson in his (Mr. Shields') opinion would make himself available to me if he only knew that I wanted to get in touch wTith him; and in view of the further fact that it had been reported to me by the persons in the office of the Associated Gas & Electric Co. that they had tried, and tried in vain, to establish contact with Mr. Hopson, that within 24 hours after our conversation of last Friday I would feel constrained to adopt some other method for informing Mr. Hopson of the fact that I wanted to get in tuch with him for the purposes of this investigation? Mr. TRAVIS. Yes. Mr. PECORA. And I told you that that other method would consist of a request to the press to publish the fact that I wanted to meet Mr. Hopson in connection with this investigation because it had been found impossible, or I had been unable through our own resources or through the facilities of }^our office, to establish such contact with him. Do you remember that I said that to you in substance last Friday? Mr. TRAVIS. I do not recall, Mr. Pecora, that you said you had been trying to establish contact with him. But it may be your language was somewhat similar to that. Mr. PECORA. I see. Well, now Mr. TRAVIS (continuing). I think you did say that you had been trying to make service on him. Mr. PECORA. Well, your office knew that before I stated that fact to you last Friday, didn't it? Did not associates of yours in the office know from the fact that a United States Marshal, or a Deputy 1760 STOCK EXCHANGE PRACTICES United States Marshal had made inquiries concerning the whereabouts of Mr. Hopson at the office of the Associated Gas & Electric Co.5 that I was trying to effect service in behalf of this committee on Mr. Hopson, so that you knew that fact before I told you last Friday, didn't you? Mr. TRAVIS. I think I knew that on Thursday afternoon, that I was informed of it. I was away the day before, out of town. Mr. PECORA. IS it a fact so far as you can tell us that for about 4 weeks persons connected with the office of the Associated Gas & Electric Co. had sought to get into communication, by telephone or otherwise, with Mr. Hopson to inform him of my request, but had been unable to do so? Mr. TRAVIS. I did not know that, but at one time, and I believe it was in the early part or middle of September, I learned that they were unable to get in touch with Mr. Hopson, and were advised that he was ill and unable to talk over the telephone. Mr. PECORA. Who made that attempt to talk with Mr. Hopson over the telephone ? Mr. TRAVIS. I, myself, made the attempt. Mr. PECORA. Well, you told me that on last Friday, didn't you ? Mr. TRAVIS. Yes, sir. Mr. PECORA. And that was the first time you told me that. You told me that about a week or 10 days prior to our conversation of last Friday you had succeeded in locating Mr. Hopson by telephone somewhere, but that when you asked to speak to him you were told by the person at the other end of the telephone, wherever it was, that Mr. Hopson was too sick to come to the telephone to talk to you? Mr. TRAVIS. Yes. Mr. PECORA. And do you remember that when you told me that on last Friday I replied that I could not quite understand the ailment from which Mr. Hopson was suffering, that he was so ill that he ^ could not come to the telephone to talk to you after you had located him by telephone and yet reports or statements had been made to my representative by persons in the office of the Associated Gas & Electric Company that they had been absolutely unable to locate Mr. Hopson anywhere because he was on an automobile tour and that they did not know his itinerary. Didn't I say that to you, in substance ? Mr. TRAVIS. I think you did make that statement. Mr. PECORA. And then didn't you indicate to me that you felt you would be able within the following 24 hours to establish contact, by telephone or otherwise, with Mr. Hopson, and that you would probably be able to get from him a definite statement as to whether or not he was going to make available to the examiners ipv this committee the books and records that had been withheld from them for the previous several weeks? Mr. TRAVIS. Yes. Senator COUZENS. Well, Mr. Pecora, I now understand that you can get Mr. Hopson by means of a subpena properly served, and also his books. Mr. PECORA. I shall be very glad to avail myself of the information which is forthcoming to me now for the first time in several weeks. STOCK EXCHANGE PRACTICES 1761 Senator COUZENS. Can you locate Mr. Hopson now for the service of a proper subpena upon him to have him bring his books and papers? Mr. TRAVIS. I have his address in Chicago. Senator COUZENS. Will you please furnish that address to Mr. Pecora. Mr. TRAVIS. It is 120 South La Salle Street, room 845. That is the office of Eobinson & Co. Senator COUZENS. Are they lawyers? Mr. TRAVIS. NO ; they are investment dealers. Senator COUZENS. And he has an office with them? Mr. TRAVIS. He makes his headquarters with them and gets his mail there. Senator COUZENS. SO we can get a subpena on him at that place? Mr. TRAVIS. I am informed he will not make any attempt to evade service. Senator COUZENS. Well, that is all on that, isn't it? Mr. PECORA. Yes; that is all on that. Of cour(se, we have been trying for the last 4 weeks to locate him. The CHAIRMAN. DO you know whether Mr. Hopson is able to attend the hearing now ? Mr. TRAVIS. I understand that he is in poor health, in a very nervous condition. The CHAIRMAN. But he is up and attending to business ? Mr. TRAVIS. Well, as much as he can attend to. I do not know how much that is. The CHAIRMAN. Where are these books and records ? Mr. TRAVIS. I believe they are in New York City. Mr. PECORA. In whose custody? Mr. TRAVIS. Well, as to that I cannot tell you, Mr. Pecora. Mr. PECORA. Whereabouts in New York City? Mr. TRAVIS. At the office of H. C. Hopson & Co. Mr. PECORA. Where is that office? Mr. TRAVIS. 61 Broadway, New York City. Mr. PECORA. IS that the place where the American Gas & Electric Co. also has its offices? Mr. TRAVIS. The Associated Gas & Electric Co. has offices in that building. But the office is provided by H. C. Hopson & Co. Mr. PECORA. I want to say to the committee in answer to some of the statements embodied in the statement made by Mr. Hurley, that we have been given access to! corporate books and records of companies connected or affiliated with the Associated Gas & Electric Co., but we have, despite repeated requests therefor, been denied access to the books of accounts and other records of what has been referred to here as personal or private companies of Mr. Hopson. That is in accordance with your understanding, isn't it, Mr. Hurley ? Mr. HURLEY. I would correct that only in one way according to my understanding. You understand that I have none of it by way of personal information, but I have been advised that they have not denied access to the books but that they wanted Mr. Hopson or someone whom he might designate or designated by you, to appear when the books are examined, so that they might be examined in public and no half truths gotten to the public by way of erroneous conclusions by reason of lack of understanding of what they contain. 1762 STOCK EXCHANGE PRACTICES Mr. PECORA. Mr. Hurley, I haven't the slightest doubt, of course, that that information has been given to you, but I want to say it is utterly at variance with the statements that they have made to my representatives when they have sought access to those books. The CHAIRMAN. Well, the committee's accountants and investigators do not give to the public, information which they are obtaining in any case. That information is collected for this committee and given through the committee here if it is given at all. Mr. PECORA. NOW, the delay, as I have understood it, that we have experienced in getting access to those books, which have been very properly referred to here as books of companies owned by Mr. Hopson, has been due, so far as the reasons for the delay have been vouchsafed to us, by individuals in the office of the Associated Gas & Electric Co., to the fact that they wanted the specific authorization given to themselves from Mr. Hopson before making those records available to us. And it was for that reason that we have been seeking to get in touch with Mr. Hopson, with a view to getting that consent. And we have been utterly unable to do it, and the information given to this committee in the last few minutes as to Mr. Hopson's whereabouts is the first information I have acquired in any way, manner, or form concerning Mr. Hopson's specific whereabouts, except that on last Sunday, just prior to my leaving my home for the train to come to Washington for the purposes of this hearing, Mr. Hurley was kind enough to call me up on the longdistance phone and inform me he had just been consulted in connection with this matter, and asked me if I would not, in view of that fact, not press for the time being, any steps that I contemplated taking to enable us to get in touch with Mr. Hopson or have access to those books. Mr. HURLEY. I think, Mr. Pecora, I might add to that that I have worked very expeditiously to try to throw this whole situation out into the deadliest limelight of publicity. I did it just as quickly as I could do it, because I am convinced that nothing short of accurate public information can save the 360,000 innocent people who have invested in the securities of this corporation. My first opportunity after having gotten just a cursory knowledge of what is involved in this case brought me, of my own solicitation, to this committee at this time. Is that correct, Mr. Pecora? Mr. PECORA. Yes, sir. Senator COUZENS. I S that Mr. PECORA. The books in all, Mr. Chairman? question belonging to those companies that are alluded to as the companies of Mr. Hopson, in our opinion, or in my opinion, at least, are necessary to an intelligent and complete investigation of the methods by which the securities of the Associate Gas & Electric Co. and its subsidiaries and affiliates have been issued and sold to the public in an aggregate value of hundreds of millions of dollars. And, among other things, the books of a company called Utility Accounting &' Tax Consultants, which, according to report made to me by my investigators, performed certain service for the Associate Gas & Electric Co. and its subsidiaries, charging them fees for such service which run into substantial amounts, estimated to be between iy2 and 2 million dollars a year. STOCK EXCHANGE PRACTICES 1763 Mr. HURLEY. Pardon me, Mr. Pecora. Would you mind if I interrupted you just a minute? Mr. PECORA. I was through anyway. Mr. HURLEY. I have no intention—and I hope you realize it—of criticism. I have had, as I told you, just a cursory glance at this, but I think that the statement that you have read is not correct and does mislead the public. That is exactly the thing that we would like to avoid. I would like to see Mr. Hopson on this stand with his books. Now, the figure is given to me of much less than that, and if I have the truth, the services rendered by that company were the services that would have been rendered by some independent institution, and that company was able to give that service to the stockholders of the Associated at less cost than it would have cost otherwise, and the figures that have been given to me reach no such proportions as you have stated. Mr. PECORA. Without the books themselves, Mr. Hurley, before us, neither you nor I could satisfactorily state what the figures are. Mr. HURLEY. NO ; and that is the reason Mr. PECORA (interposing). But I want to say this, that the sources from which the information given to me has been obtained are sources which, in my opinion, could be relied upon. Now, the best evidence is the books themselves. Mr. HURLEY. Yes. Mr. PECORA. I have been trying to, and my examiners have been trying to, see them for several weeks. Mr. HURLEY. That is exactly why I say to you, Mr. Pecora—this, of course, is said in the best spirit—it would be better not to make statements on what those books contain until the books themselves have been presented, and then the public can get a correct statement, not an estimate. Eeally, I believe that the very thing that you have stated there represents one of the reasons for my wanting to get into the public mind immediately the true facts, the books themselves. Mr. PECORA. I will say this as far as Mr. Hurley is concerned: In conferences I have had with him in the last 24 hours here in Washington, to which he returned only a short time ago from Chicago, they have been, so far as Mr. Hurley and I are concerned, of an extremely satisfactory and agreeable character, and Mr. Hurley has evinced to me every willingness on his part, so far as he can control the situation of the action of any one that he represents, to cooperate with this committee to the fullest possible extent. But it seems to me that the decision does not rest with any counsel; it rests with Mr. Hopson. That has been the situation as I have understood it for many weeks, and that is why I have sought to get in touch with Mr. Hopson and have been unable to do so. The CHAIRMAN. Mr. Hopson insists that he do not voluntarily appear to produce these books, but that he be subpenaed to do so. Mr, HURLEY. He wants to protect his rights in the matter. The CHAIRMAN. He is exceedingly careful in that regard. The committee will stand adjourned until Tuesday at 10 o'clock. (Whereupon, at 1:03 o'clock p.m., the subcommittee adjourned until the following Tuesday at 10 o'clock a.m.) 1764 STOCK EXCHANGE PRACTICES COMMITTEE EXHIBIT NO*. 12, OCTOBER 6, 1933 THE COBN EXCHANGE! BLANK, TRUST CO., NEW YORK CITY, N.Y., 1853-1933 Statement, February 1, 1933 Officers: Walter E. Frew, chairman; Dunham B. Sherer, president; Henry A. Patten, first vice president. Vice presidents, Ralph Peters, Jr., Edward B. MacKenzie, Frederick T. Martin, Calvert Brewer, Richard D. Brown, John S. Wheelan, Edward S. Malmar, E. Herrick Low, John R. McWilliam, Theodore H. Spratt, John W. Ross, Perry M. Rushmore. Vice president and secretary, Frederick K. Lister. Assistant vice president, William L. Cronin, Clarence W. Bird. Assistant secretary, Robert F. Crowell. Trust officers, Henry C. White, Charles D. Wheelock. Directors, Walter E. Frew, Richard Whitney, Philip Lehman, Ethelbert Ide Low, Robert A. Drisdale, Henry A. Patten, Warren B. Nash, Ralph Peters, Jr., D. Schnakenberg, John H. Phillips, Dunham B. Sherer, Clinton D. Burdick, C. W. Nichols, George E. Turnure, Arthur A. Fowler, Percy S. Straus, Robert Lehman, D. Stewart Iglehart, George Doubleday, Davide Wakeman. To the Stockholders of Corn Exchange Bank Trust Co.: There is submitted herewith statement of your company as of February 1. 1933, and for your information, there is included a list of the company's securities. All stocks have been reduced to market value as of December 31, 1932, and all bonds which have failed to pay maturing coupons have been reduced to $1 on our books. The net earnings from operation during 1932 were $3,334,531.75. Branches now number 72, and are well located in various parts of New York City. Your company commenced business February 1, 1853, and you will note that we have completed our eightieth year. The organization is composed of men and women working conscientiously for the growth of your company. We trust we will receive your support in our efforts to make 1933 one of the most successful in our history. Your very truly, WALTER E. FREW, Chairman. DUNHAM B. SHEREE, President. STATEMENT FEBRUARY 1, 1933. Due individuals, firms, corporations, and banks $220, 875, 730.97 To meet these deposits we have: Cash in vaults and banks 53, 768, 248. 96 Checks on other banks 12,522,396.54 U.S. Government securities 68,946,076. 81 State, municipal, and tax-exempt bonds 20, 291,493.02 Railroad bonds 7, 341, 854. 76 Public-utility bonds 3, 859,476.06 Industrial and other bonds 8, 414,134.88 Foreign bonds 2, 302,370. 87 Preferred stocks 471, 372. 50 Common and other stocks 1,497, 707. 75 Secured demand loans 31, 369, 584. 26 Secured time loans 7, 662,693.10 Bills discounted « 18, 282,219.34 First mortgages on real estate 21,659,711.47 Stock of Federal Reserve bank, Corn Exchange Safe Deposit Co., and Discount Corporation of New York 2, 898, 780.00 Customers' liability on acceptances 923,085.69 Banking houses and lots 15, 291,262. 66 Other real estate 1,409, 361. 42 * Total to meet indebtedness This leaves 260, 011, 830.09 40,036,099.12 STOCK EXCHANGE PRACTICES Capital Surplus and undivided profits Reserves 1765 $15, 000,000.00 ___ 22,145, 673.18 2, 890, 425.94 The Corn Exchange Bank Trust Co. can act as one of your executors or trustees, issue letters of credit, travelers' checks and drafts on foreign countries, rent you a safe deposit box, and provide every banking and trust service. LIST OF SECURITIES UNITED STATES GOVERNMENT SECURITIES $9,500,000 United States of America, fourth Liberty 4% percent, 1938-33. $35,000,000 United States of America, treasury bonds 3% percent, 1943-41. $2,000,000 United States of America, certificates of indebtedness 3% percent March 15, 1933. $500,000 United States of America, certificates of indebtedness 2 percent, May 2, 1933. $974,700 United States of America, Treasury certificates 2 percent, March 15, 1933. $400,000 United States of America, Treasury notes 3 percent May 2, 1934. $500,000 United States of America, certificates of indebtedness, 1% percent, June 15, 1933. $1,900,000 United States of America Treasury notes, 3 percent, June 15, 1935. $2,600,000 United States of America, Treasury notes, 3% percent, August 1, 1936. $1,500,000 United States of America, Treasury notes 2% percent, August 1, 1934. $9,300,000 United States of America, Treasury notes 3% percent, September 15, 1937. $3,900,000 United States of America, Treasury notes 3 percent, April 15, 1937. STATE, MUNICIPAL, AND TAX-EXEMPT SECURITIES $150,000, State of Arkansas, highway, 5 percent, 1954. $100,000, State of Arkansas, highway, 5 percent, 1960. $250,000, State of Arkansas, highway, 4% percent, 1963. $90,000, Bergen County, N.J., public works, 6 percent, 1935-37. $160,000, Bergen County, N.J., improvement, 5% percent, 1934-37. $100,000, Bloomfield, N.J., improvement, 5% percent, 1938-53. $150,000, Camden, N.J., park and building, 6 percent, 1937. $22,000, Columbia County, N.Y., funding, 6 percent, 1937. $475,000, East Orange, N.J., tax revenue notes, 6 per cent, 1933. $900,000, Federal farm-loan bonds, 4% percent, 1942r-33. $100,000', Federal farm-loan bonds, 4% percent, 1943-33. $35,000, Town of Hempstead, N.Y., school district no. 9, 6 percent, 1933. $50,000, State of Louisiana, highway, 5 percent, 1942. $50,000, State of Louisiana, highway, 5 percent, 1948. $50,000, Monroe County, N.Y., tax anticipation notes, 4% percent, 1933. $750,000, Montclair, N.J., tax revenue notes, 4% percent, 1933. $472,000, Morristown, N.J., improvement, 6 percent, 1934-7. $18,000, Mount Vernon, N.Y., public works, 5 percent, 1937. $470,000, Nassau County, N.Y., relief, 4% persent, 1935-7. $500,000, Nassau County, N.Y., tax anticipation notes, SV2 percent, 1933. $525,000, Newark, N.Y., temporary loan, 6 percent, June 17, 1933. $10,000, Borough of New Canaan, Conn., tax anticipation notes, 4% percent, 1933. $100,000, New Haven, Conn., tax anticipation notes, 5 percent, 1933. $78,000, New Rochelle, N.Y., sewer, 5% percent, 1936. $50,000, New York City corporation stock, 3 percent, 1935. $176,176,000 New York City serial, 4% percent, I960. $10,000 New York City corporation stock, 4% percent, 1967. $433,000, New York City certificate of indebtedness, 5% percent, 1933-35. $400,000, New York City corporation stock, 6 percent, 1933. $2,408,000, New York City revenue bills, 5 percent, 1933. $2,169,000, New York City revenue bills, 5% percent, 1933. 1766 STOCK EXCHANGE PRACTICES $4,223,500, New York City corporation stock, 6 percent, 1935-37. $900,000, State of New York gold notes, 2% percent, 1933. $10,000, State of New York World War, 4% percent, 1945, $328,000, Port of New York Authority bridge, 4 percent, 1936-50. $275,000, Port Chester, N.Y., street sewer, 5% percent, 1935. $450,000, Rochester, N.Y., tax anticipation notes, 4% percent, 1933. $25,000, Rochester, N.Y., general municipal, 6 percent, 1935. $170,000, Salt Lake City, Utah, 4% percent refunding, 1934-36, $150,000, Salt Lake County, Utah, tax anticipation notes, 2V2 percent, 1933. $120,000, San Diego, Calif., improvement, 5 percent, 1934-37. $210,000, Savings and Loan Bank, New York, 5 percent, 1933. $100,000, State of South Carolina, highway, 4% percent, 1950'. $250,000, Syracuse, N.Y., tax anticipation notes, 1.89 percent, 1933. $25,000, Syracuse, N.Y., improvement, 4 percent, 1937. $25,000, Suffolk County, N.Y., certificate of indebtedness, 4.4 percent, 1934. $140,000, State of Tennessee, building, 5% percent, 1934. $100,000, State of Tennessee, building, 4% percent, 1945. $400,000, Union County, N.J., tax anticipation notes, 4% percent, 1933. $150,000, Westchester County, N.Y., indebtedness, 3,7 percent, 1934-36. $325,000, Yonkers, N.Y., notes, 4.85 percent, 1933. $100,000, Yonkers, N.Y., certificate of indebtedness, 5% percent, 1933. $50,000, Yonkers, N.Y., local improvement, 6 percent, 1936. $250,000, Yonkers, N.Y., certificate of indebtedness, 5 percent, 1933. $145,000, Yonkers, N.Y., local improvement, 5 percent, 1933. $5,000, Yonkers, N.Y., local improvement, 4% percent, 1933. RAILROAD BONDS $250,000 Alleghany Corporation collateral trust convertible 5 percent, 1944. $35,000 Alleghany Corporation collateral trust convertible 5 percent, 1949. $50,000 Alleghany Corporation collateral trust convertible 5 percent, 1950. $420,000 Baltimore & Ohio Railroad Co. convertible 4% percent, 1960. $285,000 Boston & Maine Railroad first mortgage 5 percent, 1967. $128,000 Carolina, Clinchfield & Ohio Railway Co. first consolidated 6 percent, 1952. $489,000 Chesapeake Corporation convertible collateral trust 5 percent, 1947. $250,000 Chesapeake & Ohio Railway Co. (B) refunding and improvement 4% percent, 1995. $200,000 Chesapeake & Ohio Railway Co. notes 6 percent, 1934. $553,000 Chicago, Milwaukee, St. Paul & Pacific Railroad Co. mortgage 5 percent, 1975. $250,000 Chicago & Northwestern Railway Co. (A) convertible 4% percent, 1949. $500,000 Chicago, Rock Island & Pacific Railway Co. (A) secured gold 4% percent, 1952. $25,000 Cincinnati Union Terminal Railway (A) first mortgage 4y2 percent, 2020. $250,000 Cleveland Union Terminal Co. first mortgage sinking fund 4% percent, 1977. $50,000 Cleveland, Cincinnati, Chicago & Si. Louis Railway refunding and improvement 4% percent, 1977. $50,000 Cleveland, Cincinnati, Chicago & St. Louis Railway refunding and improvement 4% percent, 1977. $40,000 Colorado & Southern Railway (A) general mortgage 4% percent, 1980r $103,000 Delaware & Hudson Co., the, gold S1^ percent, 1937. $31,000 Denver & Rio Grande Railroad Co. first consolidated 4 percent, 1936. $200,000 Denver & Rio Grande Western Railroad Co. refunding and improvement (B) 5 percent, 1978. $145,000 Erie Railroad Co. refunding and improvement 5 percent, 1975. $40,000 Great Northern Railroad Co. general mortgage 4% percent, 1977. $100,000 Illinois Central Railroad gold notes 4% percent, 1934. $300,000 Louisville & Nashville Railroad Co. first and refunding 4% percent, 2003. $44,000 Missouri Pacific Railroad first and refunding 5 percent, 1977. STOCK EXCHANGE PEACTICES 1767 $150,000 Missouri Pacific Railroad Co. first and refunding mortgage 5 percent, 1981. $102,000 Missouri Pacific Railroad Co. first and refunding mortgage 5 percent,, 1980. $416,000 Missouri Pacific Railroad Co. first and refunding 5 percent, 1978. $280,000 Morris & Essex Railroad Co. construction mortgage 4% percent,. 1955. $20,000 Morris & Essex Railroad Co. construction mortgage 5 percent, 1955. $150,000 New York Central Railroad Co. (A) refunding and improvement 4% percent, 2013. $200,000 New York, Chicago & St. Louis Railroad refunding mortgage 4% percent, 1978. $300,000 New York, New Haven & Hartford Railroad first and refunding 4y2 percent, 1967. $10,000 New York, New Haven & Hartford Railroad secured gold 6 percent, 1940. $12,000 New York, Susquehanna & Western Railroad Co. general mortgage 5 percent, 1940. $24,000 Oregon-Washington Railroad & Navigation Co. (A) first and refunding 4 percent, 1961. $300,000 Pennsylvania Co. secured gold 4% percent, 1963. $200,000 Pennsylvania Railroad Co. secured gold 5 percent, 1964. $50,000 Pere Marquette Railway Co. first mortgage 4. y2 percent, 1980. $48,000 Pittsburgh, McKeesport & Youghiogheny Railroad second mortgage 6 percent, 1934. $50,000 Reading Co. (B) general and refunding mortgage, 4% percent, 1997. £4,000 St. Paul, Minneapolis & Manitoba Railway Co. Pacific Extension 4 percent, 1940. $250,000 Southern Pacific Co. gold with warrants 4V2 percent, 1969. $250,000 Terminal Railroad Association of St. Louis general mortgage 4 percent, 1953. $25,000 Texas & Pacific Railway Co. general and refunding 5 percent, 1980. $50,000 Western Maryland Railway Co. first and refunding mortgage S1/^ percent, 1977. $250,000 Western Pacific Railroad Co. first mortgage 5 percent, 1946. PUBLIC-UTILITY BONDS $100,000 American Power & Light Co. gold debentures, 6 percent, 2016. $150,000 American Water Works & Electric Co., Inc., gold debentures, 6 percent, 1975. $100,000 Bell Telephone Co. of Canada, first mortgage, 5 percent, 1955. $200,000 Bell Telephone Co. of Canada, first mortgage, 5 percent, 1957. $500,000 Brooklyn-Manhattan Transit Corporation, sinking fund gold, 6 percent, 1968. $500,000 Brooklyn, Manhattan Transit, gold, 6 percent, 1934. $20,000 Brooklyn, Queens County, and Suburban Railroad Co., first mortgage, 5 percent, 1941. $110,000 Denver Gas & Electric Light Co., first and refunding, 5 percent, 1951. $100,000 Detroit City Gas Co., first mortgage, 6 percent, 1947. $250,000 Hudson & Manhattan Railroad Co., (A) first lien and refunding, 5 percent, 1957. $20,000 International Hydro Electric System, convertible debentures, 6 percent, 1944. $200,000 Interborough Rapid Transit Co., first and refunding, 5 percent, 1966. $250,000 International Telegraph and Telephone Corporation, debentures, 5 percent, 1955. $500,000 Massachusetts Gas Cos., sinking fund debentures, 5 percent, 1955. $28,000 Montclair Water Co., gold, 5 percent, 1946. $100,000 North American Edison Co., (B) 5% percent, 1963. $200,000 Pacific Power & Light Co., first mortgage, power and light, 5 percent, 1955. $150,000 Standard Gas & Electric Co., debentures, 6 percent, 1966. $110,000 Standard Gas_& Electric Co., debentures, 6 percent, 1951. $250,000 Western Union Telegraph Co., gold, 5 percent, 1960. 1768 STOCK EXCHANGE PRACTICES INDUSTRIAL AND OTHER BONDS $50,000 American & Continental Corporation, debenture, 5 percent, 1943. $100,000 American International Corporation, convertible gold debenture, 5% percent, 1949. $1,000,000 American Metals Co., Ltd., gold notes, 5 ^ percent, 1934. $800,000 American Securities Investment Corporation, debenture, 6 percent, 1937. $54,000 American Type Founders Co., sinking-fund gold debenture, 6 percent, 1940. $51,000 Associated Oil Co. notes, 6 percent, 1935, $25,000 Atlantic Gulf & West Indies Steamship Line, collateral trust, 5 percent, 1959. $1,000,000 Canadian International Paper Co., first mortgage, 6 percent, 1949. $77,000 Consolidated Publishers, Inc., collateral trust sinking fund, 6%, 1936. $500,000 General American Investors Co., Inc., debenture, 5 percent, 1952. $160,000 General Rayon Co., Ltd., debenture, 6 percent, 1948. $250,000 Gobel, Adolph, Inc., collateral trust notes with warrants, 6 ^ percent, 1935. $250,000 Goodyear Tire & Rubber Co., first mortgage collateral trust, 5 percent, 1957. $169,000 Gotham Silk Hosiery Co., Inc., sinking-fund debenture, 6 percent, 1936. $800,000 Grace Steamship Co., notes, 6 percent, 1934-41. $50,000 Gulf Oil Corporation of Pennsylvania, sinking-fund debenture, 5 percent, 1947. $303,000 Hudson, J. L., Co., notes, 5 percent, 1933-36. $200,000 Hudson Coal Co., The, first mortgage sinking fund, 5 percent, 1962. $500,000 International Paper Co., refunding mortgage sinking fund, 6 percent, 1933 $100,000 Keith Corporation, B. F., first general refunding, 6 percent, 1946. $100,000 Loew Theatre & Realty Corporation, first mortgage sinking fund, 6 percent, 1947. $250,000 National Dairy Products Corporation debenture, 5% percent, 1948. $100,000 Pennsylvania-Dixie Cement Corporation first mortgage sinking fund, 6 percent, 1941. $214,000 Phillips Petroleum Co. sinking fund debenture, 5% percent, 1939. $19,500 Prudence Bonds Corporation first mortgage collateral, 5% percent, 1932-35. $250,000 Prudence Co., Inc., The, guaranteed collateral trust, 5% percent, 1961. $55,000 Railway Express Agency, Inc., serial gold (A), 5 percent, 1933-48. $250,000 St. Joseph Lead Co. convertible debenture, 5% percent, 1941. $205,000 Saks Realty Corporation leasehold, 6 percent, 1933-46. $116,000 School of Education Realty Corporation of New York University, debenture, 6 percent, 1935. $175,000 Schulco Co., Inc., (A) guaranteed mortgage sinking fund, 6% percent, 1946. $440,000 Solvay American Investment Corporation notes, 5 percent, 1942. $50,000 Smith A. O. Corporation first mortgage, 6V2 percent, 1933. $250,000 United Drug Co. gold, 5 percent, 1953. $100,000 United States Rubber Co. serial notes, .6% percent, 1933-40. FOREIGN BONDS. $249,000 Australia, Commonwealth of, extension loan of 1925, 5 percent, 1955. $75,000 Australia, Commonwealth of, extension loan of 1928, 4% percent, 1956. $32,100 Cuba, Republic of, extension sinking fund, 5% percent, 1953, $90,400 Cuba, Republic of, internal 5 percent. $25,000 Cuba, Republic of, serial gold 5% percent, 1933-37. $57,800 Cuba, Republic of, sinking fund 5% percent, 1940. $25,000 Dresden, Germany, city of, extension loan sinking fund 7 percent, 1945. $605,000 German Government, gold 5% percent, 1965. $125,000 Imperial Japanese Government, sinking fund gold 5% percent, 1965. $76,000 Leipzig, Germany, city of, extension loan of 1926, 7 percent, 1947. STOCK EXCHANGE PRACTICES 1769 $200,000' Newfoundland, Government of, bonds, 5 percent, 1952. $300,000 New South Wales, Australia, State of, extension sinking fund, 5 percent, 1957. $200,000 Province of Ontario, Canada, Treasury bills, 3% percent, 1933. $100,000 Queensland, Australia, State of, extension sinking fund, 7 percent, 1941. $180,000 Siemens Schukertwerke, 7 and 7% percent, 1933-35. $50,000 Taiwan Electric Power Co., litd., sinking fund gold bonds, 5% percent, 1971. $100,000 Uruguay, Republic of, sinking fund external, 8 percent, 1946. $250,000 Uruguay, Republic of, sinking fund external, 6 percent, 1960. STOCKS 9,990 shares of Corn Exchange Safe Deposit Go. 2.499 shares of Discount Corporation of New York. 27,000 shares of Federal Reserve Bank of New York. PREFERRED STOCKS 550 shares of Johns-Mansville Corporation. 2,100 shares of New York, New Haven & Hartford Railroad Co. 1,095 shares of Standard Gas & Electric Co., 7 percent. 10,000 United Corporation. COMMON AND OTHER STOCKS 4,200 shares of Allied Chemical & Dye Corporation, 100 shares of Bank for International Settlements. 1,000 shares of Bond & Mortgage Guarantee Co. 400 shares of Consolidated Gas Co. 8,000 shares of General Motors Corporation. 3.500 shares of Glen Alden Coal Co. 4,100 shares of Great Northern Railway Co. 400 shares of Guaranty Trust Co. 1,172 shares of International Elevating Co. 5,000 shares of Kennecott Copper Co. 5,000 shares of New York Central Railroad Co. 2,300 shares of New York, New Haven & Hartford Railroad Co. 3,500 shares of Northern Pacific Railway Co. 5,000 shares of Public Service Corporation of New Jersey. 5,000 shares of Standard Brands, Inc. 1,000 shares of Title Guarantee & Trust Co. 19,000 shares of United Corporation. Sundry stocks and bonds not included in the above list are carried on our books at $1 with a quoted value on February 1, 1933, of $310,603. COMMITTEE EXHIBIT NO. 13, OCTOBER 6, 1933 UNITED STATES & INTERNATIONAL SECURITIES CORPORATION Present and former directors Ernest B. Tracy, president United States & International Securities Corporation. Clarence Dillon, Dillon, Read & Co. Matthew C. Brush, president American International Corporation. J. H. Hillman, Jr., president J. H. Hillman Coal & Coke Co. Charles Hayden, Hayden, Stone & Co. Dean Mathey, Dillon, Read & Co. E. G. Wilmer, retired. G. M. Moffett, president Corn Products Refining Co. M. S. Sloan, formerly president New York Edison Co. S. Z. Mitchell, formerly chairman of the board, Electric Bond & Share Co. 1770 STOCK EXCHANGE PRACTICES UNITED STATES & INTERNATIONAL SECURITIES CORPORATION Date of meeting and directors present November 7, 1928: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, George M. Moffett, Matthew S. Sloan, Ernest B. Tracy. December 13, 1928: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Matthew S. Sloan, Ernest B. Tracy. January 10, 1929: Messrs. Clarence Dillon, S. Z. Mitchell, G. M. Moffett, Matthew S. Sloan, J. H. Hillman, Jr. February 14, 1929: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, G. M. Moffett, Matthew S. Sloan, Ernest B. Tracy. March 15, 1929: Clarence Dillon, Dean Mathey, S. Z. Mitchell, Matthew S. Sloan, Ernest B. Tracy. April 8, 1929: Dean Mathey, S. Z. Mitchell, G. M. Moffett, Matthew S. Sloan, Ernest B. Tracy, Charles Hayden. June 27, 1929: Ernest B. Tracy, Clarence Dillon, Dean Mathey, S. Z. Mitchell. September 9, 1929: Clarence Dillon, Charles Hayden, Dean Mathey, J. W. McConnell, Ernest B. Tracy. October 16, 1929: Clarence Dillon, Dean Mathey, Charles Hayden, S. Z. Mitchell, George M. Moffett, Matthew S. Sloan. November 11, 1929: Clarence Dillon, Dean Mathey, S. Z. Mitchell, G. M. Moffett, Ernest B. Tracy. November 22, 1929: Ernest B. Tracy, Clarence Dillon, Charles Hayden, J. H. Hillman, Jr., Dean Mathey, S. Z. Mitchell, George M. Moffett. December 9, 1929: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, G. M. Moffett, M. S. Sloan, Ernest B. Tracy. January 8, 1930: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, George M. Moffett, Ernest B. Tracy. February 13, 1930: Clarence Dillon, Dean Mathey, George M. Moffett, Ernest B. Tracy, E. G. Wilmer. March 10, 1930: Clarence Dillon, Charles Hayden, George M. Moffett, S. Z. Mitchell, E. G. Wilmer, Ernest B. Tracy, M. S. Sloan. April 14, 1930: Clarence Dillon, Charles Hayden, T. H. Hillman, Jr., Dean Mathey, Matthew S. Sloan, E. G. Wilmer. May 19, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, George M. Moffett, Matthew S. Sloan, E. B. Tracy, E. G. Wilmer. June 9, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Sidney Z. Mitchell, George M. Moffett, Matthew S. Sloan, E. G. Wilmer. August 11, 1930: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, George M. Moffett, Ernest B. Tracy, E. G. Wilmer. September 8, 1930: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, George M. Moffett, Matthew S. Sloan. October 14, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, George M. Moffett, Matthew S. Sloan. November 10,1930: Matthew G. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z Mitchell, Matthew S. Sloan. December 8, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Matthew S. Sloan, Ernest B. Tracy. January 12, 1931: Matthew C. Brush, Clarence Dillon, Charles H. Hayden, Dean Mathey, Sidney Z. Mitchell, George M. Moffett, Matthew S. Sloan, Ernest B. Tracy. February 9, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Matthew S. Sloan, Ernest B. Tracy. March 9, 1931: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, George M. Moffett, Matthew S. Sloan, Ernest B. Tracy. April 13, 1931: Matthew C. Brush, Charles Hayden, Dean Mathey, S. Z. Mitchell, George M. Moffett, Ernest B. Tracy, E. G. Wilmer. May 11, 1931: Matthew C. Brush, Charles Hayden, S. Z. Mitchell, George M. Moffett, Ernest B. Tracy, E. G. Wilmer. June 8, 1931: Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. July 15, 1931: Matthew 0. Brush, -Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. August 10,1931: Clarence Dillon, Matthew C. Brush, Charles Hayden, Ernest B. Tracy. Sidney Z. Mitchell. Dean Mathey. STOCK EXCHANGE PRACTICES 1771 September 14, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy. October 19, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy. November 9, 1931: Messrs. Matthew C, Brush, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer. December 14, 1931: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. January 11, 1932: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. February 8, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer. March 14, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer. April 11, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. May 9,1932: Messrs. Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer. June 15, 1932: Messrs. Charles Hayden, Dean Mathey, Ernest B. Tracy. July 11, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy. August 8, 1932: Messrs. Clarence Dillon, Ernest B. Tracy, Dean Mathey. September 12, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy. October 10, 1982: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer. November 14, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, Sidney Z. Mitchell, Ernest B. Tracy, E. G. Wilmer. December 12, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy. January 9,1933: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell. February 14, 1933: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy. March 13, 1933: Messrs. Matthew C. Brush, Clarence Dillon, Dean Mathey, Ernest B. Tracy. April 10, 1933: Messrs. Matthew 0. Brush, Clarence Hayden, Dean Mathey, Ernest B. Tracy. May 8, 1933: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B. Tracy. June 12, 1933: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B. Tracy. July 10, 1933: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy. September 11, 1933: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy. COMMITTEE EXHIBIT NO. 14, OCTOBER 6, 1933 UNITED STATES & FOREIGN SECURITIES CORPORATION Present and former directors Ernest B. Tracy, president United States & Foreign Securities Corporation. Clarence Dillon, Dillon, Head & Co. F. H. Ecker, president Metropolitan Life Insurance Co. G. M.-P. Murphy, G. M.-P. Murphy & Co. C. S. McCain, chairman of the board, Chase National Bank. W. A. Phillips, Dillon, Read & Co. R. C. Sehaffner, A. G. Becker & Co. E. J. Bermingham, E. J. Bermingham & Co. E. G. Wilmer, retiredPercy H. Johnston, chairman of the board, Chemical Bank & Trust Co. John Sherwin, formerly chairman, Union Trust Co., Cleveland. George W. Davison, chairman of the board, Central Hanover Bank & Trust Co. Anson W. Burchard, formerly chairman of board, General Electric Co. 175541—33—PT 4 16 1772 STOCK EXCHANGE PRACTICES J. W. Hornor, retired. George W. Wiekersham, Cadwalader, Wickersham & Taft. Harrison Williams. Benjamin Joy, retired. R. E. Christie, Jr., Dillon, Read & Co. Daniel G. Wing, chairman of board, First National Bank, Boston. Herbert Fleishhacker, president Anglo-California National Bank of San Francisco. Date of meeting and, directors present December 10, 1924: Messrs. Clarence Dillon, G. W. Wickersham, John Sherwin, R. C. Sehaffner, E. G. Wilmer, J. W. Hornor, F. H. Ecker, A. W. Burchard, W. A. Phillips. April 13, 1925: F. H. Ecker, A. W. Burchard, C. Dillon, J. W. Hornor, H. Williams, W. A. Phillips, J. Sherwin, R. C. Schaffner, E. G. Wilmer. May 28, 1925: A. W. Burchard, J. W. Hornor, F. W. Ecker, W. A. Phillips, R. C. Schaffner, E. G. Wilmer. July 13, 1925: E. G. Wilmer, H. Williams, G. W. Wickersham, John Sherwin, R. 0. Sehaffner, J. W. Hornor, R. E. Christie. September 30, 1925: E. G. Wilmer, F. H. Ecker, G. W. Wickersham, H. Williams, J. W. Hornor, W. A. Phillips, Anson W. Burchard, C. Dillon. January 19, 1926: Messrs. E. G. Wilmer, Herbert Fleishhacker, F. H. Ecker, John Sherwin, Clarence Dillon, Anson W. Burchard, J. W. Hornor, William A. Phillips. June 17, 1926: Messrs. Benjamin Joy, R. C. Schaffner, John Sherwin, William A Phillips, Anson W. Burchard. October 4, 1926: Messrs. Benjamin Joy, Clarence Dillon, Frederick H. Ecker, Anson W. Burchard, G. W. Wickersham. January 5, 1927: Messrs. Clarence Dillon, G. W. Wickersham, Frederick H. Ecker, John Sherwin, William A. Phillips, C. W. Davison, Benjamin Joy. May 10, 1927: Messrs. George W. Davison, Frederick H. Ecker, Robert C. Schaffner, William A. Phillips, Robert E. Christie, Jr. September 20, 1927: Messrs. Clarence Dillon, F. H. Ecker, W. A. Phillips, R. C. Sehaffner, E. B. Tracy. December 22, 1927: Messrs. Clarence Dillon, G. W. Davison, F. H. Ecker, G. M.-P. Murphy, R. C. Sehaffner, E. B. Tracy. January 5, 1928: Messrs. G. W. Davison, Clarence Dillon,, P. H. Johnston, G. M.-P. Murphy, W. A. Phillips, R. C. Sehaffner, E. B. Tracy. February 8,1928: Messrs. Clarence Dillon, F. H. Ecker, P. H. Johnston, W. A. Phillips, E. B. Tracy. , March 14,1928: F. H. Ecker, P. H. Johnston, G. M.-P. Murphy, W. A. Phillips, E. B. Tracy. May 9, 1928: Clarence Dillon, F .H. Ecker, P. H. Johnston, G. M.-P. Murphy, John Sherwin, E. B. Tracy. June 13, 1928: G. W. Davison. Clarence Dillon, F. H. Ecker, P. H. Johnston, G. M.-P. Murphy, W. A. Phillips, E. B. Tracy. September 12, 1928: George W. Davison, Clarence Dillon, Percy H. Johnston, William A. Phillips, Robert C. Sehaffner. October 10, 1928: G. W. Davison, Clarence Dillon, P. H. Johnston, G. M.-P. Murphy, W. A. Phillips, E. B. Tracy. October 24, 1928: Clarence Dillon, George W. Davison, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. October 29, 1928: Clarence Dillon, George W. Davison, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. November 14, 1928: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Robert O. Schaffner, Ernest B. Tracy. December 12, 1928: George W. Davison, Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Robert C. Schaffner, John Sherwin, Ernest B. Tracy. January 9, 1929: Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, Robert C. Schaffner. February 13, 1929: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, Robert C. Schaffner, Ernest B. Tracy. March 13, 1929: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Ernest B. Tracy, Daniel G. Wing. STOCK EXCHANGE PRACTICES 1773 April 10, 1929: Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, John Sherwin. June 12, 1929: Clarence Dillon, Percy H. Johnston, William A. Phillips, Ernest B. Tracy. September 11, 1929: Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. October 9, 1929: Charles S. McCain, Grayson M.-P. Murphy, Percy H. Johnston, Daniel G. Wing. November 13, 1929: Messrs. Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Percy H. Johnston, Frederick H. Ecker, Ernest B. Tracy. November 22, 1929: Clarence Dillon, Percy H. Johnston, Charles S. McCain, Grayson H.-P. Murphy, Robert C. Schaffner, William A. Phillips, Ernest B. Tracy. December 11, 1929: Clarence Dillon, Grayson M.-P. Murphy, William A. Phillips, John Sherwin, Percy H. Johnston, Ernest B. Tracy. January 8, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, Robert C. Schaffner, Ernest B. Tracy. February 13, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-Pi Murphy, William A. Phillips, Ernest B. Tracy, S. G. Wilmer. March 12, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. April 9, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. May 21, 1930: Messrs. Clarence Dillon, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. June 11, 1930: Clarence Dillon, Percy H. Johnston, Charles S. McCain; E. G. Wilmer. August 13, 1930: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. September 10, 1930: Clarence Dillon, William A. Phillips. September 11, 1930: Clarence Dillon, Percy H. Johnston, Charles S. McCain, William A. Phillips, John Sherwin. October 9, 1930: Clarence Dillon, William A. Phillips. October 23, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, Robert C. Schaffner. November 12, 1930: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, William A. Phillips, Ernest B. Tracy. December 10, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. January 14, 1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B, Tracy. February 11, 1931: Clarence Dillon, Grayson M.-P. Murphy, Charles S. McCain, William A. Phillips, Ernest B. Tracy. March 11, 1931: Charles S. McCain, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. April 8,1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. May 13, 1931: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. June 10, 1931: Messrs. Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. July 8, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain, Ernest <B. Tracy, E. G. Wilmer. August 12, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. September 9, 1931: Clarence Dillon, Percy H. Johnston, William A. Phillips, Ernest B. Tracy. October 14, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. November 11, 1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. 1774 STOCK EXCHANGE PRACTICES December 9, 1931: Clarence Dillon, Frederick H. Ecker, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. January 13, 1932: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. February 10, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. March 9, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. April 13, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. April 20, 1932: William A. Phillips, Ernest B. Tracy. April 27,1932: Percy H. Johonston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. May 11, 1932: Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy. William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. June 8, 1932: Messrs. Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer. July 13,1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. August 10, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, Ernest B. Tracy. September 14, 1932: Clarence Dillon, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. October 13, 1932: Clarence Dillon, Frederick H. Ecker, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B, Tracy, E. G. Wilmer. November 9, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. December 14, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, William A. Phillips, Ernest B. Tracy. January 11, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. February 8, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. March 8, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. April 12, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Charles S. McCain, William A. Phillips, Ernest B. Tracy. May 10, 1933: Messrs. E. J. Bermingham, G. M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer. May 22, 1933: Messrs. Frederick H. Ecker, Charles S. McCain, Grayson M.-P. Murphy, Robert C. Schaffner, Ernest B. Tracy. June 14, 1933: Messrs, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. July 12, 1933: Messrs. Clarence Dillon, Charles S. McCain, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. August 9, 1933: Messrs. Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy. September 13, 1933: Messrs. Clarence Dillon, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy. (Committee Exhibit No. 16 of October 6, 1933, is here printed in the record in full, as follows:) (NOTE.—Committee Exhibit 16 appears only in the committee's copy of today's proceedings.) STOCK EXCHANGE PRACTICES 1775 COMMITTEE EXHIBIT NO. 16 OF OCTOBER 6, 1933.—GENERAL UTILITIES SECURITIES INC., NEW YORK, N.Y. TRAVIS, BROWNEACK & PAXSON, New York City, October 5, 1933. P. J. HURLEY Esq., Washington, D.C. MY DEAR MR. HURLEY : I am enclosing photostatic copies of the following publicity of the so-called Associated Gas & Electric Co. Debenture Holders' Protective Committee headed by W. A. Nash: 1. Advertisement of the committee in the New York Times, June 2, 1933. 2. Advertisement of the committee in the New York Times, July 14, 1933. 3. Letter to debenture holders dated June 15, 1933, accompanied by a transmittal blank and slip offering commission to investment dealers. Very truly yours, CHARLES M. TRAVIS. [From the New York Times, June 2, 1933] ASSOCIATED GAS & ELECTRIC COMPANY DEBEINTTJREI HOLDERS' PEOTECT1VE COMMITTEE To All Debenture Holders of Associated Gas & Electric Co.: On May 15th last, the Associated Gas & Electric Co. requested all debenture holders to exchange their debentures under 1 and 3 options. These options, apparently, are so adverse to the interests of debenture holders that many holders feel that they should take steps to protect their rights. It has been deemed advisable that a committee be formed for the protection of the debenture holders and the undersigned have been requested to and have agreed to act as such committee. Immediately upon the announcement by the company of the so-called " options ", the organization of this committee was commenced. The committee feels that immediate concerted action is necessary and that you can best conserve your rights by depositing your debentures with this committee at the earliest possible moment. A deposit agreement has been prepared and is now on file with the depositary and with the secretaries of the committee. Debenture holders are invited to communicate promptly with the secretaries or depositary of the committee or its counsel. Counsel.—Battle, Levy, Van Tine & Flower, 37 Wall Street, New York, N.Y.; Poland & Davis, 27 State Street, Boston, Mass. Secretary.—John H. Galloway, Jr., 20 Broad Street, New York, N.Y., Rm. 1418. Tele. HAhover 2-2980. Assistant secretary.—Roger R. Phillips, 2:7 State Street, Boston, Mass., Telephone CAPitol 0900. Committee.—W. A. Nash, chairman, 27 State Street, Boston, Mass.; Rex R. Thompson, 120 Broadway, New York, N.Y.; Ambrose W. Benkert, 52 Wall Street, New York, N.Y.; E. G. Diefenbach, 44 Wall Street, New York, N.Y. Depositary.—The Commercial National Bank & Trust Co. of New York, 56 Wall Street, New York, N.Y. CocHepositary.—The National Rockland Bank of Boston, 30 Congress Street, Boston, Mass. [Prom the New York Times, Friday, July 14, 1933] ASSOCIATED GAS & ELECTRIC CO. DEBENTURE HOLDERS' PROTECTIVE COMMITTEE HOW CAN SUCH A PLAN BE ATTRACTIVE? Associated Gas & Electric Co. is offering holders of its several issues of debentures a so-called " Plan of rearrangement of debt capitalization " which is, this committee believes, merely a plan to persuade debenture holders to 1776 STOCK EXCHANGE PRACTICES surrender their just rights in order to maintain the company's present management in their positions of control, and to preserve their positions as stockholders and the positions of other stockholders at the expense of the debenture holders. Don't exchange 100 percent for SO percent.—To maintain their present senior position, debenture holders should deposit their debentures with this committee. In the event of a default of interest by the company and the inability to pay the full face value of their securities, the debenture holders will then be in a position to claim the assets of the company, which include all the stock of Associated Gas & Electric Corporation, the subsidiary through which the company owns and controls the underlying utility properties which ultimately are the assets behind the debentures. The company's management seek to forestall the objective of this committee. Though great profits were theirs in prosperous years, they are now entirely unwilling to make any sacrifice necessitated by the pressure of hard times. They seek to cast the whole burden on the debenture holders in order to protect the management and the stockholders. They ask debenture holders to accept, under option 1, in exchange for their present holdings, half the amount of their face value in fixed-rate debentures of the corporation; or, under option 2, income debentures of the corporation yielding less interest, when, as a matter of fact, all the stock of the corporation is owned by the company and is therefore already security to the face amount of the present outstanding debentures of the company. Thus, debenture holders are asked to give up half their principal and income, or to take the chance of receiving lesser income or no income, in exchange for their present right to enforce full payment of both principal and interest upon default in either or both. The function of the protective committee.—This committee's purpose is to safeguard the debenture holders from being misled into surrendering their just rights. Its entire efforts aim to prevent any steps tending to impair the security they now have. The committee's deposit agreement provides that all expenses shall not exceed 2% percent of the face value of the debentures deposited with it, viz., not more than $25 per $1,000 debenture. This is relatively nominal when debenture holders consider that upon the committee's achieving its objective they stand to gain many times that amount. In one of the company's recent advertisements nothing was said in answer to the committee's objections to the so-called " plan " of the company. Instead,. the major portion of the advertisement was devoted to an attack upon this committee's policy of allowing security dealers $6 for each $1,000 debenture deposited through them with the committee. This item is included in the 2% percent maximum expenses of the committee and has been rendered necessary by the fact that security dealers have been offered up to $7.50 for each debenture deposited with them under the company's, so-called "plan." This fact has never been mentioned in the company's advertisements. Can it be that the company's treasury, either directly or indirectly, is footing this expense and the expense for advertising the management's own plan in the newspapers and through the mails? It is obvious that the interests of debenture holders can best be conserved by immediate concerted action in depositing their holdings with this committee in support of its efforts to protect and maintain the rights of debenture holders. Literature of the committee may be obtained upon request from the secretary or assistant secretary of this committee, or from its depositary or co-depositary. W. A. NASH. Chairman, REX R. THOMPSON, AMBROSE W. BENKEUT, F . G. DlEFENBACH, Committee. Counsel.—Battle, Levy, Van Tine & Fowler, New York; Poland & Davis, Boston, Mass. Secretary.—John H. Galloway, Jr., 20 Broad Street, New York, N.Y., Room 1418, telephone Hanover 2-2980. Assistant secretary.—Roger R. Phillips, 27 State Street, Boston, Mass., telephone Capital 0900. Depositary.-—The Commercial National Bank & Trust Company of New York, 56 Wall Street, New York, N.Y. Codepositary.—The National Rockland Bank of Boston, 30 Congress Street, Boston, Mass. STOCK EXCHANGE PRACTICES 1777 Until further notice the sum of $6 (which is approximately 4 percent of current market value) will be allowed and paid to investment dealers, who are active, for each debenture deposited through them, to cover their cost of assisting debenture holders in depositing with this committee, the same to be payable immediately upon satisfactory proof of deposit. ASSOCIATED GAS & ELECTRIC CO., New York, N.Y., June 19, 193S. To debenture holders of Associated Gas & Electric Co.: In a letter dated May 15, 1933, the management of Associated Gas & Electric Co. proposed to its debenture holders a plan of rearrangement of capitalization, which, in the opinion of the undersigned committee, takes away from the debenture holders the legal and moral rights to which they are entitled. The p]an proposes an exchange of your debentures under any one of three different options. The committee is informed that, in connection with the sale of many of the company's debentures in recent years, it was generally stated that the,debentures were a direct obligation of the company, but not secured by a mortgage or pledge, and that the company agreed not to pledge any of its properties without ratably securing the holders of the debentures except in the case of a purchasemoney mortgage and liens and except in the case of pledges in the usual course of business as security for temporary loans maturing not more than 1 year from the date of issue, or indemnity not exceeding 1 year. Associated Gas & Electric Co. was organized under the laws of the State of New York in 1906 as a holding company and became the owner and holder of large amounts of the capital stock of various utility operating companies, upon which stock, it is claimed, the debenture holders of Associated Gas & Electric Co. had a first claim for the payment of principal and interest. Associated Gas & Electric Corporation was formed early in 1932 (being successor through change of name to Associated Utilities Investing Corporation, a Delaware corporation, which was originally organized in 1922), and immediately issued a large amount of 8-year 8-percent gold bonds, which became a first claim upon all of the assets, as we understand it, of Associated Gas & Electric Corporation. Associated Gas & Electric Co. now proposes to exchange its issued and outstanding debentures under the terms of the options above referred to for debentures of Associated Gas & Electric Corporation, which, as explained above, is an intermediate holding company controlled directly by Associated Gas & Electric Co., the latter controlling all subsidiaries through the former. We further understand that Associated Gas & Electric Co., on February 25, 1932, made it known that the only assets held by Associated Gas & Electric Co. were the entire outstanding shares of Associated Gas & Electric Corporation vyhich, in turn, controls directly or indirectly all companies making up Associated Gas & Electric system. .As the proposition now stands, debenture holders of Associated Gas & Electric Co. are requested to exchange the debentures of that company, under the terms of which they have a first claim on the assets of the company, for debentures of Associated Gas & Electric Corporation, which would be junior, as we understand it, to a large amount of 8-year 8 percent gold bonds. The substitution of the debentures of the corporation for the debentures of the company as offered under option (1) materially nullifies the restrictions mentioned in paragraph 2 above. Although such action may or may not be legal, it seems to us that this move very clearly approaches a breach of faith. An exchange under option (1) involves the giving up of 50 percent of principal and interest and a consequent loss of this amount, without any sacrifice on the part of stockholders, preferred or common, who stand to benefit tremendously when prosperity returns. Under option (2), the holder who exchanges receives an income bond with less coupon rate for an obligation with fixed interest. The holder who exchanges surrenders his legal rights to fixed interest and his rights to all the equities of the company for breach of contract. These equities, with return of prosperity, may become exceedingly valuable. It is to retain these valuable equity rights that the company is seeking to effect this plan of " rearrangement of capitalization." Under option (3) the holder who exchanges receives a debenture which may become an income debenture, i.e., a debenture on which interest is paid only if earned. The slight additional income offered is inconsequential compensation for the present holder giving up his right to a fixed interest payment 1778 STOCK EXCHANGE PBACTICES and his right to take over all the assets of the company in the event of default of contract. Debentures issued under this option have the further serious objection that they rank junior to the debentures issued under options (1) and (2). When the debentures issued under this option become income debentures, they are in effect nonvoting cumulative preferred stock. This option completely vitiates the security now held. To many debenture holders, investment bankers and banks, the abovementioned plan of " rearrangement of capitalization " seems not only extremely unfair to the debenture holders, but entirely unprecedented and unjust. It was, therefore, deemed necessary that a committee be formed to represent the debenture holders in order that this inequitable plan may be prevented from being enacted and/or in order to represent the debenture holders in forming a just and equitable plan of " rearrangement of capitalization." The committee feels that Associated Gas & Electric Company, either directly or indirectly, owns valuable properties which should be kept intact and the committee will use its best efforts to do so. While we are not in sympathy with the company's financing operations, we would have no quarrel with the above proposition if all securities now junior to these debentures were also called upon to make some proper sacrifice, but that is not the case. All equity securities remain as they are, including of course that portion of the equity owned by those active in the management, and all sacrifices made by the present debenture holders will, in the long run, accrue directly to the benefit of the equity holders. This seems to us to be far from equitable. The committee feels that the sacrifices which the debenture holders are called upon to make and which are not shared in by the equity holders, is contrary to all precedent as, to the best of our knowledge, information, and belief, in all other " rearrangements of capitalization," the equity holders have been called upon to bear the brunt and to make the greater sacrifice. The aim of the committee is to so represent the debenture holders that, in any financial reorganization, they will receive a more equitable and just interest in the new set-up than is provided for in the company's plan. If the company's position is so serious that it is imperative for its preservation that sacrifices be made, then the committee proposes to use their best endeavors to see that the sacrifices are made by the junior security holders and not by the debenture holders who occupy the senior position. If it should prove necessary for the debenture holders to sacrifice either a part of their principal or a part of their income, then we believe they should be compensated for this sacrifice by a substantial interest in the equity securities in the form of a bonus. This committee has a definite and fixed purpose and, as stated above, it aims to so represent the debenture holders as to secure to them a fair, equitable, and just return for the debentures which they now hold. The committee shall endeavor, if possible, to obtain an independent audit of the books of the company and to cooperate with the management in an amicable manner in the arrangement of a plan, if it is found that a "rearrangement of capitalization" is necessary. The committee is very much averse at this time to receivership or other legal proceedings, feeling that, in order to safeguard the rights of the debenture holders, an amicable adjustment of matters is more desirable than litigation. Nevertheless, if it is necessary, the committee will not hesitate to take such action, whether at law or in equity, as its counsel may deem fit and proper in order that the rights of the debenture holders may be maintained to the fullest extent, even though such litigation would involve receivership None of the members of this committee or its counsel have ever been and none are now in any way directly or indirectly connected with the company or its management. The committee's sole interest is to extend to the Debenture holders the maximum protection at this time when the safety and security of their investment is threatened. No money is asked with the deposit of debentures with this committee and there are three matters of interest to debenture holders to which the committee calls particular attention: First, the cost to debenture holders for all services of the committee under the terms of its deposit agreement cannot exceed a sum equal to more than 2% percent; second, no personal liability for any debt of the committee can possibly attach to depositing debenture holders; and, third, interest accruing on all deposited debentures will be paid to the depositor or his successor in title if, as, and when such interest has been collected and, in receiving the payment of such interest, it will not be necessary for debenture holders to surrender or exhibit their certificates of deposit. 1779 STOCK EXCHANGE PRACTICES For the convenience of the debenture holders depositing with this committee, the depositary banks will collect interest when, as, and if paid on debentures deposited with them, and mail to the depositing debenture holders a check for such interest. The object in the organization of this committee is to create a responsible agency through which the debenture holders, who are so widely scattered through the United States, Canada, and in other foreign countries, may act in concert for the protection of their rights and interests. It is essential that every debenture holder wishing to protect his interests through this committee deposit his debentures as quickly as possible, using the letter of transmittal attached to this .notice and sending the same directly to the depositary, codepositary, or one of the agents. Deposits of debentures will be received and held by the depositary or codepositary subject to the terms and conditions of the deposit agreement, copies of which are on file with the depositary, codepositary and their agents. A copy of the deposit agreement may be obtained upon request from the secretary or assistant secretary of this committee, or from the depositary, codepositary, or any of their agents. The depositary or codepositary will issue transferable certificates of deposit to each depositor. If you wish to avail yourself of the protection afforded by this committee, it is important that you indicate the same by filling out the transmittal letter attached and sending it, together with your debetures, to one of the depositary banks, or one of the agents at once. All those who deposit their debentures with this committee will be kept informed as to the progress which is made in their behalf. W. A. NASH, Chairman, HEX It. THOMPSON, AMBROSE! W. BENKERT, E. G. DlEFENBACH, JOHN H. GALLOWAY, Jr., Committee. Secretary. TBANSMITTAL BLANK FOR DEPOSITING REFUNDING, GOLD AND/OR CONVERTIBLE DEBENTURES OF ASSOCIATED GAS & ELECTRIC CO. Depositary.—The Commercial National Bank & Trust Co. of New York, 5(> Wall Street, New York, N.Y. Codepositary.—The National Rockland Bank of Boston, 30 Congress Street, Boston, Mass. To the depositary or codepositary by which this letter is received: GENTLEMEN : The undersigned hereby deposits with you as agent and deposi tary under the deposit agreement, between W. A. Nash, Rex R. Thompson, Ambrose W. Benkert, and E. G. Diefenbach, as a committee, and such holders of the refunding, gold and/or convertible debentures of Associated Gas & Electric Co. as may become parties to the agreement by depositing their debentures thereunder, a copy of which agreement is on deposit with you. The undersigned hereby assents to all the provisions of said agreement and becomes a party thereto, depositing herewith the following described debentures of Associated Gas & Electric Co., all of which debentures so deposited are specifically indicated below: Denomination Serial numbers Maturity Eate of interest Coupons attached Total amount Please issue your certificate(s) of deposit for said securities in the following name: Name Address (Please type or print, using full name) City or town Very truly yours, State Number Street (Signature of depositor) Deposits may be sent to the depositary or codepositary or any one of their agents. (See instructions on back hereof.) 1780 STOCK EXCHANGE PRACTICES INSTRUCTIONS Please fill out one letter of transmittal for each party depositing. Debentures should be sent, together with letter of transmittal, by registered mail to the depositary, codepositary, or any one of their agents. Additional letters of transmittal may be procured from the secretary of the committee or the depositary, codepositary, or any one of their agents. Registered debentures should be accompanied by appropriate assignments executed in blank by the registered owner, whose signature should be guaranteed by a bank or trust company having a principal office or a correspondent in New York City, or by a brokerage firm having membership on the New York Stock Exchange. Assignments executed by fiduciaries should be accompanied with proper evidence of their authority to execute such assignments. Assignments executed in behalf of corporations should be accompanied by appropriate resolution of the board of directors or other evidence of proper authority for such assignment. STOCK EXCHANGE PEACTICES TUESDAY, OCTOBER 10, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to adjournment on Friday, October 6, 1933, at 10 o'clock a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher, presiding. Present: Senators Fletcher ("chairman), Adams (substitute for Barkley and proxy for Costigan), Norbeck, Townsend, and Couzens. Present also: Senators Goldsborough and Kean. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Read & Co.; Boot, Clark, Buckner & Ballantine, George H. Murphy, of counsel, counsel for United States & Foreign Securities Corporation; and United States & International Securities Corporation. The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora. I believe Mr. Tracy is on the stand. TESTIMONY OF EENEST B. TKACY—Besnmed Mr. PECORA. Mr. Tracy, when you were last on the stand you were asked if you could state who signed in behalf of United States & International Securities Corporation the letter of July 13, 1929, with relation to the so-called " railroad joint trading account " with Dillon, Eead & Co. You said you would look it up for the information of the subcommittee this morning. Mr. TRACY. We have that, I think. (After consulting an associate.) I am told that Dillon, Read & Co. were unable to find the original of that letter. I t was signed by one of the officers of the company. Mr. Frank thinks he signed it as an officer of the company. Mr. PECORA. Who managed that joint account? Mr. TRACY. Well, we could not buy any securities without consulting Dillon, Read & Co., and they could not buy any without our consent. Mr. PECORA. Then there was a matter of joint management? Mr. TRACY. Yes; joint management. Mr. PECORA. What individual or individuals connected with your investment trust looked after the investments that were made for that account? 1781 1782 STOCK EXCHANGE PRACTICES Mr. TRACY. The purchases? Mr. PECORA. The purchases and sales, if any. Mr. TRACY. Mr. Frank. Mr. PECORA. Mr. Frank did that? Mr. TRACY. Yes. To the best of my recollection he had charge of all purchases. Mr. PECORA. DO you know how much experience he has had as a trader ? Mr. TRACY. Well, I know he always carried on the execution of orders very satisfactorily. Mr. PECORA. HOW much money was furnished by the United States & International Securities Corporation for the purpose of that account? Mr. TRACY. I will have to get for you the exact amount. (Consulting an associate.) I am told it is $14,261,000. Mr. PECORA. And how many shares of railroad stocks were acquired by this joint account? Mr. TRACY. Well, I will have to get the exact figure for you because there were quite a lot of them. (After securing a paper from an associate.) The following securities were purchased by that joint account, Mr. Pecora: Twenty-seven thousand four hundred shares of Rock Island common at an average price of $138.36. Ten thousand shares of Pennsylvania Railroad Co. at $98.98. Thirty-two thousand St. Louis & San Francisco common at $130.39. Ten thousand shares of Southern Pacific Co. at $145.73. Fifteen thousand three hundred shares of Southern Railway common at $159.76. One million nine hundred and eighty-seven thousand dollars par value Seaboard Air Line Railroad Co. adjustment 5s of 1949 at an average cost of $52.09. Five hundred thousand dollars par value Seaboard Air Line Railway Co. consolidated 6s, 1945, at an average price of $71.65. Mr. PECORA. This account was terminated I believe you said on last Friday, on November 9, 1929. Mr. TRACT. That is correct. Mr. PECORA. HOW many shares of Rock Island Co. stock had been acquired by that time for the purpose of this joint account? Mr. TRACY. Twenty-seven thousand four hundred shares. Mr. PECORA. In whose name were the purchases of these shares made? Mr. TRACY. All securities were delivered to us. We bought the securities and kept them for the joint account. Mr. PECORA. Which means the securities were purchased in the name of the United States & International Securities Corporation? Mr. TRACY. They were purchased by us. We had charge of them, and we kept them, and kept them in the account. Mr. PECORA. When you say they were purchased by you, do you mean to say that the transactions were put through in the name of United States & International Securities Corporation ? Mr. TRACY. I will have to ask for information about that question. I did not handle the account personally. I mean that I did not do the buying. STOCK EXCHANGE PRACTICES 1783 Mr. PECORA. Well, didn't you determine, or help to determine, as the president of this corporation, the policy that was to be pursued with regard to the operation of this joint account? Mr. TRACY. I do not believe I understood your question, Mr. Pecora. Mr. PECORA. Well, will the committee reporter please read the question. [Which was done.] Mr. TRACY. Yes, sir; I did. Mr. PECORA. Well, can't you tell the committee whether or not that joint account purchased those railroad stocks in the name of your investment trust? Mr. TRACY. I will have to look that up. Mr. PECORA. All right, then. Senator ADAMS. While that information is being looked up let me ask: Mr. Tracy, were the stocks transferred to the name of the investment trust? Mr. TRACY. Well, I am not sure whether they were or not? I will have to look that up. Senator ADAMS. Was it your custom in the purchase of stock to put them in the name of the investment trust? Mr. TRACY. We usually put them in the name of the nominee, Senator Adams. Senator COUZENS. Who was the nominee in this case ? Mr. TRACY. I will have to inquire. [After consulting an associate.] Mr. Pecora, I am told that those stocks went through the usual course. The Chase Bank had the custodianship of the account of the company. Mr. PECORA. What was that ? Mr. TRACY. The Chase Bank had the custodianship of the account, and all securities were delivered to them, and they kept them for our account. They put the securities in the name of their nominee. Senator COTJZENS. And do you know who that was? Mr. TRACY. I am not sure, but we think it was done in the name of Blass & Co. Mr. PECORA. Well Senator COUZENS (interposing). Why don't we put Mr. Frank on the stand if the witness has to get all the information from him anyway ? Mr. PECORA. I naturally assumed that the executive head of the company would be able to tell us the details of these important transactions. But, apparently, he must rely on the superior knowledge or recollection of subordinates. Mr. TRACY. The securities were bought for us, Mr, Pecora. We paid for them, and we had the holding of the securities. These are all details of operation. I do not know how to sit in the room and execute orders. I never do that. Senator COUZENS. A S a matter of fact, would anyone who would be buying those securities know who was making these purchases ? Mr. TRACY. Anyone delivering it ? Senator COTTZENS. I mean that no one could tell from that handling of the securities who was actually buying, could he ? Mr. TRACY. I shouldn't think so. 1784 STOCK EXCHANGE PRACTICES Senator COUZENS. It was all covered up in the process of the purchaser, the nominee, and so forth. Let us have on the stand one who knows about it. Mr. TRACY. That is our usual practice. We do that with everything. Senator COUZENS. I am not talking about your usual practice. That is what we are trying to get at, the usual practice, and are trying to break it up. Mr. TRACY. I think the amounts that we were going to buy of Frisco and Rock Island would have meant that the market probably would have gone up, and we would not have gotten them as cheaply as we did. Senator COUZENS. Then, the market is influenced more by who is buying and selling than the actual value of the securities; isn't that so ? Mr. TRACY. I wouldn't say that. Mr. PECORA. Well, now Senator COUZENS (continuing). Well, you have just said that. Mr. TRACY. I say they might have gone up, if people knew we were buying. Senator COUZENS. Then, buyers and sellers have more influence upon the handling of the market than the real value of the securities themselves? Mr. TRACY. Well, no; but Senator COUZENS (continuing). Well, your answer admits that when you say that, if it were known you were buying, those stocks might have gone up. Mr. TRACY. They might have. Senator COUZENS. Well, everybody knows that anyway, so I will not proceed further along that line. Mr. PECORA. Mr. Tracy, when this joint account was terminated November 9, 1929, it had to its credit 27,400 shares of Chicago, Rock Island & Pacific Railway Co. common stock, didn't it? Mr. TRACY. That is right, sir. Mr. PECORA. And how much had been paid for that stock during the operation of this joint account ? Mr. TRACY. $3,791,593.99. Mr. PECORA. NOW, all that money was advanced by the investment trust of which you were president? Mr. TRACY. Correct. Mr. PECORA. And the stocks were delivered to the investment trust? Mr. TRACY. Correct. Mr. PECORA. Well, if that was the case— Senator COUZENS (interposing). Just a minute, Mr. Pecora. They were first delivered to the nominee of the Chase Bank, as I understand. Mr. PECORA. They were delivered in that way, and then— Mr. TRACY (interposing). They were delivered to the Chase Bank, and the Chase Bank put them in the name of the nominee. Mr. PECORA. When this joint account was terminated what was done with those 27,400 shares of Rock Island stock ? STOCK EXCHANGE PRACTICES 1785 Mr. TRACY. The securities company took half of them, and half of them were delivered to Dillon, Read & Co. against payment. Mr. PECORA. What payment did they make for their half of those shares ? Mr. TRACY. Whatever was their cost at the time. Mr. PECORA. That is, one half of this sum of $3,791,593.99? Mr. TRACY. Correct. Mr. PECORA. Did they actually make that payment, or was it made through a transfer of credit on the books of account? Mr. TRACY. Well, I know they paid us for it. Whether they paid it through a transfer of credit or not I do not know. Let me find out. Mr. PECORA. HOW do you know whether they paid if you do not know about that ? Mr. TRACY. I should have to look that up. There isn't any question about it, but just exactly how it was done, whether through a transfer or credit or by check, I do not know. Mr. PECORA. We would like to know how it was done. However, we are sure of that one thing, I take it, that the investment trust paid out the full sum of $3,791,593.99 represented by the purchase of those 27,400 shares, didn't it ? Mr. TRACY. Yes, sir. Mr. PECORA. Out of its own funds? Mr. TRACY. That is correct. Mr. PECORA. And when the joint account was terminated November 9, 1929, it had in its possession 27,400 shares of Eock Island stock, one half of which were delivered to Dillon, Read & Co. against payment. Mr. TRACY. Yes. Mr. PECORA. NOW, you were going to look up and tell us, as I understood, what form the payment therefor took. Mr. TRACY. We will have to go to the ledgers in order to look that up. Mr. PECORA. Did you have anything at all to do with the operation of this joint trading account? Mr. TRACY. Anything to do with it? Mr. PECORA. Yes; anything whatsoever to do with it. Mr. TRACY. NO. They were told to purchase securities within certain limits, and those securities when purchased for the account were reported to the officers and directors. Mr. PECORA. What were the limits that you refer to? Mr. TRACY. It was on an income basis as I remember it. We bought those securities I think to yield approximately 5% percent. Mr. PECORA. Can you ascertain from any of your associates here present how payment was made by Dillon, Read & Co. for one half of those 27,400 shares of Rosk Island Railroad Co. stock ? Mr. TRACY. That is what I am having looked up from the ledger. Mr. PECORA. HOW long will it take you? Mr. TRACY. We will get it just as quickly as we can for you. Mr. PECORA. But how long will it take, so I may determine whether it is advisable to wait for the answer or proceed with further examination. Mr. TRACY. It will take at least 15 minutes. 1786 STOCK EXCHANGE PRACTICES Mr. PECORA. Well, will you have it done, and meanwhile I will continue my examination of you. Mr. TRACY. All right. Mr. PECORA. NOW, Mr. Tracy, do you recall that when this joint account was terminated on or about November 9, 1929, those 27,400 shares of Eock Island stock had sustained a rather severe depreciation of market value? Mr. TRACY. The market had gone off; yes. Mr. PECORA. And can you tell the subcommittee about what loss had been sustained on paper by reason of such depreciation? Mr. TRACY. In the case of the Eock Island stock? Mr. PECORA. Yes, sir. Mr. TRACY. Let me get what the price was. [After consulting an associate.] They are trying to look up the market price as of that date, Mr. Pecora. Mr. PECORA. While they are looking that up I will resume my examination. Do you know what Dillon, Eead & Co. did with their half of the 27,400 shares of common stock of the Chicago, Eock Island & Pacific Eailway Co. that were turned over to them on November 9, 1929 ? Mr. TRACY. What did they do with it? Mr. PECORA. Yes. Mr. TRACY. Yes. Mr. PECORA. What? Mr. TRACY. I t was bought by the United States & Foreign Securities Co. Mr. PECORA. That is the other investment trust of which you were then also the president? Mr. TRACY. Surely. Mr. PECORA. For what price? Mr. TRACY (addressing one of his associates). Have you got the price on that? It was 114%. I t was the market price. Mr. PECORA. The market price as of what date? Mr. TRACY. AS of the date of the transaction. Mr. PECORA. Were you consulted, as president of the United States & Foreign Securities Corporation, with regard to that transaction before it was consummated? Mr. TRACY. Was I? Of course I was. Mr. PECORA. With whom did you confer about it? Mr. TRACY. I conferred with practically all the directors that I could reach at that time. Mr. PECORA. Among those directors there were gentlemen who were partners in the firm of Dillon, Eead & Co., were there not? Mr. TRACY. We wanted to buy railroad securities and we saw an opportunity of buying these blocks. Mr. PECORA. YOU thought it was a good opportunity for the investment trust? Mr. TRACY. Indeed I did; we all did. Mr. PECORA. Have you got the minutes of the United States & Foreign Securities Corporation; that is, the minute book of the board of directors for the year 1929, and particularly that portion of it that includes the month of November? Mr. TRACY. I will get that right away for you. STOCK EXCHANGE PRACTICES 1787 The CHAIRMAN. Were the shares of your second trust transferred over to the first trust? Mr. TRACY. At that time? The CHAIRMAN. Yes, sir. Mr. TRACY. NO, sir. The CHAIRMAN. What did you do with those Mr. TRACY. We still have them. Senator ADAMS. HOW did the price at which shares? Dillon, Kead & Co. purchase its half of the stock compare with the price at which the stock was turned over to the United States & Foreign Securities Corporation ? Mr. TRACY, We bought this block for the United States & Foreign Securities Corporation at 114^4. It had cost them about 138. Senator ADAMS. There was a loss to Dillon, Eead & Co. on the transaction ?. Mr. TRACY. Evidently; yes. Mr. PECORA. When was that transaction effected ? Mr. TRACY (after conferring with associates). November 11. Mr. PECORA. That was 2 days after the termination of the joint trading account? Mr. TRACY. Eight. Mr. PECORA. Have you succeeded in finding the minute book of the United States & Foreign Securities Corporation for the year 1929? Mr. TRACY. Yes, sir; I have it here in front of me. Mr. PECORA. May I look at it? (The witness handed book to Mr. Pecora.) The CHAIRMAN. HOW much would that loss of 24 points amount to in dollars and cents, Mr. Tracy? Mr. TRACY (after a calculation). I make it $328,800. Mr. PECORA. Mr. Tracy, looking through the minute book of the United States & Foreign Securities Corporation which you have handed me—and the one which you have handed me is marked •" Volume 3 "—I notice that a meeting of the board of directors of that corporation was held, according to the minutes, on October 9, 1929, and that the next meeting of the board of directors was hfeld on November 13, 1929. It would seem, therefore, that this transaction whereby the United States & Foreign Securities Corporation acquired these shares of the Rock Island road from Dillon, Eead & Co. at 114-plus was consummated between those two meetings, or between the dates of those two meetings of the board of directors. What consultation did you have with members of the board of directors about that transaction before it was consummated? Mr. TRACY. I discussed it with all members of the board that I could reach at that time. Mr. PECORA. Whom did you reach? Mr. TRACY. I do not remember, but it was my practice to get in touch with as many members of the board on all transactions as I could reach; and at that period it was pretty hard to get hold of some people. I had to either get hold of them at night or early in the morning, at breakfast—if you remember the period in question. Mr. PECORA. Who were the most active directors of the company at that time ? 175541—33—PT 4 17 1788 STOCK EXCHANGE PRACTICES Mr. TRACY. The most active ? Mr. PECORA. Yes. Mr. TRACY. Mr. Dillon was very active; I was very active; Mr. Ecker was very active, and Mr. Murphy—they were all very active in that period. Mr. PECORA. Was Mr. Phillips very active ? Mr. TRACY. Yes. Senator ADAMS. That was a period of rather rapidly declining markets, was it not ? Mr. TRACY. Yes. I think there was one low on November 15 when everybody thought we had hit the bottom of the market. Mr. PECORA. Who first proposed that the United States & Foreign Securities Corporation purchase these railroad shares from Dillon, Read & Co. at that time ? What I am trying to get at, Mr. Tracy, is to find out the course of the negotiations that culminated in this transaction. Who initiated them, and who conducted them on behalf of the contracting parties ? Mr. TRACY. I do not know. I do know we all wanted to buy railroad securities. Mr. PECORA. Even after the stock market collapsed in October 1929 you all wanted to buy railroad securities ? Mr. TRACY. We wanted to buy railroad securities. Mr. PECORA. In the open market? Mr. TRACY. In the open market or in a block, if we could get them. Mr. PECORA. Who proposed this particular transaction that was had with Dillon, Read & Co. by* your investment corporation ? Mr. TRACY. I do not remember who proposed it in particular. I know I did a lot of talking about it. Mr. PECORA. The idea started with somebody, didn't it? Mr. TRACY. We wanted to buy railroad securities Mr. PECORA. When you say " we ", whom are you referring to ? Mr. TRACY. I am referring to the securities company. Mr. PECORA. YOU are referring to certain individuals connected with the securities company, are you not? Mr. TRACY. I am referring to the directors of the securities company. Mr. PECORA. With which of the directors did you discuss the matter of acquiring these .shares from Dillion, Reed & Co. ? Mr. TRACY. I do not remember any particular one, but I undoubtedly consulted Mr. Murphy and Mr. Ecker, and whoever was available. I always got in touch with every one of the directors that I could reach. Senator COUZENS. Then this evidently did not originate in the mind of any of the directors that you had to call up? Mr. TRACY. We wanted to buy railroad securities; we were looking for them. Senator COTTZENS. But this particular deal, before it went through, must have originated, as Mr. Pecora says, in somebody's mind. It could not have originated in the minds of those directors whom you called up, otherwise you would not have had to call them up. I t must have originated in yours, or somebody else's; otherwise you would not have had to consult with those directors. Mr. TRACY. YOU see, the directors of both companies, Senator^ knew that we had a joint account to purchase railroad securities. STOCK EXCHANGE PRACTICES 1789 and it was discussed at the meeting of the United States & International Securities Corporation and also the meeting of the board of the United States & Foreign Securities Corporation. They both knew of that account, and we wanted to buy more railroad securities. We discussed it among the officers; but I do not know whether I suggested it originally, or who it was, to purchase those two blocks from Dillon, Eead <& Co. Those were the only ones we wanted—the Eock Island and the Frisco. As I told you the last time I was on the stand, we had an exhaustive report made on those two companies. Senator COUZENS. Have you copies of those reports available! Mr. TRACY. I have those two reports here; and I think you will find them very complete and elaborate, and I would like to have them made a part of the record. Mr. PECORA. I was just wondering what this witness could tell the committee in the course of his testimony Senator COUZENS. May I suggest that these be left for the consideration of the committee as to whether we will put them in the record or not? Mr. PECORA. I would like to look at them. The CHAIRMAN. Without objection, that will be the course followed. Mr. TRACY. They are voluminous and full of charts and figures. The CHAIRMAN. The committee will take care of them, Mr. Tracy, Mr. PECORA. Mr. Tracy, I have before me the minutes of the regular meeting of the board of directors of the United States & Foreign Securities Corporation which was held on November IS, 1929. That date was after the consummation of the transaction whereby the United States & Foreign Securities Corporation acquired from Dillon, Eead & Co. their half of these Eock Island shares that were purchased in the joint account; and in reading through these minutes, Mr. Tracy, I find absolutely no mention in any way, shape, or form of this important transaction that had already been consummated prior to the holding of this meeting. Can you account for that? Mr. TRACY. Will you let me look through those ? Mr. PECORA. Yes, sir [handing minute book to the witness]. Senator COUZENS. Mr. Pecora, do you recall when this trading agreement was presented? Mr. PECORA. July 13, 1929. Senator COUZENS. I observe that the report of the St. Louis <& San Francisco Eailroad Co. is dated September 6, 1929. That was much later than the time the trading agreement was entered into. Mr. TRACY. That was being made during the entire summer, and we had reports on it from time to time. Senator COUZENS. The report on the Eock Island was not made until August 20, 1929, long after the trading agreement was entered into. The CHAIRMAN. What is the present market on the Eock Island shares ? Mr. TRACY. It is a nominal figure, Mr. Chairman, because the road is in receivership. Now, Mr. Pecora, I would like to read to you from the Trade and Securities Service, Standard Statistics Co., dated October 4,1929 1790 STOCK EXCHANGE PRACTICES Mr. PECORA. Before you read that will you answer the question that I put to you concerning the reason for the absence of any mention in the •meeting of the board of directors held on November 13, 1929, of this important transaction whereby the United States & Foreign Securities Corporation acquired thousands of shares of Rock Island stock from Dillon, Eead & Co. ? Mr. TRACY. The treasurer's report for the month of November, which contains all that information, is in the directors' report for the month of December. The transactions of the preceding month are always reported at the meeting held in the following month. That is our usual procedure. Mr. PECORA. IS there anything in the minutes of any meeting of the board held at any time after November 11, 1929, that contains any reference to the negotiations whereby the United States & Foreign Securities Corporation acquired from Dillon, Eead & Co. these railroad shares on November 11, 1929 ? Mr. TRACY. NO ; there is simply the statement that we had bought those securities in the usual way, our usual form of reporting it. Mr. PECORA. IS there anything in the minute book, any mention or a record of any authority having been given by the board of directors to this corporation to enter into this transaction with Dillon, Read & Co.? Mr. TRACY. N O ; I do not think there is, and I do not think there would be. Mr. PECORA. Why don't you think there would be? Did you not think the transactions were important enough to be brought specifically to the notice of the board of directors and their consent obtained before the transactions were consummated ? Mr. TRACY. We had all decided that we wanted to buy railroad securities. Mr. PECORA. When had you made that decision? Mr. TRACY. All through the summer. That summer railroad securities were considered the best securities to buy. Mr. PECORA. Did you adhere to that decision after October 1929? Mr. TRACY. Yes, sir. Mr. PECORA. Particularly after the collapse of security values in the stock market that that month brought about ? Mr. TRACY. Yes. If you will permit me to read from this, which is the opinion of Standard Statistics, who have a very high standing, I think it will be of interest to you Mr. PECORA. Just wait. We will get that into the record. Mr. TRACY. I will give you the opinion of somebody else other than ourselves. Mr. PECORA. IS it an opinion that influenced your judgment? Mr. TRACY. It did not. Mr. PECORA. Then do not give it to us. We want to know what you acted upon, not what somebody else may have thought, independently of you. Mr. TRACY. I simply want to show you what other people thought of railroad securities at that time; and I think, in fairness, you ought to let me quote this. Mr. PECORA. If it did not influence you, it had nothing to do with your transaction; and if you did not know of those opinions at that time, they had nothing to do with it. STOCK EXCHANGE PRACTICES 1791 Mr. TRACY. I did know of them at that time. Mr. PECORA. I thought you said you did not. Mr. TRACY. I said I did not think it influenced me; but I did know of them. Mr. PECORA. In your conferences with representatives of Dillon, Eead & Co. did they indicate that the}^ had an opinion similar to yours about the wisdom of acquiring railroad shares at that time? Mr. TRACY. I know that they believed in railroad shares at that time. Mr. PECORA. If they believed in railroad shares at that time, will you explain why they parted with their railroad shares at that time to vour investment trust ? Mr. TRACY. That I don't know. Mr. PECORA. YOU thought they were gentlemen whose judgment was worth something with regard to securities values, did you not? Mr. TRACY. Their judgment was worth a good deal, which the record shows. Mr. PECORA. Did it strike you at any time during those transactions back in November 1929 that it might be unwise for your investment trust to take on these railroad shares, in view of the fact that Dillon, Eead & Co., a company whose judgment you thought a great deal of, held an opinion apparently to the effect that they ought to sell their railroad shares? Mr. TRACY. I do not know anything about their reasons at that time. I know we had a lot of money that we wanted to invest, and we thought those securities were good investments, and that is why we purchased them. Mr. PECORA. When you testified last week I asked, or Chairman Fletcher asked, at page 502 of the reporter's minutes, referring to this joint account, who composed it, and it was stated, Dillon, Read & Co. and the investment trust in equal shares; each had a 50-percent interest, and you said, " We wanted to buy railroad securities. We formed this account with Dillon, Eead & Co. to buy railroad securities. They wanted to buy railroad securities also." You meant Dillon, Eead & Co. when you used the pronoun " they " in that answer, did you not ? Mr. TRACY. Correct. Mr. PECORA. SO that during the summer and fall of 1929 your directors and Dillon, Eead & Co. were of one mind about the wisdom of buying railroad shares? Mr. TRACY. Yes, sir; and a great many other people were, too. Mr. PECORA. We are concerned now with the operation of your mind, not that of a great many other people; and you can shorten this examination by confining yourself to your own activities. Mr. TRACY. I want to help you as much as I can. Mr. PECORA. I think you will give us a real contribution in that way, by confining yourself to your activities, not anyone else's. Now, when did Dillon, Eead & Co. indicate that they had changed their minds about the wisdom or the advisability of acquiring railroad shares? Mr. TRACY. I don't know when it was. I know we wanted to buy railroad securities. We knew that those blocks were owned by Dillon, Eead & Co., and we asked them whether they would sell them 1792 STOCK EXCHANGE PRACTICES to us. We only wanted the Rock Island and the Frisco; not the others. Mr. PECORA. TWO days after the distribution of the railroad shares that had been accumulated for this joint account, somebody in your company knowing that Dillon, Read & Co. had, through this joint account, acquired these railroad shares, went to Dillon, Read & Co., and asked them if they wanted to sell? Mr. TRACY. Yes; we wanted to acquire more railroad securities. Mr. PECORA. With whom did you confer between November 9 and November 11, 1929, with regard to buying these railroad shares from Dillon, Read & Co. ? Can you not tell us ? Mr. TRACY. NO; I do not remember whom we conferred with. I might have conferred with any one of the partners of Dillon, Read & Co. Mr. PECORA. Whom did you confer with, as a matter of fact ? Mr. TRACY. I do not remember. It does not make any difference, as I see it, which one I conferred with. Mr. PECORA. Did you make a proposal to them in writing to buy several million dollars' worth of railroad shares from them ? Mr. TRACY. NO ; I did not. Mr. PECORA. What bargaining did you do with them in the matter of price, if anything? Mr. TRACY. The price on the market. Mr. PECORA. Whom did you take up negotiations with on behalf of Dillon, Read & Co.? Mr. TRACY. Who in Dillon, Read & Co.? ^ Mr. PECORA. Yes. Mr. TRACY. I told you I did not remember. It might have been any one of the partners. Mr. PECORA. Who took it up at your request with any one of the partners ? Mr. TRACY. I know I discussed it with some of them, and I called up the directors and discussed it with them, and they were all of the same opinion, that it was a good opportunity to acquire a block of railroad securities. We did not want the other securities in the account. Mr. PECORA. YOU did not want the other railroad securities in the account ? Mr. TRACY. NO. Mr. PECORA. Why not ? Mr. TRACY. The directors did not want them; that Mr. PECORA. Did they give any reason ? Mr. TRACY. I cannot give you the reason. Mr. PECORA. Apparently up to this time the directors is all. of your trust were keen about acquiring railroad shares? Mr. TRACY. We had been, but we thought it was best to have those two. Mr. PECORA. YOU did acquire a variety of shares of railroad stock for the purposes of this joint account between July and November 1929, did you not? Mr. TRACY. Correct. Mr. PECORA. TWO days after the termination of the joint account with the distribution of the acquired shares to the participants we STOCK EXCHANGE PRACTICES 1793 see that your investment trust, the first one, United States & Foreign, bought back from Dillon, Eead & Co. not all of the railroad shares that had been the subject of the joint trading account, but only two issues, the Chicago, Rock Island & Pacific and the St. Louis & San Francisco? Mr. TRACY. That is right. Mr. PECORA. Why were not any of the other railroad shares purchased from Dillon, Read & Co. that had been acquired for the joint account ? Mr. TRACY. I believe we already owned a substantial amount of securities. Mr. PECORA. YOU already owned substantial blocks of these two railroad securities, did you not? Mr. TRACY. I would have to look up and see how much we had in the United States & Foreign Securities Corporation. Senator COUZENS. Was Mr. Hayden of your company one of those consulted with respect to the purchase of the Rock Island shares from Dillon, Read & Co. ? Mr. TRACY. NO ; he is on the board of the United States & International Securities Corporation. Senator COUZENS. He i(s not on the other board? Mr. TRACY. NO, sir; he is not on the other board. I will have to look that up, but I am pretty sure we did not have any Rock Island or Frisco in the United States & Foreign Securities Corporation at that time. Mr. PECORA. Why did you not acquire the other railroad shares from Dillon, Read & Co. if you thought it was an advisable and wise thing for this investment trust in that market to buy large blocks of railroad stock? Mr. TRACY. I would have to look up our railroad list before I could answer that. Mr. PECORA. YOU seemed quite anxious to put into the record some opinion expressed by somebody else, a printed copy of which you have in your hands. What is that opinion ? Mr. TRACY. This is the Industries Section of Standard Trade and Securities Service, and it is Senator COUZENS. Who compose that company? Mr. TRACY. It is a very well known statistical service, Senator. Senator COUZENS. Yes; but who runs it? Who owns it? Mr. TRACY. Who owns it? Senator COUZENS. Yes. Mr. TRACY. I do not know who owns it. Senator COUZENS. The title does not mean anything to me, unless I know who the gentlemen are that operate the Standard Statistics. Mr. TRACY. I cannot give you that information, but I can tell you that this is a service that practically everybody in the financial district subscribes to. Senator COUZENS. That may be so. Mr. PECORA. Who operate that service ? What persons operate it ? Mr. TRACY. I do not know the people in the company. Mr. PECORA. Then you are taking the judgment of someone whom you do not even know, are you ? 1794 STOCK EXCHANGE PRACTICES Mr. TRACY. I will tell you it is well known. It is an accepted service, quoted in all the newspapers, and Mr. Ross and Mr. Meehan will tell you it is as good as any service given in New York. Mr. PECORA. Mr. Boss and Mr. Meehan are doing excellent work as members of the investigating staff of this committee, but they are not operating investment trusts, and I cannot ask them about these transactions; they had nothing to do with them. Senator COUZENS. It is important to know—and that is what the committee is trying to get at—who influenced these opinions that you are so anxious to quote. Just who are the men that make that up? Mr. TRACY. I know nobody in the organization. Senator GOUZENS. Then I want to say to the committee that that opinion is not worth anything. If we do not know who makes up the opinion, the opinion is not worth a thing to this committee. Unless we know who makes up the opinion, the mere name of " Standard " does not mean anything. The men who influenced this opinion are the important facts for this committee to know. I do not see what benefit it has if we do not know who makes up the opinion and who influenced the opinion. The CHAIRMAN. The committee can, of course, attach such importance to it as it sees fit, but I think there is no objection to having it go into the record for what it is worth. I think he may read it. Mr. TRACY. Thank you, sir. It is dated October 4, 1929 Mr. PECORA. That was before the first big collapse in securities values on the exchange, was it not ? Mr. TRACY. Yes; the market had gone down considerably at that time. Mr. PECORA. But nothing compared with what happened after October 4? Mr. TRACY. NO. Mr. PECORA. GO ahead. Mr. TRACY (reading) : For the past two years the rail shares as a class have been priced at an average basis of about twelve and a half times earnings. Seldom has the rail price average deviated very far from such a valuation. The recent sharp decline of these issues, however, in sympathy with the rest of the market has greatly strengthened their price position. Beyond question more real investment bargains can now be found among the rails than in any other section of the list. And further, in speaking of the Western Trunk Line rate increase, they point out the railroads that will profit by that, and in their calculations they say: Seven roads were found to lie wholly within the Western Trunk Line territory. The greatest benefit, however, accrues to those roads which, in relation to their total stock outstanding, have the largest proportion of traffic moving under class rates within that territory. The largest increase in revenues would accrue to Burlington and Chicago & Northwestern, but when translated into share earnings, other roads are found to fare better, as shown in the following table: On the basis of share earnings, Rock Island stockholders benefit most while among the larger roads Chicago & Northwestern comes next. Mr. PECORA. These two roads happen to be in bankruptcy or receivership, do they not, Mr. Tracy? Mr. TRACY. Yes. STOCK EXCHANGE PRACTICES 1795 Mr. PECORA. The Chicago, Eock Island & Pacific and the St. Louis & San Francisco both happen to be in receivership today ? Mr. TRACY. Yes, sir. Mr. PECORA. And their stock has only a nominal value? Mr. TRACY. That is correct. Mr. PECORA. And those were the two stocks that you singled out as being primary railroad stocks to buy in November 192$? Mr. TRACY. That is correct. Mr. PECORA. YOU did not want the other railroad stocks that had been acquired through this joint account with Dillon, Read & Co.? Mr. TRACY. I told you, Mr. Pecora, that we would have to look up to see what we owned of other railway stocks. I think we owned a great many other railway stocks at that time. Mr. PECORA. AS a matter of fact, do you not know that at that very time your investment trust, the United States & Foreign Securities Corporation, had a block of 4,000 shares of Chicago, Rock Island & Pacific Railway Co. in its portfolio ? Mr. TRACY. We may have had a small amount. I will have to look that up. Mr. PECORA. IS 4,000 shares a small amount? Mr. TRACY. For a company of that size; yes. Mr. PECORA. DO you remember what it had paid for those 4,000 shares ? Mr. TRACY. I will have to look that up. Mr. PECORA. Well, my men have looked it up for you, and the amount is $552,500; and you consider that a small block, do you, for an investment trust like the United States & Foreign Securities Corporation ? Mr. TRACY. That is not a small investment; no. Mr. Pecora, I would like to point out to the committee, with your permission, the range of the price of the stock of the Rock Island after we purchased it, and the volume of sales. Mr. PECORA. Over what period of time. Mr. TRACY. I would like to give it any time up to April 18. I have got it here. Mr. PECORA. DO you mean beginning with November 11, 1929 ? Mr. TRACY. Beginning with November 1, 1929. Mr. PECORA. Can you not give us the range instead of giving us the daily quotations? Mr. TRACY. Beginning with November 9: High 115; low 101. Mr. PECORA. NO ; can you not give us the range between high and low over that period of time? Mr. TRACY. Over this period of time from November 1 to April 18 the high was 125% in the week of February 8-14, and the low was 101 on November 15, and the total sales were 117,000 shares. Mr. PECORA. The first date that you mentioned was November 1, I believe, 1929? Mr. TRACY. Yes. Mr. PECORA. What was the range on that date in Mr. TRACY. November 1 to November 8 was Mr. PECORA. NO; on November 1. That one day. Mr. TRACY. Well, I have not got it that one day. the market? 1796 STOCK EXCHANGE PRACTICES Mr. PECORA. What was the range for the week? Mr. TRACY. The range for the week? Mr. PECORA. Yes. Mr. TRACY. High is 125, and the low 112%, and the volume 16,000 shares. Mr. PECORA. May I look at that sheet? Mr. TRACY. Certainly. [Handling same to Mr. Pecora.] Mr. PECORA. The range as I get it from the sheet that you have given me for the week of November 9 to 15 was a low of 101 to a high of 115; is that correct? Mr. TRACY. Correct. Mr. PECORA. That is a pretty substantial range, is it not, for a week's time ? Mr. TRAOY. Not in that week, Mr. Pecora. Mr. PECORA. DO you mean by that that that week witnessed an unusual amount and kind of trading among railroad stocks ? Mr. TRACY. One thing that I remember very distinctly about that week is that November 15 was a very bad day. Mr. PECORA. DO you mean that at that particular period of time security values were undergoing sharp fluctuations from day to day? Mr. TRACY. Yes. Tremendous volume of sales. Mr. PECORA. Yes. And did you think that under those circumstances it was wise for your investment trust to invest large sums of money in securities that were undergoing these sharp fluctuations from day to day ? M. TRACY. Yes; we did. As I told you before, Mr. Pecora, we wanted to buy railroad securities. And I want the committee to know that the Rock Island earned $2.70 in the month of October of that year, which we knew when we bought these securities. Mr. PECORA. And we see that during the second week of that month, and in fact during the very week in which you had this transaction with Dillon, Read & Co., the market ranged from 101 to 115 in this security. Mr. TRACY. That is correct. And stibsequently sold at 125. Mr. PECORA. And you thought it was wise at that time for an investment trust to put its funds in securities that were the subject of such wild or sharp fluctuations ? Mr. TRACY. We certainly did, as I told you, Mr. Pecora, and that is why we bought it. And with your permission I would like to make this price range and the volume of sales a part of the record. Mr. PECORA. Yes. Put it in evidence. The CHAIRMAN. Let it be received in evidence and spread upon the record. (Chart containing high and low, as well as volume of sales of Chicago, Rock Island & Pacific common stock between November 1, 1929 and April 18, 1930, was received in evidence, marked " Committee Exhibit 17 of October 10, 1933," and is here printed in the record in full as follows:) 1797 STOCK EXCHANGE PRACTICES COMMITTEE EXHIBIT NO. 17, OCT. 10, 1929 Chicago, Rock Island & Pacific Ry. Co., common: Nov. 1-8 _. Nov. 9-15 Nov. 16-22.,___ Nov. 23-29 Nov. 30-Dec. 6_ Dec. 7-13 Dec. 14-20 Dec. 21-27 Dec. 28-Jan. 3.. Jan. 4-10 Jan. 11-17 Jan. 18-24 High 125 115 11934 122 i2iy2 120H H6M II8J/2 118 Low 1123^ 101 117 115% 1173^> 113 112 UV/s 114 1153^ 1163^2 Volume 16,000 16,700 7,500 2,200 5,800 6,700 5,700 4,000 2,900 1,500 4,200 2,800 1930 Chicago, Rock Island & Pacific Ry. Co., common—Continued. Jan. 25-31 Feb. 1-7 Feb. 8-14 Feb. 15-21 Feb. 22-28 Mar. 1-7 Mar. 8-14 Mar. 15-21 Mar. 22-28 Mar. 29-Apr. 4_ Apr. 5-11 Apr. 12-18 1933 High 119% 120^1 125^ 12134 Low 117 119% 120 115H 120 118 119H H7M 017% 122 124 1243^ 120 122 122 118^4 118K Volume 3,200 4,800 8,300 1,800 1,600 3,600 1,600 6,800 3,200 1,500 3,800 8,000 117,000 Mr. PECORA. May I have that sheet that the witness just asked to have spread on the record. First, let me ask you: Who compiled the data shown on this sheet that has been marked " Committee exhibit 17"? Mr. TRACY. The Keswick Corporation. Mr. PECORA. When? Mr. TRACY. Yesterday, I would say. Mr. PECORA. YOU observe that according to committee exhibit 17, which was prepared yesterday by the Keswick Corporation, the total week's volume of transactions in the open market in the common shares of the Chicago, Rock Island & Pacific Railway Co., was 16,700 shares. Mr. TRACY. I will accept your statement. Mr. PECORA. And that the range at which they sold was from a low of 101 to a high of 115; is that right ? Mr. TRACY. That is correct. Mr. PECORA. On November the 11th, which is included in this week, your investment trust purchased 13,700 shares of this stock from Dillon, Read & Co., did it not? Mr. TRACY. Correct. Mr. PECORA. At a price of 114 plus ? Mr. TRACY. That was the average market price. Mr. PECORA. And that happened to be pretty nearly the high for that week? Mr. TRACY. If that says so. But that was the market price on the date the sale was made. Mr. PECORA. But I am basing my conclusion on the assumption that these figures compiled by the Keswick Corporation yesterday are accurate. On that assumption the price at which your investment trust took over these 13,700 shares from Dillon, Read & Co., on November 11, happens to be very nearly the high for that week. Mr. TRACY. That is correct. Mr. PECORA. That is pure coincidence, of course, is it not? Mr. TRACY. A S I remember it that was the low week in that particular panic. 1798 STOCK EXCHANGE PRACTICES Mr. PECORA. Oh, was there a panic that week, too ? Mr. TRACY. I think there was a panic going on all that time. Mr. PECORA. Well, that.week it was especially violent? Mr. TRACY. The latter part of the week was fairly violent, as I remember it. Mr. PECORA. And your judgment as a director and as president of this investment trust was that it was a good thing to buy 13,700 shares of one railroad security during a panic week? Mr. TRACY. Yes, sir. Senator COTTZENS. Mr. Pecora, may I draw your attention to the report on the Rock Island Lines by Coverdale & Colpitts, page 121, where it says: We regard as an element of great strength to the company— that is, the Rock Island— the fact that its affairs are presided over by Mr. Charles Hayden as ciiairman of the board, Mr. E. M. Brown as chairman of the executive committee, and Mr. J. E. Gorman as president. I should imagine that had some influence in their purchase of these securities. Mr. PECORA. Mr. Charles Hayden at that time was a director of the United States & International Securities Corporation, was he not? Mr. TRACY. Correct. Senator COUZENS. But both investment trusts were controlled by the Dillon, Read & Co. interests. Mr. PECORA. Yes. The record is already replete with considerable evidence on that. Senator COUZENS. Yes. Mr. TRACY. I think it would be fair, Mr. Pecora, to give the range by weeks subsequent to that purchase, so that the gentlemen of the committee will know Mr. PECORA. Wait a minute, Mr. Tracy. You did not buy these shares from Dillon, Read & Co. on November 11 because of what you knew was going to happen in the weeks to follow, did you ? Mr. TRACY. Because we believed they were a good purchase at the time we purchased them. Mr. PECORA. All right. You told us that. But that belief was not based upon any preknowledge of what was going to happen in the weeks to come ? Mr. TRACY. NO. We do not profess to any preknowledge. Mr. PECORA. Then there is no sense in putting that in. Mr. TRACY. But the price of the stock went up; it did sell considerably higher after we had made that purchase. Mr. PECORA. All right. Mr. TRACY. Mr. Pecora, may I ask you something? You asked me why we did not want to buy the other securities that were in that account. Mr. PECORA. The other railroad securities that were in the account. Mr. TRACY. Yes. The list of railroad stocks that we had on that day already in our portfolio included: 5,000 shares of Atchison, Topeka & Santa Fe; 1,000,000 marks of Deutsche Reichsfyahn, 7 percent preferred stock; 10,000 shares of Pennsylvania Railroad; 1,000 shares of Pere Marquette; 10,000 shares of Southern Pacific Co.; STOCK EXCHANGE PRACTICES 1799 10,000 shares of Southern Eailway Co.; and 8,000 shares of Union Pacific Eailroad Co. Mr. PECORA. While we are going back to the questioning of a few minutes ago, have your associates succeeded in supplying you with the definite information as to the form of payment that was made by Dillon, Eead & Co. when this joint trading account was terminated on November 9 ? Mr. TRACY. They have not been able to get it yet, Mr. Pecora. Mr. PECORA. Well, they were to get it in 15 mintues, and half an hour has passed now. Mr. TRACY. They said they thought they could get it in 15 minutes. They have gone back to the hotel to get it for me, Mr. Pecora. Mr. PECORA. All right. You regarded the funds of these two investment trusts of which you were president at that time as trust funds? Mr. TRACY. We were responsible to the stockholders for the investment of their money. Mr. PECORA. And you regarded them in that sense as trust funds committed to your care and custody for investment and reinvestment? Mr. TRACY. Correct. Mr. PECORA. And you regarded yourself as a trustee for the stockholders of these two investment trusts, did you not ? Mr. TRACY. Certainly. I was responsible to the stockholders. Mr. PECORA. And do you think that it was sound judgment to discharge that kind of responsibility by buying railroad shares during a panic week in the stock market? Mr. TRACY. I do. Mr. PECORA. With prices fluctuating as much as 14 points in 1 week ? • Mr. TRACY. I certainly do. We thought those securities were very cheap, and that is why we purchased them. Mr. PECORA. Did you happen at the same time to invest any of your own personal moneys in these railroad shares ? Mr. TRACY. I do not remember that I did in those particular ones.. Mr. PECORA. If they were good enough for the investment trust they would be good enough for you, would they not ? Mr. TRACY. Well, you see the security companies were long in cash. I do not think that I was very long in cash at that time. Mr. PECORA. Did Dillon, Read .& Co. give you any reason at that time why they were willing to sell these railroad shares that you thought were a mighty good purchase for the investment trust? Mr. TRACY. NO ; Dillon, Eead & Co. gave me no reason. Mr. PECORA. Did you have to argue with them to induce them to sell their shares to you? Mr. TRACY. I do not recall that there was any argument with them. Mr. PECORA. Did you have any difficulty in inducing them to sell to you? Mr. TRACY. Oh, we wanted to purchase those securities. Mr. PECORA. And they readily agreed to sell, did they ? Mr. TRACY. And they agreed to sell. I do not remember the discussions. Mr. PECORA. Without much argument? 1800 STOCK EXCHANGE PRACTICES Mr. TRACY. I do not remember the discussions. We had a lot of money at that time, Mr. Pecora, to invest. The CHAIRMAN. Mr. Hayden was one of your directors, was he? Mr. TRACY. He was not a director of the United States & Foreign Securities Corporation, Mr. Chairman. He was a director of the United States & International Securities Corporation. The CHAIRMAN. Were any of the directors in the United States & Foreign Securities Corporation interested in the St. Louis & San Francisco road? Mr. TRACY. Yes. I believe Mr. Ecker was on the board of the Frisco. Mr. PECORA. Let me ask you this, Mr. Tracy. If Dillon, Read & Co. had attempted to dispose of these 13,700 shares at that time in the open market they would not have gotten anything like 114 and a fraction, would they, where the high for the week was 115, and the total volume of trading for the entire week was 16,700 shares ? Mr. TRACY. I certainly think that Dillon-Read could have sold them in the open market and probably realized a higher price ever a period of a few weeks. I think the records will show—— Mr. PECORA. IS that not contrary to all stock market experience? Mr. TRACY. I beg your pardon. Mr. PECORA. IS that not contrary to all stock market experience, which is that where the holder of a large block of shares of a certain security disposes of them in the open market that the price goes down instead of up ? Mr. TRACY. If you had put on the market at that period 20,000 shares of Steel you would put Steel down—or any other active stock at that time. Mr. PECORA. YOU gave DiMon, Read & Co. the market price, which happened to be 114 plus ? Mr. TRACY. Correct. Mr. PECORA. And when you did that did you not realize that if Dillon, Read & Co. had attempted to dispose of their 13,700 shares in the open market at that time they would have had to sell in a declining market? Mr. TRACY. I do not think I was thinking of Dillon, Read & Co. I was thinking of the company. If we had gone out to purchase that stock over a period of weeks we would have had to pay a higher priceMr.. PECORA. But if Dillon, Read &r Co. had wanted to sell in the open market they would have had to take a good deal less than 114, would they not? Mr. TRACY. If they had gone out and sold it at one fell swoop and1 broken the market; but I do not think they would have done that. Mr. PECORA. SO Dillon, Read & Co. got all the benefit from the transaction in that way? Mr. TRACY. STO. I think, looking at it as we did, and as we still do, I think we could not have gone out and purchased a block of that size without putting the market up. Mr. PECORA. And they could not have sold without putting the market down?: STOCK EXCHANGE PRACTICES 1801 Mr. TRACY. I do not think so on that day, but if they could have sold it over a period of weeks, as the market transactions will show, they probably would have averaged a higher price for it. Mr. PEOORA. Did you discuss the acquisition of these shares for the United States & Foreign Securities Corporation with Mr. Charles Hayden? Mr. TRACY. NO. I do not think I did. He was not on the board of the United States & Foreign. Mr. PECORA. He was on the board of the United States & International ? Mr. TRACY. Correct. Mr. PECORA. And there was a very close community of interest between the two investment tru,sts? Mr. TRACY. Yes. Mr. PECORA. And he was also chairman of the board of the Rock Island Railroad, was he not, at that very time? Mr. TRACY. Yes; he was. Mr. PECORA. Did you not think his opinion at that time might have been of some special value to you ? Mr. TRACY. Well, we had these reports; we had the opinion of all the directors, and they all thought very highly of the investment. If I met Hayden I would have probably spoken to him about that. I often consulted him and a$ked his opinion about railroad securities. Mr. PECORA. DO you know that you talked with every member-of the board of directors of the United States & Foreign Securities Corporation before you concluded this purchase from Dillon, Read &Co.? Mr. TRACY. It is my practice to reach every director Mr. PECORA. Did you in this particular case succeed in reaching all the directors? Mr. TRACY. I cannot remember in. this particular case. I say it is my practice to try to get in touch with all the directors. Mr. PECORA. It is your practice to try to get in touch with them, but do you always succeed ? Mr. TRACY. Not if they are out of town, if they are away. Mr. PECORA. Did you succeed in this particular instance in reaching all the members? Mr. TRACY. AS I remember, I reached most of them. Mr. PECORA. HOW did you reach them? By telephone? Mr. TRACY. By telephone. Mr. PECORA. Then there never was a meeting of two or more of the directors at which opinions pro and con were expressed on the proposition, was there? Mr. TRACY. We had discussed the Frisco Railroad and the Rock Island. Mr. PECORA. Can you not answer that question " yes " or " no " ? Mr. TRACY. Dozens of times at officers' meetings and directors' meetings. Mr. PECORA. N O ; I am talking about this transaction. Mr. TRACY. Not that particular transaction, except by telephone, as I remember it. There may have been an officers' meeting, but I do not recall it. 1802 STOCK EXCHANGE PRACTICES Mr. PECORA. HOW many shares did this investment trust called the United States & Foreign Securities Corporation purchase from Dillon, Bead & Co., of the St. Louis & San Francisco Railroad Co. ? Mr. TRACY. May I look that up ? Mr. PECORA. Yes. Mr. TRACY. We purchased from Dillon, Eead & Co., St. Louis & San Francisco Railway Co. common stock 16,050 shares, at a cost of $1,793,587.50. Mr. PECORA. Was that the market price as of November 11, 1929? Mr. TRACY. Yes, sir. That was the market. Mr. PECORA. And those 16,050 shares were the 16,050 shares that Dillon, Read & Co. acquired upon the termination of this joint account on November 9, 1929, were they not ? Mr. TRACY. That is correct. Senator COTJZENS. I would like to ask Mr. Tracy if the fact that these railroads were so closely related to each other, as shown in these reports of Coverdale &»Colpitts, influenced you in selecting the common stocks of these two railroads? Mr. TRACY. NO, sir. Senator COTJZENS. I notice in reading the report that you received on the Frisco from Coverdale & Colpitts on September the 6th that it says: The Frisco is fortunate in the fact that its affairs are presided over by eminent railroad executives—Mr. E. N. Brown as chairman of the board and Mr. J. M. Kurn as president. In the report on the Eock Island Line from which I just read the same Mr. E. N. Brown is referred to as chairman of the executive committee. In other words, they are both operated by substantially the same officials, and I wondered whether that influenced the trust in selecting these two stocks. Mr. TRACY. NO, sir. We had reports made on a number of railroads at that time that we did not go into. Mr. PECORA. Who proposed that the United States & International Securities Corporation acquire these large blocks of the bonds of the Seaboard Air Line Railway Co. that were referred to in your examination last Friday? Mr. TRACY. That was discussed as usual at the board meetings and officers' meetings. Mr. PECORA. IS there any reference to any such discussions in any minutes of the meetings of the board that you canfind? Mr. TRACY. I do not think those would have been. It would not have been usual for us to have put it in the minutes of the meetings. Mr. PECORA. AS a rule, what went into the minutes of the board meetings ? Mr. TRACY. At the board meetings? Mr. PECORA. Yes. Mr. TRACY. The purchase and sale of securities. What we had done; what actions we had taken. Our discussions were never written up in the minutes. I do not know of any board, Mr. Pecora, where they are, myself Mr. PECORA. Well, I do. I know of many boards where the minutes contain a fairly complete statement of the business transacted at the meetings. Meetings of important corporations, too. You STOCK EXCHANGE PRACTICES 1803 say you have never been connected with a corporation whose board5 kept minutes that fairly recorded the activities of the board? Mr. TRACY. Our minutes record everything that we have done. Mr. PECORA. Let me see if they did. Let me have that minute* book of the United States & Foreign Securities Corporation again,,, will you? Mr. TRACY. I think you will find that all our transactions wererecorded. Mr. PECORA. All right. As I understood your testimony last week: the custom at bqard meetings was for a report to be made of transactions that had already been consummated by or on behalf of the investment trust at the meeting held after the consummation of such transaction. Is that right? Mr. TRACY. That is right. Mr. PECORA. Let us now turn to the minutes of the meeting of the board of the United States & Foreign Securities Corporation held on November 13,1929. These minutes are set forth at pages 490 and 491 of the minute book that you have handed me. The only business that appears to have been transacted at that meeting was as follows—and I am going to read it right from the record. After reciting the names of those present who acted as officers the minutes read as follows: The minutes of the last meeting of the board of directors held on October '9;. 1929, were presented to the meeting, and, on motion duly made and seconded, were unanimously approved as recorded. A financial report of the treasurer of the corporation for the month of October 1929, covering transactions during such month, was presented to the meeting, and after discussion of this report and of the securities held by the corporation,, the following resolution was, on motion duly made and seconded, unanimously, adopted: Resolved), That the report of the treasurer of the corporation covering transactions of the corporation during the month of October 1929, copies of which have been submitted to this meeting, and all the transactions therein set forth,, hereby are in all respects approved, ratified, and confirmed. There being no further business to come before the meeting, it was, on motion; duly made and seconded, unanimously resolved to adjourn. • You notice, do you not, from my reading of these minutes that on November 13,1929, absolutely no mention was made, according to the minutes, of thi(s transaction consummated on November 11, 1929, through the medium of which millions of dollars of the funds of the investment trust were invested in two railroad securities? Mr. TRACY. Mr. Pecora, I think I testified already this morning that the transactions of the month previous were always reported at the meeting the following month. At the meeting the following month all the transactions for that month were recorded. Mr. PECORA. Well, now, let us see where we stand. Senator COUZENS. Just a minute, Mr. Pecora. This minute book that you just read approves of all of the activities of October without any reference to what the activities are. Mr. PECORA. Except that they are set forth in the report which is attached to the minutes. Mr. TRACY. Attached as a part of the minutes. The CHAIRMAN. That is the treasurer's report, isn't it? Mr. PECORA. Treasurer's report. 175541—33—PT 4 18 1804 STOCK EXCHANGE PEACTICES The CHAIRMAN. The treasurer's report is made a part of that record. Mr. TRACY. That is for the previous month, covering everything jthat we have done in the way of purchases and sales. Mx- PECORA. Apparently the next meeting that the board of directors of the United States & Foreign held was held on November .22, 1929, and that happens to be referred to as a special meeting. Mr. TRACY. Special meeting. Mr. PECORA. I S there anything in those minutes to show that the ^natjer of the acquisition of these shares of the Chicago, Rock Island & Pacific and of the St. Louis & San Francisco Railway Co. was brought to the attention of the board? Mr. TRACY. In normal course of our business, it would not have been recorded until the December meeting. Mr. PECORA. All right; we will look at the December meeting. Senator COUZENS. AS a matter of fact, Mr. Tracy, wouldn't it be hard to rectify any error that might have been committed by the officers when they just simply accept the treasurer's report? In .other words, the directors just ratify rather than to authorize? Mr. TRACY. If any one director objects to any securkry that has been fought we dispose of it. Senator COUZENS. Yes, but you may have to dispose of it at a great loss. Mr. TRACY. Yes, sir; but I think I testified that I got in touch with all of the directors about this purchase. Senator COUZENS. Of course, there is no record of that, is there? Mr. TRACY. NO record of it. Mr. PECORA. According to the minutes held on December 11, 1929, a treasurer's report was made and ratified and approved by the board covering the transactions of the corporation during the month of November 1929, a*h'd the copy of such treasurer's report, which is made part of the minutes of this meeting, states as follows with regard to these two particular railroad stock transactions: Purchases as follows; in the amounts and at the prices indicated: C. Chicago, Rock Island & Pacific Railroad Co. common, 13,700 shares at $114.25, a total of $1,565,225, from Dillon, Read & Co. D. St. Louis-San Francisco Railway common, 16,050 shares at $111.25, a total ,of $1,793,587.50, from Dillon, Read & Co. That is the only mention I see in the treasurer's report with regard to these two transactions. Am I to conclude that that is the only mention that can be found in the minute book anywhere regarding the action taken by the board of directors with regard to these two transactions ? Mr. TRAGY. I presume that is correct. Mr. PECOEA. There is nowhere in the minutes any discussion, any reference to a discussion having been had, among the directors and a decision arrived at by them to buy these shares and to make this investment of over three million and a quarter dollars to the benefit of the trust, is there ? Mr. TRACY. It is not recorded in the minute book; no. I t is not usual for us to do it. Mr. PECORA. It appeared from evidence submitted last Friday that portfolio statement as of December 31, 1932, which was made by the STOCK EXCHANGE PRACTICES 1805 United States & International Securities Corporation to its stockholders, showed that there had been a total shrinkage in value of portfolio securities of $26,562,400 up to that date, December 31,1932, and that of that total shrinkage $11,192,512 had occurred in the securities of the Chicago, Eock Island & Pacific Railway and the St. Louis & San Francisco Railway Co., or approximately 42 percent of the entire loss represented by the depreciation in value of all the securities in your portfolio was represented by the shrinkage in these two particular issues. Mr. TRACY. I have not figured out the exact percentage. I know it was a very large amount. But in spite of that we still have a value of $90 for every $100 the public put into that company. Mr. PECORA. And you would have had a good deal more than $90 if you had not bought these shares of these two railroad companies that were more or less under the supervision of a member of the board of the United States & International Securities Corppration ? Mr. TRACY. Yes; but we did not make that purchase on his recommendation. Mr.. PECORA. Did you avoid Mr. Hayden's recommendation? Mr. TRACY. NO ; I would not say that I avoided it. I would say that I talked to him. Mr. PECORA. YOU did not even seek it, did you? Mr. TRACY. I think I talked to him a great deal about it. Mr. PECORA. Well, did he recommend it ? Mr. TRACY. He thought very highly of his road. Mr. PECORA. Did he recommend these particular purchases? Mr. TRACY. NO, not to my knowledge; he never recommended it. Mr. PECORA. Did you think it advisable to seek his judgment about :it at the time ? Mr. TRACY. AS I said, Mr. Pecora, I talked to him at great length .•about it. Mr. PECORA. Did you seek his judgment with regard to these particular transactions at the time of the transaction? Mr. TRACY. I don't remember doing that at all; no. I saw Mr. Hayden frequently and always talked to him about the railroad. The CHAIRMAN. Have you any idea, Mr. Tracy, what was operating to cause a shrinkage in value of these particular stocks at that time? Mr. TRACY. Between 1829 and 1932, Mr. Chairman? The CHAIRMAN. Yies.. Mr. TRACY. All securities were going off tremendously in value. The CHAIRMAN. I knotf, but these seem to have suffered most of all apparently. Mr. TRACY. Those particular railroads, unfortunately, happened to be in receivership,. The CHAIRMAN. Yes. Mr. TRACY. But taking our securities as a whole, our shrinkage has been very small, and I think there were very few companies formed at the time that company was formed, I don't think there is *one, that can show the record we have in maintaining our assets in the way we did, in spita of those losses. The CHAIRMAN. 'But what were the elements or factors operating with reference to these ?two railroads during that period of time that • caused this ( l i i i i 1806 STOCK EXCHANGE PKACTICES Mr. TRACY. I have some figures on railroads that I would like to show you. I think it will enlighten you. The CHAIRMAN. With particular reference to these particular roads, that is all. Those are the ones we are concerned about, theseparticular roads. Mr. TRACY. Mr. Chairman, I find that I have the figures here. All class 1 railroads in 1929 had a gross of $6,279,000,000. The Rock: Island had a gross of $147,000,000 and the Frisco of $89,000,000. In 1932 all of the class 1 railroads had a gross of $3,126,000,000; or about one half. The Eock Island had a? gross of $70,000,000, or just a little less than a half of what it was in 29. The Frisco had a gross of $42,600,000 against $89,100,000 in '29. In other words, their revenue went off about the same as the average for all class 1 railroads. Mr. PECORA. Mr. Tracy, have your associates been able up to the present moment to obtain the information as to how Dillon, Read & Co. paid the United States & International for the railroad shares that it had acquired on the termination of the joint account on November 9, 1929 ?# Mr. TRACY. Dillon, Eead & Co. credited the account of the United States & International Securities Corporation with $7,131,184.62. Mr. PECORA. That is, they merely placed a credit on their books to the account of the United States & International for one half of the 14 odd million dollars that had been laid out by the United States & International for the operation of the joint account; is that right? Mr. TRACY. That is right. Then on the order of the United Stateside International Securities Corporation Dillon, Kead & Co. paid part of these funds to the Chase National Bank to the credit of the United States & International Securities Corporation and part to the Central Hanover Bank & Trust Co. for the credit of the United States & Foreign Securities Corporation. Mr. PECORA. Why was it done in that way, Mr. Tracy ? Mr. TRACY. I don't remember the details of the transaction, but I can get it for you. I am not familiar with the bookkeeping end of it. Mr. PECORA. NOW, these securities of the Chicago, Eock Island & Pacific Eailroad and of the St. Louis-San Francisco Eailway eventually found their way into the portfolio of the United States & International Securities Corporation, didn't they? Mr. TRACY. The ones owned by the Mr. PECORA. The ones which the United States & Foreign Securities Corporation took over from Dillon, Eead & Co. on November 11, 1929. Mr. TRACY. Eventually found their way into Mr. PECORA. Into the portfolio of the United States & International Securities Corporation. Mr. TRACY. I will have to check that up and find out. [After conferring with associates:] Yes; that was sold in December 1929 to the United States & International Securities Corporation. Mr. PECORA. What price ? Mr. TRACY. I will have to look that up. [Conferring with associates:] They are looking up the market price, Mr. Pecora, what the market was at that time. STOCK EXCHANGE PRACTICES 1807 Mr. PECORA. DO you recall whether the market price was less than the market price on November 11, 1929 ? Mr. TRACY. I will have to look that up. [Addressing an associate:] Have you got that figure? [After a pause:] $111.84. We paid $114.25 and sold it at the market, which was $111.84. So there was a loss of Mr. PECORA (interposing). You are referring now to the Rock Island stock? Mr. TRACY. Yes; Rock Island. Mr. PECORA. NOW, the United States & Foreign paid Dillon, Read & Co. on November 11 for these 13;700 shares $114.25 per share; is that right? Mr. TRACY. That is correct. Mr. PECORA. And then in December—what was the specific date' in December, by the way? Mr. TRACY. December 31. Mr. PECORA. And on December 31, the end of the fiscal year 1929, the United States & Foreign Securities Corporation sold those shares to the United States & International Securities Corporation for 111 and a fraction? Mr. TRACY. The market; yes. Mr. PECORA. That was then the market? Mr. TRACY. Then the market. Senator COUZENS. Was the whole amount sold, the whole 13,700 shares sold? Mr. TRACY. I will have to look that up. [After conference with associates]. Yes; it was, Senator. Mr. PECORA. And on the same date, December 31, 1929, did the United States &> International Securities Corporation buy from the United States & Foreign Securities Corporation the 16,050 shares of the St. Louis-San Francisco Railway Co. stock? Mr. TRACY. Yes; they did. Mr. PECORA. At what price? Mr. TRACY. $105.22. Mr. PECORA. The United States & Foreign had paid Dillon, Read .& Co. on November 11, 1929, $111.75 for that stock? Mr. TRACY. That is correct. Mr. PECORA. Yes. Senator COUZENS. Was that done for the purpose of creating a loss in making your income-tax return? Mr. TRACY. That is done for the purpose, Senator, of offsetting— partly offsetting—our profits, and to give a truer picture of the year's operations. Senator COUZENS. Well, but that'was not really the true picture, because you were transferring from one investment trust you controlled to another investment trust you controlled, and you created automatically a loss which you used to offset your profits? Mr. TRACY. That is right. Mr. PECORA. The preferred stockholders of the United States & International Securities Corporation were not the same individuals as constituted the preferred stockholders of the United States & Foreign, were they? Mr. TRACY. NO, sir; they were not. 1808 STOCK EXCHANGE PRACTICES Mr. PECORA. But the two accounts were practically officered by the same men, weren't they ? Mr. TRACY. Well, I was president of both corporations. Mr. PECORA. Yes; and they had members of the Board of Directors in common; interlocking directors? Mr. TRACY. I think Mr. Dillon and I were the only two members in common on both boards. Mr. PECORA. What decision, or rather what consideration,, prompted the directors of the United States & Foreign in December,. 1929, from selling their railroad holdings they were so keen to» acquire in November 1929? Mr. TRACY. We sold them to offset profits. Mr. PECORA. What do you mean by that? Mr. TRACY. They were allowed under the Internal Revenue Act. Mr. PECORA. What do you mean by that? Mr. TRACY. Well, the loss was there, and we could not record it unless we made a sale. Mr. PECORA. All right. Did you think on December 31, 1929, that railroad securities were still a good thing to acquire for an investment trust? Mr. TRACY. I did. Mr. PECORA. And why didn't you give the stockholders of theUnited States & Foreign the benefit of that judgment by retaining in its portfolio these railroad securities ? Mr. TRACY. Because we wanted to sell them, as I told you, tooffset profits. Mr. PECORA. Well, having sold them, you divested the stockholders of the United States & Foreign of the right to make profits by an improvement in the market, didn't you? Mr. TRACY. NO, I won't admit that. Mr. PECORA. Well, you still thought that the acquisition of railroad shares was a good thing for an investment trust on December 31, 1929, didn't you? Mr. TRACY. Yes, I Mr. PECORA. Why did. didn't you then exercise that judgment for the benefit of the stockholders of the first investment trust which bought these shares from Dillon, Read & Co., if they were a good thing for an investment trust to hold ? Mr. TRACY. Because we decided to sell them at that time to offset profits. Mr. PECORA. Well, did you thereafter reacquire them? Mr. TRACY. I beg your pardon ? Mr. PECORA. Did the first inyestment trust thereafter reacquire these shares? Mr. TRACY. I don't think so. Not to my recollection. Mr. PECORA. If the object of this transfer by the United States & Foreign to the United States & International was to offset profits for the benefit of the United States & Foreign, that result was obtained by that transaction at the end of the tax year, wasn't it ? Mr. TRACY. AS I remember it, it was the end of the year; yes. Mr. PECORA. All right then, why weren't the securities acquired after the first of the year in 1930 by the United States & Foreign, if that was the sole purpose of this transfer on December 31, 1929 ? Mr. TRACY. I don't think I understood that. I am sorry. STOCK EXCHANGE PRACTICES 1809 Mr. PECORA. Will you read the question ? (The shorthand reporter read the last question of Mr. Pecora.) Mr. TRACY. AS I remember it, we purchased the United States & Foreign Securities at that time, the year end, purchased a substantial amount of securities from the United States & International, which also included a lot of railroad securities. Mr. PECORA. Why weren't these securities acquired back again after the first of the year by the United States & Foreign if the sole purpose of transferring them on December 31, 1929, to the United States & International was to enable the United States & Foreign to* offset the shrinkage in market value against their profits for the tax year 1929? Mr. TRACT. I don't remember. Mr. PECORA. DO you know ? Mr. TRACY. I do remember that the United States & International sold a substantial amount of railroad securities to the United States & Foreign Securities Co. Mr. PECORA. When ? Mr. TRACY. Year end in 1929. Mr. PECORA. Well, I am talking about the time subsequent to the year end of 1929. Mr. TRACY. Why the United States & Foreign did not buy them back? Mr. PECORA. Yes. Mr. TRACY. Probably because the United States & International did not want to sell them. I don't remember. Mr. PECORA. YOU were the president of both. Don't you know whether that was the reason ? Mr. TRACY. I don't remember. I haven't any recollection of anything of that kind. Mr. PECORA. Well, you have a distinct recollection that the sole purpose of making the transfer on. December 31, 1929, to the United States & International was to enable the United States & Foreign to offset against its profits for the tax year 1929 the shrinkage in the market value of those two securities ? Mr. TRACY. That was the principal object of the sale. Mr. PECORA. Was there any other object sought to be attained? Mr. TRACY. Not as I remember, but I know that was the principal object of the sale. Mr. PECORA. Well, if that was the principal object of the sale, that object was fully attained by this transfer on December 31, 1929, wasn't it? Mr. TRACY. It was. Mr. PECORA. And if you still thought that railroad securities were a good thing for these investment trusts to acquire, why didn't the United States & Foreign after January 1, 1930, buy back these securities from the United States & International ? Mr. TRACY. AS I remember it, we bought a good many before the end of the—during the year end—we bought a lot more. Mr. PECORA. Did you buy these particular two issues back? Mr. TRACY. Not to my recollection. Mr. PECORA. Well, why not? Can you give any reason why you did not? Mr. TRACY. NO; I cannot give you any reason. 1.810 STOCK EXCHANGE PRACTICES The CHAIRMAN. AS I understand, the United States & International still owns these shares? Mr. TRACY. Yes; that is right. Mr. PECORA. NOW, can you explain, Mr. Tracy, why it is that in the treasurer's report to the board of directors of the United States & Foreign Securities Corporation covering the transactions for the month of November 1929 no date is assigned specifically to these two '-transactions which you say took place on November 11,1929, whereby the United States & Foreign Securities Corporation bought these two blocks of railroad shares from Dillon, Eead & Co. ? Mr. TRACY. It was not customary to put the date on. Mr. PECORA. Well, with prices fluctuating from day to day, wasn't that an important thing to put on your records'( Mr. TRACY. I don't think so. Mr. PECORA. What evidence have you in documentary form of any kind that these transactions took place on November 11, 1929? Mr. TRACY. Well, they must be recorded on the books of the company. Mr. PECORA. Can you produce any documentary evidence of any kind that establishes that as the date of these transactions? Mr. TRACY. I will have to ask the people who keep the books and accounts. [After conferring with associates.] Mr. Pecora, we can do that, of course, but it will take a little time to get it. * Mr. PECORA. NOW, Mr. Tracy, do you know of any mention anywhere in the minute book of the United States & International Securities Corporation of the decision reached by the directors of that company to take over these railroad securities from the United States & Foreign Securities Corporation? Mr. TRACY. It would be recorded in the treasurer's report for the month, in which it was done, and we discussed it. Mr. PECORA. That would be the only mention? Mr. TRACY. That would be as usual. Mr. PECORA. Have you before you all of the data necessary to enable you to tell the committee precisely how Dillon, Eead & Co. paid United States & International Securities Corporation for the railroad shares that it acquired upon the termination of the joint railroad trading account that terminated on November 9, 1929? Mr. TRACY. Dillon, Eead & Co. credited the account of the United States & International Securities Corporation with $7,131,184.62. Then on the order of the United States & International Securities Corporation, Dillon, Eead & Co. paid part of these funds to the Chase National Bank. Mr. PECORA. HOW much of these funds? Mr. TRACY. For credit of the United States & International Securities Corporation. Mr. PECORA. HOW much did it pay? You said it paid part of the funds. Mr. TRACY (addressing associate). How much? (After a pause.) We haven't got a breakdown of it. Mr. PECORA. What is that? Mr. TRACY, We haven't a breakdown of it, but I can get it for you. Mr. PECORA. At what date did Dillon, Eead & Co. make part payment to Chase ? STOCK EXCHANGE PRACTICES 1811 Mr. TRACY. I will have to get that for you, Mr. Pecora. But I am told they paid out the entire amount almost immediately. I will have to get those dates for you. It was on the same day, I am toldf, that they paid out the entire amount. Mr. PECORA. And what day wa,s it? Mr. TRACY. On the day that the Mr. PECORA (interposing). On November 11 ? Mr. TRACY. On the date the securities were taken up. I will have* to look that up on the books. I haven't the date of it here. But it was paid out immediately. Mr. PECORA. HOW about the acquisition of those large blocks of bonds of the Seaboard Air Line Eailway Co. by the United States & International Securities Corporation, who recommended their acquisition by the United States & International ? Mr. TRACY. Who recommended them? Mr, PECORA. Mr. TRACY. Yes. Well, I wouldn't remember that offhand. But the Seaboard Eailroad was the topic of discussion in a great many of our meetings. Mr. PECORA. Did Dillon, Eead & Co. have any special interest in that railroad company at that time? Mr. TRACY. They were the bankers for the Seaboard. Mr. PECORA. They were the bankers for the Seaboard, and hence were, presumably, in possession of complete knowledge of all facts respecting its financial condition; isn't that so ? Mr. TRACY. TO the best of my recollection a very complete report was made on the Seaboard Air Line situation, and Mr. PECORA (interposing). Well, that is not an answer to my question, Mr. Tracy. Mr. TRACY. Well, Mr. Pecora, if you will be kind enough to let me finish Mr. PECORA. GO ahead. Mr. TRACY. And that gave all details about the Seaboard Air Line Eailroad. So they must have been in possession of all facts. Mr. PECORA. SO far as you know, were Dillon, Eead & Co., as bankers for the Seaboard Air Line Eailway Co., in full possession of all the facts relating to the financial condition of that railroad company at the time that the United States & International purchased its bonds? Mr. TRACY. I should think so. Mr. PECORA. When the decision was arrived at by the United States & International to buy those bonds, what directors and officersof the United States & International do you recall having consulted, with before that decision was reached? Mr. TRACY. Which purchase are you now referring to ? Mr. PECORA. Of the Seaboard Air Line Eailway Co. bonds, all the bonds that it acquired. Mr. Tracy, it strikes me you ought to be able to answer the question based upon your own recollection, as to whom you consulted. Mr. TRACY. Mr. Pecora, there were some Seaboard bonds bought long before I was connected with the company. Mr. PECORA. But I am talking about the large block of bonds bought while you were president. 1812 STOCK EXCHANGE PRACTICES Mr. TRACY. If you will give me exactly what bonds they were, and the date, I will refresh my memory about it. Mr. PECORA. I gave them to you a while ago. Now, if you will turn to the report as of December 31, 1932, of the portfolio of the United States & International Securities Corporation, made by Price, Waterhouse & Co., you will find, listed under the caption " Bonds " a block of $746,500 face value of Seaboard Air Line Railway Company first and consolidated 6 percent mortgage bonds, due 1945, won't you ? Mr. TRACY. I am just getting that now, Mr. Pecora. Mr. PECORA. All right. Mr. TRACY. Mr. Pecora, according to the sheet I have in front of me, on November 12 we got $250,000 par value from the joint railroad securities trading account, and on January 27 there were $496,500 that we received on the exchange plan. Mr. PECORA. What do you mean by that? Do you mean exchange •of 6-percent bonds for the 5's? Mr. TRACY. I don't remember the details of the plan. But in general it was a plan to revamp the whole financial structure of the Seaboard Air Line Railroad Co. Mr. PECORA. YOU don't remember the details of it at all? Mr. TRACY. I can give them to you, but Mr. PECORA, (interposing). Well, give me the general terms of the exchaange if you don't know the details. Do you know those ? Mr. TRACY. I will have to get that for you. (After consulting an associate.) I haven't got that here, but we will get it for you. Mr. PECORA. NOW, can you tell us upon whose recommendation the United States & International Securities Corporation acquired for its portfolio those bonds of the Seaboard Air Line Railway Co. ? Mr. TRACY. Well, I cannot tell you specifically on whose recommendation it was made. But I am quite sure it was not made by any of the partners of Dillon, Read & Co. who might have been on the board, because they never made recommendations of their own securities. Mr. PECORA. Did they ever oppose the acquisition of their own •securities by the investment trust? Mr. TRACY. Not to my recollection. Mr. PECORA. Can you tell us who recommended specifically the acquisition of those bonds? Mr. TRACY. N O ; I could not possibly remember who specifically did it. We have had thousands of transactions, Mr. Pecora, and to try to remember who specifically recommended each transaction I think is asking too much of anyone. Mr. PECORA. Not even when the transactions are of the magnitude of the Chicago, Rock Island & Pacific or the St. Louis-San Francisco? Mr. TRACY. NO, sir. Mr. PECORA. YOU cannot Mr. TRACY. N O ; because remember any of the details ? these matters were discussed at so many meetings. Mr. PECORA. AS a matter of fact, didn't you tell us before that you discussed them over the telephone with individual directors if not at meetings ? STOCK EXCHANGE PRACTICES 1813 Mr. TRACY. Over the phone ? Mr. PECORA. Yes. Mr. TRACY. I am in constant touch with Mr. PECORA. There were large blocks of directors on the telephone. securities, both stocks and bonds, of a corporation called Louisiana Land & Exploration Co. in the portfolio of United States & International Securities Corporation, were there not ? Mr. TRACY. Louisiana Land & Explqration Co.? Mr, PECORA. Yes; and they are still in the portfolio. Mr. TRACY. Well, the original bonds were paid off at maturity, Mr. Pecora. Mr. PECORA. How about the stock? Is it still in the portfolio? Mr. TRACY. AS to the stock, we have 100,000 shares, I believe, in the International Securities Corporation. Mr. PECORA. Have you any in the portfolio of the United States & Foreign Securities Corporation? Mr. TRACY. I do not think so. Mr. PECORA. Did you ever have any? Mr, TRACY. Yes; we did have. Mr. PECORA. HOW large a block at any one time? Mr. TRACY. AS I remember, and I have forgotten exactly, but I think somewhere around. 80,000 or 90,000 shares. Mr. PECORA. And they were disposed of by United States & Foreign Securities Corporation to no one other than the United States & International Securities Corporation? Mr. TRACY. I don't believe they were. Mr. PECORA. Who recommended the acquisition of that issue by the investment trust? Mr. TRACY. The original bonds? Mr. PECORA, The bonds and stock. This block of 100,000 shares of stock, for instance, which is still in the portfolio of United States & International Securities Corporation. Mr. TRACY. I wouldn^t remember offhand, Mr. PECORA. YOU were an officer of the Louisiana Land & Exploration Co., weren't you? Mr. TRACY. I am, sir; yes. Mr. PECORA. And particularly well posted as to its financial condition and operation, aren't you? Mr. TRACY. Correct. Mr. PECORA. And were at the time of the acquisition of those 100,000 shares by your investment trust? Mr. TRACY. Correct. Mr. PECORA. Did you recommend the purchase of those shares of the Louisiana Land <& Exploration Co. ? Mr. TRACY* I don't remember, but don't think I would have done it because it is not my custom to recommend securities of any company of which I am on the board. I always give them information about it, though. Mr. PECORA. Well, apparently it was not the custom of any member of the board to recommend to the board of directors of the investment trust the purchase of any securities that that particular director might have been interested in. Is that so ? Mr. TRACY. AS a rule it was never done. 1814 STOCK EXCHANGE PRACTICES Mr. PECORA. In other words, that was the custom ? Mr. TRACY. Yes, sir. Mr. PECORA. Nevertheless, we find in the portfolio of that investment trust large blocks of securities issued by corporations in which directors of the investment trust were interested. Mr. TRACY. Oh, unquestionably. We would have to eliminate ai great many good securities if we did not do that. Mr. PECORA. YOU would have to eliminate, for instance,, such good securities as Rock Island Railroad and San Francisco Railway,, which brought a loss of over 11 million dollars to the portfolio. Mr. TRACY. That is correct. Mr. PECORA. YOU would have to eliminate those, too? Mr. TRACY. We would have to eliminate those too; yes. Mr. PECORA. And you would have to eliminate Louisiana Land & Exploration Co., too? Mr. TRACY. Well, that does not happen to be in receivership, but we would have to eliminate it; yes. Mr. PECORA. Well, it is not in receivership, but according to your statement of December 31, 1932, those 100,000 shares of stock, although costing the investment trust $278,125, thgir market value' as of December 31 last was $75,000. Mr. TRACY. Yes; that shows that. Mr. PECORA. HOW about Seaboard Airline Kail way Co., securities—and that railroad is in receivership, isn't it?' Mr. TRACY. I t is. Mr. PECORA. Will you please tell the subcommittee all the securities held in the portfolio of United States & International Securities Corporation as of December 31, 1932, that were issued by corporations of which one or more directors and officers of the United States & International Securities Corporation or with which one5 or more were identified? Mr. TRACY. I would have to check that up, because I do not know all of the directorships of Mr. Hayden, for instance, which may be something like Mr. PECORA (interposing). Could you check them up and give thesubcommittee that information this afternoon? Mr. TRACY. I do not think I can because I do not have the book here that gives directors. I would have to get that list, of Charles Hayden and Mr. Burchard, of 35 or 40. And I wouldn't want to« assert my own without going over them. Mr. PECORA. HOW about Seaboard Air Line Railway Co. securities are in the portfolio of the United States & International Securities Corporation as of December 31, 1932, with which you had been* identified in any way. Can you answer that now ? Mr. TRACY. Yes, sir; I am ready now whenever yoii are. Mr. PECORA. GO ahead. Mr. TRACY. These are companies of which I am a director and in which the United States & International Securities Corporation own securities as of December 31, 1932. Mr. PECORA. All right. Mr. TRACY. The first one appearing on the list is Empire Trust Co. The next one is American Gas & Electric Co. Mr. PECORA (interposing). Well, let us see right there STOCK EXCHANGE PRACTICES 1815 Mr. TRACY (continuing). And the next one is Mr. PECORA (interposing). One minute. In the case of the American Gas & Electric Co., according to the portfolio report as of December 31, 1932, the investment made by the investment trust in that security aggregated $1,321,683.08, didn't it? Mr. TRACY. Correct. Mr. PECORA. All right. You may proceed. Senator GOLDSBOROTTGH. The witness did not hear you, Mr. Pecora. Mr. PECORA. YOU may proceed, Mr. Tracy. Mr. TRACY. The next one is American Power & Light Co. Mr. PECORA. What is the aggregate amount of the investment made by this investment trust in the securities of that company ? Mr. TRACY. $265,000. Mr. PECORA. Plus. Mr. TRACY. Yes. It is $265,761.98. Mr. PECORA. NOW, you may continue. Mr. TRACY. The next one is National Power & Light Co. Mr. PECORA. What was the aggregate amount of the investment made by the investment trust in that security? Mr. TRACY. That amount is—let me see. Mr. PECORA. It is $95,175, isn't it? Mr. TRACY. Yes, sir. Mr. PECORA. YOU may proceed. Mr. TRACY. The next one is Amerada Corporation. Mr. PECORA. What is the aggregate amount invested in the issues of that corporation ? Mr. TRACY. $887,502. Mr. PECORA. NOW, continue, please. Mr. TRACY. Louisiana Land & Exploration Co. Mr. PECORA. And we have already got on the record the total .amount invested of that security, namely, $278,125. Is that right ? Mr. TRACY. That is right.. Mr. PECORA. NOW you may give us the next one. Mr. TRACY. United States & Foreign Securities Corporation. Mr. PECORA. First preferred stock of that company? Mr. TRACY. First preferred stock, 8,745 shares and 5,000 shares of common. Mr. PECORA. For the respective sums of $859,371.50 and $225,000. Is that correct? Mr. TRACY. That is correct. Mr. PECORA. All right. Now, are there any others? Mr. TRACY. I am looking it over now, sir. That is all that I see here. Mr. PECORA. Mr. Tracy, have you with you a copy of the charter of United States & International Securities Corporation? Mr. TRACY. Yes, we have one. Mr. PECORA. Will you produce it, please ? Mr. TRACY. Certainly. I will get it for you. The CHAIRMAN. Did those corporations pay dividends, I mean the corporations that you have just mentioned ? Mr. TRACY. Some of them did, sir, yes. I would have to go over them in .order to give you the details. 1816 STOCK EXCHANGE PRACTICES Mr. PECORA. Are you ready to answer my question now? Mr. TRACY. I have the certificate of incorporation here now. Mr. PECORA. May I have it, please? Mr. TRACY. Yes, sir. Here it is. Mr. PECORA. Have you also a copy of the charter of United States & Foreign Securities Corporation ? Mr. TRACY. Yes. We have it. Mr. PECORA. Will you please produce that also ? Mr. TRACY. Here it is. Mr. PECORA. Thank you. Now, Mr. Tracy, isn't it a fact that the original charter of United States & Foreign Securities Corporation contains the following provision, among others: 8th. In case the corporation enters into contracts or transacts business with one or more of its directors or with any firm of which one or more of its : directors are members, or with any other corporation or association of which one or more of its directors are stockholders, directors, or officers, such contract or transaction shall not be invalidated or in anywise affected by the fact that such director or directors doing it may have interests therein which are or might be adverse to the interests of this corporation, even though the vote of the director or directors having such adverse interest shall have been necessary to obligate the corporation upon such contract or transaction. No such director or directors shall be liable to the corporation or to any stockholder or creditor thereof, or to any other person, for any loss incurred by it under or by reason of such contract or transaction, nor shall such director or directors be accountable for any gains or profits realized thereon. Mr. TRACY. Yes, sir. I accept that. Mr. PECORA. And was that article 8 of the original certificate of incorporation in effect until this amendment, on or about March 12, 1930, when the original article was stricken out and the following substituted therefor: Senator ADAMS (interposing). Is that eighth article in the bylaws? or in the certificate of incorporation? Mr. PECORA. I t is in the certificate of incorporation of the company. * Senator ADAMS. Very well. You said bylaws and I wanted the record to be correct on that point. Mr. PECORA. I meant in the charter. Now, that substitute is as follows: Any contract or other transaction between the corporation and any one or more of its directors, or between the corporation and any firm of which one or more of its directors are members or employees, or in which they are interested, or between the corporation and any corporation or association of which one or more of its directors are stockholders, members, directors, officers, or employees, or in which one or more directors of the corporation are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meetings; of the board of directors which acts upon or in reference to such contract or transaction, and notwithstanding his or their participation in such action, if the fact of such interest shall be disclosed or known to the board of directors and the board of directors shall authorize, approve, or ratify such contract or transaction by the votes of a majority of the directors present at a meeting of the board of directors at which a quorum is present without counting the vote or votes of such interested director or directors. Such interested director or directors may be counted in determining whether a quorum is present at such meeting. No director or directors interested in such contract or transaction shall be liable to the corporation, or to any stockholder or creditor thereof, or to any person for any loss incurred by it under or by reason of any such contract or transaction so authorized, approved, or STOCK EXCHANGE PRACTICES 1817 ratified. Nor shall any director or directors be accountable for any gains or profits realized therein. This article 8 shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common and statutory law applicable thereto. Do you approve of the original provision of this charter that I have read? Do you think it is a proper provision to put in the charter of an investment trust whose securities are sold to the public ? Mr. TRACY. I see no objection to it. Our directors are on so many boards that if we eliminated the .securities of all companies with which our directors are connected we would have had a very restricted list from which to make our investments. Mr. PECORA. YOU see no objection to including in your charter a provision which exempts officers and directors of this investment trust from any liability whatsoever to the company, or to any of its stockholders, for any losses incurred by the investment trust in a transaction with another corporation in which a director of the investment trust is interested, even though the vote of that director was necessary to put the transaction through ? Mr. TRACY. NO. Mr. PECORA. DO you think Mr. TRACY. Yes. Mr. PECORA. Even though that is fair? the director thus exempt from liability in casting his vote might have represented an adverse interest to the investment trust ? You still think it is fair ? Mr. TRACY. Well, wait a minute, Mr. Pecora. I do not think any of our directors have ever done anything of that kind. Mr. PECORA. Whether they ever did it or not, they could have done that under the terms of this charter without being liable. Mr. TRACY. Well, a board of directors are either honest or dishonest, and if they are honest they do not do things detrimental to their stockholders. And ours have never done it. Mr. PECORA. And if the Board of Directors had desired, by a dishonest judgment, to commit the investment trust to a transaction with a corporation in which they had an adverse interest, the}?' could have done it without being liable. And if you have a dishonest board in one of these companies the security holders are just out of luck. And you think you do not put any temptation in the directors by an article of this kind. Mr. TRACY. I do not care, Mr. Pecora, what statute or article or clause you may have, if your board is not honest it makes no difference, for in that.case they will not operate the company honestly. On the other hand, if they are honest they will operate the company honestly, as this company was operated. Mr. PECORA. But nobody can guarantee the honesty of anybody. Mr. TRACY. NO, but Mr. PECORA (continuing). And here you are exempting a director who might have acted dishonestly, from any liability to your corporation by reason of any loss incurred as a result thereof, aren't you? Senator ADAMS. I do not believe this is an appropriate time for you gentlemen to get into a huddle [referring to a whispered suggestion by an associate of the witness]. Mr. NITZE. Well, there is one provision of the charter which says 1818 STOCK EXCHANGE PRACTICES Senator ADAMS (interposing). But this is a matter of examination <of the witness. Mr. PECORA. I think you are right, Senator Adams. Mr. NITZE. Well, there is one provision of the charter in which it y Senator ADAMS (interposing). But you are not being asked to answer the question. The CHAIRMAN. Mr. Pecora, when was this last language that you read substituted for the other? Mr. PECORA. On March 12, 1930, this other clause was substituted, which also exempts them from liability. The CHAIRMAN. Was that done by an act of the State legislature ? Mr. PECORA. NO ; it was done by a mere adoption of an amendment by the stockholders at an annual meeting or somi meeting of the stockholders. Isn't that so, Mr. Tracy ? Mr. TRACY. Yes, sir. PECORA. Then you say you approve Mr. TRACY. I do. Mr. PECORA. YOU think it is proper and Mr. of that sort of provision ? essential to the best interests of the investment trust to have its directors and officers protected from liability in case of any dishonest exercise of judgment by such a clause as this ? I mean in event that they should be guilty -of such action. Mr. TRACY. SO many of our directors are directors of other companies that I suppose the lawyers put that in. I think it is all right. And our company has always been run honestly, as the results show. Senator ADAMS. Mr. Tracy, aside from the question of honesty, it is a question of good judgment. You recognize that almost all human minds are influenced in their decisions by their personal interest. It may be an honest influence. This permits a man to participate in a transaction in which he has conflicting interests and in which his honest judgment may be influenced by those interests. Do you not think that that is an objectionable thing? Mr. TRACY. I think it is, in a way, Senator; but with all the directorships that a great many of our directors have we would have had to eliminate some of the best securities that there were available for investment. Senator ADAMS. Oh, not at all, because this goes this far. For instance, all Mr. Dillon has to do is to stay out and not participate in the situation. But this goes so far that any member of your board may participate and may vote upon a transaction dealing with things in which he is interested. I am only discussing it from the standpoint of the effect on his judgment. , You have demonstrated in your testimony that even your board of directors made errors of judgment, I think, in some of these very purchases. Mr. TRACY. Oh, yes. Senator ADAMS. SO you have seen fit in that to incorporate a provision setting aside the law that has been established as a result of a good deal of experience. That is, the courts in the absence of this could say to you that a director might not participate in passing upon a transaction in which he has an interest. The courts have said that that is necessary, in their judgment, to protect against these errors of judgment as well as against perhaps a violation of STOCK EXCHANGE PRACTICES 1819 the fiduciary relation. It is a question of whether or not a corporation acting as an investment trust rather than as a fiduciary should set itself up in conflict with the rule which equity courts have seen fit to establish. Mr. TRACY. Of course that was drawn up by counsel, Senator. I am not a lawyer, but I do not think that anything we put in the charter sets aside the statutes. That would not make any difference, would it ? Even if we did that in our charter and the law did not conform to that, it would not be worth anything, would it? I am not a lawyer; I am just asking you Senator ADAMS. We are discussing a question of ethics, partly, and I am just merely a country lawyer. Morals and the law, we have always thought, ought to run rather close together. Mr. TRACY. And conform. Senator ADAMS. And usually, if you find out what is the right thing to do, you will find it is the legal thing to do also. So that Mr. Tracy does not have to be a lawyer ordinarily to decide the law correctly if his ethics are sound. Mr. TRACY. That is my opinion. The CHAIRMAN. That provision would authorize you to serve two masters. Mr. PECORA. And if he served the other master on this investment trust he is immune from liability to this trust or any of its stockholders. Is not that so ? Mr. TRACY. I do not know that that has ever been the case. Mr. PECORA. That is the effect of this provision, is it not ? The CHAIRMAN. It does not require it, but authorizes it. Mr. TRACY, I dp not think we can da anything that is not legal. Mr. PECORA. If a director did anything under the law that was not legal, he is exempted from liability by this clause. Mr. TRACY. YOU know more about law than I do. I do not know anything about law. Mr. PECORA. But you still think this was a wise provision to insert in the charter ? Mr. TRACY. Our counsel did. Mr. PECORA. Did you? You are the president of the corporation. The counsel are mere hired servants. Mr. TRACY. Yes; I think it is all right. Mr. PECORA. YOU approved of it in principle ? Mr. TRACY. I approved of it. Mr. PECORA. Why was not a similar provision put in the charter of the United States & International Securities Corporations when it was organized in 1928 ? Mr. TRACY. I don't know. Mr. PECORA. If it was good in the first instance, why was it not good for the second investment trust, in 1928 ? Mr. TRACY. Counsel did not put it in; I cannot tell you. Mr. PECORA. Who organized this corporation—counsel? Mr. TRACY. NO, sir. They drew up the bylaws. Mr. PECORA. This is in the charter. They carried out the wishes of the organizers, did they not? Mr. TRACY. Yes. 175541—33—PT 4 19 1820 STOCK EXCHANGE PRACTICES Mr. PECORA. DO you recall the meeting of the stockholders held on March 12, 1930, at which this clause 8, paragraph S] of the certificate of incorporation of the United States & Foreign Securities Corporation was modified by the substitution of paragraph 8 that I have read ? Mr. TRACY. If it says so there, that was the date. Mr. PECORA. Were you present at the meeting of the stockholders? Mr. TRACY. NO, sir; I was not. Mr. PECORA. Did you participate as president and director of the United States & Foreign Securities Corporation in any discussion at which it was proposed to modify the provisions: of the original paragraph 8 of the charter? Mr. TRACY. Yes. I remember a discussion with the lawyers on that. I don't remember the details of it. Mr. PECORA. What was the reason for the change ? Mr. TRACY. I don't remember. Mr. PECORA. Did you ever know? Mr. TRACY. Undoubtedly I did know. I have discussed it with counsel. Mr. PECORA. What discussion did you have with counsel about it? Mr. TRACY. I don't remember the details of it. Mr. PECORA. DO you know any reason for the change ? Just look at the original paragraph and the substituted paragraph and see if you now can give this committee any reason for the change that was made on March 12, 1930. Mr. TRACY. NO. I don't know of any specific reason. Mr. PECORA. DO you know who proposed originally that such a change be made in the charter? Mr. TRACY. NO, I don't; I don't remember. Mr. PECORA. Did you ever recognize any necessity for a change? Mr. TRACY. I may have when I discussed it with counsel. Mr. PECORA. DO you know now the change effected by the substitution of the present paragraph 8 for the original paragraph 8 ? Mr. TRACY. I cannot say that I do. Mr. PECORA. Did you agree, as president and stockholder and officer, to a change the nature of which you did not understand? Mr. TRACY. In a matter of this kind I would accept the advice of counsel. Mr. PECORA. What advice did counsel give in the matter that influenced you to agree to it ? Mr. TRACY. He undoubtedly advised this change, and I agreed to it. Mr. PECORA. For what reason? Mr. TRACY. I don't remember the reason. Mr. PECORA. Can you tell us any reason now by comparing the original paragraph 8 with the substituted paragraph 8? Mr. TRACY. I don't remember any reason. I can ask counsel and he can give it to you and save your time. Mr. PECORA. DO you know whether or not, when the securities of the United States & Foreign Securities Corporation were offered to the public for subscription—I am referring, now, principally to the $25,000,000 worth of first preferred stock—any publication was made which apprised prospective purchasers of the first preferred stock STOCK EXCHANGE PKACTICES 1821 that the charter of this company, $25,000,000 of the securities of which they were being asked to buy, contained that provision embodied in paragraph 8 of the charter ? Mr. TRACY. I do not recall it; but I was not connected with the company at that time. Mr. PECORA. Mr. Chairman, I am suffering from a cold and hoarseness, and I would ask that the committee take a recess at this time until 2 o'clock. The CHAIRMAN. We will take a recess until 2 o'clock. (Whereupon, at 12:40 o'clock p.m., a recess was taken until 2 o'clock p.m.) AFTERNOON SESSION The subcommittee reconvened at 2 p.m., Tuesday, October 10, 1933, at the expiration of the noon recess. TESTIMONY OF E&NEST B. TEACY—Resumed The CHAIRMAN. The committee will come to order. Proceed, Mr. Pecora. Mr. PECORA. A S I recall your testimony this morning, you stated for the record the date of the acquisition of the St. Louis & San Francisco Railway stock by the United States & International Securities Corporation from Dillon, Eead & Co., and the price paid, on November 11, 1929—no. It was transferred originally by Dillon, Eead & Co. to the United States & Foreign. Mr. TRACY. Yes. Mr. PECORA. Will you state the price at which that stock was transferred on December 31, 1929, to the United States & International Securities Corporation? Mr. TRACY. I will have to look that up [after examining papers]. $105.22, according to the market as of that date. Mr. PECORA. Per share? Mr. TRACY. Yes. Mr. PECORA. DO you have the total consideration in dollars and cents? You will find it in the report of the meeting of the board of directors of January 1930. Mr. TRACY. $2,157,079. Mr. PECORA. In your testimony this morning you indicated the securities in the portfolio of the United States & International Securities Corporation as of December 31, 1932, which had been issued by companies with which you were connected or affiliated. Can you give us similar information with regard to the securities in that portfolio as of the end of last year, which were issued by corporations in which other directors of the United States & International Securities Corporation were members, or interested? Mr. TRACY. I would have to get a directors' record to check that up for you. Mr. PECORA. Can you point to any securities on this portfolio list as of December 31 last, which were issued by any corporation or corporations with respect to which no director of the United States & International Securities Corporation and no member of the firm of Dillon, Kead & Co. was interested ? 1822 STOCK EXCHANGE PRACTICES Mr. TRACY. I would be guessing at that. I would not take a chance on saying what corporations Mr. Hayden was a director of, or Mr. Brush, or Mr. Ecker. I have not a complete list of their directorships. Mr. PECORA. Calling attention to Price, Waterhouse & Co.'s report of the United States & International as of December 31, 1932, there were in its portfolio on that date, among other securities, 8,745 shares of United States & Foreign Securities Corporation first preferred, and 5,000 shares of United States & Foreign Securities Corporation common stock. Mr. TRACY. That is right. Mr. PECORA. When did the United States' & International acquire the 8,745 shares of first preferred stock of the United States & Foreign Securities Corporation? Mr. TRACY. I will have to look that up for you. Mr. PECORA. What was the total consideration paid, while you are looking up this other matter, for those 8,745 shares of the first preferred stock of the United States & Foreign? Mr. TRACY. $859,371.50. Mr. PECORA. And what was the total consideration paid for the 5,000 shares of the common stock of the United States & Foreign Securities ? Mr. TRACY. $225,000. Mr. PECORA. DO you know when the 5,000 shares of the common stock were acquired? Mr. TRACY. I will find out for you [after conferring with associates]. The preferred stock, Mr. Pecora, was acquired in October, the end of October, and the first of November 1928. Mr. PECORA. Yes. Mr. TRACY. And the common on December 12, 1928. Mr. PECORA. Were those issues purchased in the open market ? Mr. TRACY. The preferred was purchased in the open market, through Dillon, Read & Co., and the common was purchased from the United States & Foreign Securities Corporation. Mr. PECORA. DO you know whether the 8,745 shares of the first preferred stock of the United States & Foreign that were acquired, as you say, in October and November 1928 by the United States & International, and which you say were acquired through Dillon, Read & Co., were shares that were owned by Dillon, Read & Co. or any of the individual members of that firm ? Mr. TRACY. Not to my knowledge. They were purchased, as I understand it, through Dillon, Read & Co. in the open market. „ Mr. PECORA. What was the reason for the acquisition of the 5,000 shares of the common stock on December 12, 1928, of the United States & Foreign Securities Corporation ? Mr. TRACY. Those were shares that the company gave me an option on. Mr. PECORA. Under the terms of the option, what were you to pay for those shares if you exercised the option ? Mr. TRACY. $25 a share. Mr. PECORA. $25 a share. Mr. TRACY. And they sold up to $72. STOCK EXCHANGE PRACTICES 1823 Mr. PECORA. They sold up to $72. The company bought them at a little less than 50. Mr. TRACY. I will look up the price. Mr. PECORA. Say at 45. Mr. TRACY. At 45. Mr. PECORA. Five thousand shares of common for $225,000 makes ! a transaction on the basis of $45 a share; is that right ? Mr. TRACY. Yes; that is the figure. Mr. PECORA. Then, immediately upon the acquisition of those 5,000 shares at $45 a share, the company gave you an option to buy them from it at $25 a share. Mr. TRACY. That is right. Mr. PECORA. What was the reason for that, Mr. Tracy ? Isn't that an unusual transaction? Mr. TRACY. Unusual? Mr. PECORA. Yes. Mr. TRACY. I would not call it unusual. Mr. PECORA. Did you ever have any other transaction of that sort? Mr. TRACY. Any other of that sort? Mr. PECORA. Yes; where a corporation of which you are president buys in the open market, or buys from the issuing corporation, 5,000 shares of its stock at $45 a share, and immediately gives an option to its president to repurchase those shares at $25 a share? Mr. TRACY. The directors asked me what I wanted in the way of compensation, and I told them I wanted options on stock. I did not take part in their decision. Mr. PECORA. I asked you if you knew of any other kind of transaction like that. Mr. TRACY. I cannot recall any. Mr. PECORA. Then it was unusual, was it not, even within your own experience? Mr. TRACY. It may have been. I had options on stock in other companies, though. Mr. PECORA. Under similar circumstances, where you were president, and where the company went out and bought the stock at a much higher price for your benefit? Have you had those experiences ? Mr. TRACY. They bought it at the then market. Mr. PECORA. They bought it at the then market, which was $45, and gave you an option to purchase it from them at $25 ? Mr. TRACY. Correct. Mr. PECORA. YOU have never had any other transaction of that sort, have you ? Mr. TRACY. Not to my recollection, but I did not exercise the option. Mr. PECORA. What is that? Mr. TRACY. I did not exercise the option. Mr. PECORA. YOU could have. Mr. TRACY. I could have, but I did not. Mr. PECORA. The company gave it to you for you to exercise if you wished? 1824 STOCK EXCHANGE PRACTICES Mr. TRACY. Correct. I asked them for an option on stock. Mr. PECORA. Can you not tell this committee the reason why such a transaction was had ? Mr. TRACY. Well, I simply told the board that I wanted for my remuneration options on stock; that I did not want a .salary. Mr. PECORA. Were you asked if you wanted a salary for your services &s president? Mr. TRACY. I told them I did not want a salary. Mr. PECORA. Were you asked if you wanted a salary? Mr. TRACY. I believe I was. Mr. PECORA. And you declined a salary? Mr. TRACY. I declined a salary. Mr. PECORA. Was any discussion had between you concerning the question of salary they would be willing to offer you ? Mr. TRACY. NO ; I did not want any salary. That is as far as it went, as far as I was concerned. Mr. PECORA. YOU preferred to take your compensation in the form of this option? Mr. TRACY. I preferred to take my compensation in the form of an option. Mr. PECORA. Why was that preferable to you, Mr. Tracy ? Mr. TRACY. Because I felt that I would get my reward if the company was a success. Mr. PECORA. HOW much of a reward did you expect to get ? Mr. TRACY. Depending on how much of a success I made of the company. Mr. PECORA. What were the terms of the option ? Mr. TRACY. I was to be allowed to take up, as I remember it, a thousand shares per year over a period of 5 years, and I would take it up, or it could accumulate, at $25 per share, with interest at the rate of 6 percent. Mr. PECORA. Was that option given in writing ? Mr. TRACY. Yes. Mr. PECORA. Have you a copy of the option agreement ? Mr. TRACY. They are looking for it now. Mr. PECORA. All right, sir. While they are looking that up, let me ask you if, when you became president of the United States & Foreign Securities Corporation, you entered into a similar arrangement for your compensation. Mr, TRACY. Yes, sir. Mr. PECORA. In lieu of a salary? Mr. TRACY. That is right. Mr. PECORA. Then, will you produce, if you can, whatever option agreement was given to you by the United States & Foreign Securities Corporation? Mr. TRACY. Yes, sir. That is the agreement [handing paper to Mr. Pecoral. Mr. PECORA. Can you let us have this copy for the record? Mr. TRACY. Yes, sir. Mr. PECORA. I offer in evidence the copy of the agreement produced by the witness, purporting to constitute the option agreement entered into between him and the United States & International STOCK EXCHANGE PRACTICES 1825 Securities Corporation for the purchase of 5,000 shares of the common stock of the United States & Foreign Securities Corporation, which agreement is dated December 27, 1928, and is executed by the United States & International Securities Corporation by E. A. Nellis, treasurer, and by Ernest B. Tracy, this witness. The CHAIRMAN. Let it be received and introduced into the record. (The document referred to, option agreement between Tracy and United States & International Securities Corporation, December 27, 1928, was received in evidence, marked " Committee's Exhibit No. 18 ", see p. 1853.) Mr. PECORA. I offer in evidence a copy of the agreement produced by the witness, purporting to be the option agreement between himself and United States & Foreign Securities Corporation, dated December 26, 1928, executed on behalf of United States & Foreign Securities Corporation by E. A. Nellis, its treasurer, and by the witness, Ernest B. Tracy, in his individual capacity. The CHAIRMAN. Let it be received and entered in the record. (The document referred to, option agreement between Tracy and United States & Foreign Securities Corporation, December 26, 1928, was received in evidence, marked " Committee's Exhibit No. 19 ", and will be found at the end of today's record.) Mr. PECORA. The second option covered 15,000 shares. Mr. TRACY. That is correct. Senator COUZENS. Of the same stock ? Mr. PECORA. Of the same stock. Mr. TRACY. Yes. The CHAIRMAN. TO what extent have you exercised those options, Mr. Tracy? Mr. TRACY. I have not exercised them. The CHAIRMAN. Either one? Mr. TRACY. NO. The CHAIRMAN. I understood 500 shares came from one of these. Mr. TRACY. NO, sir. I have not exercised them. Mr. PECORA. The option agreement between you and the United States & Foreign Securities Corporation bears date December the 26th, 1928, and has been marked " Committee's Exhibit 19 " of this date. I notice from this option agreement, Mr. Tracy, that it covers 15,000 shares of the common stock of the United States & Foreign Securities Corporation, and that the option to you to purchase those 15,000 shares fixes a price of $25 per share. Mr. TRACY. That is right. Mr. PECORA. YOU are entitled to exercise this option in amounts of not more than 3,000 shares on or before March 1, 1929, and a similar number for each succeeding year thereafter, up to and including March 31, 1933. That is substantially correct, is it not? Mr. TRACY. Whatever that says. Mr. PECORA. Was this treasury stock that the United States & Foreign Securities Corporation agreed to sell you at $25 a share under the terms of this option? Mr. TRACY. My recollection is that it was bought in the market, but I will have to check that to be sure. Mr. PECORA. Will you please look into that and tell us ? 1826 STOCK EXCHANGE PRACTICES Mr. TRACY. I am getting those figures for you, Mr. Pecora. Purchased throughout 1928. Mr. PECORA. Can you tell us what the market value was of the common stock of the United States & Foreign Securities Corporation on December 26, 1928, the date of this option? Mr. TRACY. I can get that for you. I have not any record. Mr. PECORA. I t was considerably more than $25 a share, was it not? Mr. TRACY. Yes. Mr. PECORA. And the stock was listed at that time on the 'Sew York Curb Exchange, was it not ? Mr. TRACY. I believe it was. Mr. PECORA. HOW long will it take you or your associates to get the data which will enable you to tell the committee when the United States & Foreign Securities Corporation purchased these 15,000 shares, and the price which it paid for them ? Mr. TRACY. I have a note right here on that. We began buying them on February 20, 1928, and the first 200 shares were bought at $25.08. The next 100 shares Mr. PECORA. DO not go through the whole list. Give the period of time during which the company acquired these 15,000 shares of its stock in the market and the total purchase price. Mr. TRACY. From February 20 to October 31. The CHAIRMAN. 1928? Mr. TRACY. Yes. Mr. PECORA. What was the total purchase price? Mr. TRACY. I will have that totaled up for you, Mr. Mr. PECORA. And then while they are totaling it Pecora. they can give us the average price per share represented by these purchases. When did you become the president of the United States & Foreign Securities Corporation? Mr. TRACY. It was in the latter part of 1927, Mr. Pecora, and it was at that time that it was agreed that I should receive options at $25 per share. Mr. PECORA. Was the agreement at that time reduced to writing? Mr. TRACY. It was not. Mr. PECORA. It was only reduced to writing for the first time on December 26, 1928 ? Mr. TRACY. That is correct. Mr. PECORA. About a year or more after the agreement you say had actually been made? Mr. TRACY. That is correct. There was a long delay, as I remember it, iii drafting the agreement. Mr. PECORA. I t was a simple agreement to draft, was it not? Mr. TRACY. It was a simple agreement to draft. I did not push it. Their word was good enough for me. Mr. PECORA. With whom did you make this agreement on behalf of the United States & Foreign Securities Corporation? I mean with what officers of that corporation did you have these negotiations that culminated in this agreement providing for your compensation ? Mr. TRACY. Mr. Dillon said there was a vacancy on the board of directors and that he would like me to fill it. That was in the spring of 1927. I said I would be very glad to do so. And in the fall of STOCK EXCHANGE PRACTICES 1827 the year he asked me whether I would accept the presidency of the company, and I said I would. And they asked me what compensation 1 wanted, and I told them I wanted option warrants. They asked me if I wanted a salary and I said I did not; that I would not assume the responsibility for a salary, that I preferred to have option warrants. At that time the stock was selling, as I remember it, around 25. Mr. PECORA. It was not listed at that time, was it? Mr. TRACY. I do not remember whether it was listed or not. Mr. PECORA. Well, it was not listed, as I remember it, until February 1928 on the New York Curb Exchange. Mr. TRACY. If that is the listing date, it was not listed at that time. Mr. PECORA. Can you explain the reason for the delay of a year or more in the actual drafting and execution of this simple option agreement ? Mr. TRACY. NO ; I cannot. Mr. PECORA. And you were not pushing it at all ? Mr. TRACY. NO. Mr. PECORA. Did you have the advice of any lawyer that such* an agreement could well rest on an oral understanding? Mr. TRACY. I did not need the advice of a lawyer. Their word was good enough for me, Mr. Pecora. Mr. PECORA. Well, how about the ability of your estate in the event of your death being able to enforce this agreement of which there was no written evidence for more than a year ? Mr. TRACY. Well, during that first year, you see, I could not anyway have taken any of those options. Mr. PECORA. That is because this option agreement was not made until December 26, 1928, more than a year after ? Mr. TRACY. That is right. And at the end of the year I was entitled to take up the option. Mr. PECORA. Was there a similar lapse of time between the making of the agreement by word of mouth between you and the United States & International Securities Corporation and the actual execution of the agreement in writing? Mr. TRACY. N O ; there was not, Mr. Pecora. I remember that several drafts were drawn up and then changed by the lawyers, and they said they would get it ready. I did not push them about it. Mr. PECORA. Are you talking now about the agreement between you and the United States & Foreign Securities Corporation? Mr. TRACY. Yes. Mr. PECORA. There were several Mr. TRACY. Yes. Mr. PECORA. Submitted to you? Mr. TRACY. Yes. Mr. PECORA. Did you object to drafts drawn up by lawyers? any of the provisions in those various drafts that caused you to reject them? Mr. TRACY. NO, sir; not that I remember. Mr. PECORA. Why was not the first one of those agreements drafted actually executed between the parties? Mr. TRACY. I cannot remember the details. Of course I took my draft and submitted it to my counsel and had him go over it. I 1828 STOCK EXCHANGE PRACTICES do not even remember whether we made any changes, because in substance what I was to get was an option on stock at 25. Mr. PECORA. I thought a few moments ago you said you did not have to consult a lawyer and did not consult a lawyer for your own personal guidance. Mr. TRACY. I do not think that was the question that you asked me, Mr. Pecora. Mr. PECORA. Well, what question did you think I asked you to which you made answer that you did not find it necessary to consult a lawyer. Mr. TRACY. I would like to have it read to me, if I may. Mr. PECORA. What transaction did you think I was questioning you about when you answered that you did not find it necessary to consult a lawyer? Mr. TRACY. Well, I will have to find out what the question is before I can answer that question, Mr. Pecora. (Thereupon the following was read by the reporter, as above recorded:) • Mr. PECOKA. Did you have the advice of any lawyer that such an agreement could well rest on an oral understanding. Mr. TRACY. I did not need the advice of a lawyer. Their word was good enough for me, Mr. Pecora. Mr. PECORA. The oral understanding Mr. TRACY. I did not need the advice of a lawyer on the question of the oral side of it. I said their word was good enough for me that I was to get these options. Mr. PECORA. DO you not recall why you rejected—if you did reject—any of the original drafts of this option agreement submitted to you ? Mr. TRACY. N O ; it was perfectly simple. I said these were the terms on which I will be glad to accept the presidency of the company. I discussed it with the board and they said all right, and that was all there was to it so far as I was concerened. Mr. PECORA. Then for about a year or more the whole thing got lost in the shuffle. Mr. TRACY. Yes; for that at least. It was all during that period. Mr. PECORA. On December 26, 1928, when this option agreement was given to you by the United States & Foreign Securities Corporation, what was the market value of the stock? Mr. TRACY. We have not got that here. We will have to look it up in the Chronicle to get the market on that date. Mr. PECORA. DO you not recall that it was around $45 a share? Mr. TRACY. I t was around that, or higher, Mr. Pecora. Mr. PECORA. Around that or higher? Mr. TRACY. Yes. Mr. PECORA. Under this option agreement you had the right on or before March 1, 1929, which was a period of only 2 months and a few days after the date of this option agreement, to purchase 3,000 shares at $25 a share, did you not? Mr. TRACY. In the United States & Foreign? Mr. PECORA. In the United States & Foreign. Mr. TRACY. Yes. Mr. PECORA. If that stock was worth in the market $45 or more a share at that time, and you could have bought 3,000 shares on or STOCK EXCHANGE PRACTICES 1829 before March 1st at $25 a share you could have taken in a profit of $20 a share, or $60,000, within 2 months' time, could you not?^ Mr. TRACY. I assume your arithmetic is correct, but I did not do it. Mr. PECORA. Why did you not do it ? Did you not think that was enough compensation for 2 months' work as the president of this corporation ? Mr. TRACY. NO, I had just been made president of the company and I would not have sold my stock if I had owned it. Mr. PECORA. Why did you not take it down under this option? Mr. TRACY. Because the option could accrue. Why should I take it down when the option accrued? Mr. PECORA. SO you could make a profit on it by disposing of it in the open market. Mr. TRACY. But I told you I did not want to sell it. Mr. PECORA. HOW did you expect to get any compensation if you were not going to sell the stock ? Mr. TRACY. Well, over a period of years I would have probably taken up stock, as I expect to do eventually, and keep it. Mr. PECORA. Have you exercised any of these options up to the present time? Mr. TRACY. I have not. Senator ADAMS. Have any of those lapsed or are they all still available to you ? Mr. TRACY. They are all still available to me. They were renewed. Mr. PECORA. I was coming to that. They actually did lapse according to the tenor of their original terms, but their option periods have been extended, have they not? Mr. TRACY. Their option period has been extended because it was agreed to be extended before the option expired. Mr. PECORA. In the extension agreement were any of the terms changed ? Mr. TRACY. NO ; not a bit. Mr. PECORA. DO you know of any reason why you did not exercise your rights under either of those two option agreements at any time thereafter? Mr. TRACY. Well, because I did not want to do it; that is why I did not do it. Mr. PECORA. What was the sense of having the options as your form of compensation if you were not going to exercise your rights ? Mr. TRACY. I had 5 years in which to take up those options. Mr. PECORA. HOW did you intend toi profit by these options and thereby be compensated for your years of service as president of these two investment trusts? Mr. TRACY. I intended to take them up eventually and hold the stock and have a very valuable asset, which I still hope to do, and receive dividends on that common stock. Mr. PECORA. And when you had a chance to buy this stock at $25 a share at a time when market conditions would have enabled you to realize a handsome profit you preferred for reasons of your own not to exercise the option? Mr. TRACY. YOU are quite right. I would not have sold out on my company. 1830 STOCK EXCHANGE PRACTICES Senator ADAMS. Mr. Pecora, you see he had a good deal of confidence in the president of the company. He thought maybe the president of the company would make it prosper. Mr. TRACY. YOU are quite right, Senator. I did. The CHAIRMAN. Have dividends been paid on the common stock? Mr. TRACY. NO, sir. Senator COTTZENS. When did the stock go down below the option price ? At what time ? Mr. TRACY. I think it was in the spring of 1930, but I will have to look it up to be exact. Senator COTTZENS. YOU think in the spring of 1930 the price went down below the option price? Mr. TRACY. I think it did. Senator COTJZENS. And therefore you would not want to exercise the option under those circumstances? Mr. TRACY. I beg your pardon? Senator COTTZENS. I say, you would not want to exercise the option under those circumstances? Mr. TRACY. NO. I would let the options accrue. Senator ADAMS. YOU were really making a speculation and letting the other fellow furnish the money against your services as long as your option lasts ? Mr. TRACY. That is the way I am getting my compensation. Senator ADAMS. That is the way you are playing it? Mr. TRACY. That is the way I am getting my compensation. If I make a success of the company I will profit. If the company is not successful I will not profit. Senator ADAMS. YOU are betting your time and your services? Mr. TRACY. My services and my efforts, yes; and my endeavors to make a success of this company. If it is a success I will make a profit out of it. If it is not a success I will not make any profit. Senator ADAMS. But so far as the stock is concerned, heads you come out at least even on that, and tails you win? Mr. TRACY. Well, I devote time to it in which I might possibly otherwise make money. Senator ADAMS. In the past few years it has been much more profitable for people to handle other people's money than their own in investing it. Mr. TRACY. I believe we have done well with this company. I think we have done unusually well with it. Mr. PECORA. Has the United States & Foreign Securities Corporation made investments for its portfolio in issues other than those in which officers or directors of the United States & Foreign Securities Corporation have been interested? Mr. TRACY. I will have to look up the list of all of the directorships of the officers and directors and check every investment that they have made to be able to give you a correct answer on that, Mr. Pecora. I have not the slightest idea of all the directorships of a number of our directors. Mr. PECORA. Have your associates completed their research into the records for the purpose of giving us the total consideration paid by the United States & Foreign Securities Corporation for the 15,000 shares that were covered by the option agreement with you? STOCK EXCHANGE PRACTICES 1831 Mr. TRACY. The cost, Mr. Pecora, was $571,194.11. An average price of $38.08 per share. Mr. PECORA. When that company made this option agreement with you to sell you this stock at $25 a share which it had bought at $38 a share average, did it write down those shares in its portfolio to the $25 a share option price to you ? Mr. TRACY. We carried it on our books here, of course. Mr. PECORA. Not at the option price to you? Mr. TRACY. On this statement that I have before me it is carried on the books* Mr. PECORA. I say, it was never written down to the option price to you? Mr. TRACY. I will have to find out from the accountants. Mr. PECORA. While they are looking that up will you let me look at the minute book again, minute book of the investment trust? Mr. TRACY. What period? Mr. PECORA. 1929, those that we had this morning. The CHAIRMAN. Those options are extended to 1936, Mr. Tracy? Mr. TRACY. They were extended for 3 years, 1936. Mr. PECORA. From which office did you principally conduct the affairs of the United States & Foreign Securities Corporation as its president ? Mr. TRACY. AS its president? Mr. PtecoRA. As its president, from which office did you direct or conduct its affairs principally? Mr. TRACY. From the directors' meetings. My job was to follow the investments. Mr. PECORA. From which office? The CHAIRMAN. The location of the office? Mr. TRACY. Why, the office of the company, the only office is in Newark, N.J. Mr. PECORA. I know that, but from which office did you, as president, actually conduct its operations and business ? (Mr. Tracy started to confer with associates.) Mr. PECORA. DO you have to have the advice of anybody to answer that question? Mr. TRACY. We have only got the one office, Mr. Pecora. Mr. PECORA. I know, you are talking about the Newark office. Mr. TRACY. Yes; that is the only office the company has. Mr. PECORA. Did you as its president use that office for the conduct of the operation of the company's business and affairs? Mr. TRACY. All the details of the company are carried on in that office, Mr. Pecora. Mr. PECORA. Which office did you principally occupy in the daily routine of the conduct of the company's business ? Mr. TRACY. My office as far as running the investments of this company, which is my job, is to follow the investments and the securities that we have, I can do it anywhere. Mr. PECORA. From which office did you do it? Mr. TRACY. Directors' meetings. Mr. PECORA. From which office did you principally conduct your direction of the company's business? Mr. TRACY. The company has but one office and that is the Newark. 1832 STOCK EXCHANGE PRACTICES Mr. PECORA. IS that the office that you occupied as a matter of routine ? Mr. TRACY. AS a matter of routine, I occupy an office at 1 Wall Street. Mr. PECORA. And did you use that office at No. 1 Wall Street principally in your business of directing the affairs of this company ? Mr. TRACY. I did not. Mr. PECORA. What other Mr. TRACY. In directing office did you use principally ? the affairs of the company? The affairs of the company are run by the directors. The purchase and sale of securities, selection of their investments, are principally decided upon at officers' meetings, which may be held in my office, may be held at 28 Nassau Street, as a matter of convenience. Mr. PECORA. Where was the treasurer's office? Mr. TRACY. The treasurer of the company? I t is in the office of the company. Mr. PECORA. Where? Mr. TRACY. Newark. Mr. PECORA. Who was the treasurer ? Mr. TRACY. Mr. Nellis is the treasurer. Mr. PECORA. What office did he occupy? What headquarters or office did he occupy in the discharge of his duties as treasurer, or from what office did he discharge his duties as treasurer ? Mr. TRACY. From the only office that the company has in Newark. Mr. PECORA. Then Mr. Nellis was always located at the Newark office, was he, and no other office? Mr. TRACY. TO my knowledge, that is where he always was. Mr. PECORA. Who was the secretary of the corporation ? Mr. TRACY. At what time, sir? Mr. PECORA. In 1928 and 1929. Mr. TRACY. Because there were certain changes. Mr. PECORA. Well, in 1928 and 1929. Mr. TRACY (after conferring with associates at length). I am told that Mr. Nellis was also secretary in 1928, Mr. Pecora. Mr. PECORA. Did you go to the Newark office of the company every business day? Mr. TRACY. Indeed I don't. Mr. PECORA. Did you go as often as once a week ? Mr. TRACY. NO ; I wouldn't say that I went as often as once a week. Mr. PECORA. Did you go as often as once a month ? Mr. TRACY. I might have gone over there once a month. Mr. PECORA. There is a possibility that you did ? Mr. TRACY. Yes. Mr. PECORA. NOW, you certainly then could not have attended to the current business of this company a(s its president on the occasions that might have been as frequently as once a month when you went over to the Newark office, which you say is the only office? Mr. TRACY. Only office. All the confirmation of securities, orders placed, bookkeeping, and all the routine of the business o,f the company, is conducted in its only office at Newark. I do not have to go there to think what .security I will buy. Mr. PECORA. Your principal duties consisted of what? Mr. TRACY. Presiding at the directors' meetings, keeping in touch with the directors, and following all the investments that the com STOCK EXCHANGE PRACTICES 1833 pany has, such as making suggestions for purchases and (sales and keeping in contact constantly with all the directors. Mr. PECORA. And from what office did you discharge those duties principally ? Mr, TRACY. I do it in New York. Mr. PECORA. From what office, Mr. Tracy? Give us the address, please. Mr. TRACY. I may call them up from my office. Mr. PECORA. Which office did you principally u,se ? Mr. TRACY. I probably used my own office. Mr. PECORA. Well, it has taken me 10 minutes to find that out. Mr. TRACY. TO a large extent. Mr. PECORA. NOW, do you want to qualify it any further ? First you said "probably" and "to a large extent." Any other qualifications ? Mr. TRACY. Undoubtedly I have seen the directors in their own offices and talked to them. I have seen them at the directors' meetings and at officers' meetings. Mr. PECORA. The directors' meetings as a rule were held at No. 28 Nassau Street, were they not? Mr. TRACY. AS a rule they were held at 28 Nassau Street. Mr. PECORA. And by 28 Nassau Street is meant the offices of Dillon, Bead & Co. ? Mr. TRACY. Yes, sir; that is where they were held. Mr. PECORA. And where were the officers' meetings held? Mr. TRACY. They were held there, as a rule, also. Mr. PECORA. At 28 Nassau Street, in the offices of Dillon, Read &Co.? Mr. TRACY. Yes, sir. Mr. PECORA. And is that also true of the United States & International Securities Corporation? Mr. TRACY. It is, sir. Mr. PECORA. That is, that you attended principally to the discharge of your duties as its president from your own office at No. 1 Wall Street and that the meetings of its board were usually held at 28 Nassau Street, in the offices of Dillon, Read & Co. ? Mr. TRACY. They were. Mr. PECORA. And likewise the meetings of officers whenever they occurred usually occurred at 28 Nassau Street? Mr. TRACY. That is correct. Mr. PECORA. Can you now supply us with the information as to whether or not the United States & Foreign Securities Co. wrote down the 15,000 shares of its common stock which it had purchased for $38 plus to the option price of $25 to you ? Mr. TRACY (after conference with associates and examining documents). It was carried at cost. Mr. PECORA. Never marked down to the option price to you ? Mr. TRACY. On our balance sheet. No, sir. On our annual report we stated that these 15,000 shares were under option, in two places. Mr. PECORA. In connection with the option agreement given to you by the United States & International Securities Corporation covering 5,000 shares of the common stock of the United States & Foreign 1834 STOCK EXCHANGE PRACTICES Securities Corporation, did the United States & International write down on its books these 5,000 shares to the option price of $25 a share to you? Mr. TRACY. It was carried at cost. Mr. PECORA. Did it ever write it down to the option price to you? Mr. TRACY. It was always carried at cost. It was not written down, Mr. Pecora. Mr. PECORA. NOW, as a matter of mathematical calculation, the cost to the United States & Foreign Securities Corporation of the 15,000 shares which it had given you an option to buy at $25 a share,, and the 5,000 of the common stock of United States & Foreign which the United States & International bought in order to option them to you at $25 a share were purchased for a consideration, an aggregate consideration, of about $300,000 in excess of the aggregate option price to you of those 20,000 shares ? Mr. TRACY (after conferring with associates). I will accept those figures, Mr. Pecora, without wasting time to check them. Mr. PECORA. DO you think it was sound bookkeeping to continue those shares on the books of these two investment trusts at their cost price and not at the option price to you, which would represent a difference of about $300,000? Mr. TRACY. I think that would be something that would be up to Price, Waterhouse & Co., the accountants.. There was no way of telling whether I would exercise that option at 25. Mr. PECORA. But so long as the option agreement was outstanding those shares represented an actual value to the corporations of $300,000 less than the price at which they were carried ? Mr. TRACY. Correct. Senator COUZENS. Did you testify previously, Mr. Tracy, that Mr. Dillon selected you for the presidency of both of these investment trust companies ? Mr. TRACY. NO. The board of directors selected me as president.. Senator COUZENS. I thought I heard him say Mr. PECORA (interposing). He did say that Mr. Dillon spoke to him about it. Mr. TRACY. He spoke to me about going on the board, Mr. Pecora. That was in the spring of 1927. He told me there was a vacancy on the board and the directors would like to have me join the board. Senator COTTZENS. Who first suggested to you that you could become president of both of these investment trusts ? Mr. TRACY. I think it was Mr. Dillon, although I remember one or two of the other directors mentioned it. Senator COUZENS. But he was the dominating character of both the boards ? Mr. TRACY. NO ; he was not the dominating character of both the boards. Senator COUZENS. AS a matter of fact, didn't Dillon, Read & Co. control the common stock of both? Mr. TRACY. They control the majority of the stock. Mr. PECORA. NOW, can you tell the reason for the acquisition of the 8,745 shares of the first preferred stock of the United States & Foreign Securities Corporation by the United States & International ? Mr. TRACY. Yes, sir. It was a good investment. STOCK EXCHANGE PRACTICES 1835 Mr. PECOEA. When was that investment made? Mr. TRACY. I will have to look that up for you, Mr. Pecora. [After conference with associates:] From October the 29th, Mr. Pecora, to and through November the 1st, 1928. Mr. PECORA. That is in a period of 2 or 3 days' time? Mr. TRACY. Yes. The CHAIRMAN. What did it cost? Mr. PECORA. $859,371.50. The CHAIRMAN. YOU say it is a good investment. What is its value now ? What is the price now ? Mr. PECORA. According to the portfolio statement of December 31,, 1932, its market value on that date was $419,760. Is that correct ? Mr. TRACY. That is right. We have received our 6 percent on that investment, and the assets behind it today are about $138 for every share of preferred. The CHAIRMAN. That is figuring the assets at cost ? Mr. TRACY. At market, sir. Mr. PECORA. I wish you would make available to this committee,. say, by tomorrow morning, Mr. Tracy, statement of any securities purchased by the United States & International Securities Corporation which were in its portfolio as of the end of the year 1932 and which were issued by corporations other than those in which any officer or director of your corporation or other than those in which Dillon, Read & Co. or any of its partners had any interest. Mr. TRACY. May I get a transcript of that afterwards so that I will have that exactly ? There may be people out of town. I will have to telephone to New York. I will have to get the list of directors of the board and all the people that served on it. Mr. PECORA. Perhaps you can tell us this: Do you know of a single security purchased by either one of these investment trusts now in their portfolios which were issued by corporations in which no officer or director of either of these investment trusts or in which Dillon, Read & Co. or none of its partners had any interest? Mr. TRACY. AS I told you before, Mr. Pecora, I would have to guess at that. I think Mr. Hayden is a member of 50 boards. I don't know. Mr. PECORA. What would your best guess be ? Mr. TRACY. I would certainly think that we had a number of them, yes, but I don't remember. I have no idea what boards Mr. Burchard was on. I am told there were about 40 or 50, and I would have to check every one of them. I don't know all the boards of all the Dillon, Read & Co. members referred to this morning. I would have to check that. And I don't know where I can get that information here. I will try to get it to the best of my ability. Mr. PECORA. YOU could get that pretty quickly from the use of a directory of directors, couldn't you? Mr. TRACY. I could get the most of them, although the New York Directory of Directors only gives directorships who are residents of New York. Mr. PECORA. NOW, will you place before you, for the purpose of reference and in order to enable you to answer the questions which I am now about to put to you, a copy of the portfolio statement of 175541—33—PT 4 20 1836 STOCK EXCHANGE PRACTICES the United States & International Securities Corporation as of December 31, 1932? Mr. TRACY. All right. Mr. PECORA. Have you got it before you now? Mr. TRACY. Yes, sir. Mr. PECORA. There was put in evidence here last week, Mr. Tracy, the answer to question no. 3 of the questionnaire that was submitted by me to Dillon, Read & Co., which question called for the following information: The names of all corporations in which any partner or representative of the firm of Dillon, Read & Co., or any of its agencies, is a director or officer. The answer thereto indicated that the following corporations were corporations in which a Dillon, Read & Co. member was a director or officer: The Amerada Corporation. Now, I notice in the portfolio of your investment trust there is a large block, 35,000 shares, of the stock of the Amerada Corporation. Mr. TRACY. Yes, sir. Mr. PECORA. Beneficial Industrial Loan Corporation. Are there any securities issued by that corporation in the portfolio of your investment trust? Mr. TRACY. I do not see any here, Mr. Pecora. Mr. PECORA. Brazilian Traction, Light & Power Co., Ltd. Are there any securities of that corporation in the portfolio of your investment trust? Mr. TRACY. I have the portfolio of the United States & International Securities Corporation in front of me, Mr. Pecora. Mr. PECORA. Yes. Mr. TRACY. NO. There Mr. PECORA. Will you are no Brazilian Traction securities here. also make immediately available to you a €opy of the portfolio statement of the United States & Foreign Securities Corporation as of December 31, 1932? Mr. TRACY. Yes, sir. I now have it. We have Brazilian Traction, Light & Power Co., Ltd., securities in the portfolio of the United States & Foreign Securities Corporation. Mr. PECORA. Broadway Department Store, Inc. That appears to be another corporation according to the answer to question 3 of our questionnaire addressed to Dillon, Kead & Co., of which a member of that firm was a director or officer. Mr. TRACY. Yes, sir. We have 1,000 shares of common. Mr. PECORA. NOW, Commercial Investment Trust Corporation seems to be another corporation in which a member of Dillon, Read «& Co. was a director or officer. Have you any issues of that company in your portfolios ? Mr. TRACY. Yes, sir; we have, both preferred and common. Mr. PECORA. Consolidated Cigar Corporation appears to be another one of those corporations. Have you any of its securities in your portfolios? Mr. TRACY. I do not find the Consolidated Cigar. Mr. PECORA. Neither do I. Educational Pictures, Inc., is another one of those corporations of which a member of the firm of Dillon, Read & Co. was an officer or director. Do you find any of its securities in your portfolios? Mr. TRACY. No; I do not. STOCK EXCHANGE PRACTICES 1837 Mr. PECORA. Equitable Office Building Corporation is another one of those corporations. Are any of its securities in your portfolios ? Mr. TRACY. Yes, sir; there are. Mr. PECORA. In both investment trusts? Mr. TRACY. NO, sir; in one of them. Mr. PECORA. In the United States & International Securities Corporation, is it? Mr. TRACY. In the United States & International; yes, sir. Mr. PECORA. Goodyear Tire & Kubber Co. is another one of those corporations. Do you find any of its securities in the portfolios of either one of those investment trusts? Mr. TRACY. JSTO ; I do not, sir. Mr. PECORA. Louisiana Geophysical one of Mr. Co. Mr. one of Exploration Co. is another those companies. Are any of its securities in the portfolios? TRACY. N O : none of the Louisiana Geophysical Exploration Louisiana Land & Exploration Co. is another those corporations, isn't it? PECORA. NOW, Mr. TRACY. Yes, Mr. PECORA. DO sir. you find any of its securities in either of those portfolios ? Mr. TRACY. Would you mind allowing the committee reporter to repeat that question? Mr. PECORA. The Louisiana Land & Exploration Co. Are any of their securities in the portfolio of either of those two investment trusts ? Mr. TRACY. Yes, sir. We have 100,000 shares. Mr. PECORA. In which portfolio? Mr. TRACY. In the United States & International. Senator COTTZENS. At what cost are those 100,000 shares carried? Mr. TRACY. $278,000. Mr. PECORA. It is $278,125, isn't it? Mr. TRACY. Yes, sir—no; it is $125,000. Mr. PECORA. That is the company that you are the president of ? Mr. TRACY. I am happy to say I am the president of it. Mr. PECORA. DO you get a salary from that company as its president, or is your compensation in the form of option agreements to buy stock ? Mr. TRACY. My compensation is in the form of option agreements. Mr. PECORA. Loew's, Inc., seems to be another corporation in which Dillon, Read & Co. was interested, or one or more of its members is an officer or director. Do you own any of its securities in your portfolios? Mr. TRACY. Yes, sir. Mr. PECORA. In which ones? Mr. TRACY. We have 1,000 shares of common stock, and it is in the United States & International. Mr. PECORA. NOW, there is a corporation called the Nederlandsche Crediet en Financiering Maatschappij, as near as I can pronounce it. Senator ADAMS. HOW do you spell it? Mr. PECORA. I will have to " sneeze " it. Mr. TRACY. We haven't any of that that I can find. 1838 STOCK EXCHANGE PRACTICES Mr. PECORA. NOW, weren't you mistaken when you said in answer to my previous question, there were no securities issued by Loew's Inc., in the portfolio of either of these investment trusts? Mr. TRACY. NO. I said we do have some. Mr. PECORA. YOU had some also in the United States & Foreign Securities Corporation, didn't you ? Mr. TRACY. Yes, sir; 7,500 shares. Mr. PECORA. NOW, how about the Panhandle Eastern Pipe Line Co. ? Have you any of its securities in either of these portfolios ? Mr. TRACY. NO; we haven't any. Mr. PECORA. NOW, it seems that the St. Louis & San Francisco Railway Co. is another corporation in which a partner of Dillon, Read & Co. is a director or officer. We know the extent of the holdings of securities of that railroad corporation in these portfolios, I believe. Mr. TRACY. Yes, sir. Mr. PECORA. HOW about A. C. Spalding & Bros.? That is another corporation in which Dilon, Read & Co. or a partner is an officer or director. Mr. TRACY. We have nothing in Spalding Bros. Mr. PECORA. HOW about the Tubize Chattilon Corporation ? Mr. TRACY. We have none of that. Mr. PECORA. Nothing in that ? Mr. TRACY. NO, sir. Mr. PECORA. HOW about United New Jersey Railroad & Canal Co. ? Mr. TRACY. Nothing in that. Mr. PECORA. And how about Union Oil Co. of California. Mr. TRACY. We have none of that. Mr. PECORA. HOW about Victor Chemical Works ? Mr. TRACY. We have none of that. Mr. PECORA. NOW, in answer to question no. 3 of our question- naire as it appears from the record before this committee, Dillon, Read & Co. stated that the following-named corporations are corporations in which an employee or representative of Dillon, Read & Co., other than a director, is an officer or director; and the companies are as follows: Ault-Wiborg, Ltd., Ernesto Breda Co., Cespedes Sugar Co., Commander-Larabee Corporation, 419-435 Flatbush Avenue Extension, Inc., General Cable Corporation, German Credit & Investment Corporation. Mr. TRACY. That is the only one we have so far on that list. Mr. PECORA. Its securities are in the portfolios of both investment trusts, aren't they ? Mr. TRACY. Yes, sir; we have some in both. Mr. PECORA. And next is the International Printing Ink Corporation. Mr. TRACY. Yes; we have some of that. Mr. PECORA. That is in both portfolios, isn't it ? Mr. TRACY. Yes, sir. Mr. PECORA. And International Water Co., Inc., and International Water Corporation, South America? Mr. TRACY. NO. Mr. PECORA. Layne-New York Co., Inc., of Delaware? Mr. TRACY. NO. STOCK EXCHANGE PRACTICES 1839 Mr. PECORA. National Cash Register Co.? Mr. TRACY. NO ; we haven't got any of that. Mr. PECORA. San Francisco Bridge Securities Corporation? Mr. TRACY. NO. Mr. PECORA. Societe d'Electricite de la Region de Malmedy? Mr. TRACY. NO; we haven't any of that. Mr. PECORA. And Societe d'Etude d'Execution des Grands Travaux ? Mr. TRACY. NO ; we have none of that. Mr. PECORA. AS I recall your testimony of a few minutes ago— and you are the president of the Louisiana Land & Exploration Co., aren't you? Mr. TRACY. Yes, sir. Mr. PECORA. YOU said you got no salary from it as president? Mr. TRACY. NO, sir. Mr. PECORA: That the only form of compensation you receive from it is through the medium of the exercise of options to purchase its stock as granted you by the company. Mr. TRACY. TO purchase the stock of the Louisiana Geophysical Exploration Co., which is a subsidiary company. Mr. PECORA. Have you exercised any of those options? Mr. TRACY. NO, sir. Mr. PECORA. SO that you have been serving these four corporations, two investment trusts, and the Louisiana Geophysical Exploration Co. and the Louisiana Land & Exploration Co., up to the present time, without any actually realized compensation? Mr. TRACY. Correct, aside from what I have received as directors' fees, of course. Mr. PECORA. NOW, the portfolio of the United States & Foreign Securities Corporation as of December 31, 1932, among other things, shows an investment of $1,250,000 in the securities of the German Credit & Investment Corporation 6 percent preferred stock, 12,500 shares. That is correct, isn't it? Mr. TRACY. That is correct. Mr. PECORA. NOW, your portfolio report as of December 31, 1932, gives the market value to that stock as of $1. Mr. TRACY. That is correct. Anything that is not quoted we put down at a nominal market value of $1. Mr. PECORA. Who recommended the acquisition of those 12,500 shares of the German Credit & Investment Corporation 6 percent second preferred stock? Mr. TRACY. I assume that that was passed on by the board, Mr. Pecora. Mr. PECORA. What did you say ? Mr. TRACY. I assume it was passed on by the board, but that was purchased before I became the president of the company. Mr. PECORA. And has it been retained in its portfolio during periods when its market value was receding, during your term as president ? Mr. TIJACY. It has been in the portfolio in my term as president; yes, sir. Mr. PECORA. Are you familiar with that particular investment ? Mr. TRACY. I beg your pardon ? 1840 STOCK EXCHANGE PRACTICES Mr. PECORA. I say, are you familiar with that particular investment? Mr. TRACY. I am fairly familiar with it; yes, sir. Mr. PECORA. What do you know about it? Mr. TRACY. I know that it has assets today, of cash and Government securities, equivalent to approximately—well, what is it [addressing an associate] ? Well, the securities that they own in this country have a market value in excess of $25 per share, not counting securities that they own in Germany, which are long-term investments, short-term investments, and loans to small investors. Mr. PECORA. Why is this stock marked down to $1 ? Mr. TRACY. Because there is no market quotation for it. And in the case of a number of our securities, as you will see, on our annual report it shows, in the absence of a market, where we cannot find a market quotation, we give it a nominal value of $1. Senator COTJZENS. DO you ever attempt to sell any of those securities? Mr. TRACY. I beg your pardon? Senator COTTZENS. Has any attempt been made to sell any of those securities that you carry at $1 ? Mr. TRACY. 1 do not think we have tried to sell any of them. Mr. PECORA. NOW, tell the committee on whose recommendation— I know I asked you this question before, but I do not know whether you have had the information before—on whose recommendation the bonds of the Seaboard Air Line Eailway Co. were acquired by these investment trusts. Mr. TRACY. The matter was discussed at .some of the meetings. Mr. PECORA. What do you recall as having been urged at any of these many meetings in favor of the acquisition of these bonds by your investment trust? Mr. TRACY. Of the Seaboard? Mr. PECORA. Of the Seaboard. Mr. TRACY. AS I remember the Seaboard situation, a plan of refinancing it was discus,sed at a number of the directors' meetings and officers' meetings, and the development of the plan was followed. Mr. PECORA. At the time of that discussion some of the bonds had already been acquired by one or other of these two investment trusts, had they not? Mr. TRACY. I believe they had. Mr. PECORA. What do you recall that anyone said in urging or recommending these bond,s as a proper investment for either of these two investment trusts? Mr. TRACY. I do not remember any specific recommendation that was made, because the Seaboard situation, as I remember clearly, was discussed at a great many meetings. Mr. PECORA. What was said specifically at all these meetings? Apparently the security was frequently discussed. You surely ought to be able to tell us some of the things that were urged in favor of investing in that security. Mr. TRACY. The general opinion was that the plan for refinancing the company would improve the financial structure of the company Mr. PECORA. Of which company—the Seaboard ? STOCK EXCHANGE PRACTICES 1841 Mr. TRACY. Yes,.sir—that it would be a benefit to all the security holders; and that plan was under discussion for a long time. Mr. PECORA. Are you familiar with the financial history of the Seaboard Air Line Railway for the past 15 years? Mr. TRACY. I would not go back 15 years; no. Mr. PECORA. Would you go back 10 years ? Mr. TRACY. Since I have been familiar with the securities as we have been buying them into the company; yes. Mr. PECORA. HOW far would you have to go back ? Mr. TRACY. I know that back in the old days there was a receivership, and then they borrowed imoney from the United States Treasury after the railroads were turned back by the Government in 1920, and then its earnings began to show an improvement. Mr. Warfield died, as I remember, somewhere along in 1927 or 1928, and at that time I believed it was Dillon, Eead & Co. who suggested to the management that they had a complete survey made for the road. Mr. PECORA. When was that made by Dillon, Eead & Co. ? Mr. TRACY. The report was made by Coverdale & Colpitts Mr. PECORA. When? Mr. TRACY. I think that report was in 1928. Mr. PECORA. Had not Dillon, Read & Co., as bankers, undertaken the reorganization of that road prior to that time ? Mr. TRACY. I do not remember. I would have to check that up. I would have to refresh my memory on that. Mr. PECORA. Was your judgment, as the president and a director in these two investment trusts, consulted about investing in Seaboard Air Line Kailway Co. bonds ? Mr. TRACY. Certainly. Mr. PECORA. Did you approve of the acquisition? Did you favor the purchase of these bonds ? Mr. TRACY. I certainly did. Mr. PECORA. What were the factors that prompted you to favor them? Mr. TRACY. In the first place, the report of Coverdale & Colpitts was very favorable Senator ADAMS. I suppose that report wound up with commending the road for the high class of its management ? I notice in the two reports here they are very commendatory of the management of those roads. Mr. TRACY. I think that is the usual courtesy that they put in at the end of a report. Senator ADAMS. I was wondering if that was customary. Mr. TRACY. Yes; I think it is put in at the end of all reports. Mr. PECORA. In other words, the operation of the road was successful, but the patient died ? Mr. TRACY. Yes; the railroad is in receivership. Mr. PECORA. DO you know that Coverdale & Colpitts were members of an underwriting syndicate managed by Dillon, Read & Co. in connection with the reorganization of the Seaboard Air Line Railway Co.? Mr. TRACY. Yes. They took a substantial interest in it and in the Pennsylvania Railroad. They took a very substantial interest in the underwriting of the common stock. 1842 STOCK EXCHANGE PRACTICES Mr. PECORA. DO you mean, the Pennsylvania Eailroad or the Penni-oad Corporation? Mr. TRACY. The Pennroad Corporation. Mr. PECORA. DO you happen to have read the testimony that was given before this committee last June or July by the president of the Pennroad Corporation with regard to the purchase by the Pennroad Corporation of large blocks of the shares or bonds of the Seaboard Air Line Kailway? Mr. TRACY. NO, sir. Mr. PECORA. DO you remember that Mr. Lee, president of the Pennroad Corporation, testified Mr. TRACY. NO, sir; I did not read any of it. Mr. PECORA (continuing). That the Pennroad Corporation acquired a much larger block of those securities than it had ever intended to acquire, and it was led to do so by some oversight in the preparation of some agreement Mr. TRACY. I did not read any of the testimony. Mr. PECORA (continuing). Which pledged them, apparently, to take over more than they had intended to take? It seems to me I recall some such testimony having been given last summer. Mr. TRACY. AS I remember—.and this is memory only, Mr. Pecora—in Pennsylvania Railroad, the Pennroad Corporation, agreed to take 25 percent of the stock that was not taken by the stockholders, and I think the agreement with the Seaboard was finally signed some time in October, and there was the usual delay in getting the approval of the Interstate Commerce Commission. That was obtained in the early part of the next year; and when the stock was taken over, in the meantime there had been a very precipitous drop in the market, and very few stockholders subscribed, so they very probably got their full amount. Mr. PECORA. They took over more than 400,000 shares, whereas they contemplated originally taking over only 125,000 shares. That is my present recollection of Mr. Lee's testimony before this committee in the early summer of this year. Mr. TRACY. I have not read the testimony, as I told you, Mr. Pecora; but between the date of the closing of that agreement with the Seaboard and the approval of the Interstate Commerce Commission, which I think was 2 or 3 months, there had been a panic, as everyone knows, and very few of the stockholders to whom the stock had to be offered took any stock, on account of the decline in the market. So that the Pennroad Corporation got their full participation, as all the others did, because the stockholders took very little. There was a decline in the market during that time. Mr. PECORA. According to Mr. Lee, they got more than their full participation, more than they contemplated acquiring when they entered into the underwriting agreement. Mr. TRACY. I do not know anything about Mr. Lee's testimony; but of course the market went down and they got 25 percent of what the stockholders did not subscribe for. The market declined and the stockholders did not subscribe to the stock which they would have probably subscribed for if it had stayed up. STOCK EXCHANGE PRACTICES 1843 Mr. PECOKA. When were the Seaboard Air Line Eailway Co.'s stocks and bonds acquired by this investment trust of which you were president? Mr. TRACY (after conferring with associates). Those are the acquisitions of the United States & Foreign Securities Corporation (handing papers to Mr. Pecora) ; and I will give you others shortly. Mr. PECORA. I notice, for instance, in the portfolio statement of the United States & International as of December 31,1932, that there were in this portfolio at that time 131,908 shares of the common stock of the Seaboard Air Line Eailway and 9,930 warrants for the purchase of common stock of that company, which stock and warrants cost the United States & International a total of $1,478,675.79. Do you find that to be correct, in the portfolio of the United States & International as of December 31, 1932? Mr. TRACY. $1,478,675.79. Mr. PECORA. And do you also find that at the same time in this portfolio were bonds of the Seaboard Air Line Eailway Co. which cost the investment trust $506,847.13 ? Mr. TRACY. That is correct, sir. Mr. PECORA. There is a gross investment of very close to $2,000,000 in common stock and bonds of this railroad company. When was that investment made? Mr. TRACY. That was made in the fall of 1928—I find I am incorrect ; it was in the early part of 1930. Mr. PECORA. That was after the stock market collapsed in October and November, 1929, was it not? Mr. TRACY. That is correct. I believe we signed the agreement in October. If you will let me look it up Mr. PECORA. It was after the stockholders of the Seaboard Air Line Eailway Co. had failed in large numbers to subscribe for the stock of the company under the reorganization plan? Mr. TRACY. If my memory serves me correctly—I would like to look this up to be exact and give you the accurate information—we signed the agreement to go into that in October 1929. Then it had to be submitted to the stockholders. They had to be given the right to subscribe, the opportunity to subscribe, to the common stock. After that had been ratified, it had to have the approval of the Interstate Commerce Commission; but we were permitted, as I remember,, by the Interstate Commerce Commission Mr. PECORA. YOU were committed by virtue of this agreement of October 1929? Mr. TRACY. We agreed to go into it. Mr. PECORA. DO you know the date of that agreement ? Mr. TRACY. If you will let me check it up I will give you accurate information on it, but my distinct recollection is that the cause of that delay was the delay in getting the machinery through and the approval of the Interstate Commerce Commission. This was a long,, big, constructive job to build up that railroad. Mr. PECORA. TO build up a railroad that had had a bad record uj> to that time. Up to that very time the Seaboard Air Line Eailway had had a bad record ? 1844 STOCK EXCHANGE PRACTICES Mr. TRACY. It had; but those are the kinds of things that you can often make the most money out of. Mr. PECORA. And you think investment trust funds are the kind of funds to put into ventures of that sort ? Mr. TRACY. We believed thoroughly Mr. PECORA. Not " we." I want your individual opinion. Mr. TRACY. I did, thoroughly. Mr. PECORA. YOU think that would be a good investment for moneys that this morning you said should be regarded as a trust fund? Mr. TRACY. It was money given to us by the stockholders. We were responsible to our security holders. It was not in the nature of a trust fund, as you might say, or trust estate, limited by law as to what you can put funds into. Mr. PECORA. The great virtue claimed for these investment trusts is that they are managed and operated by persons of trained and expert minds possessing a judgment superior to that of the ordinary investor, whereby the ordinary investor is enabled in subscribing for the shares of an investment trust to obtain a safe diversification of investment? Mr. TRACY. I think the fact that we have $138 a share on every $100 of public money that has been paid into this company is proof that this company has been well managed during this very trying period. Mr. PECORA. YOU do not happen to have $138 a share behind these shares because of such investments as those you made in the Seaboard Air Line Eailroad Co. or the Chicago, Kock Island & Pacific or the St. Louis & San Francisco Mr. TRACY. We do not profess to be infallible. Mr. PECORA (continuing). Where your original investments have been almost completely wiped out by depreciation. Mr. TRACY. We do not pretend to be infallible. Mr. PECORA. But you do think it is proper for the funds of an investment trust to be invested in an enterprise having for its object the rebuilding of a railroad corporation which had had a bad history up to that time ? You think that is a proper investment for funds of an investment trust ? Mr. TRACY. When we made that investment we believed in it thoroughly. Senator ADAMS. Mr. Tracy, may I divert? In this schedule that is on file here, showing the holdings of the Foreign Co., I see in addition to the columns headed " Book value " and " Market value " there is one headed " Dividends received in cash ", with a total at the foot of that column of $129,000. Does that represent the dividends received during the year 1932 ? Mr. TRACY. I will have to find out. Senator ADAMS. It is exhibit I I I apparently. The CHAIRMAN. I do not think it has been offered for the record. Senator ADAMS. NO ; it is not one of the committee's exhibits. It is marked " I I I " on one of these carbons. Mr. TRACY. In the year 1932 the cash dividends received on domestic stocks of corporations was $671,159, and on foreign corporations $9,221. STOCK EXCHANGE PRACTICES 1845 Senator ADAMS. This is a tabulation headed " Securities on December 31, 1932." Mr. TRACY. I am told those dividends were declared but not yet paid, Senator, totaling $84,947. Senator ADAMS, Totaling $129,000. Mr. TRACY. YOU may have a different one. You have the other company. Senator ADAMS. This is the Foreign Securities. Mr. TRACY. Yes, sir. Those were dividends that had been declared but not yet received. Senator ADAMS. YOU have no list in here of the dividends paid, on this tabulation? Mr. TRACY. We have right here the dividends received during the year, cash dividends received [indicating]. Senator ADAMS. $671,000. Mr. TRACY. Yes. Mr. PECORA. Mr. Tracy, what experience had you had in the investment market before you became president of these two investment trusts ? Mr. TRACY. In the investment market? Mr. PECORA. Yes. Mr. TRACY. I am on the board of a number of other investment security companies. Mr. PECORA. Before you became president of these two investment trusts, what experience had you had in the investment market? Mr. TRACY. YOU mean you want to go back to my early history ? Mr. PECORA. I want you to answer the question, narrating your experience in the investment market up to the time that you became president of these two investment trusts. Mr. TRACY. I will be very glad to give it to you. I joined the firm of William P. Bonbright & Co. in 1909 and I was with them until the war broke out, when I went into the Army in 1917. I had charge of all the foreign business in Bonbright &> Co., in the sale of securities to the foreign correspondents. After the war I did not go back with Bonbright, and I have been on my own since. I am on the board, and I have been on the board since 1911, I think it is, of the American & European Securities Co., and its predecessor company, which is the securities company that was originally formed in Geneva, Switzerland. I am on the board of the Societe Financiere Franco Suisse, that was formed in 1892, with Swiss and French bankers, and I have been on that board for a great many years. I am on the board of the Electrical Securities Corporation, and have been on that for a great many years. That was formed in 1905. I am on the board of the Illuminating & Power Securities Corporation, which was formed, if my memory is right, about 1911. I am on the board of the Public Utility Corporation, which is another security company which was formed, I think, in about 1904 or 1905; and for the last 10 years my entire time has been given to the management and supervision of investment funds. Mr. PECORA. Investment funds of investment trust corporations? Mr. TRACY. Of investment trust corporations; and I also advise 1846 STOCK EXCHANGE PRACTICES Mr. PECORA. Have you served all these investment trust corporations without salary as president? Mr. TRACY. N O ; I am not president. I am a director of most of them. I am president of one, the American & European Securities Co.; and in addition to that, if I may add, I acted in an advisory capacity to a number of foreign bankers on American securities. Mr. PECORA. At the time, in the early part of 1930, when the United States & International Securities Corporation, of which you were then president and director, invested nearly $2,000,000 of its funds in the stock and bonds of the Seaboard Air Line Railway Co., did you make any personal investment in those securities for your individual account? Mr. TRACY. I believe I did buy some of the common stock of the Seaboard. Mr. PECORA. HOW much, in shares? Mr. TRACY. I do not remember off-hand, but I know I sold it about 2 years afterward, and took a loss of $35,000 to $40,000 on it, or .something like that. Mr. PECORA. When this agreement was made in October 1929 by the United States & International Securities Corporation, that obli;ated it to buy this large block of the common stock of the Seaoard Air Line Railway, with whom did it make that agreement? Mr. TRACY. AS I remember it—I will check it up for you—Dillon, Read & Co. headed that syndicate. Mr. PECORA. YOU mean it made the agreement with Dillon, Read & Co.? Mr. TRACY. With whoever the syndicate managers were. Mr. PECORA. The syndicate managers happened to be Dillon, Read & Co. Mr. TRACY. I believe they were Dillon, Read & Co. and Ladenburg-Thalman. Mr. PECORA. Although the agreement was made in October 1929, the investment was not actually made until January 1930. Mr. TRACY. NO. It was because we had to wait until we got the approval of the Interstate Commerce Commission. Mr. PECORA. Meanwhile, had the price at which the common stock was to be acquired by your investment trust been fixed in the October 1929 agreement? Mr. TRACY. We agreed to take a certain percentage in the syndicate which was to take up the stock not subscribed by the stockholders, as I remember it. Mr. PECORA. At what price were you to take that stock ? Mr. TRACY. Would you mind my checking that? (After examining papers.) The underwriting price, Mr. Pecora, was $12, less $1, which was the commission. Of course, the amount was not fixed, because we did not know how much the stockholders might take. The stock had to be offered to the stockholders first. Mr. PECORA. DO you know the date of that agreement? Mr. TRACY. October 11, 1929. Mr. PECORA. Between that time, when you agreed to buy, in behalf of this investment trust, 131,000 shares, more or less, of the common stock of the Seaboard Air Line Railway, and January 1930, f STOCK EXCHANGE PRACTICES 1847 when the transaction was consummated, there had been a very substantial decline in securities values in the stock market, had there not? Mr. TRACY. Indeed there had. ' Mr. PECORA. And that decline affected the common stock of the Seaboard. Mr. TRACY. It also affected the amount we bought. Mr. PECORA. And you had to take more than you originally intended to take. Mr. TRACY. More than we originally intended to take, because the stockholders did not take any when the stock went down. Mr. PECORA. HOW much of a depreciation had there been in the market value of the common stock of the Seaboard Air Line between October 11, 1929, and the date in January 1930, when the transaction was consummated? Mr. TRACY. May I look that up for you ? [After conferring with an associate.] We have not got the Financial Chronicle here, to look that up. Mr. PECORA. YOU recall the decline was quite a substantial one? Mr. TRACY. Indeed, it was, in all securities, Mr. Pecora. Mr. PECORA. Was any suggestion made by anybody in behalf of the investment trust to anybody connected with Dillon, Read & Co., that the investment trust be released from this agreement? Mr. TRACY. I do not remember any such suggestion. We had signed an agreement. Mr. PECORA. YOU signed an agreement with persons who, by virtue of their stock ownership, were in control of the United States & International Securities Corporation? Mr. TRACY. They were managers of the syndicate. Mr. PECORA. They were managers of the syndicate, and the principal participants in that syndicate, were they not ? Mr. TRACY. Well, I will have to check that. I do not know. I know they were participants in the syndicate, but I do not know offhand what the extent was. Mr. PECORA. And this agreement, made early in October, had, to use the vernacular, "turned sour" by January 1930, when it was consummated; is that right ? Mr. TRACY. A great many securities went down. It was a failure because there was a break in the market, and the stockholders would not take up more than a very small amount of stock. Mr. PECORA. And nobody connected with your investment trust, which, through stock ownership, was controlled by Dillon, Head & Co., suggested to Dillon, Eead & Co. that the investment trust be released from the fulfillment of this agreement? Mr. TRACY. NO. Mr. PECORA. SO, through the enforcement of the agreement and the fulfillment of its terms and obligations, whatever loss ensued between October 1929 and January 1930 fell on the investment trust. Mr. TRACY. Of course. We fulfilled our agreement. Senator GOLDSBOROTTGH. Mr. Pecora, may I ask this question, that I may get the arithmetic of it straight ? As I understand it, in the first investment trust there were $30,000,000. That trust had $26,000,000 losses, and that stock today, I understand, is worth $138. Is that correct? 1848 STOCK EXCHANGE PRACTICES Mr. TRACY. It has an asset value today of approximately $138 for every share of first-preferred stock outstanding, and we have paid up all the dividends to date. Senator GOLDSBOROTJGH. Notwithstanding the original capital was $30,000,000 and the losses were $26,000,000, it still has a value of $138? Mr. TRACY. Yes. Mr. PECORA. But the market value is about 90, is it Mr. TRACY. I will have to check that. Senator GOLDSBOROUGH. That can only be accounted not? for by large profits in other directions. Mr. TRACY. Yes, sir. We have made very large profits. Mr. PECORA. Senator, I am reminded that it was the United States & International that had losses of $26,000,000, not the United States & Foreign. Mr. TRACY. I would have to check that, toi see the exact losses at the end of different years. It was a very substantial amount. The CHAIRMAN. The losses of the two trusts were about $26,000,000, were they not? Mr. PECORA. JSTO; only the International. The CHAIRMAN. What was the other loss ? Mr. TRACY. We still have the equivalent of over $90 a share in the United States & International, which was formed at about the peak of the market in 1928, which I think we should be proud of, and be pardoned for being proud of. The CHAIRMAN. The International had a capital of $60,000,000? Mr. TRACY. Yes, sir. Mr. PECORA. And losses of $26,000,000? Mr. TRACY. At one time. Mr. PECORA. And still its stock has an asset Mr. TRACY. The United States & Foreign value of $138 ? has an asset value of about $138. The United States & International today has about $90 out of $100. Mr. PECORA. Did not the United States & International retire, through purchase in the open market, stock which had been sold to the public for about $20,000,000, but which was purchased in the open market by the United States & International for about $10,000,000? Mr. TRACY. We purchased a substantial amount. I will have to check that figure for you. Mr. PECORA. SO that $10,000,000 of the asset value of the stock of the United States & International Corporation was created through the retirement of $20,000,000 of its stock, that is, stock which cost the public $20,000,000, and its retirement by purchase in the market for $10,000,000 by the corporation? Mr. TRACY. We retired a great deal of stock. I will have to check those figures. Mr. PECORA. YOU retired it at a loss to the original investing public. Mr. TRACY. We bought it in the market and retired it. Mr. PECORA. But you retired it at a loss to the original investing public. Mr. TRACY. If a man sold it at a price below what he paid for it, he naturally took a loss on it. STOCK EXCHANGE PRACTICES 1849 Mr. PECORA. That loss was a loss of about 50 percent, was it not ? Mr. TRACY. I do not know what the average was. I can get that for you if you would like to have it. Mr. PECORA. For the last few years you have been functioning as president not only of these two investment trusts, but have also been a director of two other investment corporations. Did I understand you correctly to say that ? Mr. TRACY. I have been a direcor of the American & European; the Electrical Securities, Illuminating & Power, the Public Utility, and the Societe Financiere Franco Suisse. And I might add, Mr. Pecora, for the benefit of the committee here, that I, of course, have information and access to all the information that all the other directors have, and the benefit of their judgment and knowledge in making investments for those other companies. Mr. PECORA. And you have rendered all these services without any compensation ? Mr. TRACY. I expect to get substantial compensation. Mr. PECORA. But up to the present time you have not received a dollar of compensation. Mr. TRACY. Except from my director's fees. But I expect to make a good deal out of it in the future. The CHAIRMAN. What are the director's fees? Mr. TRACY. At the present time they are $50 a meeting. Mr. PECORA. Did you sell, or was there sold to either of these investment trusts, any of your personal holdings in the stock of the Louisiana Land & Exploration Co.? Mr. TRACY. NO, sir. Mr. PECORA. Did you ever participate in any joint account with Dillon, Read & Co. in any of their operations ? Mr. TRACY. I may have purchased some stock personally at the same time they were buying some. Senator COUZENS. Did you ever receive any salary from Dillon, Read & Co. ? Mr. TRACY. NO, sir. Mr. PECORA. I think that is all The CHAIRMAN. IS there any of this witness. particular reason, Mr. Tracy, for having the officers of these trust companies in New Jersey ? Mr. TRACY. It is much more economical to operate over there. Mr. Chairman. The CHAIRMAN. YOU save State income tax ? Mr. TRACY. Yes; chiefly you save taxes, and rent is cheaper. You can get much more space at a much lower rate of rental, and to carry on all the routine bookkeeping and accounting, and everything of that kind, it is much more convenient. The CHAIRMAN. With reference to these reports which you tendered for the record this morning, the committee feels that to print those will unnecessarily encumber the record, but that if there are any extracts from them that are material, you might select those and we would be very glad to have those. To print those two reports would make quite a volume, and the committee thinks it would be unnecessary. Mr. TRACY. Mr. Chairman, I believe Senator Couzens read them over. I do not know whether any of the other members have. If I 1850 STOCK EXCHANGE PRACTICES may, I will go through those reports, and if there is anything I would like to suggest, may I do so in the morning ? The CHAIRMAN. Yes. Mr. PECORA. AS I recall it, Mr. Chairman, the testimony of this witness this morning showed that the principal investments of these two investment trusts in those railroad companies that are covered by those surveys or reports of Coverdale & Colpitts were made in July 1929, whereas these reports appear to have been sometime subsequent to that. So I do not think it could be fairly argued or contended that these reports influenced the directors in the making of these investments if the reports were made after the investments were made. Mr. TRACY. We knew exactly what was going on all the time in those reports. We were getting advance reports from them before they were finally turned in. We had proofs of the reports and we knew about the principal findings long before that. Senator COUZENS. Somebody had suggested that you knew what the report was going to be before they started. Mr. TRACY. I have not much respect for anybody who would suggest that kind of thing, because Cloverdale & Colpitts do not make that kind of report, and I think that is entirely uncalled for. Mr. PECORA. Why did you make the investments before their reports were completed? Mr. TRACY. Because we knew what was going to be in the reports. Mr. PECORA. I am satisfied to rest with that answer. Senator COTJZENS. That is just what I said. Mr. TRACY. Let me make myself plain. We were in constant touch with the engineers and knew their findings in advance of the publication of the report. The final reports came in. We got the proofs of those reports and their primary findings as they went along. And you will find that the statistical services advised the purchase of those securities after we had made our purchases. Mr. PECORA. I have before me, Mr. Tracy, printed copy of the report to the stockholders of the United States & Foreign Securities Corporation, as of December 31,1932. In its balance sheet under the caption of " assets " on the last page I notice the investment of the United States & Foreign Securities Corporation in 93,700 shares of the second preferred stock and 1,987,653 shares of the common stock of the United States & International Securities Corporation is carried at a nominal value of $1. Mr. TRACY. Yes, sir; that is right. Mr. PECORA. That item represented an investment of approximately $10,000,000, did it not? Mr. TRACY. That is correct. I told you before, where there was not an established market we put these things down as $1. At that time that second preferred stock had no asset value—at that particular time. Mr. PECORA. Has it now ? Mr. TRACY. NO, sir; it has Mr. PECORA. That is all. not. (Witness excused.) Mr. PECORA. Mr. Chairman, Mr. Clarence Dillon has just submitted to me a typewritten statement with respect to the United STOCK EXCHANGE PRACTICES 1851 States & Foreign Securities Corporation and the United States & International Securities Corporation, which he would like to submit for the record. I see no objection, and ask that it be put in evidence. The CHAIRMAN. I t may be admitted in evidence and spread upon the record. (Statement presented by Mr. Clarence Dillon with reference to the United States & Foreign Securities Corporation and the United States & International Securities Corporation was received in evidence, marked " Committee Exhibit No. 20 of October 10, 1933 ", and is here printed in the record in full as follows:) COMMITTEE EXHIBIT NO. 20, OCTOBEE 10, 1933 As far as I know, United States & Foreign Securities Corporation was the first investment company of substantial size organized in the United States. At its formation in 1924 $25,000,000 of its 6 percent first preferred stock was sold publicly. There were also issued a, million shares of common stock, of which one quarter went to the public with the first preferred stock. The sum of $5,100,000 was paid in by Dillon, Read & Co. and their associates for the second preferred stock and three quarters of the common stock. The allocation of this common stock was clearly set forth in the advertisement and in the circular. In my opinion, the public bought this $25,000,000 of first preferred primarily for two reasons. First, because Dillon, Read Co. put their names and reputation back of this company and took full responsibility for organizing a board of directors which would manage these large funds competently. Secondly, because Dillon, Read & Co. put up $5,100,000 behind the public's money where it ran the risk of being entirely lost before the public would lose anything. This turned out in fact to be a real risk, for at the low point in 1932 the company's assets had shrunk to a point where this investment no longer represented any asset value whatsoever, though the first preferred stock then represented assets with a market value of approximately $90 a share. This company and United States & International Securities Corporation are fundamentally different from any other investment companies which I know of, in that they are the only companies into which large sums of money have been paid by the organizers for the protection of the first preferred stocks. Certain of the individual members of Dillon, Read & Co. thought so well of the first preferred stock of United States & Foreign that they purchased for themselves and their families in the market as personal investments approximately 36,000 shares of his first preferred stock at an average cost of about $90 per share. These purchasers represented an additional investment of approximately $3,250,000. Dillon, Read & Co., certain of its individual members, and the members of the board of directors represent a total investment of over 96,000 shares in the first and second preferred stocks of the company, or approximately 37 percent of the company's present preferred capitalization. For assuming the risk and responsibility referred to above Dillon, Read & Co. and their associates upon payment by them of $5,100,000 received the entire issue of second preferred stock and three quarters of the company's common stock. Dillon, Read & Co. has never had any management control with the company and the individual members of the firm who have served as officers or directors from time to time have received no salaries as officers and only the regular fees paid directors. At the time the company was organized its entire common stock had an asset value of $900,000 less than nothing and it was by no means clear that it could ever be made valuable. By 1929, however, the company's original assets of $29,100,000 had increased to approximately $78,000,000, and this after full dividend payments on both classes of its preferred stock. The common stock thus came to represent an asset value of about $48,000,000, or $48 a share, and it sold in the open market as high as $72 a share. None of the common shares purchased by Dillon, Read & Co. have ever been sold except shares sold to directors. I have never sold any of the stock which I purchased at the formation of the company, but on the contrary, have actually added to these holdings from time to time. 175541—33—PT 4 21 1852 STOCK EXCHANGE PKACTICES In this same year, more than four years after the formation of the company, some of the members of Dillon, Read & Co. sold a portion of their individual holdings. These sales aggregated about 16 percent of the total common shares originally acquired by Dillon, Read & Co. and their associates. The proceeds from these sales, which were made at around $56 per share, amounted to about $6,800,000. Had the first-preferred stockholders sold their 250,000' shares of common stock at the same price at which certain members of Dillon, Read & Co. sold some of their stock, they would have received about $14,000,000, all of which was potential profit. Members of Dillon, Read & Co. were entirely free to sell their individual holdings. In the fall of 1928, the directors of United States & Foreign caused United States & International Securities Corporation to be formed; $50,000,000 of its 5 percent first preferred stock was sold publicly, one share of common going with each share of first preferred; $10,000,000 of its 5 percent second preferred stock, with 2,000,000 shares of its common stock, was bought by United States 6 Foreign for $10,000,000. In the fall of 1928, the investment of Dillon, Read & Co. and their associates in the junior stocks of United States & Foreign had been profitable. It was anticipated then that a similar investment by United States & Foreign in the junior stocks of United States & International would also be profitable. This anticipation was apparently being realized up to the time of the stock market collapse in the fall of 1929, for in August of that year the assets of United States & International had a market value which indicated an appreciation of $3,700,000, or 37 percent on the $10,000,000 invested by United States & Foreign. Should there be only a partial restoration at some future date of the former level of security values, this expectation of a profitable investment by United States & Foreign in the junior stocks of United States & International may yet be realized. Obviously Dillon, Read & Co. and its members on account of their large investment in the*first and second preferred stocks of United States & Foreign, if for no other reason, would not have sanctioned any investment in United States & International or any other investment which they did not believe to be in the best interest of all classes of stock of United States & Foreign. Furthermore, the majority of the board of directors of each of these two companies has always been composed of men wholly unconnected with Dillon, Read & Co. These directors are men of standing and integrity. They passed on all purchases and sales made by these two companies and regularly attended meetings of the boards. Considerable stress has been laid on the relations of these two companies with Dillon, Read & Co. The fact is, however, that the companies figures show that up to December 31, 1932, these two companies had made purchases of about $393,000,000 of which approximately 7.8 percent, or $30,600,000 were issues sponsored by Dillon, Read & Co. and purchased from them. The total net profits of these two companies up to that date from sales of securities and from participations in syndicates and trading accounts, after deducting realized losses, amounted to $11,800,000, of which 10y2 percent, or $1,370,000 arose from purchases from Dillon, Read & Co. of issues sponsored by them and from participations in syndicates managed by them. For the purpose of this calculation unrealized losses on issues sponsored by Dillon, Read & Co. and purchased from them have been taken into account as actual losses. The best way to understand the investment records of these two companies is to look at these records as a whole. At the organization of United States & Foreign in 1924 there was approximately $116 in assets back of each share of first preferred stock. Since that time approximately $13,120,000 in cash has been paid out in dividends on the preferred stocks, and on August 31, 1933, there was approximately $138 in assets back of each share of first preferred stock. In the case of United States & International, which received its money between 1928 and 1930, there still remains almost $90 in assets back of each share of stock for which the investor paid $100. In view of the unparalleled decline in security values in the past few years and in comparison with the average prices of securities expressed in the Dow-Jones and Standard Statistics averages this seems a creditable performance. From December 31, 1927, at which time United States and Foreign had received all amounts due on the subscriptions to first preferred stock, $100 invested as United States & Foreign invested its assets would have declined to approximately $72 on June 30, 1933, while $100 invested in the stocks com STOCK EXCHANGE PBACTICES 1853 prising the Dow-Jones Industrial Average would have shrunk to about $49; the record of the United State & Foreign being better by 47 percent. Similarly, $100 invested in the securities comprising the Standard Statistics Bank Stock Average would have declined to $39, United States & Foreign's record being better by 85 percent. Similarly, $100 invested in the securities comprising the Dow-Jones Railroad Average would have declined to $35, United States & Foreign's record being better by 106 percent. The record of United States & International is equally impressive. From December 31, 1930, at which time the full amounts clue on subscriptions to its first preferred stock became payable, to June 30, 1933, $100 invested as United States & International invested its assets would have declined to approximately $86. During the same period $100 invested in the securities comprising the Dow-Jones Industrial and Railroad Averages and the Standard Statistical Bank Stock Averages would have shrunk to about $52, United States & International's record being better by 65 percent. These records speak for themselves and show a real service rendered by these carefully managed investment companies to their stockholders. The CHAIRMAN. The committee will stand adjourned until 10 o'clock tomorrow morning. (Thereupon at 4:15 p.m. Tuesday, Oct. 10, 1933, an adjournment was taken until 10 a.m. the next day, Wednesday, Oct. 11, 1933.) COMMITTEE EXHIBIT NO. 18, OCTOBER 10, 1933 Agreement made this 27th day of December, 1928, between United States & International Securities Corporation, a Maryland corporation (hereinafter referred to as the company), party of the first part, and Ernest B. Tracy, party of the second part, witnesseth: Ernest B. Tracy is the president of the company, and the company desires to provide that Tracy shall have an option to purchase, as herein provided, 5,000 shares of the common stock of United States & Foreign Securities Corporation, now in the treasury of the company (which corporation now owns 80 percent of the common stock of the company) ; Now, therefore, in consideration of the sum of ten dollars ($10) to it paid by said Tracy, and of other good and valuable considerations, receipt whereof is hereby acknowledged, the company agrees to and with said Tracy as follows: 1. For the purpose of the option herein provided for the company has set aside and deposited with its treasurer 5,000 shares of the common stock of United States & Foreign Securities Corporation (hereinafter referred to ss the corporation) and hereby grants to Tracy the option to purchase such stock from time to time, at the price specified below, as follows and only as follows: On or before March 1, 1929, Tracy may purchase amounts of such stock aggregating not more than 1,000 shares and on or before each successive March 1 thereafter, to and including March 1, 1933, Tracy may purchase additional amounts of stock aggregating not more than 1,000 shares for any year of this option, plus such number of shares as Tracy shall theretofore have had the right to purchase and shall not have purchased, so that the aggregate of the purchases under said option shall be at the rate of not exceeding 1,000 shares a year for each year of the continuance of this option (treating the period up to March 1, 1929, as a full year). The option price shall be $25 a share up to and including March 1, 1929, but in the case of any and every exercise of the option after that date the option price shall be $25 a share plus an additional sum equivalent to interest on $25 a share at the rate of 6 percent per annum from March 1, 1929, to the date of the exercise of the option, and less an amount equivalent to the sum of all cash dividends which shall be paid on the shares purchased on or after March 1, 1929, and before the date of purchase. The option price for each share of stock purchased hereunder shall in the case of each such purchase be paid to the company in New York funds against delivery of the shares. Every exercise of the option hereby given shall be by notice in writing delivered to the treasurer of the company not less than 24 hours before the time set in the notice for the purchase of stock hereunder, and all deliveries of stock and payments therefor shall be made at the office of the treasurer of the company. 1854 STOCK EXCHANGE PRACTICES % Tracy shall not be entitled to make any exercise of the option hereby granted unless at the time of such exercise he shall either (1) be president of the company, and shall not then be physically incapacitated from COBtinuing to perform the duties of such office, or (2) shall have been ready and willing to accept that office at the annual meeting of the directors preceding the date of such exercise and shall have failed of such election: Provided, however, That if said Tracy shall voluntarily cease to be president of the company before the termination of this agreement, or shall die, he or hist executors or administrators may at any time, or from time to time, within, 4 months thereafter, exercise the option with respect to such number of shares of stock as said Tracy shall have had the right to purchase up to the time of ceasing to be president, or death, and shall not have theretofore purchased. 3. No change in the name or capitalization of the corporation shall affect or annul this option. In case any dividend payable in stock shall have been declared or paid upon the common stock of the corporation, before any particular exercise of the option, Tracy shall be entitled to receive with each share purchased at the price herein specified, without additional cost to him, a number of additional shares corresponding to the dividend stock in respect to the number of shares purchased, and the company shall provide and similarly deposit with its treasurer such additional stock with respect to the stock1 deposited by the company for the purposes of the option. In case the shares of common stock of the corporation shall be reclassified, the shares into which said deposited common shares of the corporation shall be reclassified shall replace the common shares deposited hereunder. In- case of any reorganization or merger, shares in any corporation shall be distributed by the corporation in respect of the deposited shares without the surrender of such shares, shares so distributed in respect of the common shares deposited with the treasurer shall be held on deposit in addition to the deposited shares, and whenever said Tracy shall make purchase of any deposited shares, he shall with the shares purchased, without payment other than as hereinabove specified, receive with each share of the corporation purchased the share or shares so distributed by the corporation in respect thereto. In case of any reorganization or merger of the corporation, shares and/or other securities issued or exchanged for the common shares of the corporation deposited hereunder shall replace such shares, and thereafter the term "share " as used in this agreement shall be deemed to refer to the share or shares and/or other securities issued or exchanged for a share of common stock of the corporation in connection with such reorganization or merger, and all the provisions of this agreement shall apply to the share or shares and/or other securities so issued or exchanged. Tracy shall have no interest in any dividends in cash distributed on any shares of the deposited stock. 4. Except as hereinabove expressly provided, this agreement shall continue in full force and effect until March 2, 1933, unless earlier terminated by mutual agreement of Tracy and the company, or by the death of Tracy. In witness whereof, United States & International Securities Corporation has caused this agreement to be executed in its name and behalf by its treasurer, thereunto duly .authorized, and said Ernest B. Tracy has hereunto set his hand and seal, on the day and year first above written. UNITED STATES & INTERNATIONAL SECURITIES CORPORATION, By R. A. NELLIS, Treasurer. ERNEST B. TRACY. COMMITTEE EXHIBIT NO. 19, [SEAL] OCTOBER 10, 1933 Agreement made this 26th day of December 1928, between United States & Foreign Securities Corporation, a Maryland corporation (hereinafter referred to a& the company), party of the first part, and Ernest B. Tracy, party of the •second part, witnesseth: Ernest B. Tracy is the president of the company. The company through its board of directors agreed in April 1928 to grant to him an option to purchase common stock of the company and this agreement is to express such option. STOCK EXCHANGE PRACTICES 1855 Now, therefore, in consideration of the foregoing and of other good and valuable considerations, receipt whereof is hereby acknowledged, the parties agree as follows: 1. For the purposes of the option herein provided for the company has set aside and deposited with its treasurer 15,000 shares of common stock of the company, heretofore purchased by it, and hereby grants to Tracy the option to purchase such shares from time to time, at the price specified below, as follows, and only as follows: On or before March 1, 1929, Tracy may purchase amounts of such stock aggregating not more than 3,000 shares and on or before each successive March 1 thereafter, to and including March 1, 1933, Tracy may purchase additional amounts of stock aggregating not more than 3,000 shares for any year of this option, plus such number of shares as Tracy shall theretofore have had the right to purchase and shall not have purchased, so that the aggregate of the purchases under said option shall be at the rate of not exceeding 3,000 shares a year for each year of the continuance of this option (treating the period up to March 1, 1929, as a full year). The option price shall be $25 a share up to an including March 1, 1929, but in the case of any and every exercise of the option after that date the option price shall be $25 a share plus an additional sum equivalent to interest on $25 a share at the rate of 6 percent per annum from March 1, 1929, to the date of the exercise of the option, and less an amount equivalent to any cash dividends which would have been payable to said Tracy after March 1, 1929, had he been the owner of such share from that date to the date of the exercise of the option. The option price for each share of stock purchased hereunder shall in the case of each such purchase be paid to the company in New York funds against delivery of the shares. Every exercise of the option hereby given shall be by notice in writing delivered to the treasurer of the company not less than 24 hours before the time set in the notice for the purchase of stock hereunder, and all deliveries of stock and payments therefor shall be made at the office of the treasurer of the company. 2. Tracy shall not be entitled to make any exercise of the option hereby granted unless at the time of such exercise he shall either (1) be president of the company and shall not then be physically incapacitated from continuing to perform the duties of such office,, or (2) shall have been ready and willing to accept that office at the annual meeting of the directors preceding the date of such exercise and shall have failed of such election: Provided, however, That if said Tracy shall voluntarily cease to be president of the company before the termination of this agreement, or shall die, he or his executors or administrators may at any time, or from time to time, within 4 months thereafter, exercise the option with respect to such number of shares of stock as said Tracy shall have had the right to purchase up to the time of ceasing to be president, or death, and shall not have theretofore purchased. 3. No change in the name or capitalization of the company shall affect or annul this option. In case any dividend payable in stock shall have been declared or paid upon the common stock of the company, before any particular exercise of the option, Tracy shall be entitled to receive with each share purchased at the price herein specified, without additional cost to him, a number of additional shares corresponding to the dividend stock in respect to the number of shares purchased, and the company shall provide and similarly deposit with its treasurer such additional stock with respect to the stock provided by it for the purposes of the option. In case the shares of common stock of the company sjiall be reclassified, the shares into which said deposited common shares of tine company shall be reclassified shall replace the common shares deposited hereunder. In case upon any reorganization or merger shares in any corporation shall be distributed by the company in respect of the deposited shares without the surrender of such shares, shares so distributed in respect of the common shares deposited with the treasurer shall be held on deposit in addition to the deposited shares, and whenever said Tracy shall make purchase of any deposited shares he shall with the shares purchased, without payment other than as hereinabove specified, receive with each share of the company purchased the share or shares so distributed by the company in respect thereto. In case of any reorganization or merger of the company, shares and/or other securities issued or exchanged for the common shares of the company deposited hereunder shall replace such shares, and thereafter the term " share " as used 1856 STOCK EXCHANGE PRACTICES in this agreement shall be deemed to refer to the share or shares and/or other securities issued or exchanged for a share of common stock of the company in connection with such reorganization or merger, and all the provisions of this agreement shall apply to the share or shares and/or other securities so issued or exchanged. Tracy shall have no interest in any dividends in cash distributed on any shares of the deposited stock. 4. Except as hereinabove expressly provided, this agreement shall continue in full force and effect until March 2, 1933, unless earlier terminated by mutual agreement of Tracy and the company, or by the death of Tracy. In witness whereof, United States & Foreign Securities Corporation has caused this agreement to be executed in its name and behalf by its treasurer, thereunto duly authorized, and said Ernest B. Tracy has hereunto set his hand and seal, on the day and year first above written. UNITED STATES, & FOREIGN SECURITIES CORPORATION, By R. A. NELLIS, Treasurer. ERNEST B. TRACY. [SEAL.] STOCK EXCHANGE PRACTICES WEDNESDAY, OCTOBER 11, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met, pursuant to adjournment on yesterday, at 10 a.m. in the caucus room of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams (substitute for Barkley and, proxy for Costigan), Norbeck, Townsend, and Couzens. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Bead & Co.; Boot, Clark, Buckner & Ballantine, George H. Murphy of counsel, counsel for United States & Foreign Securities Corporation and United States & International Corporation. The CHAIRMAN. The subcommittee will come to order. Mr. Dillon, Mr. Pecora desires toi ask you some questions. TESTIMONY OF CLARENCE DILLON, OF BILLON, EEAD & CO.— Kesumed Mr. PECORA. Mr. Dillon Mr. DILLON (interposing). Mr. Pecora, may I, before you start your examination, say that you asked on yesterday for us to prepare a list of some companies in the portfolio, which Mr. Tracy could not give offhand. You asked us to prepare a list of corporations whose securities were held on December 31, 1932 in the portfolio of United States & Foreign Securities Corporation and on whose boards there were no representatives from either the directors, officers, or employees of United States & Foreign Securities Corporation, United States & International Securities Corporation, the Keswick Corporation, or Dillon, Eead & Co.; and, furthermore, where Dillon, Eead <& Co. had not acted as bankers. Mr. Tracy replied that he could not name these companies offhand, without checking. You asked us to prepare such a list. We did it last night hurriedly and we find in the portfolio of United States & Foreign Securities Corporation some 51 companies on whose boards there are no such representatives and no such banking connection. These companies are American Can Co., American Chicle Co., American Home Products Corporation, American Eadiator & Standard 1857 1858 STOCK EXCHANGE PRACTICES Sanitary Corporation, American Smelting & Refining Co., American Sugar Refining Co., American Telephone <& Telegraph Co., American Tobacco Co., Axton-Fisher Tobacco Co., Inc., Baltimore & Ohio Railroad, Beatrice Creamery Co., Best & Co., Inc., Central Aguirre Associates, Chesapeake & Ohio Railway, Citizens & Southern National Bank, Savannah—but do you care for me to read off this entire list? Mr. PECORA. NO. We will put the whole list in evidence, Mr. Dillon. Mr. DILLON. All right. Mr. PECORA. I now offer in evidence the document produced by the witness, purporting to give the names of companies whose securities were purchased from time to time for the portfolio of United States & Foreign Securities Corporation Mr. DILLON (interposing). May I correct that Mr. PECORA (continuing). And in connection with which companies no director of the investment trust nor any member of the firm of Dillon, Read & Co., nor any agent or representative of such firm, had any affiliation as officer, director, or otherwise. Mr. DILLON. And for which we were not bankers. Mr. PECORA. Yes. Mr. DILLON. And that was not as to purchases from time to time. We thought your statement was that we should furnish Mr. PECORA (interposing). Securities in the portfolio. Mr. DILLON. Yes, on December 31, 1932. Mr. PECORA. Well, I offer this statement in evidence and ask that it may be spread on the record of the hearings of the subcommittee. The CHAIRMAN. Let it be so received and made a part of the hearings. (The statement referred to was marked " Committee Exhibit No. 21, October 11, 1933 ", see p. 1937.) Mr. PECORA. Mr. Dillon, would you say that a majority, or the greater part in amount, of the funds of United States & International Securities Corporation which were used in the purchase of securities for its portfolio, were used in the purchase of securities issued by corporations other than those in which any director of United States & International or any member of Dillon, Read & Co. had any affiliation as officer, director, banker, or otherwise ? Mr. DILLON. YOU are speaking now of United States & International Securities Corporation? Mr. PECORA. Yes. Mr. DILLON. YOU asked on yesterday for United States & Foreign Securities Corporation ? Mr. PECORA. Yes. Mr. DILLON. I should say, without having those figures before me that the greater part were not that, but I haven't checked those figures. Mr. PECORA. That is, you believe that the greater part of the funds invested by the United States & International Securities Corporation were invested in the purchase of securities issued by corporations with which some one or more of directors or officers of United States & International Securities Corporation, or one or more members of Dillon, Read & Co. had some affiliation? STOCK EXCHANGE PRACTICES 1859 Mr. DILLON. Well, that was true in the case of the United States & Foreign Securities Corporation figures. In the case of United States & International Securities Corporation figures it may not be true on account of the fact of Mr. Hayden being on the board of the Eock Island Bailroad, and Mr. Ecker being on the board of the Frisco [consulting an associate]. They say here that I haven't your question correctly. Mr. PECORA. I think you did twist it around. Mr. DILLON. May I have it read to me ? Mr. PECORA. I will put it in another way: Referring now only to investments made by the United States & International Securities Corporation for its portfolio, is it your opinion or belief, based upon your best recollection of the facts, that the greater part of those investments were made in securities issued by corporations with which an officer or director of the United States & International Securities Corporation, or a member of the firm of Dillon, Eead & Co., had some corporate connection? Mr. DILLON. It would be very difficult for me to answer that question without checking, because that fact would never have entered into consideration when buying the security. So it is not impressed on my mind. Mr. PECORA. I so understand, but I wondered if you could give the subcommittee your best recollection or belief about that. Of course, I take into account the fact that you have made no research for the purpose of ascertaining the specific fact. Mr. DILLON. When purchases were made that specific fact was never brought up, because it was not of particular interest or concern to anyone. So it would be the wildest kind of guess if I should make it now. We have no figures prepared like that. My guess would be that it would be in about the same proportion in the case of the two securities companies. Mr. PECORA. Would you make a similar answer to a similar question as applied to investments on behalf of United States & Foreign Securities Corporation ? Mr. DILLON. I would have to make the same answer, certainly. Mr. PECORA. NOW, you heard the testimony of Mr. Tracy during the time when he was on the stand, last Friday, and again on yesterday, didn't you, Mr. Dillon ? Mr. DILLON. I heard most of it. Some of it I could not get. Mr. PECORA. DO you recall the testimony he gave with respect to the joint railroad stock trading account that was entered into in July of 1929 by the United States & International Securities Corporation with Dillon, Eead & Co.? Mr. DILLON. I think I heard most of it. Mr. PECORA. Are you familiar with that joint trading account, Mr. Dillon? Mr. DILLON. In a general way, yes. Mr. PECORA. Will you tell the subcommittee in a general way and without traversing any ground that Mr. Tracy went over, the circumstances that surrounded the creation and formation of this joint trading account? Mr. DILLON. I am afraid Mr. PECORA (continuing). As I understand it, and possibly to shorten your answer, the joint trading account was entered into on, 1860 STOCK EXCHANGE PRACTICES July 13, 1929, the terms and provisions under which the account was to be operated being set forth in written form in the shape of a letter which has been received in evidence here, and those terms and provisions, in effect, were that there was to be equal participation by Dillon, Read & Co. on the one hand and United States & International Securities Corporation on the other hand. That confirms your recollection, does it not ? Mr. DILLON. Yes, sir. Mr. PECORA. NOW, who proposed originally that such joint trading account be created? Mr. DILLON. I cannot say because I would not know. That matter was discussed over a period of a good many weeks—that is, the matter of buying railroad securities. It was discussed probably for a longer time, in meetings of the Board, and by Dillon, Read & Co. We also discussed the matter of railroad securities, and they looked attractive to us at the time. But just how they should be purchased, and how to the trading account was to be set up and so ony and who discussed it, I don't know. Mr. PECORA. Mr. Tracy said that, among other things, the purpose of the account or its operation was simply to acquire railroad company stocks, not to trade in them as that term is ordinarily understood. Does that conform to your recollection ? Mr. DILLON. My recollection was that we bought. But I do not recall that that meant to enter into trading, buying, and selling from day to day. I think it was simply accumulating stocks. Mr. PECORA. That was Mr. Tracy's testimony. But the account itself is headed, and the references to it in the minute book of United States & International Securities Corporation describe it as^a joint railroad stock trading account. And the letter indicating the terms under which the account was created and was to be operated, gave authority to the managers of the account not only to buy but to sell and resell and to sell short. You recall that, don't you? Mr. DILLON. May I look at the letter ? Mr. PECORA. Yes. Mr. DILLON. The letter does not call it a trading account. It says "Joint Account." Mr. PECORA. I said references in the minute book to the account stated Mr. DILLON (interposing). Oh. Mr. PECORA (continuing). Are to the term " Joint Railroad Stock Trading Account." Mr. DILLON. And in this letter I do not see anything about selling short. Mr. PECORA. Perhaps I can point it out to you, Mr. DILLON. All right. It might very well be put that way as it might use the ordinary phrase, but I do not see it in that letter. That letter does not say it, but it might probably have been overlooked. Mr. PECORA. Well, I call attention to the first paragraph of this letter of July 13, 1929, which reads as follows, it being addressed by the United States & International Securities Corporation to Dillon, Read & Co.: STOCK EXCHANGE PRACTICES 1861 SIRS : Referring to the above account which is being formed to buy and/or sell and/or trade in the common and/or preferred stocks and/or bonds of various railroads, subject to the condition that the account shall never be committed at any one time in a net amount exceeding $30,000,000, long or short, we beg to confirm the participation of the $15,000,000 allotted you in this account." Mr. DILLON. That is simply ordinary phraseology. It means nothing because we did not trade and we did not sell short, and did not sell any stocks, and never intended to. Mr. PECORA. Eegardless of what was actually done in connection with this account, the fact is that the letter agreement gave the managers of the account the right to sell short. Now, you want to emphasize the fact, I presume, that while the managers had that power yet they did not exercise it in the operation of this account. Is that right? Mr. DILLON. Yes. And why that phraseology is used I do not know, other than it is just the general way of writing a letter of that kind, to cover every possible thing, simply to protect the managers of the account in anything that they might do. Mr. PECORA. The operations in this account, or the transactions that were had for the benefit of this account, were principally, so far as the amounts involved were concerned, in the stocks of two railroad companies, namely, the Chicago, Rock Island & Pacific and the St. Louis & San Francisco, weren't they ? Mr. DILLON. I think that is not correct. I think they bought a series of stocks. Mr. PECORA. I know that they bought other railroad stocks, but the principal trades or the principal acquisitions in amount of money involved was in the stock of those two companies. Mr. DILLON. In the Eock Island it was, in round numbers, $2,700,000, and in the Pennsylvania Eailroad about one million dollars, and in the Frisco Eailroad about four million dollars, and in the Southern Pacific about one and one-half million dollars, and in the Southern Railway about two million dollars or perhaps two and one-half million dollars, and in the Seaboard Air Line about one million dollars. That is, roughly, the account, but the principal items were those two. Mr. PECORA. SO that the largest individual amounts invested were in the stocks of the two railroad companies that I mentioned? Mr. DILLON. That is correct. Mr. PECORA. At that time and during the operation of this trading account, or this joint account rather—the reason I use the term " trading account " Mr. DILLON (interposing). I have no objection to "trading account." Mr. PECORA (continuing). Is because it is styled even in that letter, if you see the caption of it, as a "joint trading account", isn't it? Mr. DILLON (handing document to Mr. Pecora). No, it is not so styled; but I am perfectly willing to call it a trading account. I have no objection to it. Mr. PECORA. N O ; it is "railroad securities joint account." I beg your pardon. Mr. DILLON. Yes. 1862 STOCK EXCHANGE PRACTICES Mr. PECORA. I got the term " trading " from the minute book. During the time of the existence and operation of this joint account there were certain gentlemen who were directors of the United States & International Securities Corporation who were connected with those two railroad companies in some capacity or other, were they not? Mr. DILLON. That is correct. Mr. PECORA. And who were those men? Mr. DILLON. I must correct my statement. There was no one on the board of United States & International that was connected with the Frisco. Mr. Hayden is on the board of United States & International and he is chairman, or was chairman, of the Rock Island Railroad. I think what has confused you, Mr. Ecker, who is on the United States & Foreign board, was a director of the Frisco, but he was not on the United States & International. Mr. PECORA. Mr. Ecker as a director of the United States & Foreign Securities Corporation was in a position where his judgment was available to the board of the United States & International, was lie not? Mr. DILLON. Well, he was available to Mr. Tracy as president of the Foreign, who was also president of International. Mr. PECORA. And also available to Mr. Tracy and members of the board of United States & International, because the United States & Foreign, on the board of which Mr. Ecker sat, had control through ownership of common stock of the United States & International ? Mr. DILLON. That is correct. Mr. PECORA. DO you recall, Mr. Dillon, whether the advice, judgment, or opinion of Mr. Hayden and Mr. Ecker, or either of them, was specifically sought before this joint account invested so much money in the common stock of those two railroad companies? Mr. DILLON. Well, I heard Mr. Tracy's testimony where he said he telephoned to all the directors that were available. I can remember myself, in the meetings preceding this, the general discussion of buying railroad stocks and the formation of an account to buy them. Whether those two men were specifically consulted I do not remember myself. Mr. PECORA. Well, apparently Mr. Tracy did not remember either, because he was unable to testify specifically, as I remember his testimony here, as to whether or not he had any conversations with any particular director or directors. He merely told us of his general custom in telephoning people and conferring with them by that means. Mr. DILLON. I think we filed with you the other day a list of all the meetings of the board and the men that attended in both companies. If just preceding these 6 weeks or so immediately preceding the account those men were present as directors, I should feel sure that it was discussed with them, because the matter was discussed at that time. Mr. PECORA. Did you have anything to do with the investments that were made for this joint account? Mr. DILLON. In what way do you mean ? Mr. PECORA. Advising or counseling the kind of investments to be made or the market operations by which the investments were made. STOCK EXCHANGE PRACTICES 1863 Mr. DILLON. Undoubtedly I discussed the different stocks we were buying, railroad stocks, whether we were going to buy Rock Island or Frisco or some other stock, Southern Pacific or Southern Railway. Undoubtedly I discussed that, in the board and with Mr. Tracy. Mr. PECORA. The agreement dated July 13, 1929, which created this railroad securities joint account provided specifically that the account was to terminate on October 13, 1929, unless sooner dissolved by mutual agreement, and that it may be extended by mutual consent. Was it, as a matter of fact, terminated on October 13, 1929 ? Mr. DILLON. I t was terminated on November 9. Mr. PECORA. Apparently then the life of this account was extended by mutual consent ? Mr. DILLON. That is correct. Mr. PECORA. Up to and including November 9; is that right ? Mr. DILLON. I have a letter to that effect. Mr. PECORA. I was just going to ask you if there was any written evidence of such extension. Mr. DILLON. Yes; there is a letter here of October 14, extending it. Mr. PECORA. I offer in evidence the document produced by the witness, purporting to be a copy of a letter addressed by the United States & International Securities Corporation to Dillon, Read & Co., dated October 14, 1929. I will read it into the record—it is very short—and I will give it to the reporter to mark. The CHAIRMAN. The letter may go in the record. (Letter and confirmation dated October 14, 1929, from UnitedStates & International Securities Corporation to Dillon, Read & Co. was thereupon designated "Committee Exhibit 22, October lly v 1933.") Mr. PECORA (reading): DILLON, READ & Co., Nassau and Cedar Streets, New York, N.Y» $30,000,000 RAILROAD SECURITIES JOINT ACCOUNT GENTLEMEN : Referring to our letter to you of July 13, 1929, with reference to the above account, this will confirm our understanding that the account is to be extended to December 15, 1929, unless sooner dissolved by mutual consent, and that it may be further extended by mutual consent. Kindly acknowledge receipt of this letter by signing the attached copy and returning to us. Very truly yours, UNITED STATES & INTERNATIONAL SECURITIES CORPORATION. Accepted: Dillon, Read & Co. October 14, 1929. Mr. DILLON. Mr. Pecora, a moment ago you asked the companies whose securities were held in the portfolio of International and with which no representation on the board and for which we were not bankers. I didn't know we had it. We have it if you care for itThere are some 29. [Handing document to Mr. Pecora.] Mr. PECORA. NOW, after the extension of the life of this account from October 15 to December 15, were market operations continued for the account in the acquisition of railroad company stocks? Mr. DILLON. AS well as I can remember, we stopped buying stocks about the end of August, I should think it was, or the 1st of September. The security company, United States & Foreign, as I remember, was selling stocks from that point on, and from the 1st of September until about the 1st of November they had sold some IS 1864 STOCK EXCHANGE PRACTICES millon dollars worth of securities other than railroads. They were keeping their railroad securities because they were a most attractive investment, in our judgment, but other things looked high and they were being liquidated in the hope of investing later on when the market should come down, if it did come down. So that when we came to the 1st of November the United States & Foreign had some 13 million dollars odd in cash ready to invest on breaks in the market if they should come after that. During that period the account was not buying stock. When I say " not", maybe a few odd shares, but it was not active. I will find that out for .sure. That is just my memory. Mr. PECORA. Surely. Mr. DILLON (after conferring). I think that is substantially correct. Mr. PECORA. What was deemed to be the necessity for extending the life of this joint account from October 15 to December 15 ? Mr. DILLON. Why, I think we were just marking time to decide whether we wanted to buy more stock or not. The CHAIRMAN. Did you invest the entire 30 million in railroad certificates ? Mr. DILLON. NO, Senator; I think we only invested about 14 million in that account. Mr. PECORA. Between 14 and 15 million. Mr. Tracy gave the specific figure. It was nearer 15 million than 14 million. Mr. DILLON. I think I saw it here. Mr. PECORA. Fourteen million seven hundred thousand? Mr. DILLON. Fourteen million two hundred sixty-one thousand and odd. Mr. PECORA. About fourteen and a quarter? Mr. DILLON. Yes. Mr. PECORA. NOW, the account was actually terminated on November 9, at which time the stocks had been acquired and distributed in equal proportions between the two participants in the joint account, namely, Dillon, Read & Co. and the United States & International? Mr. DILLON. That is correct. Mr. PECORA. And at that time it became necessary for Dillon, Read & Co. to pay to the United States & International for one half of the securities that had been acquired for the benefit of this joint account and which had been distributed and turned over to Dillon. Read & Co. upon termination of the account ? Mr. DILLON. That is correct. Mr. PECORA. NOW, how was that payment made, if you can tell us ? Mr. DILLON. I heard yesterday that it was just credited on the books. Mr. PECORA. Mr. Tracy gave some information about that, but I wondered if you could give us more definite information. Mr. DILLON (after conferring with associates). I am informed that Dillon, Read & Co. made that payment of seven million one hundred and thirty-one thousand and odd dollars by crediting United States & International's accounts on Dillon, Read & Co.'s books with that amount. On the same day on order from United States & International Securities Corporation Dillon, Read & Co. paid to the Chase STOCK EXCHANGE PRACTICES 1865 National Bank for the credit of the United States & International $3,300,000 and paid to the Central Hanover Bank & Trust Co. for the account of the United States & Foreign $3,350,000. Mr. PECORA. Why should payment have been made to the Central Hanover Bank for the account of the United States & Foreign by way of liquidating the indebtedness which Dillon, Read & Co. owed to the United States & International on account of this railroad stock joint account? Mr. DILLON. Dillon, Bead & Co. credited the whole $7,000,000 to United States & International and then paid it out on order of United States & International. United States & International instructed Dillon, Eead & Co. to pay $3,300,000 to the Chase bank and to pay $3,350,000 to Central Hanover for the credit of the United States & Foreign. We simply followed the instructions of the depositor. Mr. PECORA. YOU were director of both of these investment trusts, weren't you ? Mr. DILLON. Yes; and active in both. Mr. PECORA. Yes. Can you tell us, Mr. Dillon, what was the nature of the account then existing between the Chase National Bank and the United States & International? Mr. DILLON. May I inquire? [After conferring with associates.] I think, as I am informed here, that the United States & International simply transferred that to their account in the Chase, where they had an active bank deposit. Mr. PECORA. It was credited to their deposit account—is that what you mean to tell us ? Mr. DILLON. We are not sure, but we assume that. Mr. PECORA. And do you know the nature of the account then existing between the United States & Foreign Securities Corporation and the Central Hanover Bank? Mr. DILLON. United States & Foreign? Mr. PECORA. Yes. Mr. DILLON. They kept their active checking account, their active banking account, with the Central Hanover Bank & Trust Co. Mr. PECORA. What obligation at that time did the United States & International owe to the United States & Foreign which it liquidated either in whole or in part by means of the payment made by your firm? Mr. DILLON. I should think it would either be for the purchase of securities or the payment of a loan or the making of a loan. I can find out which. [After conferring.] United States & International owed United States & Foreign money which they had borrowed. Mr. PECORA. When this joint account was terminated on November 9, 1929 Mr. DILLON (interposing). That borrowing, Mr. Pecora, was in anticipation of the subscriptions for the stock of United States & International, I am informed. That was paid in in installments, and they invested in anticipation of those installments and borrowed against it, sometimes from the bank. At this time United States & Foreign had money to loan, and they loaned it to International. Mr. PECORA. When this joint railroad securities account was terminated on November 9 your firm received its half of the railroad stocks that had been accumulated through the account and paid in 1866 STOCK EXCHANGE PRACTICES the manner that you have just indicated for those securities an aggregate sum of something like $7,100,000, and then the stock was delivered to your firm? Mr. DILLON. Well, I assume it was delivered. Yes; that is correct. Mr. PECORA. TWO days later, according to the testimony of Mr. Tracy, those shares of railroad company stock which your firm received upon the termination of this joint account, which consisted of the shares of the Chicago, Kock Island & Pacific Railway and of the St. Louis & San Francisco Railway, were sold by your firm to the investment trust? Mr. DILLON. The investment trust bought those shares from us. Mr. PECORA. At the then market ? Mr. DILLON. Yes; that was the United States & Foreign Securities Corporation bought them. Mr. PECORA. Yes. Mr. DILLON. At the then market ? Mr. PECORA. At the then market. Up to that time did you think that the acquisition of railroad stock was a good thing for the portfolio of either of these investment trusts? Mr. DILLON. I did. Mr. PECORA. Did you still think so Mr. DILLON. I did, decidedly. Mr. PECORA. If they were a good on November 11, 1929 ? investment for the investment trusts' portfolios, weren't they equally as good an investment for Dillon, Eead & Co.? Mr. DILLON. Had Dillon, Read & Co. been desirous of making investments at that time; yes. Mr. PECORA. Well, your judgment that the acquisition of railroad stocks for the portfolio of either or both of these investment trusts was a good thing, was your judgment as a director of the investment trusts ? Mr. DILLON. That is correct. Mr. PECORA. And it was actually your opinion and judgment at the time, irrespective of any relationship you bore to anybody ? Mr. DILLON. Exactly. Mr. PECORA. And hence it was your opinion as a member of the firm of Dillon, Read & Co., wasn't it? I mean, whatever opinion you have is your individual opinion? Mr. DILLON. That is correct. Mr. PECORA. YOU may express it and you may render it and you may act upon it in any other capacity than for your own individual benefit, but it still remains your opinion—that is a constant thing ? Mr. DILLON. That is correct. Mr. PECORA. Yes. Mr. DILLON. And if I had money, for example, that I was not using, I would say to buy Rock Island at that time was a good thing to do. I would advise some other person differently if it meant something different to him, I would say, " Don't you buy." Mr. PECORA. Dillon, Read & Co. had entered into this joint account with the United States & International to buy railroad stocks, and acquired an equal interest in the joint account with the investment trust, because they thought that such investments were sound and valuable at that time. Mr. DILLON. That is correct. STOCK EXCHANGE PKACTICES 1867 Mr. PECORA. That being the case, what persuaded Dillon, Read & Co., on November 11, 1929, to sell at the then market to the United States & Foreign Securities Corporation the shares of these two railroad companies that I have already mentioned, and which had been acquired through the medium of this joint account? Mr. DILLON. Dillon, Read & Co. went into this joint account to accumulate this stock in the expectation and in the belief that the stocks being so cheap and so attractive, would rise in price, and could later be sold at a profit. Dillon, Read & Co. are interested only in short-term investments. They do not make long-term investments. When it came to the termination of this account, it looked as though to hold them profitably would mean a long-term investment, which is not of interest to Dillon, Read & Co. Security companies, on the other hand, are interested in long-term investments. Mr. PECORA. AS well as short term ? Mr. DILLON. AS well as short term. Those stocks were attractive^ and Dillon, Read & Co. made a poor sale when they sold them to the security companies, because, had they held them a little longer, they could have obtained better prices for them. Mr. PECORA. Had they held them for a period of about 2 months. The market went up somewhat from the price at which Dillon, Read & Co. sold to the United States & Foreign, as I recall. Mr. DILLON. The sale to the United States & Foreign was made on November 11, 1929. The price paid by United States & Foreign for Frisco stock was 111%; for Rock Island 114^4. In every week thereafter to and including April 18, 1930—a period of 5 months—Rock Island sold on the New York Stock Exchange for a price higher than that paid by United States & Foreign, and only at times during 5 weeks of this 5 months' period did it sell for as low a price as that paid by United States & Foreign. During the 5 months' period it sold up to 125, and in 13 weeks of the 5 months' period it sold for a price of 120 or better. In the case of the Frisco stock, this stock sold on the New York Stock Exchange in each of 15 weeks of the 5 months' period following the purchase by United States & Foreign at a price in excess of that paid by United States & Foreign, reaching a high during the 5 months' period of 119. In only 7 weeks during the 5 months' period did it fail to sell for as high a price as that paid by United States & Foreign, and even during this 6 weeks' period the low price at which it sold was less than 6 points below the price paid by United States & Foreign. Mr. PECORA. I recall, on that point, the testimony of Mr. Tracy to the effect that between November 11, 1929, and December 31, 1929, the market value of these railroad securities in question had depreciated to a point where, on December 31, 1929, the United States & Foreign found it to its advantage to transfer the stocks to the United States & International at the lower prices in order to offset the consequent loss against their taxable profits for the year 1929. You recall that testimony of Mr. Tracy ? Mr. DILLON. Yes; I do. It might have been, on that particular day, of that particular week, they were selling below the November 11, 1929, price, but that in no way contradicts the statements I have just made. 175541—33—PT ~4 22 1868 STOCK EXCHANGE PRACTICES Mr. PECORA. While we are on that particular point, Mr. Dillon, could you tell this committee, out of the fullness of your experience and knowledge of these things, whether or not a custom has developed in past years under which numerous transfers of securities are made at about the end of the tax year in order to reduce taxable profits made during the year, for income-tax purposes ? Mr. DILLON. My general knowledge and impression is that that is the case, that at the end of the year companies and people do sell stocks in which they have losses, in order to ascertain their net profit on which they should pay the income tax. I think that is a general practice. Mr. PECORA. Does not that kind of a selling movement have the natural effect of temporarily depreciating the market value of securities, Mr. Dillon ? Mr. DILLON. I should think, if it were general at that time, it would. Mr. PECORA. And you believe that it has been quite general, do you not? Mr. DILLON. I think the practice has been general. Mr. PECORA. SO that the values established in the market for securities by means of these sales made for the purposes that you have indicated are really artificial to a certain extent ? Mr. DILLON. They might be very well, but that would mean that the volume would have to far exceed the normal trading on the Exchange. If it were a big market, it would affect it, naturally, very much less. If it were a dull market, it might affect it very much more. Mr. PECORA. Mr. Dillon, the Seaboard Air Line Railway Co. is a company that your firm became bankers for some years ago? Mr. DILLON. That is correct; jointly with Ladenburg, Thalman &Co. Mr. PECORA. When did your firm and the banking firm of Ladenburg, Thalman & Co. undertake those banking relations to that railroad? Mr. DILLON. 1924, they tell me. Mr. PECORA. And sometime thereafter the bankers undertook a financial readjustment or reorganization of the railroad company, did they not? Mr. DILLON. That is correct. Mr. PECORA. When did they do that ? Mr. DILLON (after conferring with an associate). That was at the beginning of 1929. Mr. PECORA. At the beginning, you say, of 1929 ? Mr. DILLON. That is what I am told. The CHAIRMAN. Was Mr. Warfield alive then ? Mr. DILLON. N O ; Mr. Warfield was not alive at that time. The CHAIRMAN. I thought it was a reorganization begun during his lifetime. Mr. DILLON. Mr. Warfield was the president of the railroad when it first came into our office, and he was very much interested in the development and extension of it through the South, particularly in Florida. Mr. Warfield had great confidence in Florida and the development of the State and the future traffic to come out of the STOCK EXCHANGE PRACTICES 1869 State, and we did finance the Seaboard for building those extensions in Florida, but Mr. Warfield had died before this time. He died in 1927. Mr. PECORA. At the time of the undertaking of this reorganization did your firm or your associates, Ladenburg, Thalman & Co., make or cause to be made, a survey of the railroad company with a view of ascertaining its value as a property and a going concern? Mr. DILLON. At the time these discussions were going on the Seaboard Railroad itself had that report made, which was completed, I am informed, in 1928. Mr. PECORA. Who made that report for the railroad company? Mr. DILLON. Coverdale & Colpitts. Mr. PECORA. Had you, at any time since you became identified, or your firm became identified with the Seaboard Air Line Railway Co. as its bankers, made a study of that railroad company's history, properties, and so forth? Mr. DILLON. May I just hear the opening part of your question ? (The reporter read the pending question.) Mr. DILLON. Shortly after Mr. Warfield came in, in 1924, to discuss the Seaboard situation with us, a Mr. Hooper, who was a railroad expert in our office, went down and went over the property, and made his report, and thereafter we relied on Coverdale & Colpitts for our information. Mr. PECORA. When did Hooper make his report ? Mr. DILLON (after conferring with an associate). I am told probably in 1925. Mr. PECORA. Was there much difference in general conclusions regarding the value of the company's property, between Hooper in his report and Coverdale & Colpitts in their report ? Mr. DILLON. I am told that Mr. Hooper thought it was a fine property with great prospects, if put in good financial condition. Senator CotrzENS. Have you conveniently Mr. Hooper's report, and Coverdale & Colpitts' report. Mr. DILLON. We do not have them here. Mr. PECORA. Did you personally read or analyze those two reports ? Mr. DILLON. NO. Mr. PECORA. Were you aware of the fact that the Interstate Commerce Commission had caused a very complete survey and analysis to be made of the Seaboard Air Line Railway Co., and had made its findings public? Mr. DILLON. Was I personally aware of that ? No; I do not think I was [after conferring with an associate]. I am told that we did know that the United States Treasury loaned the Seaboard Railroad $17,000,000 with the approval of the Interstate Commerce Commission. Mr. PECORA. That was during the war, or after the war ? Mr. DILLON. NO ; it was afterwards, when the Government turned the properties back. Mr. PECORA. When was that loan made, Mr. Dillon ? Mr. DILLON. 1920 or 1921, some such time. Mr. PECORA. That was shortly after the Government returned the management and operation of the railroads of this country, which the Government had taken over during the World War, was it not ? Mr. DILLON. I think that is correct. 1870 STOCK EXCHANGE PRACTICES Mr. PECORA. By the way, was that loan of $17,000,000 ever repaid, to the Government? Mr. DILLON. NO. They tell me it was repaid in part. Mr. PECORA. DO you know to what extent it was repaid ? Mr. DILLON. NO. We have not those figures. Mr. PECORA. The proportion of repayment was very small, was it not? Mr. DILLON. I do not know, but I think that is a fair assumption. Senator ADAMS. Loans which the Government itself makes are not often repaid. Mr. PECORA. Did you know that the Interstate Commerce Commission, in its survey and analysis of the road, had reported publicly that as of the end of 1918 the road had outstanding a total par value of $190,938,527.20 in stocks and long-term obligations, of which $37,019,400 represented common stock, $23,931,400 preferred stock, $129,884,166.60 funded debt unmatured,- and $103,560.54 non-negotiable debt to an affiliated company; and that as of the same time the cost of reproduction new of the railroad company as a physical property was $125,468,154, and that its cost of reproduction at that time, less depreciation, was $99,214,147, or something like $100,000,000 less than the securities it had outstanding? Mr. DILLON. I do not recall knowledge of that report. I may have known it at the time. I do not recall the report at all. Mr. PECORA. I am assuming that the figures of the Interstate Commerce Commission are quite accurate. Mr. DILLON. What is the date of the report, Mr. Pecora ? Mr. PECORA. 1931. That is, the data that I have read are contained in a report or pamphlet issued by the Interstate Commerce Commission in 1931, but this report and its findings had been furnished to the railroad company at the time they were made, and as they were being made, which was long prior to 1931. Mr. DILLON. I misunderstood you in the beginning. I thought that was some old report back in those years. Mr. PECORA. The data embodied in this report were in the files of the railroad company, which had received them from the Interstate Commerce Commission long prior to 1931. Now, if it be The CHAIRMAN. Was not that along about 1918 ? Mr. PECORA. The date as of which these figures are ascertained was sometime in 1918. Senator COTJZENS. Have you any information as to when the railroad got that report? Mr. PECORA. I understand it is the practice and custom for the Interstate Commerce Commission to furnish railroad companies with its reports and findings as they are made. This pamphlet of 1931, which I now have before me, Senator, and from which I have read the figures which I have embodied in the question to the witness, was not published until 1931, but it is merely a compilation made in 1931 and embodied in this pamphlet of facts and figures which had been ascertained long before, and copies of which it had given to the railroad company. Senator COTJZENS. I was interested to know when the copies were given to the railroad. I do not presume you have that information. Mr. PECORA. NOI. I can get that by inquiry at the Interstate Commerce Commission office. We will try to get that this afternoon. STOCK EXCHANGE PRACTICES 1871 As a matter of fact, as I understand it, these figures were arrived at from data furnished by the railroad company. Mr. DILLON. Are those pre-war cost figures? Mr. PECORA. These are the actual figures representing cost. Mr. DILLON. At the time the road was built ? Mr. PECORA. Less depreciation. Mr. DILLON. That is probably pre-war, that is, when the road was built. But that printed report was not available until after 1931, as I understand it. Mr. PECORA. But the information embodied in this report was available long before that. Much of this information was taken out of the records of the railroad company itself, furnished to the Interstate Commerce Commission. Have you any report in your possession, or did you ever have a report made, which indicated at any time, up to the time that you became bankers for the road, or up to the time subsequently when you undertook, as bankers, a reorganization of the finances of the road, the outstanding obligations of the company, and also showed the physical valuation of the company? Mr. DILLON. We have a very complete report along those lines made by Coverdale & Colpitts. Mr. PECORA. DO you recall whether that very complete report of Coverdale & Colpitts included the data embodied in this pamphlet taken from the records of the railroad company as furnished to the Interstate Commerce Commission? Mr. DILLON. Those figures were prepared as of 1928 or 1927, and probably they would not be the same as in 1918, although they may have similar data. We go further than just the physical property in determining the value of a railroad. We take its earning power into consideration and its future prospects. In the case of the Seaboard we had great hopes and faith in its future earnings, because we had faith in the territory that it was opening up. In speaking of this report of the Interstate Commerce Commission, of course you are aware that the Interstate Commerce Commission .approved and passed on all the financing that we did for the Seaboard Air Line Railway. It was all done with their approval. Mr. PECORA. I know that. I was just wondering what persuaded your judgment as a banker to have something like $2,000,000 in funds in either one or both of these two investment trusts to put into securities, both stock and bonds, of this railroad company subsequent to 1928 and 1929. Mr. DILLON. AS I said, we had faith in the future prospects of that railroad. We had great faith in the territory that was opening up. Mr. Warfield had a vision of developing the Southland, particularly the State of Florida. He built these lines, which we financed, into the State, and we had great hope of traffic from there; and I still think that that railroad will be a valuable property and a prosperous railroad, because we still have faith in that territory which it taps. Mr. PECORA. DO you know how many other banking firms had studied this railroad and its prospects besides yourselves? Do you know that other banking firms had'( 1872 STOCK EXCHANGE PRACTICES Mr. DILLON. Ladenburg, Thalman & Co. did, because they went into it with us Mr. PECORA. Besides yourselves ? Mr. DILLON. I am informed that Ladenburg, Thalman & Co. had been bankers for this road for many years before we came in. Mr. PECORA. When you undertook the reorganization of the road, in 1929—or was it 1928? Mr. DILLON. 1929. Mr. PECORA (continuing). There was not much equity value in. the stock, was there? Mr. DILLON. In the common stock? Mr. PECORA. Yes. Mr. DILLON. The common stock, at the time that the plan wasmade effective—I think that is a correct statement—was selling around $16 a share; and the main part of that plan at that time was to put more into the common stock and make the senior securities better, and we agreed to furnish $20,000,000 for common stock. Common stock was offered to the stockholders and we underwrote the offer. Mr. PECORA. HOW much of that $20,000,000 was subscribed for by these stockholders, as a matter of fact ? Mr. DILLON. I do not know whether any was. [After conferring; with associates:] Yes; some was, about 300,000 shares out of about. 2,000,000 shares. We underwrote that offer. Mr. PECORA. That is about one seventh ? Mr. DILLON. I am surprised it is that much. Under the rules of the Interstate Commerce Commission we had to wait—I think it was 30 days or so—for their approval, and then beyond that there was another 30 days for the stockholders to come in and say what they would take. During that 60 days market conditions changed very much, and we were very disappointed in the results, and we as underwriters had to take it up. When, as a matter of fact, when we underwrote it for a small commission. It totaled $1 a share. We assumed it would be taken by the stockholders and that it would be a profitable underwriting. Mr. PECORA. YOU encountered a very severe disappointment in the reaction by the stockholders to this reorganization insofar Mr. DILLON. NO. Mr. PECORA. Wait a minute—insofar as that was evidenced by their failure to subscribe for more than one seventh of the new^ issue ? Mr. DILLON. NO ; that is not a correct statement. Mr. PECORA. Did you not expect the stockholders would take up a, much larger proportion? Mr. DILLON. Oh, we thought they would take it all; and they would have done so* if general conditions in the stock market had not changed. That is why they did not take it. Mr. PECORA. And when they took only about one seventh, you were disappointed ? Mr. DILLON. We were disappointed in the stock market and the general financial condition of the country that developed in those 60 days. Mr. PECORA. But your firm, meanwhile, anticipating perhaps some disappointment at the results that would be obtained in offering STOCK EXCHANGE PRACTICES 1873 this stock to the stockholders, had organized a syndicate to take over on some underwriting basis those shares of new issues which were not subscribed for by the existing stockholders? Mr. DILLON. NO. When we agreed to underwrite the stock offering we offered interests in the underwriting to friends. We thought it would be profitable and that we were doing them a favor. We kept a substantial portion of it for ourselves. Mr. PECORA. But you did organize such an underwriting syndicate? Mr. DILLON. That is correct. Mr. PECORA. And the Pennroad Corporation was one of the participants in that syndicate, was it not ? Mr. DILLON (after conferring with associates). Well, in effect it was. I am told that its participation in that syndicate was in the nature of a commitment to buy 25 percent of the stock that was not subscribed for by the stockholders. So the Pennroad Corporation was in the syndicate in that way. Mr. PECORA. The United States & International Securities Corporation was also a member of that syndicate, was it not ? Mr. DILLON. I think it was. Yes; that is correct. Mr. PECORA. That reorganization at that time of this railroad company was largely in the nature of a business gamble, was it not? Mr. DILLON. I do not know what you mean by "business gamble ", unless everything is that. Mr. PECORA. Here was a road that up to that time had a very weak history Mr. DILLON. That is correct; but those roads, as a rule Mr. PECORA (continuing). And it was your object as bankers for the road to undertake a reorganization which was designed, to use the vernacular, to " put it on its feet " ? Mr. DILLON. Those have always been, in the history o,f this country, I think, the most profitable investments in railroads. Mr. PECORA. That is, where they turn out successfully? Mr. DILLON. Yes. Mr. PECORA. And they have been the most expensive and costly, where they have turned out unsuccessfully? Mr. DILLON. NO ; I should not 3ay so. Mr. PECORA. They have been pretty expensive, have they not, where they turned out unsuccessfully? Mr. DILLON. I was thinking of an investment we have just been discussing, where we bought a very prosperous railroad stock. Mr. PECORA. I am talking about the Seaboard Air Line Eailway investment. Is it doing violence to the situation to characterize the reorganization that you attempted back in 1929 as involving more or less of a business gamble ? Mr. DILLON. YOU might so characterize it. I would call it just an ordinary business transaction—the underwriting of stock. Mr. PECORA. But the road was in poor shape. Its earnings did not justify according any substantial equity value to the stock. It needed, in your opinion, some 20,000,000 dollars' worth of new capital to help you to rehabilitate it; and to the extent that that $20,000,000 might not serve the purpose that you intended for it to serve, it was a gamble, was it not? 1874 STOCK EXCHANGE PRACTICES Mr. DILLON. NO. We thought this road had a great future. Mr. PECORA. That is why I call it a gamble. You thought it had n great future. There was nothing in the past up to that time which gave any certainty to the reorganization. It was more or less of a gamble, was it not? Mr. DILLON. We thought it was an attractive investment to put money into the junior position of that railroad, because we thought that the future development of that railroad would make the investment exceedingly profitable; and the buying of that stock, Mr. Pecora, was not an investment. We were underwriting it and offering it to stockholders, and if we had not had the disturbance in the general security market, the stockholders would have taken that ;stock, and we would have been paid a commission as underwriters. The reason we took the stock up was that general conditions were such that the stockholders did not take the stock. Senator COTTZENS. Was the Interstate Commerce Commission's decision unanimous on this refinancing plan ? Mr. DILLON. May I find that out ? I always assume Government bodies to be unanimous. Senator COTJZENS. Oh, no. Mr. DILLON (after conferring with associates). We have no information or knowledge that that decision was other than unanimous. Mr. PECORA. I will get that information from the Interstate Commerce Commission's office. Senator COUZENS. I wish you would, because if it is unanimous we ought to investigate the Interstate Commerce Commission. Mr. DILLON. In regard to that report of 1931 which you have just read, Mr. Pecora, I think the valuations you will find there were for rate-making purposes, and that they were based on the 1914 costs less depreciation. Senator COUZENS. Plus additions, and so on? Mr. DILLON. Yes, sir. Mr. PECORA. They were based on the 1918 estimates of cost of reproduction. Mr. DILLON. I think if you will read it you will probably find something like this, that the Interstate Commerce Commission's valuations were made for the purpose of determining comparative rates. The figures given out by the Interstate Commerce Commission were not actual costs, but costs of reproduction new, using for all roads the same price basis; that is, pre-war, 1914 prices. Mr. PECORA. In the statement that was put into the record at the very end of the hearing yesterday afternoon, and which, I take it, was prepared by you or at your request Mr. DILLON. Yes. Mr. PECORA (continuing). And a copy of which I have before me, you set forth that the United States & Foreign Securities Corporation was the first investment company of substantial size organized in the United States. Now, Mr. Dillon, was it your belief that investment trusts were intended to furnish capital to new enterprises or reorganizations of old enterprises, or was it your belief that investment trusts were primarily designed to find investments or to make investments of its funds in securities of established value and with an established income-producing power? STOCK EXCHANGE PRACTICES 1875 Mr. DILLON. My own conception of that is that they were organized for the profitable investments of the funds that had been entrusted to the securities company to invest. I should not feel that these companies were compelled to stay out of any profitable field. I personally would have advocated going into any field that seemed profitable. The prospectus stated the purpose, that it has been formed to buy, sell, underwrite, offer, and generally deal in corporation, government, and other securities, both American and foreign, and when desirable to take part in the organization and operation of corporations. So the purposes of the corporation were very broad. Mr. PECORA. I know the prospectus sets that forth, but I was merely seeking to get your judgment or opinion as to whether or not investment trusts were organized for the purpose of investing the public's money in new enterprises or in reorganization or rehabilitation of old enterprises, rather than in the making of investments in securities that had an established value and an established income-producing power. Mr. DILLON. My own judgment would be—which, I suppose, is what you want—to go into any field that is profitable, and I would diversify investments in all those fields. I would do all the things you have talked about. I would buy some seasoned securities, and I think the record of those companies is that they have been in the different fields. The United States & Foreign Securities Corporation made a profit by participation in syndicates, after taking losses, of over three and a half million dollars. So that is a profitable field. The corporation is not limited simply to the investments in interestbearing securities. My feeling, Mr. Pecora, on that is that the corporation should go into any field that seems profitable, for a group of experienced men should try to handle the investment of those funds in the interest of the stockholders, to the best of their judgment, without being restricted. We have laws restricting investments of trust funds and other things. Mr. PECORA. But those laws do not apply to the investment of moneys belonging to an investment trust. Mr. DILLON. This is not a trust at all; it is a corporation. You call it an investment trust, but it is simply a corporation, a business corporation. The law governing the investment of trust funds, I was just going to say, does specify established earnings, and so forth. Those securities, I think you will find over the past decade, have suffered probably worse than any form of investment. The CHAIRMAN. What proportion of the money going into these investment trusts came from the public ? Mr. DILLON. In the case of the United States & Foreign Securities Corporation—by the public you mean, I suppose, the stock offered to the public ? The CHAIRMAN. Yes. Mr. DILLON. The first preferred stock ? The CHAIRMAN. Yes. Mr. DILLON. There was originally 25 millions. There are now, I think, 21 millions and odd outstanding. And that stock is what you mean, Senator Fletcher? The CHAIRMAN. Yes. 1876 STOCK EXCHANGE PRACTICES Mr. DILLON. That, of course, would mean the public. Some of us, ourselves, are the largest stockholders. The CHAIRMAN. That is what I was trying to separate; what proportion came from the public and what proportion was put in by those who organized it. Mr. DILLON. Those who organized it put in $5,100,000 for the second preferred and a part of the common. The first preferred was $25,000,000. Mr. PECORA. That is what the public subscribed ? Mr. DILLON. If you call me the public, I own 25,000 shares of that for my family as an investment. Mr. PECORA. YOU bought that Mr. DILLON. In the open market. Mr. PECORA. I am talking about the original flotation of issues of the $25,000,000 worth of first preferred stock. That was offered and sold,to the public? Mr. DILLON. That is correct, Mr. Pecora. Senator ADAMS. Mr. Dillon The CHAIRMAN. Let us go on with the other. Senator ADAMS. May I just follow with one more question? The CHAIRMAN. Yes. Senator ADAMS. YOU made the statement a moment ago, which interested me, to the effect that the conservative investor had suffered more heavily than the investor in the less conservative lines. Mr. DILLON. When I say " more heavily ", maybe that is not exactly right; but he suffered very heavily. I do think it is more heavily, but I would want to check that. Senator ADAMS. Would you deduce from that that the investor should avoid conservative investments?1 Mr. DILLON. NO. I think that investing to conserve money is a most difficult thing. I know of nothing that is so difficult or uncertain as investments. I am not sure that the phrase "security " is not a misnomer. Senator ADAMS. Some of them might be called " insecurities " ? Mr. DILLON. Well, you should call them investments, because if you take the investments which we all considered to be the highest grade—and I do not want to particularize—but take such investments as you would have bought for trust funds, unfortunately you would have suffered more if you had bought them than if you had bought certain common stocks. It is very difficult to take over a period of years any specific class of security and just tie to that blindly. I think you have got to keep changing and rearranging your portfolio constantly and almost from day to day. It is very difficult to look into the future with respect to investments. Senator ADAMS. It would not be very difficult now, with the information which you now have, to reach back and make safe investments in 1928? Mr. DILLON. Yes. Looking backward we should have done a lot of things that we did not do. Mr. PECORA. Mr. Dillon, another virtue claimed for investment trusts—and by that I mean investment corporations like the United States & Foreign and the United States & International—was that the investor in the stock of such companies was enabled to obtain a diversification ? STOCK EXCHANGE PRACTICES 1877 Mr. DILLON. That is correct. I think that is one of the essences of it. Mr. PECORA. That is one of the important virtues claimed for these so-called " investment companies "? Mr. DILLON. That is correct. Mr. PECORA. Yes. When the United States & Foreign Securities Corporation on November 11, 1929, took over large blocks of the shares of the railroad stocks which had been accumulated through the medium of the joint account that we have already spoken about, what proportion did the moneys that the United States & Foreign Securities Corporation paid for those railroad stocks bear to the then available cash resources of the United States & Foreign ? Mr. DILLON. Well, the then available cash resources—all were available resources really of a company like the United States & Foreign Securities Corporation. Mr. PECORA. TO the total resources. Mr. DILLON. Yes; to the total resources. Just a second; if I can get the portfolio at that time. [After consulting same:] Less than 7 percent. About 6 percent plus. Mr. PEOORA. But subsequently that investment company had put in over 11 million dollars, had it not, in the stock of the Chicago, Kock Island & Pacific and of the St. Louis & San Francisco roads? Mr. DILLON. Mr. Pecora, I think you are confusing the two security companies. The one that bought the stock from Dillon, Head & Co. w^as the United States & Foreign. The one that was in the joint account was the United States & International. Mr. PECORA. It has appeared from the evidence heretofore submitted that one of these two investment trusts had in its portfolio stock of these two railroad companies that represented a total investment by the securities company of over 11 million dollars in the stock of those two railroad companies. I have that definitely in mind. Mr. DILLON. I think that was in the International Corporation. Mr. PECORA. All right. Mr. DILLON. YOU are now speaking of the International? Mr. PECORA. Yes; the International. Mr. DILLON. I think that is correct. Mr. PECORA. Was that not a very large investment to make in the stock of two railroad companies if diversification was one of the things sought for? Mr. DILLON. That is about 9 percent, roughly, is it not, of the assets in each ? Supposing that investment was equally divided between the two roads; say 5y2 million in each; that would be roughly about 9 percent of the assets, assuming that the corporation had 60 million dollars, which, as I remember, is what it had. Mr. PECORA. Eleven million dollars compared with a total of 60 million dollars is more than 9 percent. Mr. DILLON. NO ; I say supposing that investment was equally divided between each of the two roads. Assuming that 11 million dollars is divided equally between the Rock Island and the Frisco. Mr. PECORA. It would be 9 percent in each ? Mr. DILLON. That is right. Mr. PECORA. Approximately 18 percent in both of them? Mr. DILLON. Yes. I see no reason to couple those any more than any other investments in railroad securities. 1878 ' STOCK EXCHANGE PRACTICES Mr. PECORA. Except that they were acquired as a part of the same transaction and apparently were jointly considered. Mr. DILLON. But I go further. I think 9 percent in one thing is a large proportion. Mr. PECORA. TOO large a proportion for safety, is it not ? Mr. DILLON. N O ; I would not say that, because it would depend on the circumstances. In this case it was an unfortunate investment. It was a mistake that we did not sell it. There is a difference. I think that these were good stocks when they were bought. In fact the record that I have just introduced shows they were good purchases. The mistake that was made was that they were not sold subsequently, say in the spring of the following year, when they could have been sold. Senator ADAMS. Probably the bonds of Carthage had a time when they were very good. Mr. DILLON. I did not know that Carthage had any bonds,, Senator. Mr. PECORA. According to our analysis of the portfolio statements issued annually by the United States & International Securities Corporation, the first time that it appears in the portfolio reports that any substantial investment had been made in the stock of the Seaboard Air Line Railway was during the year 1930, because it appears in the portfolio report as of December 31, 1930, that 131,908 shares of the stock of the Seaboard Air Line was on that date in the portfolio of the United States & International Securities Corporation, and those shares represented a cost of $1,478,675. Do you know when those one hundred and thirty-one thousand and odd shares were acquired during the year 1930? Mr. DILLON. I am told in January 1930. Mr. PECORA. That was in connection with the participation of the United States & International in the syndicate agreement managed by Dillon, Read & Co. in connection with the refinancing and reorganization of the road that was commenced in 1929? Mr. DILLON. Most of them were. Mr. PECORA. Yes. When did the Seaboard Air Line Railway go into receivership ? Mr. DILLON. In December 1930, I am told. Mr. PECORA. That is 11 months after? Mr. DILLON. Eleven months after. Mr. PECORA. Your firm was one of the two bankers for the road ? Mr. DILLON. Yes. Mr. PECORA. And had been since 1924? Mr. DILLON. Or thereabouts. Mr. PECORA. Or thereabouts. And that gave your firm exceptional opportunities to follow the course of the road, its values, and so forth? Mr. DILLON. Yes. Mr. PECORA. And its business prospects, as well as the actual earnings of the company? Mr. DILLON. I should think that was correct. Mr. PECORA. Were you not cognizant of conditions in January 1930 which made it seem extremely probable that the reorganization plan which you had undertaken would fail, and that a receivership might be imminent? STOCK EXCHANGE PRACTICES 1879 Mr. DILLON. Obviously not, because we would not have underwritten that common stock at $20,000,000 if we had any such feeling. Our feeling was that this would go through and that would be all that would be needed, and that the road would prosper. Mr. PECORA. Eailroad receiverships are not projected overnight, are they? Mr. DILLON. Occasionally; yes. Mr. PECORA. AS a matter of fact the conditions that culminate in a receivership for a railroad company are conditions that accumulate over quite a long period of time before the receivership ? Mr. DILLON. Oh, yes. You mean that the road simply grows worse and worse? Mr. PECORA. Yes. Mr. DILLON. Yes; I Mr. PECORA. When should think that is generally a true statement. for the first time were you able to observe as one of the bankers for the road that conditions were getting so bad that a receivership might be imminent within a year's time or thereabout ? Mr. DILLON. Oh, I do not think we foresaw it for a year, Mr. Pecora. We would not have underwritten that $20,000,000 of stock if we had. Mr. PECORA. When did you first begin-to feel that a receivership or other serious embarrassment was imminent? Mr. DILLON. Eight up to the time of the receivership we were hoping that it would not be necessary, so they inform me. Mr. PECORA. Would you then say that this was one of those receiverships that developed overnight? Mr. DILLON. They say that in 1930, just refreshing my mind, the business in the country disappeared very quickly, and from the middle of 1930 on the railroad traffic was disappearing very fast, and this receivership came on very quickly. Mr. PECORA. And you saw the clouds gathering in the financial skies along about the middle of 1930? Mr. DILLON. I do not think it was financial skies. I think they were talking ab*out actual traffic on the railroad disappearing. Mr. PECORA. Well, those conditions are reflected in the financial skies, are they not?1 Mr. DILLON. Yes; I should think they would be. Mr. PECORA. Yes. Was anything done by the investment trust or the people who operated it, so far as you know, to lessen the possible loss to this investment trust through its holdings of the Seaboard Air Line Co. stock by disposing of them before the crash came—the crash signalized by the receivership in December 1930? Mr. DILLON. NO ; because we felt that to hold them was the best thing to do. That we would get more money by keeping them rather than by selling them. That was a mistake. Our judgment is not infallible, Mr. Pecora. I wish it were. Mr. PECORA. And in the light of those conditions you still think that funds of investment corporations, so-called " investment trusts ", should be used as a matter of brains or as a matter of sound business judgment in operations of this sort? Mr. DILLON. Yes, I think that they should be so used, and I think probably we would do the same thing again. Possibly 1880 STOCK EXCHANGE PKACTICES Mr. PECORA. YOU would still take a gamble on the improvement of a railroad company with funds of the public that had been put intoan investment trust on the claimed virtues of diversification and the making of sound investments by experts of trained minds? Mr. DILLON. But, Mr. Pecora, your assumption is not one in which I concur. Mr. PECORA. DO you mean by that that you do not concur in my assumption that investments of investment trusts are made by persons of sound minds and trained judgment, expert judgments Mr. DILLON. I think if you will look at the record as a whole we may be excused pardonable pride when we think our minds were sound. But if you take some specific things such as we are talking about now—in those we may have made mistakes. But I think taking our record as a whole I doubt if there are any banks in the country—certainly not many—which can show a record in the balance sheet like these security companies show today. Senator COTTZENS. AS a matter of fact if you had sold them the person who would have bought them would have been of unsound mind, would he not ? Mr. DILLON. Possibly. We sold some. We were not right in everything. Mr. PECORA. I understand that the liquidating value of the first preferred stock of the United States & International is around $60 a share at the present time, according to its assets ? Mr. DILLON. I am told it is around $90 a share. Mr. PECORA. Of the United States & International Securities Corporation ? Mr. DILLON. Yes. Senator COUZENS. That is what was testified to Mr. PECORA. AS of what date ? Mr. DILLON. September 30. Mr. PECORA. Of this year? Mr. DILLON. Yes. Just now. Mr. PECORA. We were basing our estimates upon yesterday. an analysis of the annual report as of December 31, 1932. Mr. DILLON. There has been a decided appreciation since then. Mr. PECORA. Because of the increase in value of the securities ? Mr. DILLON. Yes. Mr. PECORA. On December 31, 1932, the liquidating or asset value of the first preferred stock was around $60 a share, was it not ? Mr. DILLON. That I do not know. I t is $90 now. Do you want me to look back and see what it was ? Mr. PECORA. Yes. Mr. DILLON. We do not have that. Mr. PECORA. IS it not a fact that prior to December 31, 1932, United States & International Securities Corporation retired about 200,000 shares of the first preferred stock ? Mr. DILLON. I am not sure of the amount. They bought in the market a considerable amount. Mr. PECORA. They bought in the market a large amount ? Mr. DILLON. Yes. Mr. PECORA. Which I understand is about 200,000 shares ? Mr. DILLON. That I do not know, but I am willing to assume that it was a substantial amount. STOCK EXCHANGE PRACTICES 1881 Mr. PECORA. I also understand—and you can affirm or correct it, if you wish—that the United States & International Securities Corporation retired that stock by buying it in the open market at a cost of about one half what that stock had originally been sold for to the public. Mr. DILLON. I do not know if that was the average price, but I assume it was. But of course we cannot assume we were buying it from the original purchasers. We do not know from whom we were buying it. Mr. PECORA. The company was able to improve or enhance the liquidating value of the stock to the extent of about $10,000,000 by buying in and retiring these 200,000 shares—that is an approximation—of the first preferred stock, at a cost of about $10,000,000 less than the sum which the company received from the original subscribers for that stock ? Mr. DILLON. I am not sure that is a correct statement. The correct statement, I think, would be—and they may coincide—that you increase your liquidating value by the difference in your cost and your asset value, not the par value. Mr. PECORA. I understand that that represented an improvement in the company's asset position or liquidating value of the stock of about 10 million dollars? Mr. DILLON. If your assumption—and I am taking your assumption—is correct that the liquidating value was only $60, and your assumption is correct that our purchase price was $50, then we only improved the asset price by $10 a share; not by $50. Mr. PECORA. I said by $10 a share. Mr. DILLON. Yes; that is right. Mr. PECORA. In other words, you improved the liquidating value from $50 a share to $60 a share, representing an improvement of about 10 million dollars? Mr. DILLON. That would only be true if you bought 50 percent of the stock. Mr. PECORA. Yes; at about half the price which the company received from the public upon its original issuance. Mr. DILLON. Take our present asset value of stock, say, of $90. Suppose we buy stock at $80. We are adding $10 to asset value. If your asset value in 1932—and I am accepting your figure at that time—was $60, and you bought it at $50 a share, you are adding $10 to your asset value on each share that you buy; not on the shares that are left. Mr. PECORA. YOU reduced the outstanding shares held by the public by means of the retirement of the shares we have referred to through the purchase in the open market by the company, did you not? Mr. DILLON. That is true. But you took $50 a share out of your assets in order to do that. So you have only improved your asset value by $10 a share. Mr. PECORA. One or two more questions, Mr. Dillon, and I will be through with you. The CHAIRMAN. One moment, Mr. Pecora. Mr. PECORA. Certainly, Mr. Chairman. The CHAIRMAN. What I am most concerned about, or am more particularly concerned about, is how the investor came out. He is 1882 STOCK EXCHANGE PRACTICES the chap I am interested in. How about the man who put his money into these investment trusts ? How did he come out by reason of this transaction ? Mr. DILLON. We will take the first trust first, Mr. Chairman—and I take it you do not want my experience, because it has not been a very good one. My investment has not paid as well as those who bought the senior securities. You want the preferred stock, do you ? Mr. PECORA. The first preferred. Mr. DILLON. The man who bought that received one share of first preferred and one share of common and paid $100. With the money that was paid in for the second preferred stock the corporation showed a value back of his preferred stock of about $116 a share. Now, he has gone through this period of depression, and he has received in dividends $6 a year. The company has paid the total sum of about $13,000,000 through dividends. The CHAIRMAN. Six percent? Mr. DILLON. Yes. And the investor has an asset value back of his first preferred stock. Today the asset value back of his preferred stock—and when I say today I mean at the time of our last calculation—is about $138 a share. Or, in other words, the asset value of the stock is considerably more than when he started. In the meantime he has received 6 percent per annum dividends. Does that answer your question? I am assuming he did nothing with his common stock but held it. He fared one way or the other according to what he did. But I am assuming that he did not sell it, and that The CHAIRMAN (interposing). Then notwithstanding the losses suffered by the investment trust, the investor really has not lost anything yet ? Mr. DILLON. Oh, no. You are talking about losses in particular terms. If you are looking at our operations as a whole they are not losses but profits. We are here just going into some unfortunate things that we did, where our judgment was not so good as in others. But if you take our operations as a whole over the period of time, they have been profitable. Does that answer your question, Senator Fletcher? The CHAIRMAN. Yes. Mr. PECORA. Mr. Dillon, is it fair to say that the most of the losses that were incurred by the investment trusts were by reason of investments made in securities of corporations with which members of the board have been affiliated in some capacity or other, or associates of Dillon, Head & Co. had likewise been so associated? Mr. DILLON. I think when you put the question in that way I must answer yes. But in making such answer I should like to qualify it. Mr. PECORA. GO ahead. Mr. DILLON. The fact that we bought Eock Island or Frisco stock or Seaboard stock, or other things where we have had losses, wasn't because Mr. Hayden and Mr. Ecker, or someone else, happened to be on those boards, but simply because we thought those were good investments. Mr. PECORA. When you say " we " you mean directors who included Mr. Hayden and Mr. Ecker? Mr. DILLON. That is true. STOCK EXCHANGE PRACTICES 1883 Mr. PECORA. That brings me to a point I want to question yon about briefly. You heard me read into the record on yesterday, didn't you, the text of paragraph 8 of the charter of United States & Foreign Securities Corporation? Mr. DILLON. Yes. May I look at that? [After looking at the paper.] Yes; I did. Mr. PECORA. YOU know the contents of it, or the general substance of it, do you not? Mr. DILLON. I know the general substance of it. Mr. PECORA. What was the reason for including or inserting that provision in this charter ? Mr. DILLON. I assume that that was done by the lawyers as a general practice. Provisions similar to that are, I think, not unusual. It is done in order to give protection to directors against, well, we will say, unfair claims that might be made against them. It is to protect them against that. Mr. PECORA. It also goes further than that, and gives those directors protection against claims that might be fair because based upon the exercise of judgment by directors where that judgment was not exercised by them in good faith. Mr. DILLON. If that were true, I think a clause like that should not be placed in any certificate of incorporation, because I think a director should be fully responsible, fully liable for the exercise of good faith in all things. Senator ADAMS. Then I gather if there is any fault any place it is to be put upon the lawyers; that if anybody is to be made the scapegoat it is the lawyers. Mr. DILLON. If that is put in, or any other provision is put in a charter, which would excuse a director for the exercise of bad faith, then I certainly think it is their fault. I do not think any company should do that. Senator ADAMS. Don't most lawyers do what their clients ask them to do? I am simply trying to present the lawyer's standpoint a little bit. [Laughter,] Mr. DILLON. I haven't found that to be so, because we do not ask lawyers to do things. We ask them to tell us how things should be done or shouldn't be done, and they draw the documents. But we do not ask them Mr. PECORA (interposing). Did you ask the lawyers in this instanqe to tell you how directors could be rendered immune for liability for acts committed in bad faith and which might prove a loss to stockholders ? Mr. DILLON. NO. This was simply put in by the lawyers themselves when they drew whatever this is. Mr. PECORA. The charter ? Mr. DILLON. Yes; the charter. The CHAIRMAN. That is, the amendment to the charter ? Mr. PECORA. That was amended on March 12, 1930. But I was talking about the original charter for the time being. Mr. DILLON. It is the certificate of incorporation. Mr. PECORA. Which is another term for charter. Mr. DILLON. Ye,s; but as I read it, it does not excuse directors ^br bad faith or anything like that. \ r 175541—33—PT 4 — 2 3 1884 STOCK EXCHANGE PRACTICES Mr. PECORA. Well now, let me read it to you. Let us read the original provision prior to its amendment on July 12, 1930: In case the corporation enters into contracts or transacts business with one or more of its directors, or with any firm of which one or more of its directors are members, or with any other corporation or association of which one or more of its directors are stockholders, directors, or officers, such contract or transaction shall not be invalidated or in any wise affected by the fact that such director or directors doing it may have interests therein which are or might be adverse to the interests of this corporation, even though the vote of the director or directors having such adverse interest shall have been necessary to obligate the corporation upon such contract or transaction. No such director or directors shall be liable to the corporation, or to any stockholder or creditor thereof, or to any other person, for any loss incurred by it under or by reason of such contract or transaction, nor shall such director or directors be accountable for any gain or profits realized thereon. Mr. DILLON. Yes; but that does not excuse them for bad faith. I think this clause is too broad, myself. Mr. PECORA. So do I ; and that is why I think the text of it excuses them, the import of it is designed to exclude such director from any liability. Mr. DILLON. But not for fraud. Mr. PECORA. Well, I think our courts of equity might intervene there and not enforce this provision, but the presence or inclusion of this clause in the charter, if it was calculated to serve any purpose at all, was calculated to protect the directors even from the exercise of bad faith. Whether the courts would give effect to that purpose is another thing. Mr. DILLON. N O ; I shouldn't think that at all, because that was simply put in by the lawyers in the drafting of the charter. It was nothing that we had any interest in or were consulted about, because the charter of the United States & International Securities Corporation hasn't that clause in it at all. Mr. PECORA. I know that. Mr. DILLON. And this has been amended since. But I think directors of any company should always be liable and responsible for the exercise of good faith. Senator ADAMS. DO lawyers get the share of profits commensurate with the responsibility which they seem to bear? [Laughter.] Senator COUZENS. Might I ask what brought about this amendment you refer to? Mr. DILLON. I do not know. I suppose the lawyers suggested the amendment, that they brought it in and then the directors adopted it. Senator COUZENS. SO the lawyers corrected their previous act ? Mr. DILLON. I think that is probably true. Mr. PECORA. Mr. Dillon, would you today approve in principle the inclusion of any such provision in the charter of a company whose securities are to be sold to the public ? Mr. DILLON. We have a real problem there and it is difficult to know how to handle it; not in this company, but I mean in general. I think directors should be responsible for their acts, for the exercise of care and diligence. They should be liable for any malfeasance or bad faith, of course. On the other hand, directors receive as compensation from $200 to probably $600 a year. You give some sort of protection to a man of character and standing if you want STOCK EXCHANGE PRACTICES 1885 him to do a public service by serving on a public company, where he gets nothing out of it except the satisfaction of acting in the interests of the stockholders. Senator ADAMS. Well, now, a director is supposed to be a man who is interested in the company. That is, he is there serving his own interest. He does not go on a board because of his little director's fee. Mr. DILLON. He goes on the board to represent the stockholders. Senator ADAMS. The law requires in some cases that he must be a stockholder himself. Mr. DILLON. But that can be fulfilled by owning 1 share or 10 shares. Senator ADAMS. I know, but you do not hire directors like you hire a manager. Mr. DILLON. NO ; you try to get men to serve as directors who are not for hire. Senator ADAMS. Yes; but don't you do that because of the knowledge and understanding that the members of boards of directors are really the principal owners of the business, and you hold out the board of directors as representing—well, take a list of bank directors and you draw the conclusion that they are the men who not only control but own the concern generally, don't you? Mr. DILLON. In our companies that is the fact. Senator ADAMS. And it ought to be the fact, ought it not? Mr. DILLON. The directors here are largely the people that own the securities, that own the company so to speak. They own first preferred and second preferred and common stock. But t am speaking now on a broader plane. Senator ADAMS. But you ought not to window dress a company with people as directors who are not substantially interested ? Mr. DILLON. NO. YOU ought not to window dress anything. Mr. PECORA. But that is frequently done, isn't it ? Mr. DILLON. I think it has been done. ' Mr. PECORA. And it has been quite a common practice to your knowledge, has it not? Mr. DILLON. Well, I have seen boards of directors that looked as though the directors were just there lending their names; yes. Mr. PECORA. YOU know of many instances where persons serving on many corporations the securities of which are sold to the public, and where those corporations represent a great diversity or variety of business interests, so many in fact that the director has no adequate opportunity for really fulfilling the functions of a director as those functions should be fulfilled. Mr. DILLON. I think that may be true; but there are men that serve on a great many boards, and you wouldn't think they would have the time to do anything about their own companies. As a matter of fact, some of those men are the most helpful directors. I personally do not serve on any boards at all except these security companies, and that takes all of my time. Other people probably have greater capacity than I have and can serve on more boards. But I think a director should take a real responsibility for the company and should be familiar with its management and operation. 1886 STOCK EXCHANGE PRACTICES Mr. PECORA. Take a personality like one of the directors of United States <fe Foreign Securities Corporation, Mr. Ecker. Mr. DILLON. Yes, sir. Mr. PECORA. He is the president of a great life insurance company, with billions of dollars of resources. Now, as the president of that company, looking after the safety and the interests of policyholders and the resources of the company, running into the billions of dol