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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
SECOND SESSION
ON
S-Res. 84
A
(72d CONGRESS)
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 18
Reports on Cleveland Banking Investigation
MAY 3 AND 4, 1934
Printed for the use of the Committee on Banking and Currency
175541
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1934
COMMITTEE ON BANKING AND CURRENCY
DUNCAN U FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
ROBERT F WAGNER, New York
ALBEN W BARKLEY, Kentucky
ROBERT J BULKLEY, Ohio
l^HOMAS P GORE, Oklahoma
EDWARD P COSTIGAN, Colorado
ROBER1 R REYNOLDS, Noith Carolina
JAMES F BYRNES, South Carolina
JOHN H BANKHEAD, Alabama
WILLIAM GIBBS McADOO, California
ALVA B ADAMS, Colorado
WILLIAM L
PETER NORBECK, South Dakota
PHILLIPS LEB GOLDSBOROUGH, Maryland
JOHN G TOWNSEND, JR , Delaware
FREDERIC C WALCOTT, Connecticut
ROBERT D CAREY, Wyoming
JAMES COUZENS, Michigan
FREDERICK STEIWER, Oregon
HAMILTON F KEAN, New Jersey
HILL, Cleih
R H SPAEKMAN, Acting Clerk
SUBCOMMITTEE ON STOCK EXCHANGE PRACTICES
DUNCAN U FLETCHER, Florida, Ghmrmcm
CARTER GLASS, Virginia
ALBEN W BARKLEY, Kentucky *
EDWARD P COSTIGAN, Colorado
ALVA B ADAMS, Colorado
1
2
PETER NORBECK, South Dakota *
JOHN G TOWNSEND, JR , Delaware
JAMES COUZENS, Michigan
Alternate, Thomas P Gore, Oklahoma
Alternate, Phillips Lee Goldsborough, Maryland
II
CONTENTS
I GUARDIAN TRUST COMPANY REPORTS
ORDER OF PRESENTATION
>
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Summary report
Corporate history of Guardian Trust Co and subsidiaries
Financial history
Financial condition, 1929 to 1933
Consolidated list of officers and directors
Compensation paid to officers
Loans to officers and directorsLoans to officers of other banks
Loans to "Eaton interests"
Window dressing
Supplemental window-dressing report
Trust practices
_ __ _
Commglmg of funds
__
Examinations
Employees'retirement fund. _.
Membership on board and management committees
Officers and directorate's representation m other concerns
Stock-market activities of the Guardian Securities Co
Hotel Hollenden Co and DeWitt Hotels Co
Loans from R F C
Pages
7978-7988
7988-7998
7998-8013
8013-8029
8030-8035
8036-8040
8040-8048
8048-8054
8054-8058
8058-8061
_ _ 8062-8063
8063-8068
8068-8069
8069-8079
8080-8084
8084-8087
8087
8087-8089
8089-8117
8118
II UNION TRUST CO REPORTS
ORDER OF PRESENTATION
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Summary report
8121-8133
Corporate history
8133-8137
Financial history
_ __ _ __ __ __ 8137-8146
Financial condition, 1929 to 1933. _
8146-8158
Consolidated list of officers and directors
8158-8161
Compensation to officers
8161-8162
Loans to directors
8162-8168
Loans to officers and directors of other banks
8168-8172
Loan to J P Harris
8172-8176
Loans to William G Mather, director, Union Trust Co__
8176-8181
Loans to K V Painter, director of Union Trust Co
8181-8188
Van Swermgen loans
8189-8215
Window dressing
8215-8223
Trust accounts
8223-8224
Directorate m other coaeerns
_
8225-8230
Corngan-McKmney Steel Co
8230-8238
Pamter-Bradley-Nutt Van Swermgen Syndicate
8238-8239
United Milk Products Corporation
8239-8250
Loans from the R F C
8250-8254
20 Union Cleveland Corporation
8254-8259
21 Union Cleveland Corporation, Activities in Trust Co Stock
8259-8263
22 Union Cleveland Corporation, Tax Evasion
8263-8266
NOTE —Interspersed throughout the text of the reports in this volume will be
found references to other reports and exhibits which are included m subsequent
volumes The reader is advised, however, that the page references in the above
references are to the typewritten copy on file with the committee and not to the
printed pages
ni
STOCK EXCHANGE PEACTICES
THURSDAY, MAY 3, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C
The subcommittee met at 10 30 a m , following adjournment on
Tuesday, May 1, 1934, in room 301 of the Senate Office Building,
Senator Duncan U Fletcher presiding
Present Senators Fletcher (chairman), Costigan, Adams, Norbeck,
and Townsend
Present also* Ferdinand Pecora, counsel to the committee; David
Saperstein, associate counsel to the committee, and Frank J. Meehan,
chief statistician to the committee
The CHAIRMAN The subcommittee will come to order, please.
Mr Pecora, have you something to submit to the subcommittee this
morning?
Mr PECORA Yes, Mr Chairman You will recall that sometime
last November, I believe it was, I was instructed by the committee
to make an investigation into banking practices and methods pursued
by the Detroit banks that had been closed, and by certain banks in
Cleveland that also, a t the time, were closed
In pursuance of those instructions members of the investigating
staff repaired to the cities of Detroit and Cleveland, respectively,
and pursued their fieldwork and investigations m those cities under
the immediate supervision of Mr. Frank J. Meehan, who is a member
of the investigating staff of this committee The evidence collected
with respect to the Detroit banks has already been presented to the
committee through the medium of the examination of witnesses and
the introduction of evidence by way of documents
We have completed our investigation of the Cleveland banks that
were the subject of inquiry and have collated and marshaled all the
facts gathered by the members of the investigating staff in the form
of reports which have been made, after considerable care, by the members of the staff who actually conducted the field investigations
* Introduction of this evidence to the committee through the usual
medium of subpenaing and examination of witnesses before the committee would probably require 6 weeks of daily hearings. In order
to save the time and also the expense that would be entailed in that
method of presentmg these facts—and I understand it is the desire
of the committee to save both the time and the expense m connection
therewith—I would now suggest that this evidence or that these facts
collected by the investigators be pat mto the record of this committee's
hearings through the medium of the reports that have been prepared
by the investigators and which we have here now in typewritten form
7973
7974
STOCK EXCHANGE PBlCTICES
If there is no objection to that procedure I will now authenticate
the reports through the testimony of Mr Meehan, who is here and
will submit them, one by one, for the record
The CHAIRMAN IS that agreeable to the subcommittee?
Senator ADAMS Of course, Mr Chairman, I do not know anything
about what is m these reports But as I gathered from the suggestion
made by Mr Pecora, it is that there be submitted really the reports
made by the investigators covermg their investigations rather than
to proceed to the takmg of testimony
Mr PECORA Yes, Senator Adams, receive the reports that the
investigators have prepared, covering what they claim to be the facts
that have come to light as a result of their investigations
Senator ADAMS My inquiry is that the reports, as I understand,
come in authenticated by the investigators, and they say We have
investigated and found these facts, rather than to put m the facts m
the form of testimony, as has heretofore been the case
Mr
PECORA
Yes
Senator ADAMS That is, just as if someone were sent out by a
department to mvestigate a certain problem and comes back and
makes a report and says I have found this, that, and the other, and
it is m that case authenticated in that way
Mr PECORA Yes
Senator ADAMS All
right I just wanted to understand the situation
The CHAIRMAN Very well You may proceed, Mr Pecora
Mr PECORA The reports that I will offer to the committee
Senator ADAMS (interposing) I am asking to find out, ol course,
if back of the reports is your approval of each report coming m That
is, that you think it is the thing that ought to be done
Mr PECORA Of course, it is an exceedingly informal way of presenting so-called " evidence" to the committee, but it has been thought
that
Senator ADAMS (interposing) Well, Mr Pecora, I might say that
we do practically this very thing almost every day in the matter of
bills that come up The committee writes a report on the bill that
somebody, perhaps under the Secretary of the Interior or the Comptroller of the Currency, has gone into the matter and brought in a
report so and so Rarely, if ever, is the evidence brought in the case
of hundreds of bills that come for consideration The report is based
upon an examination made by somebody that perhaps we never see
Mr PECORA I understand that that informal method is pursued by
legislative committees in some cases
Senator ADAMS But this mvestigation was made, of course, by
our own investigators
Mr PECORA Yes I would suggest, however, that announcement
be made on the record to the effect that if anyone desires to present
any evidence controvertmg or qualifying m any way, or bearing on
the matters set forth m these reports, that opportunity will be given
to such persons desiring so to do
The CHAIRMAN I think that can be arranged all right
Senator ADAMS I do not know what is in these reports, but assuming that there might be something reflecting upon somebody's business activities, I think they ought to have a chance to explam in
event they desire so to do.
STOCK EXCHANGE PRACTICES
7975
Mr PECORA. Yes. I think that full opportunity ought to be
given to them, and I suggest that the subcommittee now so indicate.
The CHAIRMAN If we had to call all the witnesses necessary to
testify to these specific facts, I mean the facts mentioned m these
reports, it would take a great deal of time and entail a great deal of
expense and, I think, unnecessary trouble. And these investigators
here will say that these are the facts, won't they, Mr Pecora?
Mr
PECORA
Yes.
The CHAIRMAN I think we can proceed in that way. And if
somebody complains that the record shows something that is incorrect
or erroneous and they want to correct it, we can give them an opportunity to do so.
Mr PECORA Yes, Mr Chairman, I would suggest that that be
done.
The CHAIRMAN. With that understanding you may proceed, Mr.
Pecora
Mr PECORA I ask that Mr. Meehan be sworn
The CHAIRMAN. Mr Meehan, will you please stand, hold up your
right hand, and be sworn.
You do solemnly swear that the testimony you are now about
to give in connection with this investigation will be the truth, the
whole truth, and nothing but the truth, so help you God
Mr
MEEHAN I do
TESTIMONY OF FRANK J. MEEHAN, BROOKLYN, N.Y.
Mr PECORA Mr Meehan, will you please give your full name and
address?
Mr MEEHAN Frank J Meehan, 215 East Fourth Street, Brooklyn,
NY
Mr PECORA Are you connected officially with the office of the
attorney general of £he State of New York?
Mr
MEEHAN I am
Mr PECORA What is your official title or position in that office?
Mr MEEHAN Chief statistician of the department
Mr PECORA HOW long have you been connected in that official
capacity with the office of the attorney general of New York State?
Mr MEEHAN Seven years
Mr PECORA Pnoi to that were you connected with any other
governmental or State agency or department?
Mr MEEHAN Immediately prior to that I was with the Department of Justice for approximately 4 or 5 years as an accountant
Mr PECORA Have your services also been loaned to this committee
at my request, by the attorney general of the State of New York?
Mr
MEEHAN
Yes
Mr PECORA Have you been rendering service as a member of the
investigatmg staff of this committee since January of 1933, or since
I became counsel to this committee?
Mr MEEHAN I have, as its chief statistician
Mr PECORA NOW, during the latter part of the year 1933 did you,
at my suggestion, go to the city of Cleveland, Ohio, with other
members of the investigating staff of this committee, for the purpose
of inquiring into the banking methods and practices prevalent m the
banks of that city?
7976
Mr
STOCK EXCHANGE PRACTICES
MEEHAN I did.
Mr PECORA And how many members of the investigating staff
of the committee worked under your immediate supervision for the
purpose of such inquiry in Cleveland?
Mr MEEHAN. The number of our people in Cleveland varied all
the way from 5 to 25—25 being the peak
Mr PECORA Did they include accountants and auditors?
Mr MEEHAN Yes, sir; and stenographers
Mr PECORA YOU personally went to Cleveland at times to supervise their work, did you?
Mr
MEEHAN I did
Mr PECORA And reported the results to me from time to time?
Mr
MEEHAN. Yes, sir
Mr PECORA. Have there been prepared by the members of the
investigating staff of this committee written reports setting forth
the results of their investigations?
Mr MEEHAN There have been
Mr PECORA Have you got such written reports here?
Mr MEEHAN Yes, I have
Mr PECORA Will you please produce those of them which relate
to the bank called "Guardian Trust Co of Cleveland, Ohio"?
Senator ADAMS May I ask at that point as to what was the
method of the investigation, having in mind how far it was made
up of an examination of individuals connected with the banks and
how far made up by an examination of bank records?
Mr MEEHAN Our men in Cleveland had to depend upon the
receivers to get access to the actual books, records, and files Where
in certain cases—and there were quite a few of them—essential
records were missing, they would then go to the men most interested
in that particular phase of the investigation, former directors of the
banks, former officers, assistants of the superintendent of banking of
Ohio, in order to get the factual information which they needed and
upon which they have commented m their reports. Following an
investigation, wherever any statement of fact is made in a report, it
is backed up by a photostatic copy of the document or letter, or
transcript of the record Such photostats are in the original report.
So that all of our statements of facts are supported by documentary
evidence
Senator ADAMS Then am I to understand that no part of your
report is based merely on oral statements made to you?
Mr. MEEHAN NO, sir.
Senator ADAMS But that it is all documentary
Mr MEEHAN. All documentary
Senator ADAMS And I gather from what you say
you have a basic
accumulation of all the data, and then you have made a summary of
it, which you are now putting before the committee
Mr MEEHAN A summary of each phase
Senator ADAMS But not a full accumulation of all the data compiled
Mr MEEHAN Well, we have two summary reports, one on the
Guardian Trust Co and one on the Union Trust Co Each of these
summary reports summarizes the results of all the different phases of
/that particular investigation The main investigation was devoted
to two different groups, two prmcipal groups, the Guardian Trust Co.
STOCK EXCHANGE PEACTICES
7977
group and the Union Trust Co group So that these two summaryreports, which are not documented you understand, will furnish a
sketch of the whole story as it relates to these two main groups.
We have particularized hj preparing a report on each specific
phase of each group, and it is in those reports that we have the
documentation.
Senator ADAMS All right
The CHAIRMAN In other words, these reports are not based on
hearsay or rumors but on the records of the banks themselves
Mr MEEHAN Yes, sir
The CHAIRMAN And, of course, other sources of data referred to
Mr. MEEHAN Yes, sir^
Mr PECORA. And I might say that the references in these reports
to
such documentations are not only set forth in the text of the reports
but also in the marginal notes that appear on the face of each report.
Mr MEEHAN. Yes; in the marginal notes of the summary reports,
that will be found by way of reference to the exhibits And the exhibit
will be found subheaded on the left-hand side of the folder containing
the report
Senator COSTIGAN Has it been the practice to make indexes for
these reports ? Are they so arranged that there is an index in each
instance?
Mr. MEEHAN NO, sir. We have not prepared an index That
could be done, however, at very little time and trouble.
Senator ADAMS. But they are indentifiable by numbers or some
symbol?
Mr MEEHAN Yes, sir.
The CHAIRMAN. Have you identified these papers that you now
have here before the subcommittee?
Mr MEEHAN Yes, Mr. Chairman.
Mr PECORA. Senator Adams, you might see just how they are
prepared in the matter of form by referring to this folder. Here is
the text of the report This is the reference to the documentary
evidence supporting the statements in the text And all these exhibits
will be made a part of the record of the hearing. I might explain
that the exhibits are now in the hands of the Government Printing
Office.
Senator ADAMS. All right.
The CHAIRMAN. YOU may proceed, Mr. Pecora.
Mr. PECORA. Mr Meehan, I show you a report produced by you
and entitled " Guardian Trust Co.—Summary " It is addressed to
you by Walter H. Seymour, senior examiner, bearing date April 27,
1934, and relates to the Guardian Trust Co. of Cleveland, Ohio
Will you look at it and tell me if you recognize it as being a copy of
one of the reports submitted to you by Mr. Seymour, who was one of
the members of the investigating staff who worked in Cleveland under
your direction?
Mr. MEEHAN Yes; I do.
Mr PECORA Mr. Chairman, I now offer that report in evidence,
together with the supportmg exhibits, which exhibits we do not have
here at this time. I might explain that the exhibits are now physically
in the possession of the Government Printing Office. They were
delivered to the Government Printing Office yesterday in order to
save time incidental to the printing of the record.
7978
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The report and exhibits will be received in evidence
(The report entitled "Guardian Trust Co—Summary", together
with the exhibits now at the Government Printing Office, were received m evidence and marked " Committee Exhibit No. 1, May 3,
1934", and are as follows )
COMMITTEE EXHIBIT N O
1—MAY 3,
1934
GUARDIAN TRUST CO., CLEVELAND, OHIO
SUMMARY
The closing of the Guardian Trust Co , like that of the Union
Trust, was not the result of the "Michigan bank holiday" nor the
"National bank holiday", but was the result of unsound practices
and mismanagement
In the individual reports written in connection with each phase of
the bank's activities we have reported m detail This report will
simply be a summary of the information disclosed in the individual
reports.
The Guardian Trust Co and its subsidiaries comprise 26 separate
corporations
(Report re Corporate History)
As will be shown later m this report, the Guardian Trust Co ,
through the medium of its accounting methods, has never issued a
statement of condition which has shown the true facts These
25 subsidiaries were used by the bank management to cover up those
activities of the Trust Co. other than of the banking business.
(Report re Corporate History, p 5)1
The largest and most important subsidiary is the New England Co ,
a corporation formed originally to take title to the main bank building
Later, stock ownership of the Hotel Hollenden Co and the DeWitt
Hotels Co were transferred to the New England Co
In the acquirement and formation of the following companies, we
find evidence of subterfuge for four different reasons
(Report re Corporate History, p 3)
1 New England Co —To invest in a banking building in an amount
beyond that permitted by law.
2 The Guqrdian Securities Co —To permit the bank to speculate
in mortgages and, subsequently, stocks and securities.
3. 4400 Superior Co.—To conceal and to attempt to recuperate a
loss incurred through an unwise loan
4 Harrison County Investment Co —To attempt to protect a loss
sustained through a bad investment, the bank indirectly entered the
coal-mining business.
(Report re Corporate History, p 4)
From 1928 until the closing of the bank, the formation of subsidiaries became a common occurrence, 4 being formed in 1928, 1 in
1929, 2 in 1930, 7 m 1931, and 6 in 1932. Naturally, all these sub1 See explanatory note, table of contents
7979
STOCK EXCHANGE PBACTICES
sidiaries required financing, and the Guardian was milked by means of
"loans" and "investments", all of which were carried on the various
books at full value, although many of them were obviously not worth
the paper on which they were recorded.
(Report re Corporate History)
From a summary of the activities of these subsidiaries we find that
the Guardian Trust Co , besides being a bank, was actually engaged
in the following businesses
1. The operation of an office building
2 The operation of a chain of hotels
3. The operation of a coal mine
4. The ownership of a produce market house
5 The operation of residential, apartment, and business property,
6 The holdmg of vacant allotment property
7 Speculation m stocks and bonds
MANAGEMENT
The affairs of the Guardian Trust Co were dictated and managed
almost wholly by Mr J Arthur House, president, and Mr H C Robinson, executive vice president Associated with these 2 were 4 or 5
of the other semor officers, however, all important questions and
final decisions were left to the Messrs House and Robinson
(Report re Compensation Paid to Officers)
A review of the pay roll shows that in the years 1928 to 1932 inclusive, salaries and bonuses of the seven highest paid officers were as
follows.
1928
$98,333 33
J A House, presidentH O Robinson, executive vice president. 72,500 00
H P Mclntosh, Jr , vice president
33,450 00
T E Monks, vice president
36,450 00
32,750 00
H I Shepherd, vice president
27,000 00
A Q Stucky, vice president
H F Young, vice president
27,000 00
1929
1930
1931
$107,083 33
76,875 00
36,875 00
36,275 00
35,375 00
30,625 00
31,625 00
$108,750 00
77.708 50
36,775 00
36,175 00
35,575 00
30,125 00
30,125 00
$90,000
65,000
33,000
33,000
33,000
27,000
27,000
1932
$75,350 00
54,925 00
27,791 67
29,375 00
17,125 00
23,708 33
23,708 33
(Report re Compensation to Officers)
At the end of each year the board of directors voted a sum of
money to be paid as a bonus to the officers of the Trust Co , and left
the distribution to the discretion of Mr House After taking the
lion's share for himself and allowing Robmson a large portion of the
remamder, Mr House distributed the bonus money to the various
officers
Our report regarding Compensation Paid to Officers shows in
detail the value placed on his services by Mr House In fact, m
answer to an mquiry, Mr House stated
(Report re Compensation Paid to Officers, p 6)
I am coming more and more to the conclusion that executives in banks, who
are responsible for the success of the institution and who are really the money
makers, should be paid, in addition to their salaries, a percentage of the net
earnings
7980
STOCK EXCHANGE PEACTICES
FINANCIAL HISTORY
(Report re Financial History, p 1)
The management of the Guardian Trust Co , in order to conceal
from the stockholders the true facts regarding the bank's condition,
resorted to methods of accounting and preparation of reports designed
to conceal losses which were constantly sustained, due to poor judgment and speculative tendencies
(Report re Financial History, p 2)
The Guardian Trust Co. has never issued
which showed the earnings for any period
apprised of the company's earnings through
read at the annual meeting of stockholders
annual reports or statements of the bank
a report to stockholders
The stockholders were
the medium of a report
None of the published
disclosed the earnings
(Report re Financial History, pp 1, 2)
Earnings were reported greatly in excess of their actual amount,
as a result of which excessive dividends and bonuses were paid.
The entire method of reportmg earnings and the condition of the
bank was misleading and contrary to sound principles of accounting.
(Report re Financial History, p 2)
Transfers of semi-worthless assets were made to subsidiary companies at their book value in order to prevent showing losses which
would have occurred had the assets been written off to their true
value.
(Report re Financial History, p 4)
The profits of the Guardian Trust Co were exaggerated in the
annual report, due to the fact that m preparing the consolidated
statement, only the operations of certain subsidiaries were included,
these being companies that were making money, while losing companies were completely ignored
f(Report
re Financial History, pp 7 and 9)
In the case of the Guardian Trust Co , the term " Reserve for
Depreciation Account" was a misnomer, as the account was at all
times entirely inadequate to take care of the occurring losses. As a
result of the general madequacy of the reserve and the failure to provide for losses, it was necessary to transfer from undivided profits
at the end of each year, sufficient to take care of the balance of the
losses. This transfer from prior year's profits did not affect the
current year's operations
(Report re. Financial History, p 10)
Through the confusmg method employed by the bank in running
losses through the reserve accounts, it was enabled to show earnings
of $7,573,470 51 m excess of the actual earnings after deducting
losses, for the 10-year period from 1923 to 1932 inclusive The
earnings of the bank as reported on the annual reports for this period
STOCK EXCHANGE PRACTICES
7981
were $15,035,156 35, whereas the actual earnings, after deducting
losses, were $7,461,685 84.
(Report re Financial History, p 15)
On page 15 of our Fmancial History Report we have tabulated the
earnings as reported, actual earnmgs, and the dividends paid for the
10-year period from 1923 to 1932 inclusive Dividends were paid of
more than $15,000 m excess of the actual earnings for this period
It seems extremely unlikely that had the stockholders and directors been aware of the amount of the real combined earnmgs, that
they would have approved the declaration of such large dividends
Neither does it seem logical that they would have approved the payment of salaries and bonuses to officers of approximately $700,000 for
the years 1929 and 1930
(Report re Financial History, p 16N/
While the earnings of the Guardian Trust Co were reported to the
stockholders on an accrual basis, the earmngs reported by the bank
for Federal income-tax purposes was on the cash basis It should be
noted that a$ a result of filing on this basis, no income-tax liability
was incurred, with the exception of $13,424 which was paid for the
year 1929
(Report re Financial History, pp 20, 21)
Trust no 1092 —Further evidence of concealment of facts was discovered in an account called " Sundry Trust no 1092 ", the component
parts of which were carried on the bank's statements as resources, or
assets, with an offsetting credit among trust funds, whereas m reality
this account included revenue and expense items as well as worthless
assets This so-called " trust" was merely another of the many subterfuges used by the bank management to conceal losses sustained by
reason of unwise loans and investments Semiworthless assets were
transferred to this trust, the trust funds being shown in excess of their
true worth on the annual report, as no wnte-off due to losses or
decline in values was made
(Report re Financial History, p 22)
Sundry trust no 1092 was originally created for the purpose of
segregating certain commissions on real estate loans consummated
by Mr. A. D Fraser for various insurance companies.
Under an agency agreement, Mr Fraser, an official of the bank,
placed loans for several large insurance companies, receiving a certain
commission from them for his services Of such commissions, Mr
Fraser retained 40 percent and the bank, 60 percent On the assumption that such earnings were not entirely applicable to the year in
which the loan was consummated, but should be distributed over the
life of tho loan, the bank management decided that these commissions
should be segregated in a trust fund, a proportionate share of which
could be withdrawn yearly and credited to the earmngs of the bank.
Had this policy, which is perfectly tenable, been adhered to, there
would be no occasion for criticism, but after some years the trust
became, in effect, nothing more tban a clearing house for many
extraneous and generally nonprofitable transactions
7982
STOCK EXCHANGE PRACTICES
This trust became nothing more than a secret reserve account in
which was placed earnings from many sources, such as profits from
the sale of acceptances, rentals on properties owned, etc , and from
which funds were withdrawn for such purposes as the payment of
rental to other trusts operated by the Guardian Trust Co , as trustee,
the purchase of mortgages, notes receivable, bonds, etc from the
Guardian Trust Co
(Report re Financial History, p 24)
In order to have sufficient funds m this trust to cover the bank
losses being run through it, it was necessary to divert some of the
bank's earnings and assets into it, the total amount so diverted being
$1,074,923 85, including commissions on loans
(Report re Financial History, p 25)
That the bank officials themselves considered this account as a
secret reserve is borne out by memoranda and journal tickets signed
by official's referring to this trust as " Sundry Trust Reserve 1092 "
FINANCIAL CONDITION
(Report re Financial Condition pp 1, 2)
As we have stated previously in this report, the closing of the
Guardian Trust Co. was simply the result of unsound practices and
mismanagement The unsound practices were many, bemg
1. An unwise loan policy
2 An unsound mvestment policy
3 Due to the loan policy, the bank was forced mto a position of
bemg a large holder of real estate through foreclosure.
4 Inadequacy of reserves
5 Too liberal dividend policy
6 The engagement m practically every type of busmess along with
the banking business
(Report re* Financial Condition, p 6)
Loans.—While a bank's principal function is primarily to make
loans, conservative banking demands that these loans be of a fairly
liquid nature In the Guardian Trust Co. the reverse was true, a
very large percentage of the loans bemg secured by real estate In
addition, too many of the collateral loans were made on security of a
highly speculative nature Even as early as 1929 the bank had loans
past due of $10,000,000, and an additional total of loans to officers
and directors and their corporations amounting to $10,500,000 more
(Report re. Financial Condition, p 13)
The Guardian Trust Co was hopelessly insolvent in February 1932,
1 year before it was closed
On February 29, 1932, the bank had estimated losses on loans of
$11,867,576 23, to which should be added doubtful loans of
$7,462,354 13 and loans of undeterminable value $10,518,881 08,
making
a potential loss of $29,848,811.44 or enough to wipe out the
STOCK EXCHANGE PRACTICES
7983
entire capital and surplus of the bank, amounting to $17,187,563.63,
a potential deficit of $12,661,247 81
(Report re Financial condition p 15)
Assets pledged —On April 8,1933, when the conservator took charge
of the bank, 55 percent of the bank's total resources were pledged to
secure loans. The percentage of pledged mortgages to total mortgages
increased from nothing on March 23, 1929, to 64 percent on April 8,
1933, and pledged loans from nothing to 52 percent during this same
period, a clear indication of the bank's desperate attempts to keep
operating at any cost
From December 1931 to February 1933 the total resources of the
bank decreased more than 78 millions of dollars and liabilities increased by almost 20 million.
(Report re Examinations)
One of the chief reasons for the widespread confidence in the
Guardian Trust Co prior to the closing of that institution in February 1933 was undoubtedly the belief by depositors that their savings,
often those of a lifetime, were adequately protected through the
medium of frequent examinations as to the condition of the bank by
National, State, and local bodies
Sections 710-1 to 710-36 of the Ohio banking laws provide that
the superintendent of banks must examine each bank "at least once
each year " Section 9281 of the Federal Code provides that examinations should be made by the Federal Reserve examiners "at least
twice each year", except that examinations by State authorities may
be accepted in the case of State banks
(Report re Examinations)
There have been only six examinations of the Guardian Trust Co.
conducted m the period from 1922 to the time of the bank's closing,
as follows
1922. December 8, Federal Reserve examiners assisting.
1924. October 11, Federal Reserve examiners assisting
1926 February 26, Federal Reserve examiners assisting.
1928* January* 27, Federal Reserve examiners assisting.
1929 November 15, State department examiners only
1932 February 29, Federal Reserve examiners assisting.
In our report regarding the examinations of the Guardian Trust
Co. we have severely criticized the number and the methods of these
examinations Also, we have condemned the "examinations" made
by the directors' examining committee
LOANS
In the 2 years from December 1930 to December 1932, collateral
loans decreased from 46 to 31 million and real-estate loans decreased
from 37 to 31 million, while deposits decreased from 157 to 109 million
dollars
7984
STOCK EXCHANGE PRACTICES
(Report re Financial Condition, p 7)
Possibly one of the worst features of the real-estate loan situation
the large amount loaned on vacant property, the value of which is
highly speculative There can be no doubt that vacant or allotment
property is purely speculative, its ultimate value being entirely
dependent upon the sales ability of the allotment owner, and for a
bank to loan large sums upon real estate of that nature mdicates a very
weak loan policy.
(Report re Loans to Directors and Officers, p 3)
Mr J Arthur House, like several of the other semor officers, availed
himself of the device of obtaining loans from the bank as bemg made
to his trust estate and not in his own name The records of these loans
did not, therefore, indicate the true borrower but merely a trust-fund
number Mr House's indebtedness to the bank totaled on April 8,
1933, $245,933 48, on which he had been charged a preferential interestrate of 5 percent The liquidator has mcreased the mterest rate to 6
percent
Besides the loans to Mr House, the Guardian Trust Co has loans
of $400,000 outstandmg to the Mills Co Mr House is related to the
Mills, and is a director of the Mills Co
(Report re Loans to Directors and Officers)
Other senior officers who boirowed large sums from the Guardian
Trust Co and whose loans arc still unpaid are Mr H P Mclntosh,
Jr , a vice president, with loans of over $100,000 unpaid, and Mr
Robinson with loans totaling $42,000 still due Thomas Monks has
unpaid borrowings of $42,090 All of these officers enjoyed a preferential interest rate until the liquidator raised it to 6 percent
(Report re Loans to Officers and Directors of Other Banks)
Also, when the Guardian Trust 13o closed, it had outstanding
approximately a half million dollars in loans to officers and directors
of other banks Some of these loans were sufficiently collaleraled,
while others were obviously made because of the connections of the
borrower
Attention is called, in particular, to the following loans*
E R Fancher, Governor of Federal Reserve Bank
$53, 000
George DeCamp, Federal Reserve agent
40, 000
W M Baldwin, president, Union Trust Co
32,000
A W Dean, Guardian director and treasurer of Enos Coal Mining
Co
.1, 257, 000
(Report re Loan? to Eaton Interests)
The loans made by the Guardian Trust Co to the so-called " Eaton
Interests" are represented by six loans totaling $5,343,055 19, and
are composed of the following:
7985
STOCK EXCHANGE PEACTICES
April 8,1933
Eaton interests
Loans
A
B
C
D
E
F
Cleveland Cliffs Co
Continental Shares
George T Bishop, syndicate manager.
Foreign
Utilities, Ltd
Otis
& Co
B H Bishop, Jr and Samuel Mather _
Total
Deposit
General average
balance ap- deposit balances
1931 and 1932
proximate
$2,010,338 61
1,146,281 62
440,796 69
360,000 00
417,863 37
978,786 00
$344,000
15,000
None
None
3,000
$300,000-700,000
11,000-300,000
None
None
1,000-50,000
6,343,055 19
All of these loans are collateraled by the same character of securities, l e , securities involving the Mather operations and the OtisContmental companies
The Trust Co also has loans outstanding due from the Van Swermgens totalmg $4,306,324 60
EMPLOYEES RETIREMENT FUND
On July 1, 1913 the Guardian Trust Co created an employees'
retirement fund for the purpose of retiring faithful employees after
certain prescribed periods of service Under the terms of this fund,
the employees contributed an amount equal to 3 percent of their
monthly salaries and the bank contributed an identical amount
(Report re
Employees' Retirement Fund, p 2)
The management of the fund was administered by a board of trustees, of which Mr House, as the president, was an ex-officio member
Mr W R Green, vice president, was secretary of the fund
Mr House utterly disregarded his oath to faithfully perform his
duties as trustee, and his management of the fund is a flagrant example
of the abuse and violation of the trust placed m him as a guardian of
life savings
(Repoit re Employees' Retirement Fund, p 3)
In 1930, Mr House, along with his ever-present aide, H C Robinson, saw the possibilities of divertmg funds from the retirement fund
to their own use
(Repoit re Employees' Retnement Fund, p 4;
A group of officers and directors of the bank formed a syndicate
known as the "Directors' Syndicate7' to trade in the Guardian Trust
Co stock. The syndicate was predicated on the plan that each
director and officer of the bank was to subscribe to a certain number
of shares m the syndicate, and the syndicate was to acquire the stock
from the outside market
Mr H. C. Force, vice president, acting as agent for the syndicate,
borrowed from the retirement fund to make the stock purchases for
the syndicate.
The syndicate was never completed, and was left with 287 shares of
Guardian bank stock on hand. Thereupon, these 287 shares were
175541—-34—PT 18
2
7986
STOCK EXCHANGE PRACTICES
sold by Mr Force, after approval had been arranged by Mr. House,
to the employees' retirement fund at $265 23 per share, notwithstanding the fact that the retirement fund had purchased only the day
before 49 shares m the open market at $69 72 a share
(Report re Employees' Retirement Fund)
Another example of Mr House's arbitrary price-fixing on the Guardian stock is shown by his conduct mvolvmg the sale of Guardian
Trust stock to employees The Guardian, m February 1929 sold its
stock to the employees at $250 a share on a partial-payment plan In
the event of a subscriber ceasmg to be an employee of the bank, his
subscriptions were refunded The stock was thenceforth subject to
the control and disposition of the president, as trustee, for reallotment.
By July 1932 Mr House, as trustee, had repurchased 218 shares of
the Guardian stock at $250 per share He thereupon sold this stock
to the retirement fund at the 1929 subscription price The high market price of the stock in July 1932 was $70 per share
Messrs House, Robinson, and Green have been indicted by the
Federal grand jury for their acts in regard to the retirement fund.
No definite date has been set for the trial
"WINDOW DRESSING"
(Reports re " Window Dressing", Financial History)
In the preparation of its published statements, the Guardian Trust
Co resorted to the device of "window dressing" This "window
dressing" was through the medium of repurchase agreements, kiting
of checks, and large temporary deposits from friendly depositors Of
course, as we have already pointed out, the statements of the bank
did not mclude the losmg subsidiaries, so that the "window dressing"
methods described above were only part of the deception carried on
by the bank management.
TRUST PRACTICES
(Report re Trust Practices)
The Guardian Trust Co , in its capacity as trustee, has violated its
fiduciary relationship in more than one instance, by burdening trust
estates over which it had discretionary investment powers, with
securities in which the bank realized a profit by the expedient of passing securities through its bond department and subsequently to its
estates.
(Report re Trust Practices, p 1)
In one particular case the bank relieved one of its directors of a huge
block of bonds at a profit of 5 points to the director These bonds
were subsequently sold to the trusts In his particular instance the
bank itself held a large block which it could have passed on to the
trusts at cost, without incurring the 5-point profit to the director.
The following are some of the securities which were sold to the
trust estates, and a comparison of the cost price paid by the bank to
the selling price:
STOCK EXCHANGE PRACTICES
7987
(Report re Trust Practices, p 3)
$66,000 of H A Stahl Properties gold bonds, costing 92 percent, were sold to
trusts at 99 and 100 percent
$33,000 of Erie-Prospect Co bonds, costing 96 percent, were sold to trust at
98 to 100 percent
(Report re Trust Practices, p 3)
$39,000 Fairmount-Development bonds, costing 93 percent, sold to trusts at
99 and 100 percent
$300,000 H F Neighbors Realty Co land-trust certificates were purchased by
the bank at 96 66 percent and sold to the trusts at a 3-pomt profit
(Report re Commingling of Trust Funds)
The officials of the Guardian Trust Co commingled the uninvested
trust funds with the general funds of the bank After the Guardian
Trust closed, and the first liquidating dividend of 20 percent was declared, the trust clients received their pro-rata share of the disbursement as general creditors in the same manner as the commercial
depositors
GUARDIAN SECURITIES CO.
(Report re Stock Market Activities)
The largest single activity of the Guardian Securities Co seems to
have been in the stock of the Inland Investors, Inc , an mvestment
trust The Guardian Securities Co borrowed money from the
Guardian Trust Co and purchased 15,000 shares of the Inland
Investors, Inc stock, selling all but 2,004 shares to outside customers.
The 2,004 shares were sold to the employees of the bank on the partialpayment plan, at $52 50 a share The present market price of the
stock is about $9 a share
WALTER H. SEYMOUR,
Senior Examiner.
Senator ADAMS Mr Meehan, the Guardian Trust Co. of Cleveland,
Ohio, is in the hands of a receiver, isn't it?
Mr MEEHAN Yes, sir
Senator ADAMS When did it close?
Mr MEEHAN. I will have to look that up
Senator ADAMS I mean approximately
Mr MEEHAN In March 1933,1 think
Senator ADAMS It was closed back in 1933 some time?
Mr MEEHAN. Yes, sir.
Senator ADMAS And it is in process of liquidation now?
Mr MEEHAN Yes, sir.
Senator ADAMS All right
The CHAIRMAN YOU may contmue, Mr Pecora
Mr PECORA. Mr Meehan, I show you another report,
entitled
"The Guardian Trust Co and Subsidiaries—Corporate History " I
ask you if you recognize it as being another report prepared by Mr.
Seymour under your immediate supervison
Mr MEEHAN I also identify this as a report having been made
under my immediate supervision
Mr. PECORA Mr Chairman, I offer that report in evidence, together
with the exhibits that are referred to m the report itself
7988
STOCK EXCHANGE PBACTICES
The CHAIRMAN. The report and exhibits will be received in evidence
(The report entitled "The Guardian Trust Co. and Subsidiaries—
Corporate History", together with the exhibits now at the Government Printing Office, were received in evidence and marked "Committee Exhibit No 2, May 3, 1934," and are as follows-)
COMMITTEE EXHIBIT N O 2—MAT 3,
1934
CORPORATE HISTORY
(G-3A, G-3B)
From the time of its organization in 1894 until 1913, the Guardian
Trust Co operated as a bank only, but in 1913 it acquired the first
of the 25 subsidiary companies, which were instrumental in bringing
about its ultimate failure
(G-3-1)
We find by referring to the minutes of the New England Co that
as of January 3, 1914, the bank owned all, except directors' qualifyingshares, of the capital stock of the New England Co , the outstanding
5,000 shares being held as follows
Shares
Guardian Savings & Trust Co
H P Mclntosh
Chas, S Mosher
J A House
H C Robm&oa___
__
H P Mclntosh, Jr
4, 995
1
1
1
1
1
5,000
As the New England Co owned the property occupied by the bank,
the purpose of this acquisition was, obviously, to obtam control of
the banking premises, and as we know of no law that prevented a
bank from owning its own banking quarters, we cannot understand
why the property was not purchased outright and carried on the
bank's books as a real-estate asset and can only assume that even at
such an early date, the bank management had manipulation m mind.
The purpose of the move becomes apparent, as we go further into
the minutes of the New England Co and find the following m the
mmutes of a directors' meeting held May 7, 1915
(G-3-2)
Whereas this company is empowered to borrow money and to issue its coupon
or registered bonds therefore bearing any legal rate of interest and to secure their
payment by a mortgage of its property, real or personal or both, and
Whereas it is necessary for this company to borrow money for the purpose of
refunding its present mdebtedness and of making contemplated improvements to
its property, now, therefore, be it
Resolved, That the president or vice president, and secretary or treasurer of this
company be, and they are hereby, authorized and directed to execute and deliver
the coupon bonds of this company to an aggregate amount of not exceeding
$1,500,000 of said bonds
From this it can easily be seen that the Guardian Trust Co wished
to erect additional new quarters of a semispeculative nature without
violating the bankmg laws and adopted the expedient of a subsidiary
STOCK EXCHANGE PEACTICES
7989
company, the first of many designed to evade banking laws In later
years the New England Co proved to be a very convenient medium
for the bank to conceal indiscretions of the bank management, as will
be brought out m later paragraphs
The second subsidiary to be formed was the Guardian Mortgage Co.
formed in 1917 for the purpose of permittmg the bank to indirectly
engage in the buying and selling of mortgages (at a time when such
speculation was profitable) In 1927 the company recapitalized and
was chartered to deal in securities
Next in order of formation came the Branch Investment Co ,
organized for the purpose of taking over the sublease on certain property mtended for the housing of the East One Hundred and Fifth Street
branch of the Guardian Trust Co The original purpose of this company was also lost sight of in later years
In 1928, the bank found it necessary to organize the 4400 Superior
Co for the purpose of purchasing a leasehold for the assumption of an
indebtedness to the Guardian Trust Co
The Harrison County Investment Co was formed in 1930 to take
title to certain coal properties, in which the bank had made an investment, and which were sold by court order
We have so far given only a brief outline of the five direct subsidiaries
of the Guardian Trust and have commented on them only very generally
However, we believe that even from this brief outline it is possible
to gage the intent of bank officials to "camouflage" losses and evade
banking laws
In the acquirement of and formation of the aforementioned companies, we find evidence of subterfuge for four different reasons
1 New England Co To invest in a banking building in an amount
beyond that permitted by law
2 The Guardian Securities Co To permit the bank to speculate
in mortgages, and, subsequently, stocks and securities
3 4400 Superior Co To conceal and to attempt to recuperate a
loss incurred through an unwise loan
4 Harrison County Investment Co To attempt to protect a loss
sustained through a bad investment, the bank indirectly entered the
coal mining business
These companies were all purchased or financed with Guardian Trust
Co. money secured from depositors and the practice of concealing
losses and evading laws should have been apparent to examiners and
curtailed, but as it was passed unnoticed, the bank officials really
settled down to serious business in the matter of organizing subsidiaries
in 1928. However, not wishing to make the fact too apparent, they
adopted the expedient of organizing subsidiaries to the subsidiaries,
thereby making the detection of subterfuges more difficult.
From 1928 until the closmg of the bank, the formation of subsidiaries
became a common occurrence, 4 bemg formed in 1928,1 in 1929, 2 in
1930, 7 in 1931, and 6 in 1932. Naturally all of these subsidiaries
required financing; and the Guardian was milked by means of "loans"
and "investments", all of which were carried on the various books at
full value, although many of them were obviously not worth the paper
on which they were recorded.
Having given a general idea of the Guardian Trust subsidiaries, we
shall now take them up individually and trace through the various
ramifications.
7990
STOCK EXCHANGE PBACTICES
NEW ENGLAND CO.
We have already explained the original purpose of this company
and traced it through to 1915. In 1913, when acquired, the capital
stock of the company consisted of 5,000 shares with a par value of
$500,000
Since then, there have been the following changes in the capital
stock*
1915, the capitalization was changed to 15,000 shaies (2,500 shares of
which was issued as a stock dividend)
1916, increased to 19,000 shares
1917, increased to 20,000 shares
_
1921, increased to 23,000 shares
1924, the capitalization was changed to 10,000 shares
Par value
$1, 500, 000
1, 900, 000
2, 000, 000
2, 300, 000
2, 300, 000*
On March 14, 1928, the board of directors voted to change the
stated common capital of the company to $3,800,000, the present
figure at which the stock was carried on the books of the Guardian
Trust Co
From 1913 until 1926 the New England Co did not acquire any
subsidiaries, but m 1926 the Vincent Building Co was formed for the
purpose of building a hotel building to the east of the Hotel Hollenden,
to be used by the Hotel Hollenden To finance this, the New England
Co invested $619,500 m the Vmcent Building Co and guaranteed
$800,000 of leasehold bonds As the Guardian Trust Co owned the
New England Co , the bank, therefore, voluntarily went into the hotel
busmess
In 1928 the New England Co purchased from the Guardian Trust
Co all of the capital stock of the Hotel Hollenden Co for the sum of
(G-3-3ab)
$750 and all promissory notes of the Hotel Hollenden Co to the
Guardian Trust Co for the sum of $1,350,000 By this means the
management of the Guardian Trust Co was relieved of the embarrassment of showing a large loss on the Hotel Hollenden Co loans
and stock
(G-3-3)
In order to handle this deal, the New England Co (oi m other
words the Guardian Trust Co ) mortgaged its building for $3,250,000
with the Metropolitan Life Insurance Co and purchased the Hotel
Hollenden Co stock and notes from the bank By this means the
Guardian Trust Co relieved its books of "sour" loans amountmg to
$1,350,000 which properly should have been written off; mortgaged
what was m effect its building, bolstered its cash to the extent of the
amount received from the New England Co , and contmued to carry
on the bank books at full value under the caption "Banking house 7 '
the $3,800,000 stock of its subsidiary, the New England Co , even
though the management knew they had just unloaded a potential loss
of over a million dollars on the subsidiary Durmg the ensuing years,
the New England Co made advances to the Hotel Hollenden Co for
various purposes, until in 1930, at a regular meetmg of the board held
June 25, the treasurer reported—
STOCK EXCHANGE PRACTICES
7991
(G-3-4)
that the company is now loaning to the Hotel Hollenden Co $1,987,500 of which
$441,310 is represented by trustees' advances for ground rent, taxes, and other
items
The Hotel Hollenden Co has requested that the New England Co refund
these various loans, totaling $1,546,189 23 and on motion properly made and
unanmously carried, it was resolved to accept from the Hotel Hollenden Co its
second leasehold mortgage in the amount of $1,546,189 23 securing the Hotel
Hollenden Co notes for a like amount
Despite this idea, the Hotel Hollenden Co still represented a
"sour" liability on the New England Co books, which might have
caused embarrassment to the bank management in carrying the
New England stock on the Guardian books at full value In order
to correct this, another brilliant plan was conceived, and at a meetmg
of the Aboard of directors held on December 27, 1932
(G-3-5)
The president stated we have had recent appraisals made of the land and
building owned by this company having in mind that if said appraisals were for a
sufficient amount in excess of the present amount to write-off the notes receivable
and first-mortgage bonds of the Hotel Hollenden Co The treasurer, Mr Green,
reported the following appraisals of the land
Henry Hertel
$2, 603, 904
W J Purvis, special representative of the Metropolitan Life Insurance Co as of Dec 17,1932
2,063,760
Geo L Craig as of Dec 28,1932
3,137,308
On motion, the land and building were placed on the company books as follows
Land
$1, 939, 200 00
Building
3, 041, 099 14
Total value of land and building
4, 980, 299 14
Which were carried on the company's books for
3, 021, 505 35
Thereby creating a credit through revaluation of assets of
1, 958, 703 79
Which is hereby credited to an account "Appraised surplus "
On motion, the officers are authorized to charge to appraised surplus
Notes receivable, Hotel Hollenden to
$1, 751, 243 79
First mortgage L H bonds, Hotel Hollenden Co ($220,500
par)
207, 550 00
1, 958, 793 79
By this maneuver the Hotel Hollenden Co loss of $1,958,793 79
was wiped from the books of the New England Co as successfully
as it had been eliminated from the Guardian Trust Co records The
chicanery in this entire deal is so apparent it needs no further comment The "reappraisal" could not be made sufficiently large, however, to cover the trustee advances made by the New England Co
to the Hotel Hollenden Co , and there still remains on the New England books a debit agamst the Hotel Hollenden Co in the amount
of $483,483 13
We have traced the Vincent Building Co and Hotel Hollenden Co
through the New England Co , but there still remams another
factor to make the hotel picture complete
The De Witt Hotels Co was formed March 2,1931, for the purpose
of owning, holding, managing, operating, and controlling hotels All
of its stock, 500 shares, was subscribed for by the New England Co.
7992
STOCK EXCHANGE PRACTICES
at $500 and $2,000 of surplus was paid in—making the total investment $2,500
The picture is now complete We have the Guardian Trust Co.
sustaining a large loss by reason of loans to and investments in the
Hotel Hollenden Co , concealing this loss by transferring it to its
subsidiary, the New England Co , which in turn erased it by a convenient "reappraisal" and which, through the formation of another
subsidiary, continued in the hotel business
In March 1931 the Guardian Trust Co , with its record cleared of
its former losses in its hotel venture, forgot its previous experience and
loaned $475,000 to the De Witt Hotels Co , its indirect subsidiary,
this loan being collateraled by $500,000 bonds of the Neil House,
Columbus, Ohio, which were to be purchased with the proceeds of the
loan Could there be better evidence of the Guardian's reentry into
the hotel business? The entire story of the Hollenden Hotel Co ,
Vmcent Building, and De Witt Hotels Co is contained in a separate
report which brings out all details
In addition to " camouflaging" the hotel activities of the bank, the
New England Co also served a useful medium in handling real estate
acquired by the bank through foreclosure Unfortunately, the
charter privileges of the New England Co were not sufficiently broad
to allow this, bemg.
(New England Co certificate of incorporation)
Said corporation is formed for the purpose of acquiring, holding, and managing
the leasehold estate of the premises on the northerly side of Euclid Avenue, in
Cleveland, Ohio, upon which is constructed the certain office and store building
known as the New England Co , a corporation, and for the purpose of erecting,
holding, managing, and leasing further buildings upon the said premises, and of
acquiring, holding, and managing other buildings designed for business purposes
To get around this, the ever-present subsidiary idea was again invoked, resultmg m the formation of
The Valuation Service Co. in October 1929; capital stock, $500;
capital surplus, $49,500; 100 no par shares all held by the New England Co In addition to taking over properties acquired by the
Guardian through foreclosure, it also acted as a manager for properties. As it was primarily financed by the bank, it placed the bank
indirectly in the real-estate business
(G-3-6, Minutes of executive committee, p 143)
In 1930, the company purchased several parcels of property on
which the Guardian Trust Co. was foreclosmg. In 1933, the company purchased from the Guardian some 120 or 130 properties on
which the bank had foreclosed, notes in the amount of $1,327,468 89
being taken therefor These notes were for 1 year with interest at
6 percent, secured by mortgages on the property As the financial
responsibility of the Valuation Service Co was practically nil, this
subterfuge to evade the following section of the banking code is
apparent.
(Ohio bank act)
Section 710-108, provides in part
A bank may hold real estate as follows (c) Such as has been purchased by it at
sales upon the foreclosure of mortgages owned by it, or on judgments 6r decrees
STOCK EXCHANGE PRACTICES
7993
obtained or rendered for debts due it, or in settlements effected to secure such
debts All real pioperty referred to in this paiagraph shall be sold by such bank
within 5 years after it is vested therein.
(G-3-9, G-3-15)
In 1932, the New England Co acquired the stock of the Vcela
Building & Loan Association at $200 per share and after acquiring an
additional 3 shares in January of 1933, owned all but 4 shares of the
outstanding stock. The investment at that time amounted to $891,800 The Guardian Trust Co originally held the option to the New
England Co It was the original purpose of the Guardian to use the
location of the Vcela as branch offices of the trust company and then
to liquidate the Vcela Building & Loan Association The reason for
handling this deal through the New England Co is indicated by the
fact that the net worth of the Vcela as shown by the January 31,1933,
balance sheet was $1,093,079 01 Included in this are mortgage
loans of $733,000 which were reduced in value on the books of the New
England Co, $407,778.21, which reduction applied against the above net
worth made the value of the stock approximately $200,000 less than
the purchase price. The Guardian did not desire to show this loss on
its own books
In 1931, the Guardian Trust Co found that by reason of extensive
real-estate loans on allotment property that had failed to sell, it was
being forced into a position where it would be necessary to foreclose
on a great deal of this property. To avoid showing these properties
among the bank's assets, the
Land Development & Realization Co was formed May 28, 1931,
with a capital stock of 100 shares no par value, all held by the New
England Co. The purpose or purposes for which this company was
formed were, briefly, to:
(Certificate of incorporation)
Third—To acquire, own, hold, operate, manage, control, buy, sell, exchange,
lease, mortgage, hypothecate, lend upon as security, and otherwise deal in and
dispose of, for itself and for others, both real and personal property, including
stocks, bonds, notes, drafts, bills of exchange, acceptances, mortgages, bills of
lading, warehouse receipts, and other securities as owner, broker, agent or factor,
to construct, erect, repair, and maintain buildings and other structures upon real
estate owned, leased or controlled by it or others
To organize, or cause to be organized under the laws of the State of Ohio, or
of any other State, Territory or country, or the District of Columbia, a corporation or corporations, for the purpose of accomplishing any or all of the objects of
which this corporation is organized, and to dissolve, wind up, liquidate, merge or
consolidate any such corporation or corporations, or to cause the same to be dissolved, wound up, liquidated, merged, or consolidated
In accordance with these articles of incorporation, the Land Development & Realization Co acquired all of the capital stock of the following real estate companies on the dates indicated The articles
of incorporation of these various companies are, in each case, the same
as those of the Land Development & Realization Co
June 17, 1931 The Shore Development Co and the Riverside Manor Co
August 19,1931 The Noble Woodworth Co and the Ri-May Realty Co
January 6, 1932 The Severn Park Realty Co
January 22, 1932 The Staten Heights Realty Co , the College Heights Realty
Co , Inland Lakes, Inc , and the Headland Realty Co
September 23, 1932 The Brookside Manor Co and the Memphis Heights
Realty Co
7994
STOCK EXCHANGE PRACTICES
May 25, 1933 The 1761 East Eighteenth Street Co , the 1874 East Eighteenth
Street Co , and the 2116 East Fortieth Street Co
In addition to being used in an effort to protect the Guardian's
loans to the above compames the Land Development & Realization
Co was used in 1933 in connection with the Western Reserve Mortgage Co deal, which is explained in another (Reconstruction Finance
Corporation) report The Guardian Trust Co sold to the Land
Development & Realization Co approximately 130 to 140 parcels of
property for notes amounting to $1,180,960 11 These notes were
made for 1 year in the amount of the purchase price of the individual
pieces of property and were secured by mortgages on these properties
As the Land Development & Realization Co had no real financial
stability, the " dummy " effect of the transaction is apparent
In the above we have traced through the chief direct subsidiary of
the Guardian Trust Co and have shown that by means of it, the
bank was enabled to conceal from depositors, stockholders, and perhaps even from directors, losses sustamed by reason of injudicious
loans, to evade State laws m regard to real estate, to engage in the
hotel business and to present a balance sheet that showed the bank
in a fairly liquid position when in reality it was in possession of large
amounts of "frozen assets" m the form of real estate All of this was
done through the New England Co alone Additional mcidental
transactions of the company are shown in its history attached.
(Gr-3-14r-5
See financial history report)
As we have indicated earlier m this report, the entire capital stock
of the New England Co was carried on the books of the Guardian
Trust Co at $3,800,000 under the caption "banking houses " To
carry the stock of this company at such a figure is, in the opinion of
your examiner, one of the chief mdictments against the management
of the bank, as this stock, as of December 31, 1930, had a real value
of slightly over a million dollars, according to a generous appraisal
This statement is substantiated by an analysis of the balance
sheet
of the New England Co. The carrying of this item, as w a s done,
seems to indicate a case of publishing a fraudulent financial statement dated December 31, 1932
(G-3-10, O-3-lla)
The Guardian Securities Co —The Guardian Securities Co was originally incorporated in 1917 as a mortgage company under the name,
the Guardian Mortgage Co , actmg as a mortgage company and retaining that name until 1927, at which time the management—
apparently desirous of reapmg some of the profits to be made in
securities speculation, recapitalized the company for $250,000, all
owned by the Guardian Trust Co and secured a license to deal in
securities The company, however, did not act as a brokerage company though it had a dealer's license, but rather bought and sold for
profit During the years 1927, 1928, and 1929, this company bought
and sold stock of a great number of stock issues, almost all of which
were listed stocks In order to finance these purchases, collateral
loans were made with the Guardian Trust Co , and at times these
loans ran from $600,000 to $700,000. At one time in 1930 the investments ran slightly over $1,000,000
STOCK EXCHANGE PBACTICES
7995
(G-3-11A)
As of December 31, 1932, the Guardian Securities Co owed the
Guardian Trust Co $540,000 secured by collateral, the book value
of which was $816,484 85, but the stated market value of which was
$711,510 39 This collateral included an item of 10,000 shares of
Cleveland Worm & Gear common at $500,000, which actually cost
$180,759 25, and for which there were no bids in 1932
(G-3-14-3)
If we were to reduce the so-called " market value " of $500,000 to the
book value of $180,759 25, the total schedule would then show that
the excess of book value over market value would be $424,215 01
The balance sheet of December 31, 1932, shows capital and surplus
of $282,182 15, thus it will be seen that a reduction of the securities
to market value in the manner described above would wipe out the
entire capital and surplus and would also wipe out approximately
$140,000 of the security on the loan Despite this the Guardian
Trust Co contmued to carry the stock of the Guardian Securities
Co among its assets at full book value of $250,000 In 1932 the
Guardian Securities Co paid a $2,500 dividend to the Guardian Trust
Co even though the reduction noted above would have more than
wiped oat the surplus The Guardian Securities Co definitely placed
the bank in the brokerage or tradmg field
(G-3-14-1)
The Branch Investment Co—This company was incorporated in
1920 with 1,000 shares no par common stock, all the shares being
held by the Guardian Trust Co The present capital stock outstanding is $350,000 plus paid-m surplus $315,000, making the total capital
$665,000 The mvestment m this company was carried on the books
of the Guardian at $550,000 as of the date of closing
The original purpose of the company was to take over a sublease
on property at East One Hundred and Second Street and Euclid
Avenue for the purpose of housing the One Hundred and Fifth Street
branch of the bank In order to take over this lease it borrowed
$125,000 from The Guardian Trust Co in 1920 In 1921, improvements of approximately $75,000 were put in the building and, in 1928,
they purchased the lease on the property for $257,812 50 At the
same time they took over the stock of the Euclid Arcade Co for the
balance of the loan to that company, in amount $38,273 84.
In 1930, the Euclid-One Hundred and Second Street Market was
acquired for $144,363 30—that amount including the fee to three
vacant lots in the rear of the leasehold estate In 1931 and 1932
special alterations of $85,900 81 were made The result of the whole
transaction has been that The Branch Investment Co owns a leasehold estate and three vacant lots costing $701,587 12 which, according
to the 1932 tax bills, had an assessment valuation of $429,060
From the foiegoing it can readily be seen that through its subsidiary, The Branch Investment Co , the bank entered into the real
estate business through the ownership of a market house We also
find, that, once again, through subterfuge the bank was enabled to
conceal potential losses due to poor judgment
7996
STOCK EXCHANGE PKACTICES
(G-3-14-2)
The 4400 Superior Co —This company was formed for the purpose
indicated in an earlier paragraph, the details of the company being
there given; and it needs no further comment
The Harrison County Investment Co —In 1929 The Guardian Trust
Co held approximately $600,000 in bonds of The Short Creek Coal
Co , the value of which was problematical
In 1930 the property underlying these bonds was sold at a judicial
sale and the Guardian Trust Co , through a former subsidiary known
as the Smith Coal Co., acquired the property.
(G-3-14-4)
On July 8, 1930, the Harrison County Investment Co was incorporated with 250 shares of no par common stock $500, all of this
stock being held by the Guardian Trust Co. The property held by
the Smith Coal Co was then turned over to the Harrison County
Investment Co., who issued bonds in the amount of $600,000, which,
were turned over to the Guardian Trust Co., these bonds bemg carried
on the Guardian book at $588,000. Through the formation of this
company we have the bank gomg into the coal-mining business and
at the same time concealing a bad investment.
From a summary of the activities of the above so-called " subsidiary" companies, we find that the Guardian Trust Co., besides
being a bank, was actually engaged in the following businesses.
1
2
3
4
5
6
7
The operation of an office building
The operation of a chain of hotels
The operation of a coal mine
The ownership of a market house
The operation of residential, apartment, and business property
The holding of vacant allotment property
Speculation in stocks and bonds
We have used the phrase "so-called subsidiaries'7 because it is our
belief that due to the degree of control exercised over these companies
by the Guardian, they had lost their corporate entity and were in
reality nothing more than departments of the bank Powell, on
Parent and Subsidiary Corporations, has stated that a parent corporation may be held liable
When the parent corporation has exercised its control over the subsidiary, not
in the manner normal and usual with stockholders, but to such a degree that it
has reduced the subsidiary to a mere instrumentality
and we cite that the Guardian by reason of the close control over its
subsidiaries had put the bank in a position where it was liable for the
acts and debts of 25 subsidiary companies, thereby jeopardizing the
interest of depositors and stockholders
(G-3-7)
As a result of investments m and loans to these various subsidiaries,
the bank had over $11,000,000 tied up m subsidiary companies as of
April 8, 1933 as shown by the attached summary As the total
resources of the bank at that date amounted to approximately
$113,0,00,000, these investments and loans represented almost 10
percent of the total resources involved in deals extraneous to banking.
STOCK EXCHANGE PEACTICES
7997
It should be borne in mind that all through these years during which
the Guardian Trust Co. was loaning to, investing in, and forming subsidiaries, a consolidated balance sheet was never presented to stockholders and depositors, and consequently they had no means of knowing the extent to which their bank was bemg involved in hazardous
enterprises Instead of so doing, a balance sheet was presented showing the investments in and loans to these subsidiaries at par, the nonliquidity of certam assets being concealed m this manner
(G-3-8)
In order to clearly illustrate the different picture which would have
been shown to stockholders by the presentation of a consolidated
balance sheet, we refer to a photostatic copy of one prepared by
Lybrand, Ross Bros. & Montgomery as of February 28, 1933 From
this can be noted the following differences between the bank balance
sheet and the consolidated balance sheet
(O-3-8, p 20)
ASSETS
Other bonds (decreased)
Other investments (increased)
Collateral loans (decreased)
Investment in banking houses (decreased)
Investment in office buildings (increased)
Other real estate owned (increased)
Mortgages payable (increased)
Bonds payable (increased)
Interest payable (increased)
LIABILITIES
$708,410
1,347,894
1, 540, 224
3, 800, 000
6, 214, 258
11, 413, 718
86
30
28
00
42
49
8, 308, 618 19
705,000 00
571,069 93
These figures show the condition of the bank in an entirely different
light from that when the subsidiary investments are concealed.
(G-3-8)
As can be noted from the comparative balance sheet, the principal
effect the formation of subsidiaries had on the Guardian balance sheet
was to eliminate the necessity of showing " other real estate" in the
amount of $17,627,976 91 and mortgages payable amounting to
$8,308,618 19. We doubt very much that stockholders would have
approved of such items had they known of them
From the foregoing it can be seen that by the formation of convenient subsidiaries, it is possible for a bank to conceal from its
depositors, stockholders, and even many directors, facts they are
entitled to know. Through the formation of these subsidiaries it is
possible to understate total investments in real estate, speculative
securities, liabilities or mortgages payable, and to overstate the value
of real estate and collateral loans. It is possible to transfer doubtful
assets to a subsidiary and to carry the subsidiaries' stock at a fictitious value It is also possible to charge off losses and worthless
assets through them as was done m the case of the Hotel Hollenden.
(G-3-14)
As briefly as possible, we believe we have made clear, in the foregoing, the purpose of the formation of subsidiary compames by the
799&
STOCK EXCHANGE PEACTICES
Guardian Trust Co , but, in addition, we have prepared separate
short reports on each individual company, for your information and
analysis, if deemed necessary
WALTER H
SEYMOUR,
Senior Examiner
This report based upon preliminary report and complete investigation by Committee Examiner R E Long
Mr PECORA. I now show you another report entitled "The
Guardian Trust Co.—Financial History", addressed to you by Mr.
Seymour, and I ask you if you recognize this report as bemg another
one prepared by Mr Seymour under your immediate supervision
Mr
MEEHAN. I do
Mr PECORA. Mr. Chairman, I offer that report m evidence,
together with the various exhibits referred to therem.
The CHAIRMAN Let the report and exhibits be received m evidence.
(A report entitled "The Guardian Trust Co —Financial History ",
together with the exhibits now at the Government Printing Office,
were received in evidence and marked "Committee exhibit no 3,
May 3, 1934", and are as follows )
COMMITTEE EXHIBIT NO. 3—MAY 3,
1934
(G-4-1)
FINANCIAL HISTORY
It is our purpose in this report to bring out and substantiate the
fact that the closing of The Guardian Trust Co was not merely the
result of unusual economic conditions, but rather the result of many
years' mismanagement in the form of too much leniency in the granting of credit, and laxity m collection, as a result of which the bank was
gradually forced into activities beyond the scope of banking, becoming
to a large extent a real-estate company and the holder of many worthless securities, a fact which was concealed from stockholders by the
forming of subsidiary companies We will brmg out and support
tLat the management was, or by the exercise of ordinary judgment
should have been, aware of the condition into which the bank was
drifting, and that in order to conceal from shareholders the true facts,
resorted to methods of accounting and preparation of reports designed
to conceal losses which were bemg constantly sustained due to poor
judgment and speculative tendencies
This report will show
1. That earnings were reported greatly in excess of their actual
amount, as a result of which excessive dividends and bonuses were
paid;
2. That transfers of semiworthless assets were made to subsidiary
companies at their book value in order to prevent showing losses
which would have occurred had they been written off to their true
value;
3. That the entire method of reportmg earnings and the condition
of the bank was misleading and contrary to sound prmciples of
accounting.
STOCK EXCHANGE PRACTICES
7999
We have been advised through various sources that the Guardian
Trust Co , Cleveland, has never issued a report to stockholders which
showed the earnings for any period. The stockholders were apprised
of the company's earnings through the medium of a report read at the
annual meetmg of stockholders Each of these annual reports is a
bound volume of 100 or more pages. It would have been expensive
and cumbersome to have photostated complete copies of these reports.
Instead, we have prepared analyses and statements from these annual
reports which we wnl use to substantiate this report and have requested that the annual reports be brought to Washmgton to be
offered in evidence, if it is so desired
(G-4-1)
In analyzmg the earnings and general condition of the bank, it is
first necessary to realize that the bank had
26 SUBSIDIARY COMPANIES
under its direct control, these companies obviously bemg formed for
the purpose of transferrmg to them semiworthless assets acquired by
the bank, concerning which there is additional comment m subsequent
paragraphs The purpose of our mentioning the subsidiary companies
in tins report is to point out that while bank officials recogmzed the
necessity of presenting a combmed statement of the earmngs of the
,bank and subsidiaries by preparing a consolidated statement, they
distorted this consolidated statement m such a manner that it did
not present a true picture of the combined operations
(GHfc-2)
To illustrate, we present page 14, Statement of Consolidated Earnings, made a part of the bank's annual report for the year 1932 m
which are shown combmed earmngs of
1932
1931
1930
1929
$1, 359, 054 83
2, 066, 293 14
2, 115, 578 34
2,087,359 93
Total
7. 628, 286 24
(GMr-3)
The combined figures for this period after the elimination of intercompany transactions and dividends paid by subsidiary companies
amounted to only $6,535,161 39, as follows
1932
1931
1930
1929
.'
Total
$916, 074 34
1,692,679 22
1, 777, 325. 46
2,149,082 37
6,535,161 39
Difference of $1,093,124 85
Earnings before elimination of Intercompany
Earnings after elimination of Intercompany
Difference—
$7, 628, 286 24
6, 535, 161. 39
1, 093, 124 85
being the amount by which profits were misrepresented for a 4-year
period from this source alone
8000
STOCK EXCHANGE PRACTICES
(G-4-3)
l a the preparation of this statement, we have used earnings of
the Guardian Trust Co. as shown in the annual reports, all other
figures being taken from exhibits of a Lybrand, Koss Bros. & Montgomery report to special deputy superintendent of banks of Ohio,
dated January 19, 1934.
The profits for the'4-year period mentioned above were exaggerated
due to the fact that in preparing this consolidated statement, only
the operations of certain companies were included, these being companies that were making money, such as the New England Co.
and Branch Investment Co , while losing companies such as the
Hollenden Hotels Co and the many small real-estate holding companies were completely ignored.
(GMr-5 and G-4-3)
The year 1931 is a fair example of this and we have prepared a
statement based largely on the report of Lybrand, Ross Bros. &
Montgomery dated January 17, 1934, showing the consolidated
earnings as taken from the bank's report, ($2,066,293 14) with the
combined earnings of the bat>k aad subsidiaries, after eliminating
intercompany dividends and transactions and making small adjustments to cover items handled directly through the surplus accounts
($1,692,679 22) and it can readily be seen that the difference of
$373,613 92 is composed of the losses and earnings of companies not
listed in the bank's report of consolidated earnings In fact, the
operating loss of the Hollenden Hotels Co alone, $411,010 96, which
was not included in the bank's statement read to stockholders, more
than accounts for the difference and we can see no reason for not
including this figure other than to deceive the stockholders and directors. Surely the operations of a company which lost $1,001,704 27
in a 4-year period could not have been omitted through an oversight.
Not only were the results from operations of the bank and subsidiary companies distorted on this consolidated report made a part
of the bank's annual report, but the information was spread upon
the minutes of the annual shareholders' meeting held January 18,
1932, as follows
The president reported the gross and net earnings, also the gross expenses by
department The net earnings of the company, including its subsidiary companies and after eliminating intercompany dividends being $2,066,293 14, compared with $215,578 34 for the year 1930
(G-4-5 and G-4-4 pp 1 to 14; p 29)
The true earnings for 1931 were $1,692,679 22.
This same misinformation is shown on the minutes of the annual
meeting of the board of directors held January 19,1932, in even greater
detail.
It is hard to conceive that the president of an institution entrusted
with public funds would be so ignorant of the true facts of the bank's
operations as to permit him to innocently overlook an error of over
STOCK EXCHANGE PRACTICES
8001
$400,000 in computations, especially when this amount was represented
chiefly by what must have been a "nightmare" to all of the bank's
officials, namely, the Hollenden Hotels Co. situation, and we can
only consider his reporting these incorrect figures as being part of the
general plan to deceive stockholders and directors. A separate
report has been prepared on the Hollenden Hotels Co.
(GMt-8; G-4-9; G-4-10; G-4r-ll; G-4r-12)
That this incorrect reporting of combined earnings was not an isolated case is proven by the iact that it was also done for 1929, 1930,
.and 1932 as can be seen by comparing photostatic copies of minutes
attached with correct figures, as shown on exhibit 2.
So far in this report we have dealt only with the difference between
the combined earnings of the bank and subsidiaries as shown on the
bank records and the earnings as they should have been truly reported
on a consolidated basis and have shown that the earnings were exaggerated by $1,093,124.85 for 4 years alone. Now, we will bring out
that stockholders were further misled by the manner of preparing a
statement of earnings for the bank alone.
RESERVES
In the operation of a bank, it is necessary at times to write off losses
due to unpaid loans, discounts, interest, etc., and to reserve for decline
in securities, real estate, and other assets acquired. To provide for
this it is customary to set aside a "reserve for depreciation" by
charging to current year's operations and crediting to the reserve for
depreciation account a sum which past experience has indicated
should be sufficient to take care of losses which might reasonably be
^expected to occur. If this sum is truly representative of the losses
which might be expected to occur, the profits for each individual year
as reported will be reasonably close to actual profits for the year.
Of course, there will be some difference between the sum transferred
to the reserve for depreciation account and the amount actually required, but it should be comparatively small when ordinary judgment
is used in creating a reserve. The important point is that a reserve
account is created by currently transferring amounts sufficient to take
.care of anticipated losses.
(G-4-13)
In the case of the Guardian Trust Co., the term "Reserve for depreciation account" was a misnomer as the account was at all times
entirely inadequate to take care of the occurring losses. This inadequacy is clearly brought out by the attached unsigned, but bound
typewritten schedule found in the file of W. R. Green, comptroller,
headed as follows: "Nonaccruing Loans and Investments, August 13,
1929." The total of this schedule which indicated doubtful loans,
was $4,359,470.29. The reserve for depreciation on the same date,
according to the general ledger account, was only $192,182.68. As a
result of the general inadequcy of the reserve and the failure to provide for losses, it was necessary to transfer from the undivided profits
At the end of the year, sufficient to take care of the balance of the losses.
175541—34—PT18
8
"8002
STOCK EXCHANGE PEACTICES
This transfer from prior years' profits did not affect the current year's
operations.
In other words the president (Mr. House) reported the current
earnings of the bank, which included accrued interest receivable on
loans. Subsequently some of these loans became uncollectible and
other losses were incurred; and the undivided profits account had to
then be charged back with these losses. If adequate reserves had been
created from current operations this charge-back would not have
occurred. To quote from the Lybrand, Ross Bros. & Montgomery
report:
(G-4-4, p. 2)
As a result of this procedure, the earnings of the bank as shown m the auditing
department reports did not reflect the actual results from operations. The
minutes of the board of directors for the years 1931 and 1932 indicate that the
earnings of the bank as shown by these auditing departments reports were submitted by the president to the board of directors and considered correct earnings
by them in determining dividends and the financial condition of the bank.
Inasmuch as the inadequacy of the reserve for depreciation account
makes it obvious that it was not truly a reserve, it can only be considered as a portion of the profit and loss account through which it was
customary to rim losses, which, if reflected on the current statement of
earnings of the bank, would have caused embarrassment to the bank
management. To avoid showing the actual earnings of the bank
when computed on a basis designed to include losses due to write-offs
of bad loans, discounts, investments, etc , which was proper due to the
failure to provide reserves, the bank management used the reserve for
depreciation, reserve for taxes and undivided profits accounts in such
a manner as to make the net result from operations very confused and
obtainable only by a detailed analysis of these accounts in connection
with the reported earnings of the bank for each year. Had the bank
created proper reserves, this would have been unnecessary, as the
operating statement would have reflected the losses.
The failure to provide proper reserves and the practice of running
the losses mentioned through the above-mentioned accounts, made of
these accounts merely burial grounds for losses due to poor judgment,
and before proceeding with the details of individual transactions and
showing how losses were concealed, it is perhaps well to explain each
of these accounts, so that the impropriety of the methods employed
may be easily seen.
1. Reserve for depreciation account.—This account in connection
with a bank is for the purpose of taking care of losses due to the decline
in value of securities and properties acquired lawfully and is created
by charging to current operations and crediting to the reserve an,
amount which, as indicated by past experience and the nature of the
securities, should be sufficient to take care of losses reasonably to be
expected for the year.
2. Reserve for taxes.—This reserve is created by the same method
as mentioned above for the purpose of setting up the tax liability and
charging the expense to the current year.
3. Undivided profits—The undivided profits account is in effect
nothing more than a portion of the general surplus and is created by
transferring to it the net earnings after all expenses, and it is to be
reasonably expected that under proper management this fund over a
period of time would show a constant increase, unless deductions are
STOCK EXCHANGE PRACTICES
8003
made from it for the purpose of increasing surplus or for the payment
of dividends in a nonprofitable year.
(G-4-14)
Had the purpose of these accounts been observed by the Guardian
Trust Co., there would be no occasion for criticism as the statement of
earnings made a part of the annual report would have reflected the
losses constantly occurring, but the confusing methods the bank
employed m running losses through the reserve accounts enabled it
to show earnings of $7,573,470.51 in excess of the actual earnings
after deducting losses, for the 10-year period, 1923 to 1932, mclusive
We have prepared a statement based on the bank's annual reports
and report of Lybrand, Ross Bros. & Montgomery dated January 7,
1934, showing that the earnings of the bank as reported on the annual
reports for these years was $15,035,156 35, whereas the actual earnings on an accrual basis, after deducting losses, was $7,461,685 84.
This statement shows the difference between the yearly earning
reported and the actual earning as ranging from $200,000 to $2,000,000
each year, the $2,000,000 figure being reached in 1932.
(G-4-15
We have also prepared a statement showing the year-by-year
earnings as reported on the annual report of the bank as compared
with the actual earnings after deducting losses and in order that this
statement may be clearly understood, we will explain the difference
for the year 1932.
(G-4-15;
Starting with the bank's reported earnings of $1,342,192.79, we
have added $33,476.53 for recoveries on losses previously written
off—$15,785.15 for recovery of interest accrued which was written off
in prior years and subsequently recovered—$337,000 reserve provided
for tax payments; while we have deducted $1,681,493 41 for losses
on loans, investments, etc , written off during the year—$334,254.15
for accrued interest on loans and discounts charged off and
$397,026 68 taxes actually paid, the result of these adjustments
being a net loss of $684,319 77 for the year and not a profit of
$1,342,192.29 as reported by the bank. We believe this statement
brings out very clearly the manner in which losses were buried in
the reserve accounts and prior years' profit and loss account and we
cannot construe the failure of the bank management to call these
adjustments to the attention of stockholders as other than an attempt
to keep them in the dark regarding the true state of the bank's
affairs. Surely it is unreasonable to expect that stockholders would
realize that part of the profits reported for previous years and the
current year had been dissipated m losses due to unwise management
which had been cleverly concealed through the misuse of certain
accounts.
To show the nature of the losses written off yearly, we have prepared a statement entirely from bank's annual reports, classifying the
losses. It can readily be seen that except in 1932 the bulk of the
8004
STOCK EXCHANGE PEAOTICES
write-off was due to collateral loans and discounts. - These items aggregated $4,559,064.20 during the years 1923 to 1932, inclusive, out of a
total write-off of $8,400,493 05. Of the remaining $3,841,428.85, the
sum of $747,210.61 was written off in 1932 to cover losses on bonds
owned. Surely it seems that in view of the tremendous write-offs due
to losses on collateral loans and discounts the bank's policies were far
too liberal and could not have failed to result in criticism had stockholders been aware of the tremendous losses which were occurring.
The large write-off on bonds, which we assume were acquired by the
bank in connection with collateral loans, in the year 1932 also indicates that sufficient consideration was not given to the type of collateral being accepted, a fact which stockholders had no means of knowing. The entire subject of loans is dealt with in a separate report
which should prove of interest in connection with the above.
(G-4-17)
In order that the nature of the loans and discounts written off may
be readily noted, we have prepared statements from the bank's
annual report detailing the larger items of each and it can be seen that
the bulk of them are due to advances made to a comparatively few
firms and individuals, in which cases, had less leniency been shown
in granting credit, losses would not have occurred. It is very probable
that had the results of bad judgment been brought to the attention of
directors and stockholders by means of an accurate statement of earnings, the practice of promiscuous loaning would have been curtailed.
It is of interest to note that officers or directors of the bank were
interested in a number of the companies whose loans, amounting to
$759,479.43, were written off, namely:
(G-4-18)
Amount
of loan
written off
Name of firm
National Humas & Chemical Co (1923 and 1924)..
Russell Co (1926)
Russell Holdmg Co (1926 and 1929).
Headlands Lumber Co l
Gulf Region Lumber Co
Total
Interested director
$80,312 59 H C Robinson
55,000 00 W H MarlottandH
J Shepard
36,750 00 H C Robinson
420,490 15
Do
166,926 69
Do
759,479 43
* Organized to take over Gulf Region Lumber Co m an endeavor to recover losses sustained
ACCRUAL A N D CASH B A S I S
(G-4-19)
It has been the practice of the Guardian Trust Co. in reporting
earnings to stockholders and directors to report on an accrual basis,
which included the accruing interest receivable on loans and securities
and interest payable on deposits and other expenses, while for incometax purposes, the cash basis which eliminates these items was used.
We have prepared a statement to show the difference between
earnings when computed on the two bases, the earningsjas reported
to stockholders being $967,658.14 in excess of the earnings as reported
8005
STOCK EXCHANGE PKACTICES
for tax purposes for the years 1923 to 1932 inclusive, although, in
accordance with the tax laws, the fact should have been brought
out to the stockholders that the earnings reported were on an accrual
basis and not on a cash basis.
DIVIDENDS PAID
(G-4-4, p. 6)
We call attention to the combined statement of earnings of the
bank and subsidiaries shown on page 6 of exhibit G-4-4 which uses
the actual earnings of the bank after deducting concealed losses for
the 10 years 1923 to 1932 inclusive ($7,461,685 84), adding thereto the
amount of income taxes paid to the bank by subsidiaries ($209,723.94)
also the earnings of the subsidiaries as taken from the books
($380,798.63) and deducting intercompany dividends ($1,697,878.53),
making the actual combined earnings of the bank and subsidiaries
$6,354,329.88.
(G-4-14, and G-4-20)
It seems extremely unlikely that had the stockholders and directors
been aware of the amount of these combined earnings that they would
have approved the declaration of dividends by the bank of $6,370,000.00 for this same 10-year period, which was an excess of $15,670.12
over the combined earnings of the bank and subsidiaries for this
period.
The following is a comparison of the earnings as shown on the
Trust Co.'s annual report and the true earnings of the Trust Co.,
together with the amount of dividends paid from 1923 to 1932
inclusive.
Annual Reports G-4-4, p 6, and G-4-14
Actual earnings
Dividends
paid
Year
Earnings as
reported
1923
1924
1926
1926
1927
1928
1929
1930
1931
1932
$1,287,549 98
1,048,646 16
1,103,615 50
1,192,616 95
1,502,450 44
1,482,758 00
1,931,061 44
2,079,722 27
2,064,542 82
1,342,192 79
$451,030 68
521,137 26
711,666 46
725,141 64
1,229,116 23
1,069,250 75
1,981,894 46
1,290,280 36
387,311 62
1,110,438 22
$480,000
480,000
480,000
560,000
600,000
600,000
930,000
1,050,000
840,000*
350,000
15,035,156 35
6,354,329 88
6,370,000
(G-4-20)
Neither does it seem logical that they would have approved the
payment of salaries and bonuses to officers of approximately $700,000
for the years 1929 and 1930, as brought out on the attached statement.
Misled as they were, however, by reported earnings, approximately
ie "bank and
7K millions in excess of the actual combined earnings of the
subsidiaries they readily approved the payment of dividends which
prevented the building up of undivided profits to a point sufficient to
enable the bank to weather a period of financial stringency.
8006
STOCK EXCHANGE PRACTICES
However, the officers or management of the Guardian Trust Co.
were deliberate in their actions, as is pointed out m the report of
Lybrand, Ross Bros & Montgomery:
It is evident that the management of the bank recognized this accounting
principle by filing Federal income tax returns on a consolidated basis. It should
be noted that as a result of filing on this basis, no income-tax liability was incurred,
with the exception of $13,424 for the year 1929
(G-4-4, p 26)
We also submit page 26 of exhibit G-4-4, which is an analysis of
earnings and undivided profits of the bank alone for the years 1923
to 1932, inclusive, to show that despite reported earnings by the
bank during this period of $15,035,156.35, the undivided-profits
account actually showed a shrinkage of $1,085,742.38 between the
balance at January 1, 1923 ($1,690,572.09), and the balance at
December 31, 1932 ($604,829.71). This proves very conclusively
that losses which were being sustained and dividends which were
being paid were preventing the bank from reaching a position of
security It also proves conclusively that all of our previously r*ommented-upon statements pertaining to the earnings of the bank alone
are correct, as in this analysis there are used the actual earnings of
the bank alone, computed on a basis reflecting losses due to writeoffs on loans, discounts, etc, and the resultant balance of undivided
profits agrees with the balance of the account as shown on the annual
report of the bank and on published statements of condition.
It is therefore obvious that the losses we have enumerated and
commented upon actually occurred and weie only kept from the
knowledge of stockholders by means of concealing them in accounts
with which the average person would be unfamiliar, in such a manner
that it would be necessary to analyze the reserve accounts, undividedprofits account, and earnings account very closely to realize what
was actually taking place Had the management of the bank been
interested in presentmg a true picture of affairs to stockholder^ and
directors, it would have been a simple matter to follow standard
accounting procedure by which these losses would have been readily
apparent
(G-4-4, p 30)
Page 30 of exhibit G-4-4 shows the undivided profits of the bank
and subsidiaries for the 10 years 1923 to 1932, inclusive, and the
decline from a credit balance of $2,194,518.88 as of January 1, 1923,
to a debit balance of $52,254.84 as of December 31,1932, a,nd tells the
entire story of the bank's failure. However, this surreptitious decline
was cleverly concealed from the stockholders and directors.
(G-4-21)
We have also prepared a statement to show that in the 4-year
period, 1929 to 1932, inclusive, despite an increase in capital stock of
$3,000,000, an increase in surplus of $3,800,000 by reason of cash
received for stock sold, and earnings of $3,431,406.15 (total increase
over 10 million) the combined capital, surplus, and undivided profits of
the bank alone as of December 31, 1932, were only $3,711,388.69 in
excess of the same combined accounts as of December 31, 1928,
indicating the constantly weakening condition of the bank.
STOCK EXCHANGE PBACTICES
8007
RESOURCES AND LIABILITIES
(G-4r-23 to 26)
So far in this report, we have dealt only with the subject of earnings
and the manner in which they were distorted and misrepresented, but
the financial history of the Guardian Trust Co. cannot be considered
complete without reference to its published statements of condition
and some of the items thereon,
(G-4-22)
For this purpose, we have prepared a comparative statement of
condition for the years 1929,1930,1931, and 1932 to show the fluctuations of certain resources and liabilities and also in order that items
commented upon may be readily available for reference. First, we
wish to point out that the total resources as of December 31, 1932
($148,417,566.57), were $33,409,928.17 less than the total resources
of December 31, 1930 ($181,827,494.74), a decline of 14.25 percent.
This in itself is an indication of the general trend of the bank's affairs
that is significant. During this period, the ratio of real-estate loans
to total loans increased from 33.63 to 36.47 percent, an increase of 2.84
percent in what might be considered frozen assets.
(Minutes of executive committee, p. 491)
This entire subject of loans is dealt with in a separate report, but
in connection with them we make a part of this report an excerpt from
minutes of an executive committee meeting held September 9, 1932,
in which the president stated in part—
that conferences between representatives of the State banking department and our
executive officers had been&eld after which it was agreed that $2,000,000 should be
taken from "surplus" and $600,000 from "undivided profits" to create a special
reserve to meet anticipated losses
(Minutes of executive committee, p 154)
In connection with loans, we also refer to a copy of minutes of a
special meeting of the executive committee held February 15, 1933,
which deals with a loan of $1,200,000 to a subsidiary which was
collateraled in part by stock in a company formed for the purpose of
holding mortgages which were slow in collection. However, this is
being covered fully in a separate report.
(Minutes of executive committee, p 94)
We also wish to refer to exerpt from the minutes of executive committee meeting held September 22, 1931, authorizing a payment of
$60,000 into " paid-in surplus " account of the Branch Investment Co.,
a subsidiary formed for the purpose of altering the East One Hundred
Fifth-Euclid office of the Guardian Trust Co.
The above two loans to subsidiaries are quoted in connection with
the fact that the Guardian Trust Co. in preparing the statement of
condition for presentation to the public included in its resources the
stock held in subsidiaries at par value, regardless of the actual book
value of such stock as reflected by the books of each subsidiary, and
8008
STOCK EXCHANGE PRACTICES
that by reason of this and the fact that loans to subsidiaries were
included in the general loan total the resources of the bank as reported
were greatly inflated.
(G-4-4, p. 14)
A concrete example of this is the Hotel Hollenden transaction whick
is dealt with fully in a separate report. The loss of the New England
Co. in this enterprise in 1931 amounted to $1,958,793.79, which was
written off against revaluation surplus in 1932.
(G-4-2, p. 9; G-4-26; G-4-30 to 33, inclusive)
The next item on this statement worthy of attention is United
States bonds. On the statement of condition shown on page 9 of
exhibit 2, United States bonds in the amount of $16,131,481.60 are
shown as a resource while the same amount is shown on published
statement of condition as of December 31, 1932 In neither statement was there any contingent liability set up to indicate that a portion of these bonds was pledged, but concrete evidence that this was
the case is shown in the attached copies of letters to the Irving Trust
Co. and the Chemical Bank & Trust Co. of New York, the amount of
bonds pledged being $7,000,000 The circumstances of this pledge
are explained in a separate report under the subject of "Window
dressing", which also explains how "deposits" were inflated by means
of purchasing Federal Reserve funds from foreign banks with official
checks which the Guardian Trust Co. requested to be held until after
December 31, 1932, and for which they agreed to pay interest for the
days held
SUNDRY TRUST
1092
Further evidence of concealment of facts was discovered in an
account called "sundry trust 1092", the component parts of which
were carried on the bank's statements as resources or assets, with an
offsetting credit among trust funds, whereas in reality this account
included revenue and expense items as well as worthless assets.
It is our purpose to bring out and substantiate that this so-called
"trust" was merely another of the many subterfuges used by the
bank management to conceal losses sustained by reason of unwise
loans and investments and that through it were run many transactions
which properly should have been reported in connection with the
earnings and losses of the bank. We will also show that by reason of
semi-worthless assets being transferred to this trust at full value,
the trust-department funds were shown in excess of their true amount
on the annual report presented to stockholders and directors, as no
write-off due to losses or decline in values was made.
Before going into specific instances to prove that sundry trust 1092
was merely a secret reserve account used for the purpose of concealing
losses, we oelieve it advisable to establish definitely our opinion of the
purpose of a trust and how it should be handled.
A trust, we believe, is primarily created for the express purpose of
safeguarding money which is to be distributed at a later date in some
specified manner and it should be the general practice to transfer to
such trusts only the very sdfest securities as specified by law. It ia
not the purpose of this report to deal extensively with the subject
df trusts, as that topic is covered in a separate report, but we cite the
STOCK EXCHANGE PRACTICES
8009
above only to fix in mind what a trust actually should be, so that we
may show in subsequent paragraphs how little this sundry trust 1092
resembled an actual trust.
(G-4-34)
For the purpose of supporting various comments made in subsequent paragraphs of this report, we attach photostatic copy of
Lybrand, Boss Bros. & Montgomery report to the special deputj
superintendent of banks of Ohio, dated November 10, 1933, which is
hereinafter referred to as exhibit G-4-34.
Sundry trust 1092 was originally created for the purpose of segregating certain commissions on real-estate loans consummated by Mr.
A. D. Fraser for various insurance companies. Under an agency
agreement, Mr. Fraser, an official of the bank, placed loans for several
large insurance companies, receiving a certain commission from them
for his services. Of such commissions, Mr. Fraser retained 40 percent
and the bank 60 percent. On the assumption that such earnings
were not entirely applicable to the year in which the loan was consummated, but should be distributed over the life of the loan, the
bank management decided that these commissions should be segregated in a trust fund, a proportionate share of which could be withdrawn yearly and credited to the earnings of the bank. Had this
policy, which is perfectly tenable, been adhered to, there would be no
occasion for criticism, but after some years the trust became, in effect,
nothing more than a clearing house tor many extraneous and generally nonprofitable transactions.
(G-4-34, pp. 6 and 7; G-4-34, p 16)
Beginning January 1, 1927, and continuing until the close of the
bank, we find that the original purpose of sundry trust 1092 was almost
completely lost sight of in the many transactions run through it.
During this period the fund shows receipts of $1,443,085.21 and disbursements of $1,416,645.56, the net of these amounts together with
the .balance at December 31, 1926, of $48,629.06 accounting for the
balance of $75,068.71 at the time of the bank's closing. During this
period, the trust became nothing more than a secret reserve account in
which was placed earnings from many sources such as profits from the
sale of acceptances, rentals on properties owned, etc., from which
funds were withdrawn for such purposes as the payment of rental to
other trusts operated by the Guardian Trust Co. as trustee, the purchase of mortgages, notes receivable, bonds, etc., from the Guardian
Trust Co. For example, we find placed in the trust, items such as the
following:
Interest earned
Profit on sale of acceptances
Payments on notes receivable
(G-4-34, p. 6)
__. $83,643.63
-_. 56, 428 60
456,180 93
_
while from it, funds were withdrawn for the following purposes:
(G-4-34, exhibit 1, p. 7)
Mortgages purchased
Loans
Bonds purchased
_
._
...
$137, 562. 59
449,392.61
217, 253. 11
These items are obviously entirely foreign to the purpose of the trust
and their inclusion can only be interpreted as an acknowledgment by
8010
STOCK EXCHANGE PRACTICES
the bank management that sundry trust 1092 was not in reality a trust
as conceived, but had become merely a concealed portion of the profitand-loss account.
(G-4-34, p. 18; G-4-34, pp. 10 and 11)
The total amount of these losses so concealed was $380,720, of
which $147,836.82 was recorded on the books of the Guardian Trust
Co. as a charge to the reserve for depreciation account, leaving the
net amount of concealed losses $232,883.73 and we call particular
attention to the loss of $214,133.11 on bonds acquired from trusts
operated by the Guardian Trust Co., as trustee, as at the time the
bonds mentioned were transferred to sundry trust 1092, the worthlessness of the bonds should have been known to bank officials, as the
companies issuing the bonds were then either in receivership of
liquidation.
(G-4-34, p. 8; G-4-34, p. 6; G-4-35 to G-4-42, inclusive)
In order to have sufficient funds in this trust to cover the bank losses
being run through it, it was necessary to divert some of the bank's
earnings and assets into it, the total amount so diverted being $1,074,923.85, including commissions on loans. Of this amount, $436,443.78
in cash was transferred back to the bank, leaving a net diversion of
$638,480.07. Of this amount, we wish to call particular attention to
an item of $78,000 shown under section 5 on page 6 of exhibit G—4-34.
This amount represents earnings of the trust department arbitrarily
transferred from their proper place to sundry trust 1092, for no other
apparent reason than to bolster this fund for the purpose of concealing
losses. The original transfer of such funds consisted of $28,000 early
in 1931 and in each subsequent month the sum of $3,000 was transferred by means of a debit to trust-department earnings. We are
attaching photostatic copies of some of these debits signea by officials
of the bank, which show conclusively that responsible officials were
fully aware of the subterfuges being resorted to. It is significant that
these debits all refer to this trust as sundry trust reserve 1092, so there
can be no doubt that they considered it merely a secret reserve.
(G-4-34, p 8; G-4r-34, p 16, G-4r-34, p 9)
As shown upon page 8 of exhibit G-4-34, the total assets diverted
to sundry trust 1092 aggregated $638,480 07, while as of February 28,
1933, the cash in the fund was $75,068.71, leaving a net difference of
$563,411.36 to be accounted for, which is done upon page 9 of exhibit
G-4-34. Of particular interest thereon are the items: $299,524.39
payment for investments, rentals, etc., to other trusts operated by
the Guardian Trust Co. as trustee; reimbursement of the Guardian
Trust Co. for losses and expenses; notes receivable $63,675 and
Fraser agency commission on Heather Building mortgage paid to
H. P. Mclntosh $1,200.
The $299,524 39 payment for investments, etc., is made up as
follows:
STOCK EXCHANGE PBACTICES
8011
(G-4r-34, p 10)
Bonds
$214, 133
Land trust certificates
55, 905
Advances to other trusts for rentals, interest, etc , less repayments _
6, 678
Land rentals
1
22, 807
Total
11
40
51
28
299, 524 39
We ba*ve already called attention to the semiworthless condition of
these bonds, but wish to do so again, in view of their being carried as
an asset of the fund at the time of the bank's closing.
(G-4-34, p 13)
Page 13 of exhibit G-4-34 details the reimbursement to the Guardian Trust Co. for losses and expenses, and it can readily be seen that
the majority of the items making up this amount had no real connection with sundry trust 1092 and prove again that the original purpose
of this trust was deliberately ignored.
The notes-receivable item mentioned above represents the unpaid
balances on certain notes receivable as follows:
(G-4-34, p. 15)
Edward Morgan
A D Fraser (vice president)
Cleveland Cliffs Iron Co
B Benjamin Co
$1, 775
1,900
45, 000
15, 000
Total.
63,675
The note of the Cleveland Cliffs Iron Co originated when this
company borrowed $2,000,000 on a collateral loan, giving in consideration of the loan, commission in the form of notes amounting to
$20,000. In renewing the collateral loan, the commission was increased to $45,000 for which new notes were given.
(G-4-34, p. 16)
The A D. Fraser balance results from borrowing $3,500 in 1932
and repaying $1,600 in 1933 In 1929 a commission of $10,000 was
earned on a collateral loan to B. Benjamin Co. and deposited in this
fund. During the same year this company borrowed $20,000 from
the fund and in 1930, in order to record a reduction in this indebtedness, $5,000 of the commission deposited was transferred and applied
in payment of this loan. A. D. Fraser had a participation of $10,000
in the loan.
(G-4r-43)
In regard to $1,200 commission paid to H. P Mclntosh, Sr., we
attach photostatic copy of debit signed by J. A. House, president,
authorizing a check to Mr. Mclntosh and a charge to sundry trust
1092 and as we have no record of Mr. Mclntosh's being a party to
an agency agreement entitling him to commissions, we are interested
in the reason for this apparent gratuity.
(G-4-34, p 16; G-4-34, p. 17)
As a result of loading this trust with worthless or semiworthless
assets of the bank the worth of this trust was shown greatly in excess
of its true value and published statements were consequently mis
8012
STOCK EXCHANGE PRACTICES
leading; as we know that as of February 28, 1933, the assets of this
trust were shown on the books at $566,812 63 while their true value
did not exceed $182,690.81, after eliminating the bonds of liquidated
companies, the investments in and advances to the Resarf Co. and
other doubtful assets, and even this valuation is doubtful in view of
the character of the remaining assets, the difference of $384,121.82
being composed of worthless assets in the form of bonds such as previously mentioned, worthless notes receivable, etc.
(G-4-44 to 56, inclusive)
We are attaching photostatic copies to the original of the report of
miscellaneous letters pertaining to sundry trust 1092, all of whi<jh
indicate very clearly that various bank officers were fully aware of
the nature of the items being run through the trust and their failure
to prevent the practices being engaged in cannot help but make them
parties to the subterfuges being used to conceal certain operations. We
believe that in the above comments we have definitely established—
(a) that sundry trust 1092 was not a trust;
(b) that it was in fact a secret reserve account used for the purpose
of taking care of losses which should have been reflected on the bank's
books;
(c) that in the latter years of the bank's existence no attempt was
made to adhere to the original purpose of the trust, which was to hold
certain earnings to be distributed on a deferred basis;
(d) that to the trust were transferred worthless investments in
order to avoid showing a loss on the bank's books;
(e) that bank officials were fully aware of what was going on and
were parties to the continued deception being carried on, knowing
that earnings of the bank and the true worth of sundry trust 1092 were
being misrepresented;
(/) that responsible officials of the bank permitted this misrepresentation and that such action on their part is clear evidence of a
willful intent to deceive directors, stockholders, and depositors as to
the true result of the bank's operations
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner R. E L6ng.
Senator ADAMS. Mr Meehan, doubtless it is in this report, but can
you give for my information at this time the surplus and deposits of
the Guardian Trust Co when it closed its doors?
Mr MEEHAN I would have to refer to the exhibits to give you
that information.
Senator ADAMS. Are those exhibits available here now?
Mr MEEHAN NO; the exhibits are in the hands of the Government Printing Office just now.
Senator ADAMS And that information is not given in this summary?
Mr. MEEHAN. Only in a general way We would not have the
financial set-up of the Guardian Trust Co. That would be in one
of the exhibits accompanying this report, which exhibits, for convenience of printing—for the purpose of expediting the printing—
are now m the Government Printing Office.
STOCK EXCHANGE PBAOTIOES
8013
Senator ADAMS All right.
The CHAIRMAN YOU may proceed, Mr Pecora
Mr. PECORA Mr Meehan, I now show you another report addressed to you by Mr Seymour, entitled "The Guardian Trust Co —
financial condition, 1929-33", and ask you if you recognize that as
being another report made to you by Mr Seymour, under your
immediate supervision
Mr
MEEHAN. I do
Mr PECORA Mr. Chairman, I offer that report in evidence,
together with the various exhibits referred to therein
The CHAIRMAN Let the report and exhibits be received in evidence
(The report entitled "The Guardian Trust Co—Financial Condition, 1929-33", together with the exhibits now at the Government
Printing Office, were received and marked "Committee Exhibit No*
4, May 3, 1934", and are as follows )
COMMITTEE EXHIBIT N O . 4—MAT 3,
1934
FINANCIAL CONDITION—1929-33
The closing of the Guardian Trust Co. was not the result of the
"Michigan bank holiday," the "National Bank Holiday," or any
sudden disturbance of economic conditions, but was rather the result
of unsound banking practice over a period of years. The unsound
practices were numerous, being*
1. An unwise loan policy in the following respects:
(a) Credit granted too freely on loans.
(6) Collateral loans made too freely on collateral of a highly speculative nature.
(c) Real-estate mortgage loans out" of proportion to the bank's
resources and total loans.
(d) Too many real-estate loans on vacant property.
(e) Excessive loans to officers and directors and to companies in
which officers and directors were interested.
2. An unsound investment policy in that:
(a) Many investments were in bonds and stocks of speculative
enterprises
(b) A large portion of investments were in companies in which
officers and directors were interested and were apparently made more
with the intent of aiding the company than benefiting the bank.
3. Due to the loan policy of the bank, it was forced into the position
of being a large holder of real estate through foreclosure, very little of
which could be disposed of due to a falling market.
4. That the bank, instead of creating reserves out of its yearly earnings to cover losses on loans and mvestments, concealed these losses
from directors and stockholders, as explained in another report, and
continued to pay large dividends which were not justified.
5. That as a result of the above, the bank instead of adding to its
surplus and undivided profits in cash, Government bonds, or any
other valuable manner was doing so only in theory as far as the bank
proper was concerned, and when taking mto consideration the bank
and its subsidiaries, was actually depleting them.
8014
STOCK EXCHANGE PEACTICES
6. That by reason of paying out unjustified cash dividends and
steadily accumulating real estate, semivalueless securities and doubtful loans, the bank was not liquid for several years prior to its closing.
7. That the bank, in order to continue to do business, was forced to
pledge its valuable assets in every conceivable way to secure funds
and that as a result of this pledging of assets, very little was left available for distribution to preferred creditors from 1930 to the date of
closing.
8. The bank had exhausted its borrowing power with the Reconstruction Finance Corporation, had pledged everything pledgeable
and simply "borrowed from Peter to pay Paul" throughout the years
1932 and 1933.
In order that these points may be easily followed and understood,
they are treated under separate captions in succeeding paragraphs
LOANS
(G-6A-1)
(a) Unsecured loans.—To illustrate what we believe to be an unsound condition in regard to unsecured loans, we have prepared a
chart to show the general condition of loans as of November 15, 1929,
and February 29, 1932. The figures shown on this chart are taken
from the State examiner's reports.
On November 15, 1929, the total loans of the bank amounted to
$112,006,762.86, of which 27.93 percent or $31,098,693.25 were unsecured. Of this sum, 6.45 percent, or $2,357,460.17, were past due.
(G-6A-1)
On the same date, collateral loans which represented 44.15 percent
of the total loans, or $49,832,392.14, had 4.08 percent past due,
amounting to $2,103,011.52.
Real-estate loans representing 27.92 percent of the total loans, or
$31,075,677.47, had delinquent 12.9 percent or $4,704,207.28.
(G-6-2, p. 316)
We, therefore, find past due as of November 15,1929, the following
loan items:
Unsecured loans
Collateral loans.
Real-estate loans
_
-
Total past due
$2, 357, 460; 17
2,103, 011 52
4, 704, 207, 28
9,164, 678. 97
which represented a potential loss to the bank of a figure far greater
than that of $570,625.29, as indicated by the State examiner.
Due to the liberal attitude of the State examiner, as expressed in his
comments, your examiner finds it difficult to arrive at an approximate estimate of the loss likely to be sustained on these loans, but we
cite some of the larger items and refer to the State examiner's comments regarding them.
(G-6-2 p 199)
Puritan Realty Co
$199, 604 77
(G-6-2 p 199)
Richmond Mayfield Land Co
115, 336 41
STOCK EXCHANGE PKACTICES
8015
(G-6-2 p. 200)
J. Roy Taylor, Inc
$205, 581. 94
Stouder Thompson Co
(G-6-2 p. 200)
_
55, 301. 40
Interstate Foundries, Inc
(G-6-2 p. 221)
_
307, 457. 58
J. C. Russell
(G-6-2 p. 223)
_
23, 500. 00
_-
(G-6-2 p. 225)
Fort Smith & Western Railway Co
87, 735. 00
(G-6-2 p. 226)
J. H. Jones, Jr
-
_-_
66, 500 00
(G-6-2 p. 229)
Arthur M and Ottillie M. Brown
178, 000. 00
(G-6-2 p 233)
C. H. Judkins--.
—
20, 000. 00
(G-6-2 p 234)
C H. Mathews
46,400.00
(G-6-2 p 246)
M C Rosenfield
147,000.00
(G-6-2 p 254)
Harry N. Beddell
_
17, 264. 00
(G-6-2 p. 255)
Jacob Babin, et al
223, 250. 00
(G-6-2 p. 267)
Clinton DeWitt, et al
85, 300. 00
(G-6-2 p. 270)
Carrie and Fred S. Jones—
118, 000. 00
(G-6-2 p. 272)
_-_
Edward and Florme Paul
135, 626. 30
(G-6-2 p. 274)
R H. Rutherford, et al
37, 000. 00
(G-6-2 p. 278)
Gulf Region Lumber Co
309, 278. 80
(G-6-2)
—
Joseph Laronge, et al
Total
-
-
630, 960. 84
3, 009, 097. 04
In compiling the above list we have included only a few of the
larger items on which even the State examiner, as optimistic as he
8016
STOCK EXCHANGE PEACTICES
was, acknowledged the probability of a loss, and, if imbued with
his same spirit of liberality, we only consider 50 percent of it as a
potential loss, we can still arrive at a figure in excess of a million and
a half dollars, or one million in excess of the State examiner's figures.
We realize that second guessing in 1934 is much easier than making
an original decision in 1928 or 1929, but believe that the potential
losses indicated at that early date prove the weakness of the bank's
loan policy, especially so when it is borne in mind that the State
examiner did not complete his 1929 report until June 1930, which
was 7 months after the stock-market crash.
Realizing that judging collateral by 1928 or 1929 standards is
entirely different from judging it by 1934 standards, we have not gone
too deeply into the matter of speculative collateral, but merely cite a
few instances to prove that even as early as 1929, the worth of a great
deal of the collateral was problematical. To illustrate this, we quote
the State examiner's comments made November 15, 1929:
(G-6-2, p. 220)
C. B Ellenwood
400 shares Euclid-Windsor Conn : Present value, nothing
(G-6-2, p 221)
J. L Free
2,858% shares Wmton Hotel stock No bids for stock
(G-6-2, p 223)
J. C. Russell
—
331 shares miscellaneous stocks No value.
(G-6-2, p 224)
Old Dominion Mtge. Co
680 shares miscellaneous stocks. No value
$25,026 55
$43,233.49
$23,500 00
$14,000.00
The above items, taken at random, are indicative of the character
of a great deal of the collateral securing loans, and, we believe, prove
our statements in respect to speculative collateral.
(G-6A-1)
While a bank's function is primarily to make loans, conservative
banking demands that these loans be of a fairly liquid nature. In
the Guardian Trust Co. the reverse was true, 28 percent of their loans
as of November 15,1929, representing real-estate loans. These loans,
reaching the large total of $31,075,677 47, were necessarily of long
duration, and failure of the mortgagors to make payments could only
mean that the bank, by process of foreclosure, would be in possession
of a vast amount of real estate for which there was no market. Even
at that early date over $4,000,000 was delinquent, which condition
reached the excessive total of over $7,000,000 in 1932.
(G-6A-11)
From annual statements of the bank we have prepared a comparative statement showing the cash on hand, various loans, deposits, and
total resources for a 5-year period, the purpose of this being to bring
out that while resources, deposits, and other loarfcs showed a steady
decrease, real-estate loans remained at the same approximate figure,
showing the bank's inability to get out from under.
STOCK EXCHANGE PRACTICES
8017
(G-6-2, pp. 170-189, inclusive)
Possibly one of the worst features of the real-estate loan situation
was the large amount loaned on vacant property, the value of which
is highly speculative. As of November 15, 1929, the Guardian Trust
Co. had loaned on vacant property approximately $4,859,038, which
was 12.9 percent of their total real-estate loans There can be no
doubt that vacant or allotment property is purely speculative, its ultimate value being entirely dependent upon the sales ability of the
allotment owner, and for a bank to loan large sums upon real estate of
that nature indicates a very weak loan policy.
(G-6-2, p. 6)
Loans to officers and directors and to companies in which officers
and directors were interested were excessive both as to number and
amount, aggregating $10,426,882.46 as of November 15, 1929, and
large amounts at other dates as shown by the statement made a part
of report on examinations. Regardless of the nature of security, to
loan a sum exceedmg the combined surplus and undivided profits of a
bank to a small group of this nature violates every principle of conservative banking and shows very clearly the selfish manner in which
depositors' funds were used by the bank management. The nonliquidity of these loans is shown by the fact that as of April 8, 1933,
they were in excess of $12,000,000.
(G-6A-2, p. 167; G-6A-2, p. 156; G-6A-2, p. 167)
Another unwise concentration of loans were the loans to the socalled "Eaton interests" and Van Sweringen interests. These loans
totaled $8,852,751.47 as of February 29, 1932, of which the loans to
the Eaton interests amounted to $4,546,426.87 and the loans to Van
Sweringen interests amounted to $4,306,324.60.
(G-6A-12)
The status of these loans is brought out clearly in subsequent paragraphs, but in connection with the Van Sweringen loans? we attach
copy of a letter dated June 8, 1932, from J. A. House, president of the
Guardian Trust C o , to H. C. Eobmson, executive vice president,
which is self-explanatory.
INVESTMENTS
We have stated that the investment policy of the bank was unsound
in that it was the holder of bonds and stocks in too many speculative
enterprises and to substantiate this we show the following semispeculative securities held as of November 15, 1929.
(G-6-2, p. 101)
Real estate and building bonds
$698, 508. 66
(G-6-2, p. 106)
Real-estate and building bonds
1,354,654 63
$2, 053,163. 29
(G-6-2, p. 102)
Miscellaneous bonds
175541—34—PT 18
56, 980 00
4
8018
STOCK EXCHANGE PRACTICES
(G-6-2)
Miscellaneous bonds
$1, 390, 422. 75
$1, 447, 402. 75
(G-6-2, p. 102)
Stocks—
848, 319. 78
(G-6-2)
Stocks
3, 839, 566. 96
4,687,886.74
Total
8,188, 452. 78
While it is true that legally the bank was within its rights in investing
in securities of this nature, there can be no doubt that such investments are speculative and the large amount shown above is indicative
of the tendency of the management to purchase highly rated securities
rather than the safer more lowly rated ones.
For information concerning some of these investments, we refer
to the State examiner's comments of November 15, 1929, concerning
a few of them:
(G-6-2, p. 109)
Lorain property
$175, 000. 00
(G-6-2, p. 109)
Alleghany By-Products Coke Co
(G-6-2, p. 109)
-
Short Creek Coal Co
___
42, 909. 47
396, 313. 68
(G-6-2, p. 109)
Pasadena Investment Co
62, 000. 00
(G-6-2, p. 109)
_
Estates and Investment Co
50,000.00
(G-6-2, p. 109)
Fairmount Development Co
Guardian Securities Co
60, 870.00
_
(G-6-2, p. 110)
_
250,000.00
(G-6-2, p. I l l )
Clinchfield Coal Co
35,116. 66
(G-6-2, p. I l l )
Euclid-Windsor Co
31,000. 00
(G-&-2, p. 113)
Relay Motors Corp
86, 900. 00
(G-6-2, p. 113)
Golden Age Macaroni Co
454, 005. 27
Total
-
1, 415, 767. 67
(G-6-6)
As indicated by the examiner's reports, a substantial loss was to be
expected on these investments—which was borne out by subsequent
developments. In fact, the depreciation was far greater than anticipated as can be seen by reference to exhibit G-6-6 which shows that
STOCK EXCHANGE PEAGTICES
8019
at February 29,1932, the depreciation on securities such as mentioned
above amounted to $3,365,131.56.
Another bad feature of the bank's investment policy was that they
had invested heavily in securities of companies in which bank officers
or directors were interested. As examples we cite the following items
found among the bank's investments as of November 15,1929:
(G-6-2, p. 105)
Continental Shares, Inc
$78,447 00
(G-6-2, p. 106)
United States Metal Products Co.-
82, 450, 00
(O-6-2, pp. 107, 101)
A C & Y R y Co
652,347.50
Total
813, 244. 50
(G-6-2, p. 6)
This item added to the total loans to officers, directors, and interested companies of $10,426,882.46 meant a total concentration of
$11,240,126.96 entirely out of proportion to the bank's total resources.
REAL ESTATE OWNED
(G-6-2, pp. 1A, 187)
As a result of the bank's loan policy on real estate, a great deal of
Mother real estate" was acquired which
could not be disposed of, due
to local real-estate conditions. As% of February 29, 1932, the State
examiner's statement of condition showed this amounted to $1,788,733.31 with an additional sum of $1,970,714.38 in process of foreclosure, a total of $3,759,447.69 in highly uiliquid resources.
SURPLUS AND UNDIVIDED PROFITS
(G-4-4)
The subject of dividends paid by the bank has been gone into fully
in another report, which snowed that on a basis of actual earnings
such dividends were not justified and it is mentioned here, only in
connection with the undivided profits account. Due to the payment
of these dividends the undivided profits of the bank failed to show
any material increase over a period of years, as should be the case and
actually showed a decrease from 1930 to the date of closing, as shown
on exhibit G-4-4 made part of the earnings report. This statement
is of the bank alone and that the true condition of the bank and its
subsidiaries may be noted, we refer to exhibit Gr4-4 which shews that
on a consolidated basis, the undivided profits account actually showed
a debit of $52,254.84. These two statements show clearly how very
thoroughly the Guardian Trust Co. was "milked" to provide large
salaries, bonuses, and excessive dividends. It is our contention that
had the books of the bank been adjusted to reflect the losses incurred
by reason of the shrinkage in value of resources, the surplus and undivided-profits accounts of the bank would have been wiped out
8020
STOCK EXCHANGE PRACTICES
entirely and a deficit shown and we believe that in our foregoing comments, we have proven that as early as 1929, insolvency was imminent
and we shall definitely prove in subsequent paragraphs that the bank
was insolvent in February 1932 one year before it closed.
So far in this report we have only pointed out certain conditions
existing in 1929, which could only lead up to the unsatisfactory condition of the bank as disclosed by the joint examination of the State
banking department and Federal Reserve Examiner Evans made in
February 1932. As of this date, the fruit of unsound banking was
apparent, as the potential losses previously mentioned had actually
occurred, plus a much greater amount.
To illustrate this, we attach an analysis taken from Federal Reserve Examiner Evans' report of February 29,1932, which shows that
out of total investments of $37,663,173, only 65.1 percent or $24,561,634 had any degree of desirability and while the remaining $13,(G-6-2, p 263)
101,539 could not be considered as entirely valueless, they were of a
highly undesirable or speculative nature, so much that the State
examiner estimated the depreciation on all securities as $7,870,729.74
(G-6-2, p 187)
to which should be added estimated loss on real estate loans $302,118.52
(G-6-2, p 45)
estimated loss on other loans $3,694,727.97, a total of $11,867,576 23,
or a sum sufficient to wipe out the combined surplus and undivided
profits of the bank. While this estimated loss is startling enough in
itself, the condition of the bank is even more apparent when we add
(G-6-2, p 358)
to it, doubtful loans $7,462,354.13, loan, undetermined value $10,(G-6-2, p 358)
518,881 08, making a possible loss of $29,828,811.44, or enough to
wipe out the entire capital structure of the bank, which amounted to
(G-6-2, p 1A)
capital stock paid in $7,000,000, surplus $9,000,000, undivided profits
$1,187,563.63, total $17,187,563 63, a potential deficit of 912,661,247.8 L
Federal Reserve Examiner Evans recognized the precarious condition of the bank, and in the comments attendant to his report
stated in part:
(G-6-2)
An extremely liberal appraisal of the assets reveals estimated losses of
$5)292,000. This in itself should not cause any particular concern. Add to
this, however, $14,606,000 in doubtful assets, $10,561,000 of undetermined value
and the result sets out more clearly the real condition with which the management is confronted. The total estimated depreciation, losses and doubtful is
sufficient in amount to absorb the entire capital structure. In appraisal of
investments, the depreciation on defaulted issues only is classed as a loss. This
is in accordance with a recently adopted policy of the banking department
Unquestionably there are substantial losses in the $7,144,000 depreciation
classed doubtful so $3,067,000 of this is in their stockholdings. In the classification of loans the liberal attitude of the examiners is further shown by reference
STOCK EXCHANGE PRACTICES
8021
to loans to Continental Shares, Goodyear Shares, Bishop Syndicate Mgr., Van
Sweringen, Metropolitan Utilities, etc.
BBAL ESTATE LOANS
This asset presents a major problem to the management. On examination
date, mortgage loans aggregated $32,492,000 or 34 4 percent of total loans. Of
this amount $8,472,000 or 26 percent was m default of interest for period of
6 months or longer. Loans m process of foreclosure total $2,145,885.
KESOURCES PLEDGED
(G-6A-4)
In view of the many frozen assets held by the bank, it was desperately in need of funds to continue to operate and, in order to obtain
them, was forced to pledge its resources. We have prepared a statement to show the amount of pledged assets at March 23, 1929,
February 29, 1932, and April 8, 1933, to show the small total of free
assets at the time the bank was taken over by the conservator. From
this it can be noted that the resources pledged increased from $36,529,552 10, or 22 26 percent of total resources as of March 23, 1929,
to $62,008,194 86, or 54.59 percent of total resources as of April 8,
1933, shortly after the closing of the bank. The percentage of pledged
mortgages to total mortgages increased from nothing to 63.44 percent
and pledged loans from nothing to 51.52 percent in the period mentioned above, a clear indication of the bank's desperate attempts to
keep operating at any cost The result of such pledging will be shown
later under a subheading "Condition at Closing."
(G-6A-5)
To illustrate the steadily growing weakness of the bank we have
prepared certain comparative statements which may be readily understood. The first is a comparative consolidated balance sheet of the
bank and subsidiaries as of December 31, 1931^ December 31, 1932,
and February 28, 1933. From this the following important changes
from December 31, 1931, to February 28, 1933, can be noted.
Cash, decreased
Government bonds, decreased
Deposits, decreasedSurplus, decreasedLiabilities, bills payable, increased
Mortgages payable, increased
_
Appreciation on real estate, increased
Total resources, decreased
_
_-_
_
$5, 547, 903. 64
2, 754, 694 23
42, 455, 406. 07
3, 000, 000. 00
--- 15, 923, 928 20
_ 3, 934, 318.19
1, 908, 969. 75
28,128, 556. 05
(G-6-11)
The second is a comparative statement of loans to officers, directors,
and companies in which officers or directors were interested, showing
that from 1929 until the time of closing, the bank had a concentration
of loans raijging from $7,000,000 to $12,000,000 to one small group,
this representing from 10 to 15 percent of the bank's total loans.
(G-6A-6)
We have also prepared a statement to show the nature of bank
investments in bonds and securities as of March 1929, January 1932,
and January 1933, the figures being taken from reports of the bank's
8022
STOCK EXCHANGE PRACTICES
examining committee. The point we wish to bring out in connection
with this is that while the total of such investments only declined
$208,496.34 from 1929 to 1933, the character of the various securities
showed a marked change, there being a considerable reduction in the
amount of the better class of securities with an attendant increase in
the amount of industrial bonds and stocks held. It can be seen that
in this period industrial bonds increased $1,918,328 27, and stocks
(G-6A-6)
increased $2,038,546.77, a total increase of $3,956,874 04 in securities
of a speculative nature.
The next statement showing the difference between book value
and market value of securities as of November 15,1929, and February
29, 1932, brings out the loss to the bank as the result of the change in
the nature of securities held, the depreciation increasing from
(G-6-6)j
$566,717.78 to $7,155,070.68, an increase of $6,577,352.90, a large
portion of this increase being made up of the depreciation on the items
mentioned in the preceding paragraph
We quote herewith certain of the Federal Reserve examiner's comments on loans in order that the nature of certain large loans may be
appreciated and our belief of a large potential loss substantiated.
(G-6-2, pp 290 to 307)
GEORGE A ENOS, $224,596
Collateraled by 4,908 shares Enos Coal Mining Co on which the bank places a
value of $46 per share. However, they carry 800 shares in the Guardian Securities Co at $1 per share Payment depends entirely on the value of the stock
which at present time has absolutely no market at any price Total loans to
Enos' interests and investments in same are.
Enos Coal Mining Co , bonds
$598, 120 00
Algers Wmslow R R , bonds
212, 500. 00
Algers Wmslow R R , loans
4, 550. 00
Geo. A. Enos loan on company stock
224, 596. 17
Direct loan to the company
25, 000. 00
F. S McConnell loan on company stock
7, 500 00
G. W Dean and E R Fancher loan..
44,201 00
(G-6-2 pp 290 to 307)
1, 116, 467.17
GUARDIAN SECURITIES CO., $645,000
Collateraled by listed securities which on date of examination had an estimated
value of $170,000. All the capital stock of the Guardian Securities Co. is
owned by the bank and m the examiner's opmion the company is believed to
have been organized for the purpose of dealing m stocks which were not legal
investments for the bank The depreciation in securities held by the company
is sufficient to wipe out the capital stock ($250,000) entirely and accordingly
no value is allowed the same in the bank's investment account
(G-6-2, pp. 290 to 307)
CONTINENTAL SHARES INC. (DUE 4-21-32), $480,000
Represents the balance of an original participation of $600,000 in a loan of
$4,000,000. Collateraled by miscellaneous stocks which have an estimated value
of $1,698,400 or 42 percent of the total loan The conditions of the affairs of the
STOCK EXCHANGE PBACTICES
8023
subject company are quite well known and the amount above the estimated value
of the collateral is considered a loss.
(G-6-10)
The large increase in nonaccrual loans from year to year is brought
out in the next statement showing an increase of $12,000,000 from
1923 to 1932. As nonaccrual loans are those on which the bank has
stopped accruing interest due to the failure of the debtor to make
payment of either interest or principal, it is obvious that a large portion of this amount represented a loss to the bank and is indicative
of the weakness of the bank's loan policies.
As of the date of examination the title to the bank building was
vested in the New England company, all the capital stock of which
was owned by the bank and carried as a building equity in the amount
of $3,800,000. Analysis of the New England company statement does
not justify a valuation of $3,800,000 on the stock.
Among the assets of the New England company were the following:
1. Six demand notes totaling $483,483.13 signed by the Guardian
Trust Co., trustee, for Hollenden Hotel first mortgage, leasehold 6}i
percent sinking fund bonds. Notes were payable to the Guardian
Trust Co., were not endorsed without recourse, and were said to represent advances for ground rent and taxes and to constitute a prior lien.
2. Seven notes totaling $1,756,848.58 signed Hollenden Hotel Co.,
of which $160,000 was payable to the Guardian Trust Co., not
endorsed without recourse.
3. Note for $25,000 signed Valuation Service Co. and $50,000
invested in the entire capital stock of the same company which was
organized to handle the bank's properties.
4. Hollenden Hotel leasehold mortgage bonds in default $207,550.
Hotel in receivership since May 1931.
(G-6A-2, p. 1A)
Briefly summarized, the resources of the bank at February 29,
1932, as shown by page 1 of the State examiner's report of that date
would appear to be
Total resources
Less contra items also shown as liabilities.
Net resources
—
Less Losses on loans and investments
$159, 781, 384. 05
7,256, 719. 00
— 152, 524, 665. 05
29,122, 299. 00
123, 402, 366. 05
44, 999, 724.18
Less Assets pledged
78,402,641.87
with which to satisfy:
Deposits of.
Bills payable.Repurchase agreements
Deficit
$102, 973, 274. 43
27, 091, 741. 34
3, 609, 429. 17
133,674,444.94
55,271,80S. 07
On September 8,1932, the final result of the appraisal of the bank's
assits by State Bank Examiner T. O. McEldowney was presented at
a meeting held at The Guardian Trust Co. Present were President
8024
STOCK EXCHANGE PEACTICES
House and Vice President Robinson for the bank, Superintendent
Fulton, Attorney Examiner Saffran and Examiner McEldowney for
the banking department and Mr. DeCamp and Examiner Evans from
the Federal Reserve bank. The result of the appraisal which brought
out conditions such as outlined in preceding paragraphs was accepted
with no contention and in conclusion it was agreed to transfer
$2,000,000 from surplus and $600,000 from the undivided profits
accounts to create a reserve for possible losses. This plan was presented to and accepted by the executive committee of the bank on
September 30, 1932, at which time the transfers were made. This
transfer, in our opinion, was meaningless, as the Guardian Trust co.
actually had no surplus or undivided profits at that time as brought
out by the foregoing figures, they having been wiped out by the losses
outlined.
The bank management, instead of taking cognizance of the bank's
condition as clearly brought out by the State examiner's report and
making some effort to retrench, proceeded along the same paths as
before, even going so far as to declare a $1 per share dividend on
December 15, 1932, when they had every reason to know the bank
was absolutely insolvent.
Condition of the bank at closing.—The complete inability of the
Guardian Trust Co. to reopen after the national bank holiday declared by President Roosevelt is partly shown by the following excerpts
from the minutes of a special meeting of the board of directors held
March 4, 1933:
(Minutes of directors' meeting, Mar 4, 1933)
The president reported that to the best of the bank's knowledge,
and according to a statement by the Comptroller, our total
deposits at the close of business, Feb. 25, 1933, subject to
withdrawal restrictions were approximately
$81, 069, 332 00
That deducting amount paid under our 1 percent restriction on
withdrawal limitation, also deducting items in last above
amount but which were since returned unpaid and making
other adjustments, the balance on which we may yet be called
for a 1 percent payment under the present plan of operation is
approximately
_
57, 091, 768 00
On which 1 percent would be
570, 917 00
That we have on hand at the commencement of business Mar
4, to meet said amount, currency and com
639, 826 00
The president also reported that our other liabilities are approximately
Rediscounts, Federal Reserve bank
3, 928, 079.12
Bills payable, Federal Reserve bank,
_
__. 1, 239, 796. 82
Bills payable, Reconstruction Finance Corporation
15, 226, 597. 62
Bills payable, Chemical Bank & Trust Co
250, 000. 00
Letters of credit and travelers checks
59, 070. 00
Bankers acceptances guaranteed or endorsed
531,106. 45
Acceptances executed for customers. _
918, 769. 24
And that to meet the present 1 percent withdrawal amount of
above stated "other liabilities" not considering securities
specifically pledged to their payment, we have funds m
process of collection approximately as follows.
Federal Reserve, reserve account
_Federal Reserve, transit account
Exchange on hand
_
Due from other banks, not subject to contra accounts, but
subject to varying restrictions.-_,
Total
22,153, 419 25
405, 501. 00
658, 668. 00
127, 828. 00
563, 413. 00
1,755,410. 00
STOCK EXCHANGE PRACTICES
8025
From the above it can be seen that at this date the Guardian Trust
Co. had quick liabilities as follows:
Due to depositors
Other liabilities
$57,091, 768. 00
22,153, 419 25
-
Total
79,245,187. 25
to meet, for which they had quick resources of—
Currency and com on hand
Funds m collection-_..
--
Shortage
$639, 826. 00
1, 755, 410. 00
—.
2, 495, 236. 00
76, 849, 951. 25
(G-6A-7)
This, however, does not teU the complete story, as it does not
bring out that $62,008,194.86 of the bank's resources were pledged,
either to secure deposits or to borrow money. Exhibit G-6A-7 is a
photostatic copy of a statement of condition prepared by the conservator on April 8,1933, showing the condition of the bank at closing.
(G-6A-7)
Briefly summarized, this statement shows that to meet withdrawals of unsecured deposits amounting to
$61, 739, 442. 66
The bank has unpledged assets of
$51, 666, 997 66
Less contra accounts
shown as liability
also
(G-6A-7)
$1,384,775 69
(G-6A-2 p. 358)
Depreciation and loss as shown
by State examiner's report
of February 29, 1932
$19, 899, 293 09
21, 284, 068 78
30, 382, 928 88
Therefore bemg short
81, 856, 518 78
of the amount required to meet withdrawals of all unsecured deposits.
While it is true that the deposits and borrowings against which
were pledged
_
_ 62, 008,194. 86
Amounted to only—
Public funds
$10, 748, 397. 21
Trust funds
4,908,491. 17
(G-6A-7)
Bills payable Federal Reserve. _
79, 316. 84
Bills payable, Chemical Bank & Trust Co.
250, 000 00
Bills payable, Reconstruction Finance
Corporation
14, 900, 481. 40
Bills rediscounted
3,893,042 30
34, 779, 247. 52
Leaving an apparent equity of
Additional available for depositors, it should be borne in mind
that there would still be a deficit between—
and
Unsecured deposits
(G-6A-7)
-
27,228, 947. 34
61, 739. 442. 66
8026
STOCK EXCHANGE PEACTICES
(G-6A-7)
Unpledged resources
Possible equity in pledged resources
$30, 382, 928. 88
27, 228, 947. 34
of
$57, 611,876. 22
4,127, 566 U
assuming that all remaining resources, both pledged and unpledged,
could be liquidated at book value, which was highly improbable, and,
as we now know, impossible.
(G-6A-7)
The bills payable item with the Reconstruction Finance Corporation amounting to $14,900,481.40 against which the Guardian had
pledged securities amounting to $42,989,919.10 is made up of four
notes as follows:
Loan no
115
306
402
680
Date of note
Mar
Apr
May
Nov
Due date
14,1932 Sept
20,1932 Oct
23,1932 Nov
2,1932 May
Loan application
14,1932 $5,100,000
14,1932 4,450,000
14,1932 2,722,500
2,1933 5,900,000
Amount received.
Collateral
pledged
Balance Apr.
8,1933
$5,047,377 89 $10,484,285 64 $4,536,997 76
4,154,528 12
9,602,508 43 3,260,898 50
2,714,090 00
8,026,873 11 2,114,007 26
5,564,401 84 12,744,395 34 4,988,577 88
17,480,397.85
40,858,062 52
14,900,481 40
From this chart it can easily be seen that as of February 25, 1933,
the Guardian Trust Co. was delinquent $9,911,903.52 in payments to
The Reconstruction Finance Corporation and was practically dependent upon the Reconstruction Fmance Corporation for its existence.
(G-6A-7)
In February 1933 the Guardian Trust Co., having exhausted its
credit with the Reconstruction Fmance Corporation, was forced to
resort to other means of obtaining money and along with several other
Cleveland banks formed the Western Reserve Mortgage Co , the ostensible purpose of this company being to buy and sell mortgages. During
the month of February 1933 the Guardian Trust Co. sold to the Western
Reserve Mortgage Co. mortgages totaling $19,340,701.98, receiving
from the latter company notes for a like amount. The Western
Reserve Mortgage Co. then pledged these mortgages with the Reconstruction Finance Corporation for a loan of $6,227,761.74 and turned
the entire proceeds of the loan over to the Guardian Trust Co. as part
payment on their notes, leaving an unpaid balance of $13,112,940.24.
This balance is carried on the conservator's statement of condition
mentioned in a previous paragraph as a resource under the title
"Western Reserve Mortgage Co. Notes" and explains the decrease in
real-estate loans during 1933.
(G-6A-8, 9, and 10)
We are attaching statements showing the complete transactions
between the Guardian Trust Co. and the Western Reserve Mortgage
Co., also the analysis of the real-estate loan account of the Guardian
Trust Co. in order that it may be clear.
STOCK EXCHANGE PBACTICES
8027
As a result of this transaction, the Guardian Trust Co. was enabled
to secure approximately $6,000,000 in cash for $19,000,000 of mortgage loans, but the nature of the business of the Western Reserve
Mortgage Co. was such that a partial loss of the unpaid balance of
$13,000,000 was likely.
(G-6A-7)
In view of this, we do not feel that the Western Reserve Mortgage
Oo. notes shown as a resource on the conservator's statement should
be considered at full value and while we have made no effort to
appraise these notes, we believe some consideration should be given
this point in estimating the condition of the bank at the time of closing.
I t is extremely likely that in view of local real estate conditions the
loss will be substantial.
To further support our contention that the Guardian Trust Co. was
in no position to reopen after the "national bank holiday", we quote
from the testimony of Alfred P. Leyburn given before the Senate
Banking and Currency Committee on Thursday, January 11, 1934.
Speaking of the "bank holiday", Mr. Leyburn stated in part:
(Testimony of Leyburn, Jan 11, 1934)
The Guardian Trust Co of Cleveland, Ohio on the 31st of December 1932,
was borrowing $18,000,000 on deposits of $109,000,000 and they had practically
.all of their assets pledged The Reconstruction Finance Corporation had poured
considerable money in there, and they had just about reached their borrowing
limit, and after the "bank holiday" the cash on hand was $1,732,000 against
deposits of $76,000,000 and bills payable of $19,385,000 Since that time with
the aid of the Reconstruction Finance Corporation, that bank has paid out 20
percent
Now, you compare that with the banks in Detroit and you can readily see that
this thing was ready to blow in your face I was afraid it was gomt to blow while
I was up in Detroit on this other deal
The Guardian Trust Co. could not have stayed open at all, because when the
^'bank holiday" 'was declared and the banks were authorized to make disbursements, some of them made 5 and 10 percent but The Guardian Trust Co of
Cleveland made a disbursement of 1 percent It is the smallest amount I ever
heard of such a large bank making
The above testimony of Mr. Leyburn supports our previous comments in regard to the condition of the Guardian Trust Co., and should
very effectively eliminate any doubt as to the bank's condition and
any thought that the refusal to allow the Guardian Trust Bank to
reopen was due to any prejudice, political or otherwise.
ATTEMPTED REORGANIZATION
(Minutes of executive committee, p. 166)
It should be borne in mind in connection with the above data
relative to the closing of the Guardian Trust Co. that the final closing
of the bank did not occur during the regime of President House.
From February 27 until March 4, 1933 the bank operated on a restricted withdrawal basis, allowing depositors to withdraw 1 percent
of deposits. From March 4 to March 11, the period of the national
bank holiday, the bank did not permit withdrawals.
(Minutes of directors' meetings, pp. 181-194)
On March 12, 1933, the Guardian Trust Co. applied for a license
under the Roosevelt Act. On March 14 the board of directors voted
8028
STOCK EXCHANGE PRACTICES
to continue to operate under the direction of the Secretary of the
Treasury on the restricted withdrawal basis until further notice.
(Minutes of directors' meeting, pp 198 and 200)
On March 18, President J. A. House tendered his resignation,
which was accepted and at the same meeting Mr. Dean suggested a
committee be chosen to act with bank officers in reorganizing the
bank.
On March 20, Harold H. Burton was elected to the board of
directors and the presidency of the Guardian Trust Co
(P 206)
On March 25 President Burton stated that the reorganization committee was developing its ideas along the lines of a charter for a new
national bank, which would take over at least a portion of the assets
and liabilities of the then present institution.
(Minutes of directors' meeting, pp. 220, 221)
On April 7, President Burton reported that a reorganization com
mittee had conferred with the Secretary of the Treasury and representatives of the Reconstruction Finance Corporation in Washington.
He stated that while the committee was well received, the Government officials did not approve of reopening the Guardian Trust Co.
as a national bank, as:
1. Its assets would not be sufficient to make possible the establishment of a new unit bank of sufficient size to be warranted in
Cleveland.
2. That in order to establish such a bank there would be competition for subscriptions to capital stock with the proposed First
National Bank in Cleveland, the formation of which the United
States Treasury representatives had, after a presentation on behalf
of the Union Trust Co , approved
(Minutes of directors' meetings, pp. 224, 227-246)
On April 8, the State superintendent of banks appointed Sidnejr B,
Congdon as conservator of the Guardian Trust Co. From April 8
until May 3, a sponsoring committee of prominent Cleveland citizens
worked to form a First National Bank of Cleveland, but due to a lack
of response of the citizenry it was impossible to do so, and on May
9, 1933, the board of directors and reorganization committee of the
Guardian Trust Co. accepted the offer of the National City Bank of
Cleveland to purchase assets from and/or make loans to the liquidators of the Guardian Trust Co.
PROPAGANDA
Possibly one of the most vicious acts of the management of the
Guardian Trust Co. was its practice of issuing advertising matter
designed to impress the public with the integrity and soundness of the
Guardian Trust Co. during the year 1932, and even in 1933.
(G-6A-14, 15, 16)
During this period, when the management could not help knowing
the precarious condition of the bank, they continued to put out adver
STOCK EXCHANGE PBACTICES
8029
tising matter assuring the public of their strength. We have photostated copies of some advertisements used by the bank and quote
from several of them
(G-6A-14)
IN 1932
Many a fortune is intact, many a cash reserve is steadily growing because the
owners agreed with the sound ideas expressed by the Guardian and saved with
the Guardian Thousands of depositors, large and small, have approved the
Guardian safe-and-sure policy.
Another reads:
(G-6A-13)
In 1898 the Guardian advertised "solid as a fortress." In 1932 "fifty times
as solid and secure."
The above from a bank tottering on the brink of insolvency.
Advertisements such as these speak more eloquently than any word
picture we might paint as to the caliber of the management of the
Guardian Trust Co. Knowing the condition of the bank, due to their
mismanagement, they still attempted by high-pressure advertising to
wring a few more dollars from the people of Cleveland to be used for
their own ends
The peak of effrontery and duplicity was reached, however, on February 21, 1933, 4 days before the bank restricted withdrawals, on
which date the following advertisement appeared in the daily papers
of Cleveland*
LEST WE FOKGET
There have been times these last 3 years when practically every man and
woman has felt the chilling fear of being without work Are you going to suffer
that fear again, or will you provide your own unemployment insurance—a Guardian savings account? Cash in the bank is the foundation of self-confidence and
peace of mind It never depreciates and is always ready to help when you need
it. And it pays 3 percent tax-free Will you forget so easily—or will you begin
now to become independent of whatever the future years may hold? Start a
Guardian savings account today
We believe that, if there is not in existence at present any law making it a penal offense to mislead the public by means of fraudulent
advertising, a law should be enacted making officials of a bank criminally liable if any advertising issued by a bank is contrary to fact, as
was the case with the Guardian Trust Co.
WALTER H. SEYMOUR,
Senior Examiner.
Mr. PECORA. I show you another report, addressed to you by Mr.
Seymour, entitled "The Guardian Trust Co. and subsidiaries—consolidated list of officers and directors." Is that another report prepared by Mr. Seymour under your immediate supervision?
Mr. MEEHAN. Yes; it is.
Mr. PECORA. Mr. Chairman,
I offer that report in evidence together with the exhibits referrea to therein.
The CHAIRMAN. Let the report, together with the exhibits, be
received in evidence.
(The report entitled "The Guardian Trust Co. and subsidiaries—
consolidated list of officers and directors", and the exhibits mentioned
therein but now at the Government Printing Office, was received in
evidence, and the same marked "Committee Exhibit No. 5, May 3,
1934", and are as follows:)
COMMITTEE EXHIBIT NO. 5—MAT 3,
1934
Consolidated list of officers and directors of the Guardian Ti ust Co and subsidiaries
1928
Director
Arter, Charles K The Guardian
Trust Co
Ayers, Allan F The Guardian Trust
Co
Berg, Philip C The Guardian Trust
Co
Bicknell, Warren The Guardian Trust
Co
Bishop, F. W Harrison County Investment.
Bishop, Bobert H , Jr The Guardian
Trust Co
Bolton, Charles C The Guardian
Trust Co
Bolton, Irving C The Guardian
Trust Co
Bond, S M
The Guardian Trust Co
Hotel Hollenden Co.
Vincent Building Co
.
Bowman, George H The Guardian
Trust Co
Brand, Carl W The Guardian Trust
Co
Brooks, Arthur D The Guardian
Trust Co
Brown, Harvey H , Jr The Guardian
Trust Co
Bruggemeier, C F The Guardian
Trust Co
Carlton, H A The Guardian Trust
Co
Case, George S The Guardian Trust
Co
Coates,H J / DeWitt Hotels Co
Cook, Allan B The Guardian Trust
Daley, W A The Guardian Trust Co,
Officer
1929
Director
Officer
1930
Director
1931
Director
Officer
Officer
*
1932
Director
Officer
*
Vice president
Vice president
Vice president
*
*
*
•
*
*
•
•
*
*
*
*
Vice president
*
Vice president
Vice president
Vice president
Vice president
*
•
*
*
*
*
*
*
*
*
*
•
*
*
*
•
*
*
*
*
*
*
*
*
*
•
*
*
Treasurer
Vice president
*
*
Vice president
*
.
Vice president
*
*
Treasurer
Treasurer
Vice president
Vice president
*
*
Vice president
i
Vice president
*
Vice president.. .
O
fed
Vice president
*
*
Secretary..
Vice president
*
Secretary
Vice president
Vice president.
President
___
Vice president
President
Vice president.
Vice president
Vice president
Vice president
Vice president
Secretary
Vice president
SecretaryVice president
Secretary—
Vice president
Vice president
Vice president
Vice presidentVice presidentVice president-
Vice presidentVice presidentVice president-
Vice president—.
Vice presidentVice president—.
Vice president.
Vice president
Vice president
Treasurer
Treasurer
Treasurer
Treasurer
Treasurer
Vice president-
Treasurer
Treasurer
Vice president..
Treasurer.
Treasurer
Treasurer
Vice presidentTreasurer
Treasurer
Treasurer
Treasurer
Treasurer
Treasurer
Vice president
Treasurer
Treasurer
Treasurer
Treasurer.
Treasurer.
Treasurer
Treasurer
Treasurer
Treasurer
Treasurer
Treasurer
Vice president
Treasurer
Treasurer
Treasurer
Treasurer.
Treasurer.
Vice president
Vice presidentSecretary
Treasurer
Vice president-
Treasurer.
Treasurer-
Secretary
Treasurer
Treasurer
1
?
NOTICES
Vice president
OCK
Dalton, H G The Guardian Tiust
Davies,S A : DeWitt Hotels Co
Dean, A W :
DeWitt Hotels Co
The Guardian Trust Co
Hotel Hollenden Co—
Deasy, John F The Guardian Trust
Co
DeWitt, Theodore
DeWitt Hotels Co
Hotel Hollenden Co
Dietz, William G The Guardian Trust
Co
Durell, George B The Guardian Trust
Co
Eide, Randolph The Guardian Trust
Co
Fish, John
The Guardian Trust Co
Land Development & Realization
Co
Fishley, W O Valuation Service Co.
Force, C H
The Guardian Trust Co
Hotel Hollenden Co
Foote, L B The Guardian Trust Co.
Fraser, A D Valuation Service Co. . .
Fraser, A R The Guardian Trust Co_
Fuller, Ralph L The Guaidian Trust
Co
Gill, K F The Guardian Trust Co
Green, W R
Branch Investment Co
DeWitt Hotels Co
4400 Superior Co
Guardian Securities Co
The Guardian Trust Co
Harrison County Investment
Hotel Hollenden Co
Land Development & Realization
Co
New England Co
Vincent Building Co
Griffiths, E S
The Guardian Trust Co
Hotel Hollenden Co
Grossman, Louis J The Guardian
Trust Co
Consolidated list of officers anddirectors of the Guardian Trust Co, and subsidiaries—Continued
1928
Director
Hall, B S
DeWitt Hotels Co
The Guardian Trust Co
Hotel Hollenden Co
Vincent Building Co
Hanna, Dan R , Jr The Guardian
Trust Co
Hanna, L C , Jr The Guardian
Trust Co
Harmon, F S The Guardian Trust
Co
Heer, Charles G The Guardian Trust
Co
Herrick, Clay The Guardian Trust
Co
Hme, Charles P The Guardian Trust
Co
Holding, S H The Guardian Trust
Co
Holmden, L E The Guardian Trust
Co
House, J A
Branch Investment Co
DeWitt Hotels Co.
Guardian Securities Co
—
The Guardian Trust Co
Harrison County Investment
Hotel Hollenden Co—
New England Co
Vincent Building Co
Hunt, William H The Guardian
Trust Co
Inglis, Richard The Guardian Trust
Co
Irish, Arthur L The Guardian Trust
Co
Johnson, George B
Guardian Securities Co
The Guardian Trust Co
Hotel Hollenden Co
Officer
1930
1929
Director
Officer
Director
Director
Officer
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Officer
Vice president
Vice president
•
*
*
Officer
•
Vice president
*
*
Director
*
*
Vice president
1932
1931
Vice president
|t
8
*
Treasurer
*
President
*
•
PresidentPresident
President
President
President
Piesident
President
*
*
President
Vice president
President
President
President
President
*
President
*
*
Vicelpresident
*
Vice president
s
President
President
President
President
Vice president
Vice president
Vice president
•
i,
President
President
President
President
President
President
President
President
—
*
*
Vice president
*
*
S
President
*
Vice president
Vice president
Vice president
Vice president
*
1
QQ
Kaufman, L J The Guardian Trust
Go
Kellogg, F D The Guardian Trust
Co
Kline, Selden The Guardian Trust
Co
Kling, John D The Guardian Trust
Co
Lee, Robert C
The Guardian Trust Co
Harrison County Investment
Hotel HoUenden Co
:
Land Development & Realization
Co
Marlatt, W H The Guardian Trust
Co
Marshall, G G The Guardian Trust
Co
Marshall, W G The Guardian Trust
Co
Masch, E F Land Development &
Realization Co
Mather, W G The Guardian Trust
Co
McGowan, F S The Guardian Trust
Co
Mclntosh, H P The Guardian Trust
Co
Mclntosh, H P Jr
Branch Investment Co..
440 Superior Co
Guardian Securities Co
The Guardian Trust Co
Land Development & Realization
Co
New England Co
Vincent Building Co
Megerth, C R
The Guardian Trust Co
Vincent Building Co.
Mills, James R The Guardian Trust
Co
Monks, T E
4400 Superior Co
Guardian Securities Co
The Guardian Trust Co
Murfey, C L Tne Guardian Trust Co.
Murfey,L A The Guardian Trust Co.
Oakes,H K The Guardian Tiust Co. .
Olstyn, S J The Guardian Trust Co —
Patterson, Proctor The Guardian
Trust Co
Vice president-
... Vice president-
Vice president
Vice president—
Vice president.
Vice president.
President.
President
§
Vice president
Vice president
a
W
g
Chairman of board
Chairman of board
Chairman of board
Chairman of board
Chairman of board
Vice presidentVice president-
Vice president
Vice president
Vice president
Vice president
Vice presidentVice president—
Vice president
Vice president
1
Vice president
Vice president-
Vice president
Vice president-
Vice president
Vice presidentVice presidentVice president-
Vice president
Vice presidentVice president
Vice presidentVice president-
Vice presidentVice president
Vice president
Vice president
Vice president—
Vice president
Vice president—
Vice president
Vice president.
Consolidated list of officers and directors of the Guardian Trust Co and
1928
Director
Petrequin E A The Guardian Trust
Co
Pomerene Atlee The Guardian Trust
Co
Prentiss, F F The Guardian Trust
Co
Prescott, Orville W The Guardian
Trust Co
Probeck, Karl
New England Co
Valuation Service Co
Valuation Service Co
Purdon, W D The Guardian Trust
Co
Quarns, B D The Guardian Trust
Co
Robinson, H C
Branch Investment Co
DeWitt Hotels Co 4400 Supenor Co
Guardian Securities Co
The Guardian Trust Co
Harrison County Investment
Hotel Hollenden Co
New England Co
Vincent Building Co
_
Rogers, E D The Guaidian Trust Co.
Rogers, E S The Guardian Trust Co.
Rossiter, W T The Guardian Trust
Co
Sanders, William B The Guardian
Trust Co
Schmidt, F A Valuation Service Co.
Sears, R P
Branch Investment Co
DeWitt Hotels Co
4400 Supenor Co
Guardian Securities Co
The Guardian Trust Co
Harrison County Investment
Director
Director
Officer
*
*
Officer
Director
*
*
1932
1931
1930
1929
Officer
subsidiaries—Continued
Officer
Director
*
*
*
*
Officer
*
*
*
*
* __r
*
*
* Treasurer
President
Vice president
* Treasurer
President
Vice president
Vice president—
-
ui
*
*
Vice president
Treasurer
President
Vice president
Vice president
Treasurer
President
Vice president
•
*
n
i
<
Vice president
President
Vice president
Executive vice
president
President
Vice president
President
*
t
Vice president
President
Vice president
Executive vice
president
President
Vice president
Vice president
*
Secretary
*
Secretary
Secretary..
Secretary
Secretary
*
Secretary
Secretary
Secretary
Secretary.
Vice president
President
Vice president
Executive vice
president
Vice president
President
Vice president
Vice president
*
*
*
*
*
*
*
*
*
*
*
Vice president
President
Vice president
Executive vice
president
Vice president
President
Vice president
Vice president
*
*
*
•
*
*
*
*
*
*
*
*
Vice president
President
Vice president
Executive vice
president
Vice president
President
Vice president
Vice president
*
*
*
*
Secretary
Secretary
Secretary
Secretary
—
*
*
*
*
*
*
*
*
Secretary
Secretary
Secretary
Secretary
Secretary
*
*
*
*
Secretary
Secretary
Secretary
Secretary
Secretary
i
a
s
Secretary
Treasurer
Vice president
!
*
*
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*
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*
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Secretary
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*
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*
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*
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• *
*
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*
*
*
SecretarySecretaryVice president
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Secretary
j
Hotel Hollenden Oo
Do
Land Development & Realization
Oo
New England Oo
Vincent Building Co
Shannan, E T The Guardian Trast
Oo
Shepherd, H I The Guardian Trast
Oo
Stewart, H B The Guardian Trast
Oo
Stone, Arthur L The Guardian Trast
Oo
Stucky, A G
The Guardian Trust Co
Land Development & Realization
Oo
Taylor, Alexander S The Guardian
Trust Co
Tillotson, E G The Guardian Trast
Co
Wade, George Garretson The Guardian Trust Co
Wallace, Robert B The Guardian
Trast Co
Warner, Worcester R The Guardian
Trast Co
Warwick, James W The Guardian
Trast Co
Whelan, George J The Guardian
Trust Co
Willkom, H Valuation Service Co
Young, A F The Guardian Trast Co.
Vice president
C
8036
STOCK EXCHANGE PBACTICES
Senator COSTIGAN. Mr. Meehan, in one of the exhibits I notice
reference is made to salaries and bonuses paid to officers.
Mr MEEHAN. Yes, sir.
Senator COSTIGAN. Was
that data taken from the books of the
banks, or was it supplied in response to a Senate resolution calling
for such information?
Mr. MEEHAN That information was gathered by our examiners
in Cleveland following the usual routine of finding out the compensation paid to officers and directors of any institution which was under
investigation.
Senator COSTIGAN. Was that information checked with the information supplied to the Senate and referred to this committee in response to a resolution which I introduced in the Senate?
Mr. MEEHAN. NO, sir. Ifc was not checked, but we did get that
information directly from the records of the bank in the hands of a
receiver.
Senator COSTIGAN All right.
The CHAIRMAN YOU may proceed, Mr. Pecora.
Mr PECORA. Mr. Meehan, I now show you another report made
by Mr. Seymour, entitled "The Guardian Trust Co.—compensation paid to officers." Will you kindly look at it and tell me
if that is another report made to you by Mr Seymour under your
immediate direction?
Mr. MEEHAN
Mr. PECORA.
Yes, sir; it is.
Mr. Chairman, I offer that report in evidence, together with the exhibits referred to therein.
The CHAIRMAN. Let the report and exhibits be received in evidence.
(The report entitled "The Guardian Trust Co.—compensation
paid to officers", together with the exhibits referred to therein and
now at the Government Printing Office, was received in evidence
and marked Committee Exhibit No. 6, May 3, 1934", and is as
follows.)
COMMITTEE EXHIBIT N O . 6—MAY 3, 1934
COMPENSATION PAID TO OFFICERS
The inequality of salaries in the pay roll of the officers of the Guardian Trust Co. forms the basis for much criticism against the conduct
of President J. A. House and Executive Vice President H. C. Robinson
in their domination of the Guardian Trust Co. and shows the ease
with which patronage could be bought by Mr. House.
(Q-ll-lla to G-ll-llc)
The review of the pay roll shows that in the fears 1928 to 1932,
inclusive, salaries plus bonuses of the seven hig] Lest paid officers to
be as follows:
1928
J
H
H
T
H
A
H
A House, president—
O Robinson, executive vice president—
P Mclntosh, Jr , vice president
E Monks, vice president
I Shepherd, vice president
G Stucky, vice president
F Young, vice president
72,600
33,450
36,450
32,750
27,000
27,000
1929
00
00
00
00
00
00
1930
$107,083 33 $108,750
76,875 00 77,708
36,875 00 36,775
36,275 00 36,175
35,375 00 35,575
30,625 00
30,125
31,625 00 30,125
1931
00 $90,0C0 00
50 65,000 00
00 33,000 00
00 33,000 00
00 33,000 00
00 27,000 00
00 27,000 00
$73,350 00
54,925 00
27,791 67
29,375 00
17,125 00
23,708 33
23,708 33
STOCK EXCHANGE PRACTICES
8037
From these figures it will be seen that the salary of Mr. House has
always been approximately three times that of any officers other than
Mr. Robinson, and that the salary of Mr. Robinson has been almost
twice that of the next ranking officer
While this is not contrary to any of the rules or regulations of the
Trust Co , it does indicate that Mr. House placed a great value on his
services. The approval by the other officers and directors of such an
unusual salary shows that the Trust Co. was practically a one-man
institution controlled by Mr. House. The word "practically" is
used here because it was necessary to have an accessory to his acts
and he chose as such, Mr. H. C. Robinson, executive vice president.
(O-ll-l)
In order to gain and hold such power, it required something more
than personality; Mr. House knew this. He also knew human nature
and its frailties and that the best way to gain patronage would be
through hard cash. Consequently, he secured the approval of the
executive committee to a plan of bonus distribution that would carry
out his ideas perfectly. Thus we find that on December 9, 1927, the
executive committee passed this resolution:
On motion made, seconded, and unanimously carried, the committee hereby
approves and authorizes fulfilling the president's recommendations, as follows
That before Christmas of this year, the bank pay to each officer and employee,
as additional compensation, an amount equal to one half of the current month's
salary of the respective individuals; and in addition thereto, there be turned over
to the president a sum not m excess of $45,000 to be by him distributed, in hisk
sole discretion, to the officers and employees, exclusive of the chairman of the
board and the president
(G-ll-2)
This was approved by the board of directors on December 13, 1927.
It will be seen from this that Mr. House could employ $45,000 to very
nice advantage in securing the patronage of officers and employees to
further his personally sponsored projects
(G-ll-3)
It would also appear that the committee had forgotten Mr House
and that his salary for 1927 had not been sufficient for his needs because we find an additional bonus of $15,000, granted him by certain
members of the executive committee in their letter to Mr Bremer,
directing Mr. Bremer as follows.
ro-n-3)
To Mr House direct the sum of fifteen thousand dollars ($15,000) is to be paid
as additional compensation for faithful, efficient, and valuable service to the
company
This in itself was irregular because it was never voted upon in the
executive committee meetings nor in the directors' meetings
Of the $45,000 in bonuses for that year given by the executive committee to Mr House to distribute, Mr. House presented $10,000 to
his "man Friday/' Mr. Robinson. He distributed the remaining
8038
STOCK EXCHANGE PEACTICES
$35,000 among 61 members of the organization, those receiving
$1,000 and more being the following.
John Fish
A R Fraser
Arthur L Irish
Geo B Johnson
L J Kaufman
H P Mclntosh, Jr. r
Thos E Monk&
F M Riddleberger
H I Shepherd
A G StuCky
A F Young
$1, 500
1,000
1, 050
1,500
2,000
2,750
2,250
1,000
1,250
2,500
2,750
We find in 1928 that the same procedure was followed by the
executive committee, December 14, but this time there is a provision
made—
(G-ll-4)
To pay to him the same amount as was paid to him last year at this time
(G-ll-5-a, 5-b, G-ll-6)
While this wording of the resolution is ambiguous as to the intention
of the committee to pay him an additional bonus of $15,000.00, we
nevertheless find that the committee so instructed the payments in
their correspondence to Mr Bremer.
On December 13, 1929, the same bonus powers and bonuses were
again granted to Mr House, but apparently the plums he handed the
various officers were not large enough, for we find, under date of
January 7, 1930, that the executive committee adopted additional
resolutions authorizing the President to—
(G-ll-7, G-ll-8)
pay $10,000 00 to the vice presidents in charge of certain departments to be distributed by them to certain of their employees, whom they might select, m recognition of loyal, faithful, and extraordinary services during the year
(G-ll-9)
This extra $10,000 bonus distributed by the vice presidents was not
voted for the year 1930 However, the executive committee did vote
in favor of the $45,000 and $15,000 (individual) bonus as it had in
prior years
In the year 1931, the constant drain on the resources of the Trust
Co. had apparently become quite evident, so the executive committee
thought it had better show some sort of conservation with the result
that no bonuses were paid for that year, yet Mr. House's regular
salary remained at $90,000 00 and Mr Robinson's at $65,000 00.
However, this plan of cutting out the bonuses apparently did not
meet with the approval of the executive committee; and as a result,
Mr. House's salary was reduced on February 1, 1932 to $81,000.00,
on July 1, to $72,000 00; on November 1, to $48,000 00 and on
December 1, to $42,000.00. In spite of this, his total compensation
for the year 1932 amounted to $73,350.00. Mr. Robinson's compensation for the same period amounted to $54,924.99, with the
same number of reductions.
STOCK EXCHANGE PEACTICES
8039
For the short period of operation in 1933, January 1 to March 1,
Mr House received total compensation in the amount of $7,000 and
Mr Robinson, $6,944 44 A recapitulation of the foregoing shows
that for the period January 1, 1928, to March 1, 1933, Mr. House
received a total of $484,516 65 in salary and bonuses and Mr Robinson, $353,852 76
Thus, the Guardian Trust Co paid out a total of $838,469 41 for
salaries and bonuses for 1928, 1929, 1930, 1931, 1932, and January
and February of 1933 to Messrs. House and Robinson.
While these unusual disbursements were sanctioned by the board
of directors of the Guardian Trust Co , it is nevertheless a reflection
on the good faith and integrity of banking officials to permit such a
condition to obtain and permit such bleeding of a dying institution,
and it is a question whether or not the directors would have sanctioned
such huge salaries had they been properly acquainted with the true
condition of the bank at that time, instead of the false earnings statements prepared for them as outlined in the report of our Mr Long
entitled "Financial History/ 7
In answer to an inquiry from a Mr Barton of the Metropolitan
Bank of Minneapolis for a plan of additional compensation to be paid
to officers, Mr. House stated in 1928
(G-ll-12, G-ll-13)
I am coming more and more to the conclusion that executives in banks, who
are responsible for the success of the institution and who are really the money
makers, should be paid, in addition to their salaries, a percentage of the net
earnmgs.
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner M. W. Firth
Senator COSTIGAN In this particular exhibit no 6, you did not
segregate bonuses and salaries, did you? In other words, the bonuses
and salaries are combined here
Mr. MEEHAN Well, that information may be shown in the exhibit
itself, but we here summarized it in our report to save space
Senator ADAMS Senator Costigan, 1 notice here in committee exhibit no 3 a statement that follows out your inquiry, indicating that
during the years 1929 and 1930 the Guardian Trust Co paid salaries
and bonuses of approximately $700,000 This exhibit also indicates,
on page 15, that they reported through their annual reports earnings
of around 15 million dollars during a period of 10 years, when their
actual earnings proved to be 6 million dollars.
Senator COSTIGAN. Does the report indicate how much of the total
was for salaries and how much for bonuses?
Senator ADAMS. It does not.
Mr. MEEHAN NO. It is in the exhibits which are now in the
Government Printing Office for the purpose of expediting their
printing, and those exhibits have been offered in evidence by Mr.
Pecora
The CHAIRMAN. YOU may go on, Mr. Pecora
Mr PECORA. I now show you another report addressed to you by
Mr. Seymour, entitled "The Guardian Trust Co.—Loans to Officers
and Directors." Do you identify this report as one prepared by Mr.
8040
STOCK EXCHANGE PRACTICES
Seymour under your immediate direction as the result of his investigation?
Mr
MEEHAN I can and I do
Mr PECORA. Mr. Chairman, I offer the report in evidence, together with the exhibits referred to therein
The CHAIRMAN. The report and exhibits will be received in evidence
(The report entitled "The Guardian Trust Co —Loans to Officers
and Directors", together with the exhibits mentioned therein and
now at the Government Printing Office, were received in evidence
and marked "Committee Exhibit No 7, May 3, 1934", and are as
follows*)
COMMITTEE EXHIBIT N O . 7—MAY 3,
1934
LOANS TO DIRECTORS AND OFFICERS
The loans made by the Guardian Trust Co to its directors and
officers totaled almost $6,000,000 on February 29, 1932, a year prior
to the bank's closing.
(G-5B-la to d)
Loans to officers and directors
$5, 926, 071 90
(G-5B-2)
Total loans and discounts---
93,087, 111. 73
From the above, it will be noted that loans to directors and officers
exceeded 6 percent of the total loans on the books of the bank at
February 29,1932. Some of these loans obviously were made without
justification from a credit standpoint and disclose the apparent laxity
toward the maintenance of sufficient collateral. Only the larger loans
and those deserving special comment have been analyzed and are
discussed in the succeeding pages of this report.
That the officers and directors of the Guardian Trust Co realized,
after it was too late, that the concentration of a large amount of
money in loans to themselves and to their interests was not expected
or suspected by the public is evidenced by a letter dated March 29,
1933, from Mr. H C. Robinson, senior vice president and director o:
the bank, to Mr Herbert K Oakes, another director, in which he saidf
(G-5B-34)
All the Guardian directors have been sued for their d6uble liability, and probably there will be a lot of unfortunate publicity regarding directors' and officers'
loans We have advised all the directors that such publicity would probably be
forthcoming, and have suggested that if you wish to avoid it, now would be the
opportune time to place any loans they have with us, so I am writing you calling
attention to your loan with us, which is now about $30,000, m order to give you
an opportunity, along with others, to pay this loan or refund it elsewhere, thereby
possibly saving you some embarrassing publicity
However, Mr. Oakes was unable to pay off his loan, there being
still unpaid a balance of $33,403.
Referring to the general loan policy of the Guardian Trust Co.,
the State bank examiner pointed out in his report of February 1932
(a year before the bank closed):
(State Bank Examiner's Report, February 1932)
To begin with, a great many of the loans were past due, both collateral and
unsecured A number of collateral loans represent speculation, and apparently
were made on that basis By that I mean, the bank loaned entirely too much
STOCK EXCHANGE PRACTICES
8041
to the borrower and did not sell him out when they should have They now have
a greatly under-collateraled loan which the market cannot pay A great many
of the loans are dependent on market conditions, and will not be paid until prices
are considerably higher than at present This situation is strikingly true of
certain officers' and some directors' loans As you will note, officers and directors
have borrowed $5,335,131 44 in their own name This amount represents 33 3
percent of the present capital and surplus It is needless to say, their present
borrowings are entirely too high and not along the lines of conservative banking
Irrespective of security, certain officers are owing entirely too much to the bank
This item is of course subject to severe criticism and is a reflection against the
present management
J. A. HOUSE, PRESIDENT AND DIRECTOR
Mr. House, like several of the other senior officers, availed himself
of the device of obtaining loans from the bank as being made to
his trust estate and not m his own name. The records of these loans
did not, therefore, indicate the true borrower but merely a trust
fund number. Later, however, the name "House" was written in
pencil, and it is our understanding that this identification was placed
on the loan card during conservatorship.
Mr. House's indebtedness to the bank on February 29,1932, totaled
$281,638 and on April 8, 1933 totaled $245,933.48, which may be
divided as follows
(G-5B-la)
Feb 29,1932 Apr 8,1933
$179,635 00
11,000 00
91,000 00
Loans to trust funds
Personal loans
Real estate loans
$166,599 96
5,157 88
74,175 64
The real-estate loans are not worthy of much comment other than
to mention that they include first and second mortgages on Mr
House's residence and earned an interest rate of 5 percent until
mcreased by the liquidator to 6 percent on May 10, 1933
(G-5B-3, 4)
The customary rate of interest on first mortgages in this mstitution
was 6 percent, and its real-estate loans are predominantly first mortgages. So, Mr House, in taking advantage of his position, was the
recipient of a lower mterest rate on his mortgages, was able to procure a service not generally given, and probably obtamed a loan in
excess of that ordinarily given with a like amount of security The
bank's valuation, which m this exceptional case was probably generous, amounted to $110,000 on which Mr House had borrowed
$65,000. The value of the property today is undoubtedly much
lower than when borrowed upon, however, Mr. House had reduced
his mortgages to approximately $40,000 so that the loss in liquidation
will probably be slight
Another $40,000 in real-estate loans made to House is on an
unimproved business
lot in downtown Cleveland and appears to be
amply secured.v There remains a balance due on these loans, as of
February 15, 1934, amounting to:
Principal
Interest
-
$74,175.64
2, 537 93
8042
STOCK EXCHANGE PEACTICES
The loans to trust funds of $179,635 are made up of three items as
follows:
Loans to trust no 1126
Overdraft on trust no. 1126
Loan to trust no 2185
$140,000
9, 413
30, 225
(G-5B-6)
The loan to trust no 1126 had its origin on May 9, 1923, and continued at various increasing amounts until November 8, 1929, when it
reached a peak of $140,000 which represented a consolidation of the
smaller loans previously made On June 15, 1930, collateral consisting of:
531 shares of Akron, Cleveland & Youngstown Ry Co
(G-5B-7c)
1,000 shares Continental Shares, Inc
(G-5B-7c)
was pledged by Mr. House to secure this $140,000 loan On February 16, 1931, the 1,000 shares of Continental Shares Inc were
released and 850 shares of Clark Comptroller Co. stock was pledged
instead. Since then the collateral has been unchanged, notwithstanding the tremendous decrease in its saleable value. The liquidator valued the collateral on February 13,1934, at $3,400
There has been only one payment of $100 on the principal of this
loan since its inception
(G-5B-7)
Mr House also enjoyed an interest rate of 5 percent on this loan
until May 10, 1933, when it was raised to 6 percent He was delinquent in interest payments beginning in June of 1932 and made payments considerably less than the accruals until March 15, 1933,
when he stopped payments altogether So that in addition to
$139,900 principal owed on this loan Mr House is also indebted to the
extent of $11,622.27 in delinquent interest at February 10, 1934.
(G-5B-8)
Another trust account belonging to Mr. House, through which he
obtained loans, was trust no 2185 The advances to this trust also
continued over a long period and on December 15, 1929, had reached
a peak of $35,210 63 when collateral consisting of miscellaneous
securities was pledged
(G-5B-8)
Mr. House made six payments against the loan and the liquidator
has applied the bank's credit bank balance against it, bringing the
amount still due down to $26,699.96. Interest of 5 percent was
charged to Mr. House on this loan also, until the liquidator changed
the rate to 6 percent. Interest has been delinquent since December
15, 1932. The liquidator's valuation of the collateral as of March
6, 1934 was $20,864.
8043
STOCK EXCHANGE PEACTICES
(G-5B-9)
A loan direct to Mr. House was made by the bank on March 16,
1932, in the amount of $11,000 with interest at 5 percent. This
loan now has an unpaid balance of $5,157.88 principal and $52.57
interest The reduction in principal is not due to payments however, but offsets made by the liquidator from credits due Mr. House.
(G-5B-11)
Concerning Mr. House's personal j&nancial status, no information
is available, but from unofficial sources we have learned that Mr.
House has said that he is "broke" and was having difficulty in meeting insurance premiums. This we are not in a position to refute but
it is interesting to know that Mr. House and his family are not
"walking the streets." In fact, they (the family) were buying new
cars during the year 1933. We might also mention that the file
wiiich should contain all information and correspondence concerning
his financial condition was found to hold just one letter which pertained to Mr. House's automobiles and was dated September 27,
1933.
THE MILLS CO. LOANS
The Mills Co. is a Cleveland concern manufacturing metal partitions. The president and vice president are relatives of Mr. House's
by marriage. Mr. House is a director of the company. The present
financial condition of the Mills Co. is extremely serious. Below is a
tabulation of outstanding loans made to the company and to members
of the Mills family and the amounts remaining unpaid*
(G-5B-12-17)
Original
loan
The Mills Co.—.
F O Mills, Jr....
F O Mills, Sr__.
George M Mills.
$60,000 00
305,053 48
15,000 00
33,000 00
Unpaid
Feb 10, Delinquent
interest
1934
$55,450 09
302,435 26
$3,174 96
19,834 95
30,765 13
None
These loans originated in 1928 and are at the present time inadequately secured with securities of very doubtful value The bank
examiner considered them in February 1932, a year before the bank's
closing, as slow and nonliquid and stated that he believed that classification to be liberal No effort is noticeable on the part of the
bank to reduce the loans nor to secure additional collateral Apparently the family relationship was strong enough to dictate a most
lenient credit policy and an utter disregard for the safety and liquidity
of bank funds
H. p M'INTOSH, JR., VICE PRESIDENT
(G-5B-18)
The borrowings of Mr Mclntosh, Jr., from the Guardian Trust
Co. began early in 1928 and extended through 1929 with seven loans
being made m all. These loans totaled, at the time thfe bank closed,
8044
STOCK EXCHANGE PEACTICES
$110,200 Mr Mclntosh has made no payments at all on these loans
since the bank has been closed, but the liquidator has applied credit
balances as "offsets " Prior to May 10, 1933, interest at the rate of
5 percent was charged, since then the rate has been changed to 6
percent
The following is a tabulation of the loans to Mclntosh, Jr.:
(G-5B-18G, 18F, 18A, 18B, 18C, 18D, 18E)
Original
loan
Date
Principal
due Feb
25, 1933
$47,000
34,400
2,500
1,100
5,000
8,000
3,300
Mar 12,1927.
Nov 14,1928.
Feb 18,1929.
Apr 26,1929.
May 22,1929.
July 25,1929_
Oct 24, 1929.
Principal
due Mar
15,1934
$45,900
34,400
2,500
1,100
5,000
8,000
3,300
$42,894 91
34,400 00
2,500 00
1,100 00
2,041 39
8,000 00
3,300 00
110,200
94,236 30
(G-53-18F)
Secured by collateral having a value of $62,210.40.
H. C. ROBINSON, SENIOR VICE PRESIDENT
Mr. Robinson, following the lead of Mr. House, took advantage of
borrowing through the medium of his trust account. His trust account number was 1114 and the identification is the name "Robinson"
written in pencil on the loan card. This, we understand, was done
during the term of the conservator.
(G-5B-19, 20)
The loans to Mr. Robinson, of which there were two, had their
origin in 1930. Thefirstwas made on August 29,1930, in the amount
of $58,000, and the other on October 6,1930, m the amount of $20,000.
Both of these loans when made bore interest at the rate of 5 percent,
but since May 10, 1933, interest of 6 percent has been charged but
not paid.
(G-5B-19, 20)
These loans originally amounting to $78,000 have an unpaid balance
of $41,352.09 as of January 30,1934, with interest in amount $2,605.46
unpaid and delinquent from December 15, 1932. Almost $5,000 of
the reduction is due to offsets, made since the beginning of liquidation.
The indicated value of the collateral securing these loans appears to
be sufficient if the liquidator's values are actual and are obtained in
the sale of the loan or its security. The loan cards for all directors
and those officials who are stockholders are marked "Hold for stockholders' liability" so that additional sums must be obtained to completely liquidate the debts of these individuals if their collateral is
insufficient.
INTERSTATE FOUNDRIES, INC.
In addition to the loans made directly to Mr. Robinson, those
made to the Interstate Foundries, Inc., by the Guardian Trust Co.
have more than a passing interest.
STOCK EXCHANGE PEACTICES
8045
(G-5B-21)
We are unable to write as much in detail concerning these loans as
we believe the subject merits, due to the virtual dearth of information
available. However, we were able to learn that Messrs. Robinson,
House, Green, Mclntosh, and Fraser, all officers of the bank, were
stockholders in this company.
(G-5B-22, 23)
The first records we have been able to locate showing loans to Interstate Foundries, Inc., indicate that two loans were made on December 15, 1924, totaling $349,701.70. Based solely on the odd amount
of these loans, we believe this was not the first advance made to the
company. I t seems evident that unsecured advances had been made
rior to December 1924 and that at that time it must have been
eemed advisable to put the advances in the form of a collateral loan.
However, the files of the Guardian Trust Co contain so little information that it was impossible to substantiate our belief.
S
(O-5B-22, 23)
At any rate, one loan of $250,000 and one of $99,701 70 were made
as of December 15, 1924, to the company. Both of these loans,
totaling $349,701.70, were secured by $400,000 Interstate Foundries,
Inc, first-mortgage bonds and some additional motor-car stock of
doubtful value at the time of the loan and of no value today.
(G-5B-23)
No payments other than a rather insignificant one of $244 12 are
noted since the date of the loan. On November 15,1929, a reduction
of $42,000 is shown. However, the collateral was reduced for the
same amount.
(G-5B-24)
The credit files show that on September 10,1926, the executive committee aiithorized the purchase of the bonds which were pledged t9
secure this loan and that—
The Interstate Foundries, I n c , has passed a resolution authorizing our purchase of said bonds without the necessity of the ordinary provision for sale
(G-5B-25)
For some reason not disclosed by the files, this transaction did not
actually occur until February 26, 1930, when the loans are shown as
paid and "Transferred to bond department/' At tms time the
interest accrued and unpaid amounted, to $131,074.31, and prmcipal
to $307,457.58, which is a total of $438,531.89. The files do not
clearly enough set out the transaction to enable us to definitely state
just how or on what basis the collateral was purchased.
(G-5B-25, 26)
As stated above, the indicated unpaid balance due the Guardian
at February 26, 1930, was $438,531.89. for which they received
$358,000 par value of the bonds. From this it would appear that the
bank took a write-off of $80,000 at the time the bonds were accepted.
8046
STOCK EXCHANGE PBACTICES
In addition to the $80,000 loss sustained, a write-off of $49,657 58
was placed on the books as of June 16, 1932 Thirty-six thousand
dollars par value of the bonds are shown as sold to the National City
Bank of Cleveland for $32,400 so that today the investment on the
Guardian books is $225,400. No interest has been paid on the bonds
since 1930 and their value is extremely doubtful due to the closing
of plants—which leaves only the real estate as the underlying security
of the bonds. What the loss to the bank in liquidation will be cannot
be estimated, due to lack of an impartial appraisal of the real estate
(G-5B-27)
Certainly the officers of the Guardian were very lenient to this
company concerning credit extension and extremely negligent in protecting the depositors' interests, as this entire transaction was some
10 years or more in being carried, with no attempt being made to
collect.
THOMAS E
MONKS, VICE PRESIDENT
(G-5B-29a, 29e)
Mr. Monks was mdebted for loans directly from the Guardian as
of April 8,1933, and amounting to $42,090. Interest was at 5 percent
until changed by the conservator to 6 percent on May 10, 1933. The
original amount of 7these loans was $45,300 and they were dated from
1923. Mr. Monks collateral for these loans consisted principally of
366 shares of Euclid Shale Brick Co. common stock which has a
current appraised value of $50 per share. The total appraisal value
of all collateral on March 122 1934, was $23,252 to secure loans
amounting to $41,540.77 in principal and $1,855 54 in accrued and
delinquent interest. In addition to these debts Mr. Monks is also
liable for double liability on his Guardian stock.
No information is found concerning the financial condition of
Mr. Monks so that the possibility of collection is unknown.
(G-5B-28)
Mr. Monks owns a personal corporation, called the "Allen Holding
Co ", the purpose of which is to hold title to his real-estate investments.
On May 26, 1930, Mr. Monks, through his corporation, obtained a
first mortgage from the bank in the amount of $175,000. This
mortgage balance is now $164,500. The bank's appraisal for the
property is $298,250. We are unable to comment concerning the
salability of the property or its value. This company is delinquent
on its interest payments to the extent of $12,337.50 and has made no
payments on principal since December 21, 1931, so that Mr. Monks
was one of the "favored group" who received most cordial treatment
concerning their obligations.
L. J. KAUFFMAN, VICE PRESIDENT
(O-5B-30)
Mr. Kauffman's loan is dated March 15, 1930, in the amount of
$87,000. As of March 14, 1934, the principal is $77,984.18 and
delinquent interest $8,083.98. To liquidate this debt the liquidator
lias collateral which he values at $30,196.60.
STOCK EXCHANGE PRACTICES
8047
Mr. Kauffman was another of the officers who was permitted to
owe money to the bank without Teceivmg even the slightest suggestion
that he make an effort to reduce his mdebtedness or increase his
collateral.
Apparently the records and files of loans to officers and directors
must have been kept in a remote corner of the bank's quarters, for
no correspondence has been found in the records which would indicate
that the loan department officials or employees were even aware of
the condition of these loans
(G-5B-31, 32)
Mr. Kauffman was also a real-estate operator and a director in a
number of compames obligated to the Guardian, among these the
L H Heister, I n c , which had mortgages with the Guardian of
$431,000 which have been reduced since their origin in 1927 and
1928 to approximately $296,000 Both of these loans are now under
foreclosure and interest has not been accrued since April of 1930.
At that time delinquent interest amounted to almost $25,000 The
underlying real estate is vacant subdivision property and, of course,
of doubtful value now How instrumental Mr Kauffman was in the
granting of this loan and whether or not he was the "good fellow"
who permitted such leniency in collection is not known, but no appreciable payment of principal is noted since 1931
The appraised value of the property at the date of the mortgages
was over a million and a quarter, but that was back in 1927 and 1928
when everybody had inflated values on their assets The only
thing which appears favorable about these loans is the interest rate
of 7 percent However, that means little if the bank is unable to
collect it
H. B. STEWART—DIRECTOR
(G-5B-33)
Mr Stewart, a director of the Guardian Trust Co , is the president
of the A O & Y. E E and is known as a capitalist in Akron, Ohio.
Loans to Mr Stewart at the Guardian began in 1921 with a loan of
$100,000 and increased at a rapid rate until June 15, 1934, when a
new loan was approved for $628,418 65 The principal security for
his loan was 7,970 shares of the capital stock of the A. C & Y E E ,
which was appraised in June 1932 at $618,288 98.
(G-5B-34)
In the minutes of the executive committee of June 21, 1932, this
loan was approved under the following conditions*
(G-5B-38)
Payment of 1 year's interest in advance.
Payment of 1 year's premium of $500,000 life insurance policies.
Pledging of additional collateral consisting of 3,800 shares of A, C & Y. Co.
stock.
Mr. Stewart enjoyed a rate of 5% percent interest until June 15,
1933, when the liquidator raised it to 6 percent.
8048
STOCK EXCHANGE PEACTICES
The unpaid balance on the principal is $621,846.14 and interest
accrued and delinquent of $24,980.05, both as of February 10, 1934.
The liquidator's appraisal of the collateral is $1,350, having allowed
no value for the principal security, i.e., A. C. & Y. Co stock. The
liquidity of this loan is entirely dependent on the financial condition
of this railroad and the approval of this loan with such a concentration
of collateral in one company should be highly condemned, whatever
the financial condition of the company, if only for the reason of the
difficulty to dispose of the collateral if necessary.
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner J. J. Sinnott.
The CHAIRMAN. I must be absent for a time and will ask Senator
Costigan to preside.
Senator COSTIGAN (presiding). You may go on, Mr. Pecora
Mr. PECORA I show you what purports to be another report made
by Mr. Seymour, entitled "The Guardian Trust Co—Loans to
Officers of Other Banks " Is this another report prepared by Mr.
Seymour under your immediate direction and based upon investigations he made?
Mr.
MEEHAN. Yes,
sir; it is.
Mr. PECORA. Mr. Chairman, I offer the report in evidence, together
with the exhibits referred to therein.
Senator COSTIGAN. The report, together with the exhibits and
other information offered by Mr. Pecora, will be received in evidence.
(The report entitled "The Guardian Trust Co —Loans to Officers of
Other Banks ", together with the exhibits mentioned therein and now
at the Government Printing Office, were received in evidence and
marked "Committee Exhibit No. 8, May 3,1934", and are as follows )
COMMITTEE EXHIBIT N O . 8—MAY 3,
1934
LOANS TO OFFICERS OF OTHER BANKS
When the Guardian Trust Co closed in February of 1933 it had
outstanding approximately a half million dollars in loans to officers
and directors of other banks. Some of these loans were sufficiently
collateralled, while others were obviously made because of the
connections of the borrower. We shall review in detail the loans made
by the Guardian Trust Co to E. K. Fancher, Governor of the Federal
Reserve bank, George DeCamp, Federal Reserve agent; W. M. Baldwin, president of Umon Trust; and A W Dean, a director of Guardian
Trust and treasurer of Enos Coal Mining Co.
LOANS TO GEORGE DECAMP
The loans made by Guardian Trust Co. to George DeCamp,
formerly Federal Reserve agent of Cleveland, were both secured loans
and unsecured loans.
The advances made by the Guardian to DeCamp reached their
peak on June 15, 1931, when he owed the bank $40,000. We have no
estimate of the value of the collateral securing this $40,000 loan in
June 1931, but feel sure that it was away below the balance of the loan.
On June 10, Mr. Mclntosh, Jr , wrote to Mr DeCamp.
STOCK EXCHANGE PRACTICES
8049
(G-5C-21)
At your convenience I wish you would stop in to see me in regard to your
loan, as I have a suggestion which I believe will put the loan in better condition.
Therefore, the bank divided on June 15, 1931, the $40,000 debt of
DeCamp's into two loans as follows:
(G-5C-23A)
Secured collateral loan, no. 71036
$16,500
(G-5C-22)
Unsecured, no 23565
23,500
40, 000
(G-5c-22, 25)
Mr. DeCamp has made seven payments against the unsecured
loan, and the balance when the Trust Co closed amounted to $12,500.
Since then the liquidator has applied DeCamp's bank balance as an
(G-5c-24)
offset bringing the balance due from the unsecured loan down to
$11,389 47 with interest from December 29, 1932, unpaid in the
(G-5c-23a)
amount of $742 75. No payments have been made on the principal
of the other loan; however, interest has been kept up to date
The credit files of the Guardian Trust Co show that DeCamp is
now president of the Licking County Bank, Newark, Ohio, at a salary
of $5,000 a year, which would not seem to indicate a liquidation of
this loan in the very near future
LOANS TO WILBUR M
BALDWIN
The loans made by the Guardian Trust Co to W M Baldwin,
president of the closed Union Trust Co are typical of the policy
loans made by bankers
Baldwin is indebted to the Guardian Trust Co for two loans: One
dated September 15, 1924, originally made for $17,000, on which
there is $15,000 still due, and the other dated December 7, 1927,
(G-5c-12a, 12b)
originally made for $15,000, on which there is $476 25 still unpaid.
The collateral securing these loans, totaling $15,476 25, had a value
on March 5, 1934, of $4,350
(G-5c-13)
Examination of the credit file discloses an interesting undated
memorandum which seems to take the place of all credit information
prior to the time of the conservator This memorandum says:
He is known to be a man of means
and speaks of his rise
To Ins present high office
175541—34—PT18
6
8050
STOCK EXCHANGE PBACTICES
A credit file memorandum under date of February 26, 1934, indicates a story of an entirely different nature. It shows total bank loans
due from Baldwin of $88,733 25 against which collateral worth
$51,000 is pledged. It further shows ujipaid interest on the
(G-5c-14a, 14b)
Guardian loans of $1,062 83; that his unpledged assets do not exceed
$3,000, that he has no other property, and that should he be pushed
by the banks
He would have no alternative other than bankruptcy.
Such a condition in a loan account can only be due to the " exchange
of courtesies" and to the failure of the bank to insist on adequate
collateral, basing their loan on their opinion of the " means" and
"high office" of the borrower.
LOANS TO A. W. DEAN, DIRECTOR, AND H I S INTERESTS
An analysis of the loans made by the Guardian Trust Co. to Arthur
W Dean, a director, covers loans made to Dean solely; loans made
jointly to Dean and E R Fancher, Governor of the Federal Reserve
bank, Cleveland, loans to George A. Enos, and loans made to the
Enos Coal Mining Co
The history of these loans begms some time prior to July 1929,
with a loan to George A. Enos, personally George A. Enos is president of the Enos Coal Mining Co., and A. W Dean is vice president
and treasurer
On December 31, 1932, the Enos Coal Mining Co. and its officers
owed the Guardian Trust Co. the following:
(G-5c-10a)
Enos Coal Mining Co (direct)
Enos Coal Mining Co (indirect)
Enos Coal Mining Co (bonds)
A W Dean (collateral)
A W Dean and E R Fancher
Fred S McConnell
Algiers, Wmslow & Western R R (bonds)
George A Enos (collateral)
Total.
_
_
__
$35, 000
3,400
651, 000
133,300
44,200
7, 500
200, 000
226,800
1, 301, 200
LOANS TO GEORGE A. ENOS
(O-5c-l)
On July 26,1929, the Guardian Trust Co. granted a loan of $14,000
to Enos personally, to be secured by 198 shares of Enos Coal Co.
stock. This loan was in addition to a loan in the amount of $18,000
and secured by 312 shares of the same stock which had been made
some time prior to July 1929 and which was then unpaid. Five
months later, on December 3, 1929, the Guardian Trust granted still
another loan to Enos in the amount of $30,000,
on the understanding that we will receive a balance for the Enos Coal Co. of at
least the amount of our loans.
STOCK EXCHANGE PRACTICES
8051
(G-5c-2c, G-5c-2d, G-5c-l
On December 19,1930, the loans to George A Enos totaled $65,000
and the executive committee agreed to grant a loan of $225,000 to be
secured by 4,900 shares of Enos Coal Mining Co. stock and a life
insurance policy of $335,000. It was agreed that $65,000 of this
loan was to be used to pay off the loans then unpaid.
(G-5c-2a)
No payments have ever been made on this $225,000 loan. The
loan was credited with dividends on the stock collateral and charged
with the insurance premiums on the policy. The insurance premium
charges have exceeded the dividends In fact the only credits that
appear against this loan are two; one on January 27, 1931, in the
amount of $403 83, and a reimbursement for a premium of $614 on
May 10, 1932 On April 13, 1933, the balance of this loan due from
Enos was $230,369 32, and his bank balance to offset this loan totaled
$4 05.
We have checked the bank balance of G. A. Enos for the year 1932,
and find that his highest balance for 1932 was $6 59 on February 18,
1932, and that it has been $4 05 since then
Interest on this loan his been paid steadily up to date.
LOAN TO A / W .
DEAN
(G-5c-3a to m)
On October 24, 1930, the Guardian Trust Co loaned to Arthur W.
Dean the sum of $150,000 secured by miscellaneous stock exchange
collateral. We have carefully checked the bank's files and find no
memoranda or letters showing the purpose of the loan, nor Dean's
financial position. Evidently, the fact that he was a director was
enough.
(G-5c-3a-3d)
Dean made several payments on the loan and on June 10, 1933, the
balance due was $110,742.10. The liquidator, Mr. Hanrahan, has
applied Mr. Dean's bank balance as an offset bringing the balance of
the loan down to $77,652.74, secured by collateral having a value, as
of March 8,1934 of $72,738. Interest has been paid regularly.
DEAN AND FANCHEB LOAN
(Q-5c-4, 5)
On November 10, 1930, the Guardian Trust Co. loaned $53,201
to A W. Dean and E K, Fancher. A memorandum in the bank's
credit file shows that—
(G-5c-5)
This loan was made tofinanceMr. Enos' home.
(G-5c-2)
At the time this loan was made to Dean and Fancher, Mr Enos
owed the Guardian Trust Co $65,000, and in the very next month
loaned him more money to bring his loan up to $225,000. Evidently
8052
STOCK EXCHANGE PEACTICES
this last loan was contemplated in November of 1930, and the officers
of the Guardian Trust Co. felt they should have endorsement other
than Enos'.
(G-5c-4)
This $53,000 loan to Dean and Fancher jointly was secured by a
mortgage and bonds on property valued at $67,950, and by several
insurance policies. The loan was dated November 10,1930, and was
originally due February 5, 1931, but was not paid when due. On
February 9, 1931, a payment of $9,000 was made and the loan was
renewed in the amount of $44,201. Subsequently, there were eight
renewals in all for this loan. A memorandum in the files of the
bank regarding this failure of payments, states—
(G-5c-5)
Because of Mr. Fancher's connection with the Federal Reserve bank, we cannct
press for payments.
(G-5c-5)
No further payments were made, although interest was paid regularly, and just prior to the bank holiday the loan was sold out to
Cleveland Trust Co. On February 10,1933, which was 2 weeks before
the Guardian Trust Co. closed, the bank received a check of the
Cleveland Trust Co. in payment of this loan. It seems very likely to
us that the Governor of the Federal Reserve Bank of Cleveland would
obviously be in a position to have known the financial condition of the
Guardian Trust Co. early in 1933, and that he acted accordingly. It
will be remembered that Alfred Leyburn testified before the committee recently, that it was known the Guardian Trust was in a very
poor financial position and in speaking of Cleveland banks stated that
the Detroit banks "just beat other banks to the draw "
(Testimony of Leyburn before committee Jan. 12,1934)
There doesn't seem to be any doubt whatsoever that Fancher,
knowing the impending crash of the Guardian, insisted on the transfer
of this loan to the Cleveland Trust Co.
ENOS COAL MINING CO.
The borrowings of the Erios Coal Mining Co. from tlie Guardian
Trust Co. began in December 1930. Previous to then the company
did not have an account with the bank
(G-5c-6)
The company opened its account early in December 1930 and on
December 9 of that year borrowed $10,000, unsecured, from the bank.
The loan was promptly paid, and then in February 1931 the Guardian
Trust granted another $10,000 loan to the company, which was paid
within the same month.
(G-5c-6)
On May 11, 1931, the Guardian Trust Co. granted another loan
to the Enos Coal Mining Co. in the amount of $25,000, secured by the
accounts receivable of the company. A notation dated May 12,1931,
in a memorandum in the credit files of the bank states:
STOCK EXCHANGE PEACTICES
8053
(G-5c-7a)
Discussed need of signed statements and of separate statements of parent
company and subsidiaries with E. T. Shannon, who will call A. W. Dean.
(G-5c-8)
We found no statement of the company in the files of the bank as
of any date close to May 1931. We did find a certified report of the
company's as of December 31, 1929, which showed that the company
had suffered a loss m 1929 of $103,535 77.
(G-5c-9,6)
The $25,000 loan to Enos Coal Mining Co. was renewed 21 times
and on March 14, 1932, the bank loaned the company an additional
$10,000, making the total loans due from the company $35,000.
Since the Guardian Trust Co. has been closed the Coal Mining Co.
has made several payments on its loan, bringing the balance down as of
February 20, 1934, to $17,000
However, we believe that the total advances to all of the above,
beginning m December 1930, should not have been made by the
Guardian Trust Co. The company had suffered a loss of more than
$100,000, in 1929, the best year for business we have ever had, and it
should have been obvious to the bank officials that the company was
unlikely to obtam profits and improve its position unless some radical
changes in expenditures and management policies were made. But
then it must be borne in mind that the advances were made because
of Arthur W. Dean, a Guardian Trust director, and E R. Fancher,
Governor of the Federal Reserve bank
WALTER H. SEYMOUR, Senior Examiner
Senalor ADAMS Mr. Meehan, m regard to committee exhibit no.
7, in relation to loans to officers and directors of the Guardian Trust
Co , it would seem that they were reasonably liberal in the making
of loans
Mr MEEHAN. Yes; Senator Adams
Senator ADAMS. It would seem that they had such loans practically
to the extent of $6,000,000 on February 29, 1933.
* Mr. MEEHAN. Yes, sir.
Senator ADAMS That is,
those loans apparently were 6 percent of
the total loans and discounts of the bank.
Mr. MEEHAN Yes; they were very generous in the making of such
loans.
Senator ADAMS TO what extent were those loans paid back to the
bank?
Mr. MEEHAN I am afraid we will have to depend upon the exhibits
to give us that information. However, I think it is a very small
percentage.
Senator ADAMS. All right.
Mr. PECORA. I now show you what purports to be another report
prepared by Mr. Seymour, entitled "The Guardian Trust Co.—
Loans to'Eaton Interests'". Do you recognize that as a report made
by Mr. Seymour based upon the investigation conducted under your
supervision?
Mr. MEEHAN. I do.
8054
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Chairman, I offer that report in evidence, together with the exhibits referred to therein
Senator COSTIGAN. The report, together with the exhibits and other
information offered by committee counsel, will be received in evidence.
(The report entitled "The Guardian Trust Co—Loans to 'Eaton
Interests'", together with the exhibits referred to therein, were received
in evidence and marked "Committee Exhibit No 9, May 3, 1934",
and are as follows )
COMMITTEE EXHIBIT NO
9—MAY 3,
1934
LOANS TO "EATON INTERESTS"
The loans made by the Guardian Trust Co to the so-called "Eaton
interests" are represented by six loans in the aggregate amount, as
of April 8, 1933, the date of the conservator's inventory, of $5,343,055 19 and are composed of the items indicated in the schedule
below:
(G-5f-l)
Apr 8,1933
Eaton interests
Loans
A Cleveland Cliffs Co
B Continental Shares
C George T Bishop, syndicate manager
T> Foreign Utilities, Ltd
E Otis & Co
F R H Bishop, Jr, & Samuel Mather
$2,010,338 61
- -- - 1,145,281 62
440,796 59
350,000 00
—
417,853 37
978,785 00
General average
deposit balances
Deposit
1931 and 1932
balance (ap
proximate)
$344,000
15,000
None
None
3,000
$300,000-$700,000
11,000- 300,000
None
None
1,000- 50,000
5,343,055 19
Loans to this group are collateraled by the same securities, i e ,
securities involving the Mather operations and the Otis-Continental
operations
CLEVELAND CLIFFS IRON CO , $2,010,338 61
(G-5e-l, 2, conservator's inventory Apr 8, 1933, p 223)
Of this total, $2,000,000 represents a participation of the Guardian
Trust Co in a line of credit extended to the Cleveland Cliffs Iron Co
originating March 20, 1930, in the aggregate amount of $14,387,500
The sum of $10,338 61 is represented by three interest notes dated
January 23, 1933. The other participants in this loan are
Central United National Bank
Union Trust Co
First National Bank of Chicago
Bankers Trust Co of New York
Continental Illinois Trust Co
$1, 000,
3, 387,
1, 000,
4, 000,
3, 500,
000
500
000
000
000
This loan was made in order to enable the Cleveland Cliffs Iron to
purchase the McKinney Steel Holding Co The details of this transaction are covered fully in a report of the Union Trust Co
STOCK EXCHANGE PRACTICES
8055
(G-6e-3)
The security for the above loan is 218 shares of Corrigan-McKinney
Steel Co , 10,100 shares McKinney Steel Holding Co , 100,048 shares
Otis Steel Co The banks carrying unsecured paper of the Cleveland
Cliffs Iron Co have agreed to extend for at least 7 months and the
company has agreed to deposit with the Union Trust Co as trustee,
certain securities for the benefit of the noteholders Offsets of the
bank balance have reduced this loan to $1,655,838 75
(G-5e-l, 2)
CONTINENTAL SHARES, INC
, $1,145,281 62
(Minutes, executive committee pp 256, 458)
This balance as of April 8, 1933, represents the amount remaining
in the following participations by the Guardian in loans of which the
Umon Trust Co was trustee The above total is composed of unpaid
balances in a $1,000,000 participation in a loan of $5,000,000 on
October 14, 1930, and a $600,000 participation in a loan of $4,000,000
dated January 23, 1931, together with a note for $44,500 executed in
favor of the Guardian Trust Co as a bonus The unpaid balances
on these loans m the amoxmts of $663,000 and $477,369 on April 8,
1933 composed the above total
These loans appeared to have been well secured at the time of origin,
accordmg to records of the bank, and at that time the corporation
enjoyed an excellent credit standmg
While these loans were open for the total balance as indicated as
of April 8, 1933, they have smce been liquidated by public sale of the
collateral This sale by transferring to the Guardian Trust Co their
share of the collateral to the loan, at the market value of the date of
the sale, resulted in setting up on the books of the bank a security
value as of the market of that date This transaction involved a loss
on the loan of $59,886 99, which has been charged to losses The
prices at which these securities were transferred to the security account
are in some cases below and m some cases above the present market,
and m those instances where the present market is higher than as of
the date of transfer, the securities have been disposed of at a profit
(Conservator's inventory, Apr 8, 1933, p 435)
FOREIGN UTILITIES, LTD
, $350,000
(G-5e-4, G-5e~3)
This loan on which interest is paid to December 15, 1931, is collateraled by 6,600 shares Continental Shares, common, and 12,000
shares Commonwealth Securities, Inc., common, and appears in its
original amount. The collateral has an estimated value of $40,000
and even that appears to be doubtful for the stock it represents cannot be sold in any quantities. This loan originated on February 12,
1931, and has not been reduced. It originally paid 5 percent interest
and was marked "nonaccruing." Unpaid interest is $36,925.08.
8056
STOCK EXCHANGE PEACTICES
GEORGE
T. BISHOP, SYNDICATE MANAGER, $440,796 59
(G-5e-5, G-5e-6)
This represents the balance in the Guardian's original participation
in a loan of $500,000 dated November 8, 1929, for a total amount
of $2,107,600 which by subsequent payments has been reduced to
$1,895,427.86. A reduction of $25,000 per year was agreed to between
the parties to the loan on April 10,1931, but the payment of $43,252 35
made May 5,1931, and responsible for the reduction above indicated,
was made with the understanding that the previously agreed to
monthly payments of $25,000 would be waived for 7 months. Since
that time, however, no other reductions have been made. Interest
has been paid to May 8, 1933, and now is accrued in the amount of
$40,351.93.
(G-5e-6)
The collateral securing this total $2,000,000 loan is 24,845 shares of
Cleveland Cliffs Iron Co. preferred, and 12,000 shares of Cliffs Corporation, common, with an estimated market value of $716,280 on
February 2, 1934, indicating that the loan is in such a condition that
little can be done concerning it at the present time but that a long
wait for the return of anything like reasonable market value will
undoubtedly be necessary for its liquidation. The balance unpaid
has not changed since June 19, 1931.
(Minutes executive committee meetings, pp 296, 872, Jfll, 478, 4?'4> 488, 4&> conservator's inventory, April 8, 1988, p 4$4> minutes executive committee meeting,
p. 296)
OTIS & Co , $417,853 37
This company has over a period of many years been a borrower at
the Guardian Trust, particularly for the period startmg with October
14,1930, and extendmg to July 1931 During this time the Guardian
participated in various loans^ ranging from $500,000 to $5,000,000
each, most of which have been amply collateraled and paid in whole or
in part at maturity, and ranging up to a high point of $1,593,294 78
in April 1931, and a low point of the balance indicated in the foregoing
schedule
(Minutes executive committee meeting, pp 4^8, 4$> conservator's inventory, April 8,
1988, p 484)
The balance represents the Guardian's participation of $584,250
on May 27, 1931, in a loan of $2,115,385 73 This loan has been
reduced to $417,853 37 on April 8, 1933, and on February 21,1934,
was $392,217 84 The collateral held for this loan is valued by the
bank at $581,863.24 in the conservator's report, plus assigned customers' accounts valued at $1,470,913 54 Payments on these
accounts are reducing the loan Accrued mterest is now $44,917 42.
(Gr-5e-7, G-5e-8, conservator's inventory, April 8, 1988, p 207)
R
H
BISHOP, J R , AND SAMUEL MATHER, $978,785
This loan is a joint loan of Samuel Mather, deceased, and his son-inlaw, R H. Bishop, Jr , originating May 29, 1931, on which date the
executive committee gave authority to participate in the amount of
8057
STOCK EXCHANGE PEACTICES
$1,066,000 in a total loan of $3,566,000, the loan to be for 1 year at
5}i percent interest with the understanding that if this loan is made,
the then present loan due the Guardian from R H Bishop, Jr.,
totaling $808,015 35 be paid at maturity This latter loan was so
paid
(G-5e-8, O-5e-9)
Minutes of the executive committee meeting of June 10, 1932,
indicate that the balance of $3,274,246 was still outstanding, of which
the Guardian's share was $978,785. This principal amount has been
unchanged. Examination of the minutes of the meeting of December
2, 1932, indicate that due to the demise of Samuel Mather and the
contingent liability of his estate on other unsecured loans, it is impossible for the estate to legally pay interest on this loan. The
income from the collateral pledged, however, is being paid to the trust
department in lieu of interest. The collateral held is estimated to
have a market value of approximately $1,000,000, consisting largely
of stocks in companies affiliated and connected with Continental
Shares, such as Youngstown Sheet & Tube, Interlake Steamship, etc.
VAN SWEEINGEN INTERESTS
The loans and participations carried on the books of the Guardian
in connection with the Van Sweringen interests are indicated in the
schedule below:
Apr 8,1933
Van Sweringen interests
O P and M J Van Sweringen „. >
Metropolitan Utilities, Inc . . _ .
Balance on
loans
$2,841,000 00
1,465,324 60
- _
General average deposit
balances,
Balance on
1931-32
deposit
i$25,000
None
$35,000-$45,000
None
4,306,324 60
i Includes balance of the Van Sweringen Co and Vaness Co
These loans have been discussed fully in the report of the Union
Trust Co
It will be remembered, however, that the borrowings of the Van
Sweringens from the Guardian Trust Co began back m 1916 when
the Vans first purchased the Nickel Plate Railroad and entered the
railroad business
WALTER H. SEYMOUR,
Senior Examiner
This report based upon preliminary report and complete investigation by Committee Examiner J H Hamilton
FINAL REPORT
Membership on board and management committees, 1927-83, the Guardian Trust Co.
Mr. PECORA. I now show you what purports to be a report made
by Mr. Seymour, entitled "The Guardian Trust Co—Window
Dressing." Do you recognize it as another report made by Mr.
Seymour of the result of the mvestigation made under your immediate
supervision?
8058
Mr
STOCK EXCHANGE PRACTICES
MEEHAN I do
Mr. PECORA Mr. Chairman, I offer that report in evidence, together with the exhibits referred to therein
Senator COSTIGAN (presiding) The report, together with the
exhibits and other information offered by counsel to the committee,
will be received in evidence.
(The report entitled "The Guardian Trust Co—Window Dressing", together with the exhibits referred to therem, were received in
evidence, and marked "Committee Exhibit No 10, May 3, 1934",
and are as follows )
COMMITTEE EXHIBIT NO. 10—MAY 3,
1934
"WINDOW DRESSING"
In order to bolster the bank's liquid position at statement periods,
the Guardian Trust Co. indulged widely in the practice of "window
dressing" through the medium of repurchase agreements, "kiting of
checks," etc.
(G-8-1, G—8—2, minutes of meeting executive committee, pp 98 to 100 and 102)
> On September 28,1931, the Guardian Trust Co. sold to the Bankers
Trust Co. $5,006,163.52 of stocks and loans under a repurchase
agreement as per Exhibit G-8-1 and according to authority contained in minutes of executive committee meeting September 28,
1931.
(G-8-1 and 2)
The above-mentioned minutes also indicate repurchase agreements
with the Chemical Bank & Trust Co. in the amount of $1,500,000
and $500,000.
(G-8-3)
These transactions total $7,000,000 and had the effect of bolstering the bank's liquid position by that amount without any mention
being made on the published statement of September 29, 1931 of the
bank's contingent liability to repurchase these securities.
The reason for the entering into the transactions on September 28,
1931, 1 day before the published statement, is obvious and needs no
comment.
(G-8-4)
On October 31,1931, a repurchase agreement was entered into with
the Chemical Bank & Trust Co. in the amount of $2,000,000.
(G-8-5)
On January 14, 1932, the following letter was addressed to Mr. F.
Coates, Jr., clearing house examiner, Federal Keserve Bank Bldg.,
Cleveland, Ohio, and Mr Ira J Fulton, superintendent of banks,
Columbus, Ohio.
(G-8-6)
We are enclosing herewith, statement of condition of this company as of the
close of business, December 31,1931.
In addition to the figures shown on the report we wish to advise you there
was, as of the date of the statement, a contingent liability for the repurchase
STOCK EXCHANGE PKACTICES
8059
of United States bonds sold to the Federal Reserve Bank, in the amount
of $5,734,000 and loans and securities sold to others in the amount of
$4,954,770 40
Very truly yours,
W. R. GREEN, Vtce president
The same information was set out in the regular call report to the
Federal Keserve bank dated December 31, 1931, as follows:
Item 24
Item 30
Agreement to repurchase United States Government bonds
Other liabilities
Total
$8,781,770 40
1, 907, 000 00
10, 688, 770 40
The published statement of condition for December 31, 1931, did
not include the information relative to the bank's contingency. It
(G-8-7)
is our opinion that the stockholders are entitled to know to what
extent the statement has been " dressed up" and the mere fact that
such information was not given indicates a desire to conceal the true
facts from the stockholders.
(G-8-8 and 9)
On October 27, 1931, W R Green, vice president of the Guardian
Trust Co , telegraphed to H H Helm, vice president of the Chemical
Bank & Trust Co , requesting that he make certain substitutions in
the repurchase agreement Helm replied that the substitutions were
undesirable, but:
(G-8-8 and 9)
This could be changed temporarily to repurchase agreement to cover publication of statement if you so desire
This is indicative that the banks cooperated with each other in
their window-dressing activities and the poor public had small chance
against such high-handed collusion
(G-8-10)
In order to bolster the statement of June 39, 1932, particularly the
deposits, the Guardian Tiust Co pledged $5,250,000 in United States
bonds which were being held by the Discount Corporation for a loan
of $5,000,000 from the Irving Trust Co The effect of this transaction
was to increase the cash and due from banks from $9,000,000 to
$14,000,000 on June 30 and to increase deposits by a like amount.
(G-8-11, 12, 13, 14)
The attached exhibits show clearly the details concerning this
transaction
(G-8-12)
On June 29, a letter signed by R P S. (R. P. Sears), secretary to
the Irving Trust Co read in part as follows:
In addition to the foregoing, at a regular meeting of our executive committee
held yesterday, the 28th, our president, Mr House, reported you had agreed to
deposit with us for your credit $5,000,000, we to guarantee the repayment of the
same by a pledge with you of United States bonds and/or Treasury notes, all of
which the committee unanimously approved
8060
STOCK EXCHANGE PRACTICES
(O-8-12 and 13)
We believe the enclosed certified copv, together with the above, fully covers
the transaction of yesterday, wherein you did deposit with us $5,000,000 as well
as all former transactions
The Irving Trust Co replied on June 30, 1932, in part as follows:
(G-8-14)
We assume that in referring to the transfer of Federal funds as a "deposit""
by us with \ ou, you did so inadvertently, and that such reference was not intended to be" descriptive of the real nature of the transaction or to affect in any
way our rights as set forth m vour letter of June 28, 1932, signed by Mr House
Your examiners were unable to locate a copy of the letter of June 28,
1932, signed by Mr. House, stating the "real nature" of the transaction, but in our opinion the intent of the transaction is obvious.
(G-8-15, 16, and 17)
In an effort to bolster the September 30,1932, statement, the Guardian Trust Co borrowed $5,000,000 from the Bank of Manhattan
Trust Co. on September 23, 1932. The loan was immediately liquidated after the publication of the statement, the exact date bemg
October 4, 1932.
(G-S-23 to O-8-26, inc; G-&-18; G-8-19; G-8-20)
On December 28, 1932, the executive committee of the Guardian
Trust Co concocted a plan which, m our opinion, was tantamount to
outright deception. On this date the Guardian Trust Co had pledged
with the Discount Corporation of New York, about $7,000,000 in
United States bonds The Guardian Trust Co. issued an official check
of $5,000,000 to the Irving Trust Co , and an official check of
$2,000,000 to the Chemical Bank & Trust Co for the purpose of
securing the release of these pledged bonds This action was authorized by the executive committee on December 28, 1932.
Letters were addressed to both banks on December 28, 1932, with
specific instruction that the checks not be presented until after the
end of the year. Instructions contamed in the letter to the Irving
Trust Co read m part as follows
(G-8-22)
We request you to withhold presentment of the above-mentioned check until
January 4, 1933, and neither such delay nor any further delay incidental to the
clearance or presentment of such check for payment shall m any way prejudice
your right hereunder or as a holder thereof
For each day commencing December 30, 1932, and ending January 4, 1933,
durmg which said check remams unpaid, we agree to pay you interest at the rate
of 3 percent per annum on the said sum of $5,000,000 and you are hereby authorized to charge our account with the amount of such mteiest
The letter to the Chemical Bank & Trust Co. and apparently
signed by J. A. House, read in part, as follows
(G-8-21)
In accordance with your suggestion on Saturday, December 31, 1930, you will
please send this check through in the regular way and it will be paid upon presentation in our clearance on Tuesday, January 3, 1933.
The results of this transaction were as follows:
STOCK EXCHANGE PEACTICES
8061
1. The Guardian Trust Co. avoided the necessity of showing onf
the published statement of condition for December 31, 1932, that
bonds shown as resources were pledged to the extent of $7,000,000.
2. The issuance of the checks was shown under "Checks outstanding", but on January 4, 1933, when the checks were presented,
"Bills payable and rediscounts" increased $7,000,000 indicating
that the liability for bills payable was at December 31, 1932 understated by $7,000,000.
We cannot condemn too strongly the very obvious collusion on the
part of banks to assist each other in the so-called practice of "window-dressing" by means of which the investing public and depositors are kept in the dark as to the true condition of a financial institution to which they have entrusted their life savings.
The following exhibits indicate that the assistance of others was
solicited to aid the Guardian Trust Co. in its "window dressing."
On December 28, 1932, H. C. Robinson, executive vice president of
the Guardian Trust Co., addressed the following telegram:
(G-8-27)
Ralph Morton, treasurer, Empire companies, Bartlesville, Okla Can you
arrange to deposit some extra funds with us from December 30 to January 2
Robinson
to which Mr. Morton replied:
(G-8-28)
Mailing today deposit one hundred thousand
cannot arrange it R S Morton, Jr.
Sorry cannot do more but
If Mr. Robinson had very many friends who willingly deposited
funds over the year end for the purpose of "dressing up " the Guardian
statement, it is evident that the statements as furnished to stockholders and depositors contained more fiction than truth.
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by committee examiners M. J. La Padula and R. E. Long.
Mr. PECORA. I now show you what purports to be another report
made by Mr. Seymour, entitled "The Guardian Trust Co—Supplemental Window Dressing." Will you look at it and tell me if you
recognize it as being another report prepared by Mr. Seymour as a
result of the investigation conducted under your immediate supervision?
Mr. SEYMOUR Yes, sir; it is.
Mr. PECORA Mr. Chairman,
I offer that report in evidence,
together with the exhibits referred to therein
Senator COSTIGAN (presiding). The report, together with the
exhibits and other information offered by the counsel to the committee,
will be received in evidence
(The report entitled "The Guardian Trust Co.—Supplemental
Wmdow Dressing", together with the exhibits referred to therein,
were received in evidence and marked "Committee Exhibit No. 11,
May 3, 1934", and are as follows:)
8082
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT N O . 1 1 — M A Y 3,
1934
SUPPLEMENTAL MEMORANDUM—"WINDOW D R E S S I N G "
One of the strongest aids to the Guardian Trust Co. in its " windowdressing" operations was the firm of Henry L. Doherty & Co Mr.
H. C. Robinson, senior vice president of the Guardian Trust Co ,
was not only not at all backward about asking for help from Doherty
& Co for "window dressing" purposes but actually admitted that he
wanted help in a crooked and underhanded way. While Mr. Kobinson did not always get assistance from Doherty for Guardian "window
dressing", he generally was successful. On October 23, 1929, Mr.
Robinson wrote to Mr E. H Johnston of H. L. Doherty & Co. stating that.
(G-8-32)
As you know, we have to keep a 10-percent reserve m the Federal bank against
money which we have on demand and a 3-percent reserve against money which
is called time money
Mr. Robinson then stated that some of the bank's largest customers
had been helping them out and
(G-8-32)
All I would ask you to do would be to write me a letter stating that the money
held on deposit here by Henry L Doherty & Co or the Cities Service Co would
not be drawn except upon a 30-day notice to us
(G-8-32)
That letter we would use only in the event the Federal Reserve Bank asked us
for evidence supporting our contention relative to time deposits I want you to
understand, however, that your money is subject to check whenever you require,
the same as usual
Mr. Johnston refused this request of Mr Robinson's by stating:
(G-8-33)
This matter has been presented to us by one of our other very good friends, but
we have so far not seen our way clear to handle the matter as you suggest I
wish that you would see me the next time you are in New York and we will discuss
this matter a little further
However, mindful of other help he had gotten from Doherty & Co.
before, Mr Robinson on September 19,1932, wrote another letter to
Mr. Johnston in which he stated:
(G-8-34)
We are looking for a call from the superintendent of banks sometime between
September 26 and October 1 I have called upon you heretofore on these occasions and you have responded loyally
I am hopeful that you can help us out the last 4 days of this month with a
substantial increase in your account
On September 22, 1932, a Mr. McCusker of the firm of EL L.
Doherty & Co. wrote to Mr Robmson stating that
(G-8-35)
* * * We have been pleased to mcrease the balance in the Cities Service
Securities Co account the last week in September to about $500,000
and then, written in longhand on the bottom of the letter is the
notation
STOCK EXCHANGE PEACTICES
8063
(G-5-35)
Mr Purdon says $200,000 has come in
On September 23, 1932, Mr Robinson wrote to Mr McCusker
regarding the additional deposit of the Cities Service Co. and stated:
(O-5-36)
This is very gratifying to us and we wish to thank you and your associates for
your cooperation
WALTER H
SEYMOUR,
Senior Examiner.
Mr. PECORA. I now show you what purports to be another report
prepared by Mr. Seymour, entitled " Guardian Trust Co. re Trust
Practices." Do you recognize it as being another report made by
Mr. Seymour of the investigation which was made under your immediate supervision?
Mr. MEEHAN. Yes, sir; I do.
Mr. PECORA. Mr. Chairman, I
offer that report in evidence, together
with the exhibits which are referred to therein.
Senator COSTIGAN (presiding). The report, together with the exhib^
its a,nd other information offered by counsel to the committee, will be
received in evidence.
(The paper entitled "The Guardian Trust Co., re Trust Practices",
together with the exhibits referred to therein, were received in evidence
and marked " Committee Exhibit No. 12, May 3, 1934/' and are as
follows )
COMMITTEE EXHIBIT NO. 12—MAY 3,
1934
TRUST PRACTICES
Among the most flagrant malpractices existing in modern banking
today is the dereliction of its duties by trust departments of our financial institutions. The Guardian Trust Co in its capacity as trustee
has violated its fiduciary relationship in more than one instance,
by burdening trust estates over which it had discretionary investment powers, with securities in which the bank realized a profit by the
expedient of passing securities through its bond department and
subsequently to its estates
In one case (K. L. Grennan realty trust) the bank relieved one of
its directors of a huge block of bonds at a profit of 5 points to the
director. These bonds were subsequently sold to the trusts In this
particular instance the bank itself held a large block which it could
have passed on to the trusts at cost without incurring the 5-point
profit to the director.
Some of the securities on which they made profits were:
The H. A Stahl Properties Co first mortgage, collateral trust 6% percent gold
bonds
The Erie Prospect Co first mortgage, L H 6 percent gold bonds
The H F Neighbors Realty Co 5H percent land trusts certificates of equitable
ownership
The Fairmount Development Co first mortgage and collateral trust 6}i percent
gold bonds of February 1, 1926
The Fairmount Development Co first mortgage and collateral trust 6}& percent
gold bonds of November 1, 1927
K L Grennan Realty Trust Co first mortgage and collateral trust 6H percent
gold bonds of July 1, 1927
8064
STOCK EXCHANGE PEACTICES
H . A. STAHL P R O P E R T I E S GOLD B O N D S
(10-l-A)
On February 25, 1926, the bond department of the Guardian
Trust Co. bought $488,000 par value of these bonds at 92.
From February 27, 1926, to March 31, 1926, the bond department
sold to various trust clients $66,000 of these bonds at 99 and 100.
This step up of 7 to 8 points on these bonds resulted in a profit of
$4,680 to the bond department saddled upon the trust clients.
(10-2-A)
Investments in these securities were approved by the trust committee as per meeting of December 1, 1926.
These bonds defaulted in the payment of interest and principal on
August 1, 1929.
(10-3-A, 10-3a-c)
T H E ERIE-PROSPECT CO. GOLD BONDS
The total issue of $400,000 of these bonds was bought March 26,
1926, at 96 and from April 21, 1926, to October 1, 1926, the bond department sold direct to trust clients $33,000 of these bonds, ranging
in price from 98 to par. This resulted in a profit of $1,152.50 to the
bond department; a profit of 2 to 4 points.
(10-4-A)
Investment in this security was approved by the trust committee
as per their meeting of December 15, 1926.
These bonds defaulted in the payment of interest due November 1,
1932.
T H E FAIRMOUNT DEVELOPMENT
GOLD BONDS OF FEBRUARY 1, 1926
(10-5-A)
The bond department on February 17, 1926, purchased the entire
issue of $140,000 of these bonds for $130,200. The purchase price
each being 93
(10-5A and B, 10-6-A)
Sales item no 4-20 to 4-30 on exhibit no 10-5-A and B reflect
sales of $39,000 to various trust clients at prices ranging from 99 to
par, resulting in a profit to the bond department of $2,571 25, a
profit of 6 to 7 points was made m these bonds.
GOLD BONDS OF NOVEMBER 1, 1927
(10-7A-D, item 6-20 to 35)
The bond department on November 30, 1927, bought the entire
issue of $354,000 par value of these bonds for $336,300 The purchase price each being 95 The bond department in December 1927
and January 1928 sold to various trusts clients $85,000 of these
bonds at prices ranging from 99% to approximately 101. A profit to
the bond department ranging from 4% to 6 points, borne by the trust
clients.
8065
STOCK EXCHANGE PEACTICES
THE
H.
F.
NEIGHBORS REALTY C O , 5}£
CERTIFICATES
PERCENT L A N D
TRUST
(10-8-A, 10-8-B-C, item 3-20-21, item 3-50-54)
April 14, 1925, the Guardian Trust Co bought $300,000 worth of
these bonds at an average price of $96 66 and then resorted to the
reprehensible practice of selling the bonds to their trust clients at a
profit of over 3 points
(10-9-A-B)
The bulk of the sales of this issue to trust clients was through the
trust department, living trust no 1043, which was created for the
purpose of centralizing the purchasing of bonds for trust clients
The sales to the trust clients from land trust 1043 was all at cost.
No profit being made between the trust department and the trust
client The profit being made between the bond department and the
trust department eventually borne by the trust client
The sales by land trust 1043 (trust department) to the trust clients
at cost apparently was the result of a premeditated plan which the
trust department hoped to escape criticism for selling bonds at a
profit.
(10-10-A)
This practice of selling at a profit is forbidden, we refer to the
Ohio Probate Practice & Procedure, paragraph 1, page 530 (Addmas
& Hosford) under the caption of Duties of Trustee which states as
follows:
And some other matters are equally well settled, that he cannot do. He cannot
deal with the estate for his own profit, or for any purposes unconnected with the
trust All his skill and labor must be directed to the advancement of the interests
of his beneficiaries He may take no benefit directly or indirectly from the estate
or his office, except the regular compensation allowed by law, and if he takes a
present or be paid a bonus or commission of any kind in a trust transaction by a
stranger, he must account to the trust for it
It is also interesting to note that trust clients had from $5,000,000
to $10,000,000 uninvested cash balances at various times and the
Guardian Trust Co had the authority to make investments in many
of these trusts It was a perfect "set u p " for the Guardian Trust
Co , viz, a market for their securities and the authority to invest
same for the trust clients The Guardian Trust Co did not overlook
the opportunity to "benefit directly from the estates" as the following
will substantiate
(10-9-A)
Trust client
M S Hanna
Harry Binder
K F Smith
R P Burnett
A A Dunn
Trust
no
Issue
L984 H E Neighbors..
089
do
C157
do._
C491
do.._
C589
do
Total
175541—34—PT 18
Amount
$4,000
3,000
1,000
3,000
25,000
36,000
Sales
price
100
100
100
100
100
Purchase Increase
per M
price
96
96
96
96
96
90
66
66
66
66
31
33
33
33
33
00
40
40
40
40
Bond
department
profits
124 00
100 20
33 40
100 20
835 20
1,192 80
8066
STOCK EXCHANGE PRACTICES
(10-11-A)
The following are excerpts from agreements, etc , giving the Cfotarck
ian Trust Co the investment authority:
(CT. 89)
Henrf Binder, clause 6 reads in part:
All the residue of my estate, wherever situate, of which I die seized I give>
devise, and bequeath to the Guardian Trust Co, of Cleveland, Ohio, and its
successors forever, in trust, nevertheless for the following uses and purposes,
to wit
1 During the entire term of this trust, my said trustee and its successors shall
have the full control and management of the trust estate, with authority to sell,
invest, and reinvest the same or any part thereof, at such times, in such manner,
and for such amounts as it deems advisable and for the best interest of my said
estate, the reinvestments to be subject to the same trusts as the original estate
(C.T 157)
Keuben F. Smith.
To hold, manage, and keep the same invested during the continuance of the
trust hereby created with full power and authority to sell any and all
property
of which I may die seized or possessed, whether real or personal, and1 to execute*
and deliver any and all instruments therefore which may be necessary in selling
such property, to invest and reinvest the proceeds arising from such sales and
in such wise as shall in the judgment of said trustee for the. best interests of my
estate
(CT 191)
Rolhn P. Burnett:
I desire that the above trustees mentioned, the Guardian Savings & Trust Co.
and Fielder Sanders proceed to manage, control, and disburse my estate and its
income as m their judgment seems best, for the best interests of my wife; to sell,
convert, invest, and reinvest as seems best to them
(CT 589)
Alice A Dunn
My said trustee shall have and retain title to and possession, management*
and control of the trust estate and every part thereof, with power to se.ll, invest,
and reinvest as they deem advisable
(L 984)
Mary Stuart Hanna:
During the entire term of the trust herein created second party shall have full?
power and authority to management, control, sell, invest,, and reinvest the trust
estate as it shall deem advisable
It has been intimated to the writer that since th,e Ohio Senate*
investigation disclosed this profit-taJdng practice there have been
many suits started against the Guardian Trust Co. From the writer's
conversation with a junior trust officer of the Guardian Trust Co.
the latter was of the opinion that the duties of a trustee were confined to the activities of the trust department. In this department
bonds were sold at cost, to the trust clients, regardless: of wlmt trans*pired in the bond department. This apparently will be their defense*
for their questionable practices.
(10-12-A)
These bonds were opposed by the trust committee as trust invest-*,
ments June 8, 1925.
The October 1, 1931, and subsequent installments are now i&
default.
STOCK EXCHANGE PRACTICES
8067
K. L. GRENNAN REALTY TRUST FIRST MORTGAGE BONDS
(10-13-A)
These bonds were purchased from the trust department on August
1. 1927, in the amount of $1,100,000 at 92 K for the joint account of
Tillitson and Wilcott and the Guardian Trust bond department.
(10-13-A, items 2 and 3)
On the same day (Aug. 1, 1927), the following sales were made at
9 & $550,000 to the Guardian sales account and $375,000 to Tillitson and Wilcott, totaling $925,000 in sales, leaving a balance on hand
of $175,000.
(10-14-A, 10-13-A, item 3, 10-15-A)
Again on August 1, 1927, Tillitson and Wilcott sold $136,500 of
these bonds to the trust department as per our verified list at 97 }i.
At that date the bond department had on hand $175,000 plus
$550,000 on hand in the Guardian sales account, totaling $725,OO0»
on hand bought at 92 K.
If the sales were made direct to trust clients by the Guardian
Trust Co. at cost (92Ji) out of the balance on hand of $725,000
instead of this Tillitson and Wilcott Co. at (97J0 the savings to
trust clients would have been $6,800.
It is interesting to note that Tillotson was a director of the Guardian Trust Co. and this apparently was the reason for him being let
in on this profitable raid on the trust clients.
(10-16-A)
All told Tillitson and Willcott sold $249,500 of these bonds to the
trust clients at 97K.
(10-17-A)
These bonds were approved for trust investments at the trust
committee August 10, 1927.
The bonds due July 1, 1932, January 1, 1933, and July 1, 1933, in
default as to principal and interest.
Apparently the Guardian Trust Co. was criticized for its trustdepartments methods because at the board of directors' meetmgs of
January 10, 1933, the following was adopted:
(10-21-D)
Care must be exercised in the purchase and sale of securities- so that criticism
or comment cannot be substantiated that the bank is profiting thereby either
directly or indirectly This means that no securities shall be purchased from,
any other department of the bank or from any other trust
(10-22-A)
It is interesting to note the slogan of the Guardian Trust Co. on
page 12 of exhibit no. 10-22-A is as follows.
There is a spirit of helpfulness in the Guardian bank.
8068
STOCK EXCHANGE PRACTICES
The Guardian Trust Co. was sincere in the carrying out of this
"Spirit of Helpfulness" because from the above transactions we find
the Guardian Trust Co. "Helping itself to a profit in the sale of
securities to its trust clients."
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner R. F. Muir.
Mr PECORA I now show you what purports to be another report
made by Mr. Seymour, entitled "The Guardian Trust Co—-Commingling of Funds." Do you recognize that as being another report
made by Mr Seymour based upon his investigation conducted under
your immediate supervision?
Mr. MEEHAN Yes,
Mr. PECORA Mr
sir.
Chairman, I offer that report in evidence,
together with the exhibits referred to therem.
Senator COSTIGAN (presiding) The report, together with the
exhibits and other information offered by counsel to the committee,
will be received in evidence.
(The paper entitled "The Guardian Trust Co.—Commingling of
Funds," together with the exhibits referred to therein and now at
the Government Printing Office, was received in evidence and marked
"Committee Exhibit No 13, May 3, 1934", and is as follows;)
COMMITTEE EXHIBIT N O . 13—MAY 3,
1934
COMMINGLING OF FUNDS, GUARDIAN TRUST CO., CLEVELAND, OHIO
This report pertains to the commingling of funds represented by
the invested cash balances in the trust accounts with the general funds
of the Guardian Trust Co., and the treatment of the clients, claims in
connection with these funds as general creditors upon Kquidation of
the Guardian Trust Co.
(1&-1-A, 18-2-B)
The statement of uninvested cash on deposit with the Guardian
Trust Co as of February 20, 1933, reflects a total of $5,146,004 57 of
trust clients, which can be traced into the general funds of the Guardian Trust Co. By referring to the statement of conditions at the
close of business February 20, 1933, we find this item appearing as a
deposit liability to the Guardian Trust Co. under the caption of trust
department funds.
(18-3-A)
When the Guardian Trust Co. closed on February 25, 1933, the
banking department had on deposit $5,016,536 91, representing uninvested cash of trust clients When the first liquidating dividend of
20 percent was declared these clients received their pro-rata share of
this disbursement as general creditors m the same manner as savings
and commercial depositors.
This injustice to the trust clients has been rectified m the State of
Ohio by the passmg of the State of Ohio House Bill 696, on June 8,
1933, and approved June 14, 1933. The bill *s as follows:
STOOK EXCHANGE PEACTIOES
8069
(18-4-A)
STATE OP OHIO, HOUSE BILL 696
Passed June 8, 1933, approved June 14, 1933, George White, Governor.
AN ACT
SEC 710-165 No properties or securities received or held by any trust company in trust shall be mingled with the investments of the capital stock or other
properties belonging to such trust company or be liable for its debts or obligations.
Money held in the trust department by any trust company, or by any bank having
a trust department or doing a trust business, pending distribution or investment
may be treated as a deposit in the trust department or may be deposited in any
other department of the bank, subject in other respects to the provisions of law
relating to deposit of trust funds by trustees and others, but in case of the insolvency, closing, or suspension of any such trust company or bank, claims for such
moneys hereafter so deposited in any other department of such trust company
or bank shall be preferred and the property and assets of such closed trust company or bank shall be impressed with a trust for the payment thereof.
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner R F. Muir.
Senator ADAMS AS I understand, Mr. Meehan, some of the officials
of the Guardian Trust Co. of Cleveland, Ohio, are now under indictment, are they not?
Mr. MEEHAN. Yes,
sir.
Senator ADAMS If that is so, the affairs of that company have been
gone into by a grand jury in Cleveland, in order to have an indictment returned.
Mr. MEEHAN. Yes, Senator Adams; both in the case of State and
Federal grand juries.
Mr. PECORA. I now show you what purports to be another report
prepared by Mr. Seymour, entitled "The Guardian Trust Co —
Examinations " The examinations referred to, as I understand, being
examinations made by the State banking department of Ohio Do
you recognize it as bemg another report made by Mr. Seymour based
upon his investigations made under your immediate supervision?
Mr. MEEHAN. Yes, sir; I do.
Mr PECORA. Mr Chairman, I offer that report in evidence, together with the exhibits referred to therein
Senator COSTIGAN (presiding). The report and exhibits offered by
counsel to the committee will be received in evidence
(The report entitled "The Guardian Trust Co—Examinations",
together with the exhibits referred to therein and now at the Government Printing Office, was received in evidence and marked "Committee Exhibit No 14, May 3,1934", and is as follows:)
COMMITTEE EXHIBIT N O . 14—MAY 14,
1934
EXAMINATIONS
The responsibility for the ultimate closing of the Guardian Trust
Co. in February 1933 must be shared by the Government bank
examining agencies as well as by the directors and officers of the bank.
As pointed out in the report regarding the exammations of the Union
Trust Co , we feel that the responsibility of the Ohio State banking
8070
STOCK EXCHANGE PBACTICES
department and of the Federal Reserve bank is wholly different from
that of the bank officials We do not think that because the Government agencies were derelict m their duties the bank officials are in
any way relieved from their own responsibilities As we pointed out
in the other report, we feel that bankers have more knowledge about
what is and what is not good banking than bank examiners, and,
therefore, are not relieved from their acts simply because the bank
examiner failed to make corrective demands
However, in this report we intend to show just how the examinations of the Guardian Trust Co were conducted and the failure of the
State banking department to live up to its duties
One of the chief reasons for the widespread confidence in the
Guardian Trust Co. prior to the closing of that institution m February 1933 was undoubtedly the belief by depositors that their
savings, often those of a lifetime, were adequately protected through
the medium of frequent examinations as to the condition of the bank,
by national, State, and local examining bodies
It was the general belief that these examinations were by three
separate agencies, as follows
1 Federal Reserve examination
2 Ohio State banking department examination
3 Cleveland clearing house examination
While specific data as to the frequency and scope of these examinations was unknown to many, it was their behef that our National
and State laws, adequately provided for searching examinations of
banks. With this thought in mind they entrusted their funds to
the Guardian Trust Co secure in the belief that they were assured
of protection by means of examinations of such a nature as to eliminate any unsound banking practice, which might result in a loss to
depositors.
FEDERAL RESERVE EXAMINATIONS
The National Government recognizing its responsibilities in this
respect has embodied in section 9281 of the Federal Code the following
in regard to banks commg under Federal supervision, as a result of
being member banks of the Federal Reserve Bank System:
(Sec 9281 Federal Reserve Act)
The Comptroller of the Currency with the approval of the Secretary of the
Treasury shall appoint examiners who shall examine every member bank at
least twice in each calendar year and oftener if considered necessary Provided,
however, That the Federal Reserve Board may authorize examination by the
State authorities to be accepted in the case of State banks and trust companies
and mav at any time direct the holding of a special examination of State banks or
trust companies, that are stockholders in any Federal Reserve bank.
(G-6-13)
The above section, while eliminating the necessity of a Federal
Reserve examination in years during which an examination has been
conducted by the State banking authorities, does not excuse the
Federal Reserve examiner from making examinations as specified in
other years The Federal Reserve examiners with too much confidence in the ability of the Ohio State banking department examiners,
failed to conduct examinations of the Guardian Trust Co. during the
following years 1923, 1925, 1927, 1930, and 1931.
STOCK EXCHANGE PEACTICES
8071
Legally they were not excused from examining during these years
"as the State superintendent of banks for Ohio also failed to conduct an
examination and the law is clear on this point We feel that the Federal Reserve examiner is subject to grave criticism for the failure to
follow the law in this respect) as the thorough examination made by
Federal Reserve examiners would have revealed the precarious position of the Guardian Trust Co early in 1930 and undoubtedly many
of the evils existing could have been corrected. As to the efficacy of
Federal Reserve examinations, no criticism is made as we have found
them to be thorough, critical, and corrective.
STATE BANKING DEPARTMENT EXAMINATIONS
(G-6-1, Ohio State Bank Act)
In an effort to protect stockholders and depositors in banks located
in the State of Ohio, the legislature of the State has enacted laws
pertaining to banks and banking.
Particular attention is called to sections 710-1 to 710-36 which
specify the duties of the State superintendent of banks and which
provide in part, as follows:
(G-6-1, p. 14)
At least once a year and as often as the superintendent of banks may deem
necessary, the superintendent of banks or an examiner appointed for that purpose shall thoroughly examine the cash, collaterals, securities, books of account,
and affairs of each bank. He shall also ascertain if such bank is conducting its
business In the manner prescribed by law
(G-6-13)
There have been only six such examinations conducted in the period
from 1922 to the time of the bank's closing, as follows:
1922, December 8, federal Reserve examiners assisting.
1924, October 11, Federal Reserve examiners assisting.
1926, February 26, Federal Reserve examiners assisting
JL928, January 27, Federal Reserve examiners assisting
1929, November 15* State department examiners only.
1932, February 20, Federal Reserve examiners assisting.
For the failufe to comply with the law regarding bank examinations
•and for the ififoequency of such examinations at the Guardian Trust
Co., the State superintendent of banks cannot be condemned too
strongly Had examinations been conducted as specified by law they
could iitot have failed to reveal the constantly weakening condition of
the batik for several years prior to its closing, and it is quite possible
that corrective measures instituted in 1930 or 1931 might have saved
considerable loss to stockholders and to depositors.
As it may be argued that scarcity of man-power was the reason
lor the failure to make examinations in accordance with the law,
we quote from the banking code, section 710-7:
(G-6-1, p 9)
The superintendent of banks may employ from time to time necessary deputies, clerks, and examiners to assist in the discharge of the duties imposed
upon him by law.
Not only is the State superintendent of banks subject to criticism
for the infrequency of examinations, but also indirectly for their
8072
STOCK EXCHANGE PRACTICES
iiature, as his examiner failed to bring out and emphasize certain
unsatisfactory conditions existing, and suggest steps to correct them.
These conditions could be readily noted from an analysis of the
examiner's reports and it was surely the intent of the Ohio lawmakers
that examinations should be more than a superficial scrutiny of the
bank's records
As examples of conditions existing in the Guardian Trust Co.
which were subject to criticism and correction, we cite:
(G-6-2, p. 6)
1. Loans to officers and directors and companies in which officers
and directors were interested totaled $10,058,742 51 as of November
15, 1929, of which there was unsecured $2,667,487 01
This condition, which is surely against conservative banking principles, was not commented upon m any way by the examiner.
2. Loans to O P. and M J. Van Sweringen and Van Sweringen
interests, secured by collateral in other Van Sweringen interests
totaled approximately $3,000,000 as of that date. This practice of
loaning such a large amount on such speculative collateral was surely
subject to criticism.
(G-6-2, p 147)
3. Nonaccruing past-due collateral loans, or loans on which the
bank had stopped accruing interest because of the unlikelihood of the
loan being paid, amounted to $752,838.47 the largest item of which
was Interstate Foundries Co. $307,457.58 and concerning which the
examiner stated in part:
(G-6-2, p. 221)
Sale of the property would liquidate this loan although at the present time
this property would bring practically nothing at a forced sale. Therefore, this
loan should be classed as doubtful
(G-6-2, p 165, G-6-3, 4, 5)
4. Unsecured past-due loans as of November 15, 1929, totaled
$2,357,460.17 and to illustrate the condition of some of these loans
we attach photostatic copies of the examiner's comments.
We also call attention to the examiner's recapitulation of possible
losses which shows loans and discounts.
(G-6-2, p. 316)
Classified as "Doubtful, loss probable but not estimated", amounting to $1,037,212.89, and classified as "Loss" $570,625.29, and also
shows a probable loss on securities due to depreciation in value,
$566,717.78, making a total possible loss of $2,174,655.96.
In connection with the above we quote from the examiner's report
of November 15, 1929:
(G-6-2, p. 318, par. 1)
Unsecured past-due loans total approximately $2,357,000. Excessive both as
to number and amount.
(G-6-2, p 318, par. 2)
All large lines and past-due loans were carefully analyzed and reviewed with
Amount set up as being doubtful appears to be unusually
one or more officers.
8073
STOCK EXCHANGE PEACTICES
large, while this amount does not represent a total loss a certain portion of it
can be classed as extremely doubtful at this time.
(G-6-2, p. 318, par. 8)
Delinquent mortgage loans totaled $4,704,000, interest being delinquent for 6
months or more; of this amount $2,370,000 was delinquent on allotment loans.
(G-6-2, p. 318, par 13)
Investments show a market depreciation of approximately $566,000. A large
percentage of this is due to the recent crash in both the stock and bond market.
(G-6-2, p. 318, par. 15)
Unable to appraise a good many stock issues All stocks of a questionable
nature were reviewed with the officers of this bank
(G-6-2, p 318, par. 16)
Certain defaulted leasehold mortgage bonds can be classed as being a slow
workout, additional losses will unquestionably be suffered on some of these issues.
(G-6-2, p. 318, par. 17)
Other bonds can be classed as being high grade with a good marketability.
No recommendation is contained anywhere in these comments
that a reserve be provided for probable losses on loans and securities,
even though the examiner indicated a probable loss of over $2,000,000
on these items. In addition to the probable losses outlined above,
there was evidence that the bank was overloaded with real-estate
bonds, industrial bonds, and stocks, as follows:
(G-6-2, p 114)
Real-estate bonds
Industrial
Stocks
-
_. $2,053,163 29
1, 630, 737. 07
4, 687, 886 74
8,371,787 10
The examiner did not complete his 1929 examination until June
1930 which certailily gave him ample time to value the securities and
should have mdicated to him that the October 1929 market crash was
not just a temporary decline of security prices. There was sufficient
evidence of a marked decline to justify the creatioh of a substantial
reserve to cover possible losses, especially on securities such as we
have detailed. Had the State examiner insisted on the providing
of such reserve from earnings, dividends of $2,820,000 which wete
declared in 1929, 1930, and 1931 might have been eliminated and
some provision made for the further decline in value of $3,365,131.56
which was shown by the next State examination as of February 29,
1932, for thes6 3 types of securities as follows
(G-6-6)
Book value
Real-estate bonds
Industrial bonds
Stocks-
-
.
_-
- _
.
., _ _
Market value Depreciation
$1,800,636 49
3,715,166 03
2,536,321 25
$945,512 77
2,987,512 05
753,967 39
$855,123 72
727,653 98
1,782,353 86
8,052,123 77
4,686,992 21
3,365,131 56
8074
STOCK EXCHANGE PEACTICES
With, the failure of the State banking department to correct con~
ditions such as previously outlined, the management of the Guardian
Trust Co. persisted in unsound banking practices throughout 1929,
1930, 1931, and 1932, until finally in February 1932, State Examiner
T. O. McEldowny, who had made the previous examination could no
longer ignore the facts that should have been apparent 2}i years
earlier, made a desperate effort to save his "face" by conducting a
real examination. In this February 1932 examination and his comments he completely reversed the comment in his November 1929
report—
(G-6-2, p 319, par 29)
Management not subject to criticism.
and stated—
(G-6-7, p 4, par 23)
The efficiency of the management can be honestly challenged The management of this bank, both junior and senior officers, have made serious mistakes
in the past.
Surely the character of the bank's officers did not change completely
in the short space of 2 years and neither can it be believed that any
efficiency in bank management acquired prior to November 1929 was
lost in so short a time. It seems much more logical to assume that
the speculative tendencies and vicious practices commented upon so
strongly by Mr. McEldowney in 1932 had been existent for some time
and had simply been overlooked by him previously or had not been,
commented upon.
Let us compare the State examiner's comments of February 29,
1932, with his comments of November 15, 1929, and existing conditions.
In paragraph 8 of the 1932 report we find:
(G-6-7, p 1, par 8; G-6-7, p. 1, par. 8)
A number of collateral loans represent speculation and apparently were made
on that basis By that I mean the bank loaned entirely too much to the borrower
and did not sell him out when they should have. They now have a greatly undercollateraled loan which the maker cannot pay.
Contrast the above with the comment in the 1929 report:
(G-6-2, p. 318, pars 4 and 5)
Each collateral loan was checked as to margin, etc, with an officer of the bank
and his opinion obtained as to the collectibihty Some commendation is due the
officers of this bank for the small amount of loans, which are undercollateraled;
this would indicate that nothing is overlooked in keeping their loans in liquid
condition.
It seems that had sufficient attention been paid to the collateral
securing loans in 1929, the possible inadequacy of some of it would
have been noted and a recommendation made to sell out the borrower.
The State examiner also states*
(G-6-7, p 1, par. 8)
As you will note, officers and directors have borrowed $5,335,131 44 m theirown name This amount represents 33 3 percent of the present capital and
surplus It is needless to say their total borrowings are entirely too high and
not along the lines of conservative banking. Irrespective of security, certain*
STOCK EXCHANGE PEACTICES
8075
officers are owing entirely too much to the bank This item is, of course, subject
to severe criticism and is a reflection against the present management.
(0-6-2, p 6)
We find no criticism in the State examiner's report of November
15, 1929, despite the fact that officers, directors, and interested companies owed $10,426,882 46, of which $2,667,487 01 was unsecured as
of that date as compared with a total of $14,085,432 72 as of February 29, 1932. Surely, if it was poor banking to loan directors and
officers $14,000,000, it was poor banking to loan them $10,000,000.
Had the examiner been as alert and free to criticize in 1929 as in
1932, the bank might have been saved some trouble
In paragraph 12 of the 1932 report, the Stste examiner comments:
(G-6-7, p 2, par 12)
A great many of the real-estate loans have been sold to insurance companies *r
one company in particular, the Metropolitan Life Insurance Co has purchased
the first 50 percent interest in various real-estate loans, the last 50 percent, or
weaker portion, being owned by the Guardian.
(G-6-2, p 318, par 9)
This same practice was prevalent in 1929, as evidenced by the comment;
Bank has sold some of their loans to the Metropolitan Life Insurance Co.
and was subject to criticism then as well as in 1932.
The State examiner in his 1932 report accuses the Guardian of
speculating in the following manner.
(G-6-7, p 2, par. 13)
It is both evident and apparent that the bank was speculating, otherwise they
would not own large blocks of stock in such corporations as the Allegheny Corporation, Cities Service Co , Domestic Industries, Goodrich Tire & Rubber Co.,
Standard Textile Products Co , and Van Sweringen Corporation They also have
invested $250,000 in a company known as the "Guardian Securities Co," which
likewise has the appearance of a speculative concern
The investment picture in this bank is a very sorrowful one and represents jii
study in itself. It is apparent heavy losses will be suffered m the future
(G-6-2, p. 105)
It is therefore somewhat strange to find listed on the examiner's
1929 scheclule of stocks the following:
Allegheny Corporation
Cities Service Co
Continental Shares, Inc
Guardian Securities Co
Standard Textile Products Co_ _
$116,877 40
._ 250, 351 50
108, 756 00
_ 250, 000 00
99, 460 00
825, 444 90
If the bank is subject to criticism for having these stocks in their
possession in 1932, what excuse can there be for not criticizing them
in 1929 and insisting on providing a reserve for loss?
8076
STOCK EXCHANGE PRACTICES
(G-6-2, p 318, par 19, G-6-7, p 3, par 18)
Paragraph 14 of the 1929 report comments and paragraph 19 of
the 1932 comments refer to the earnings of the bank. In view of the
distorted reported earnmgs of the bank, as brought m a separate
report on the "Financial history", we question the ability of the
State examiner to comment on earnmgs in any manner, as an intelligent examination could not have failed to reveal the subterfuges
being mdulged m by the bank management to mislead depositors
and stockholders.
We believe that in the foregoing we have established the utter failure
of the State bank exammer to protect the public from loss by reason
of incompetent or dishonest banking In view of the character of
the February 29, 1932, report there seems little doubt of the ability
of the exammer to unearth the true condition of a bank and we cannot
understand his failure to show the same efficiency and zeal m prior
exammations
We have made no comment on the failure of the State examiner to
criticize the Guardian Trust Co for its many subsidiary companies,
obviously formed for the purpose of concealing losses, but we feel
that had some attention been given this phase of the bank's activities,
deals like that of the Hollenden Hotel Co would not have occurred.
We also wish to criticize an examination that does not provide for the
submission of consolidated financial statements for a bank havmg
26 subsidiaries
As stated previously, we cannot help but feel that the break-down
of the Guardian Trust Co. can in a large measure be traced to State
bank exammers and the State superintendent of banks of Ohio.
Had exammations been made as specified by law and conducted in a
more thorough manner, many of the evils which resulted in the bank's
closmg would have been eliminated before serious damage was done.
However, unwarned and uncntieized, the bank management continued to conduct the affairs of the bank in such a manner that by
February 28,1933, its condition was such that there was no alternative
save liquidation.
BANK EXAMINING COMMITTEE EXAMINATION
In addition to the examinations of the State banking department
dealt with above, an additional safeguard for depositors and stockholders was provided for in section 710-69 of the State banking code
which stipulates in part
(G-6-1, p 29)
"A committee of at least three directors or stockholders shall be appointed by
the board of directors to examine or to superintend the examination of, once each
12 months, the assets and liabilities of the bank and to report to the board of
directors the result of such examination
For the purpose of presenting such reports to the State superintendent of banks, certain printed forms are furnished to banks, one of
which entitled "Report of examining committee'', states in part.
(G-6-9, p 18, par. 2)
In making the examination, the committee should acquaint itself with the
general character of the assets of the bank and with the character of its management The assets should be closely examined, all bad or doubtful items should be
ascertained and listed m detail as provided for on the accompanying blanks.
STOCK EXCHANGE PKACTICES
8077
(G-6-9, p 18, par 3)
The committee should especially examine all loans and the collateral thereto,
ascertaining thereby what loans are insufficiently secured and what collateral
is of doubtful or unknown value
(G-6-9, p 18, par. 4)
The primary object of this examination is to inform the board of directors and
the banking department of the true condition of the bank, so as to prevent the
continuance of any policy in the conduct of the affairs of the institution which in
the opmion of the committee and the board of directors might lead to loss, and to
encourage such policies of administration as will result in profitable and conservative banking.
(G-6-9, p 18, par. 7)
The examination should be made without previous notice to or knowledge by
the employees of the bank
The method employed by the Guardian Trust Co to conduct this
examination was to name a number of directors and stockholders as
examiners, each of whom would be assigned a certain part of the
assets to verify, after which the total reported by each exammer was
proved with the general ledger controls by one examiner.
(G-6-9, p. 22)
On the face of it, this seems to be an excellent manner of checking
the bank's condition, but embodied in the report to the superintendent
of banks under the heading "Remarks" on the January 1932 report,
we find the following
the value of all loans and investments being accepted by said examiners at the
figure at which same were carried on the books of the company
(G-6-9, p 18, par 3)
This alone should be sufficient to indicate the character of the examination and its complete impotence. Surely this is not in accord
with the spirit of the instructions shown above, which stipulated that
the
assets should be closely examined, all bad or doubtful items ascertained and listed
in detail; all loans examined to determine if sufficiently secured and the nature
of the collateral
(G-6-9, 18, par 5)
Clearly, the examination was but a perfunctory gesture made to comply only with the letter of the law and never made with the intent of
informing the board of directors and the banking department of the true condition
of the bank
The lack of information and comment in the report brings a mental
picture of a number of directors scurrying from place to place like
schoolboys on a lark, checking previously prepared items against a
previously prepared list, with no knowledge of its purpose and then
complacently resting from their labors in the belief that they had done
their duty to stockholders and depositors
(G-6-9, p. 1 reverse, G-6-10)
The complete inadequacy of the report is shown by the attached
exhibit where in the spaces captioned "List of all loans insufficiently
secured or secured by collateral of doubtful value or not Baadily
8078
STOCK EXCHANGE PRACTICES
marketable", we find inserted the notation "No exceptions made by
committee", this despite the fact that as of December 31, 1931, there
were over $5,000,000 in nonaccrua] loans on the books of the Guardian
Trust Co , nonaccrual loans being loans on which the bank had
stopped accruing interest because of the borrower's failure to pay.
Surely these loans were doubtful
(G-6-11)
Only one thing more need be said in regard to the examining committee report and we may then dismiss it as bemg entirely worthless
and of no protection to stockholders and depositors We wish to call
attention to the attached list of loans to directors totaling $7,426,591 07 as of February 29, 1932, and of large amounts for prior years.
Can the failure to comment on these loans and to recommend their
discontmuance be in keepmg—
to prevent the continuance of any policy in the conduct of the affairs of the
institution which in the opinion of the committee and the board of directors
might lead to loss and to encourage such policies of administration as will result
in profitable and conservative banking?
CLEABING HOUSE EXAMINATIONS
(G-6-12)
Inasmuch as the last examination of the Guardian Trust Co. by the
Cleveland Clearing House was made in 1923 there seems no need to
comment on this supposedly protective agency, other than to attach a
transcript of the testimony of Clearing House Examiner Coates before
the Ohio Senate committee, which clearly shows the value of the
examination.
There is one further point in regard to the examinations conducted
by the State examiner upon which we wish to comment.
(Ohio Bank Act)
Section 710-138 of the Ohio General Code provides:
At least 4 percent of such deposits as are payable on demand, and at least 2
percent of such deposits as are time deposits must be kept in vaults of the bank in
lawful money, national notes, Federal Reserve notes or bills, notes and gold and
silver certificates issued by the United States
This provision of the law which was intended to provide a certain
amount of liquidity in banks was being violated by the Guardian
Trust Co on November 15, 1929, as shown by State Examiner MeEldowney's report of condition, at which time the demand deposits were
664,466,046 98 and time deposits $72,821,451.12 for which the cash
reserve should have been.
Demand deposits, $64,466,046.98 at 4 percent
Time deposits, $72,821,451 12 at 2 percent
Cash reserve required
- $2, 578, 641. 87
1, 456, 429. 02
4, 035, 070 89
On which date the bank had on hand:
Gold coin and gold certificatesSilver com
Nickels and pennies
Paper currency
Cash reserve short
$11, 427 94
102, 448 79
28, 226 52
1,229,334 00
-
lt 37i? 482 25
2, 668, 588. 64
STOCK EXCHANGE PRACTICES
8079
As of February 29,1932, the reserve was short, per Examiner McEl<downey's report of condition, as follows:
Reserve required
Cash on hand.
Cash reserve short
_
_
-__
$2, 764, 224. 50
1, 337, 809. 15
1, 426, 415. 85
No comment was made by the examiner in regard to either of these
reserve shortages, and no attempt was made to invoke the penalty
<of the law which provides:
(Ohio Bank Act)
Jf the reserve of a bank falls below the amount required by law, it cannot
make new loans or discounts otherwise than by discounting or purchasing bills
of exchange payable at sight or on demand; nor can it declare dividends of its
profits until the reserve required by law is restored
In discussing this matter informally with S€ate Examiner Evans,
we were informed that the Federal Reserve Bank had relieved the
Guardian Trust Co. of the necessity of abidmg by the above quoted
section of the Ohio Banking Code, in view of the bank's being a member of the Federal Reserve System and meetmg that body's reserve
requirements.
We have been un&ble to find anything in the Federal Code giving
the Federal Reserve Bank the power to abrogate State laws to any
•such extent as tins, and have, therefore, included the foregoing facts
in order that counsel might pass on the legal aspects of this matter.
From the foregoing we believe we have established the complete
inadequacy of examinations such as have been conducted in the past,
to protect stockholders and depositors from the losses attendent to
unwise speculative banking. It is apparent from the failure of any
existing examining body to safeguard the public interests that this
function must be placed in more competent hands and examinations
conducted in such a manner that the inefficiency of bank management and the subterfuges used to conceal it may be discovered before
the bank has reached a state beyond recovery.
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Ex&miner R. E. Long.
Mr PECORA I show you now what purports to be another report
made by Mr Seymour, entitled "The Guardian Trust Co —Employees' Retirement Fund." Do you recognize it as being a copy of a
report made by Mr Seymour based upon his mvestigation conducted
xmder your immediate supervision?
Mr. MEEHAN I do
Mr PECORA Mr Chairman,
I offer the report in evidence, together with the exhibits alluded to therein
Senator COSTIGAN (presiding) The report and exhibits offered by
counsel to the committee will be received in evidence
(The report entitled "The Guardian Trust Co—Employees' Refrrement Fund", together with the exhibits referred to therein and
now at the Government Printing Office, was received in evidence and
marked "Comnuttee Exhibit No. 15, May 3,1934", and is as follows:)
8080
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT N O . 15—MAY 3,
1934
EMPLOYEES' RETIREMENT FUND
(G-9-12-A, G-9-12-F; minutes of meeting, board of directors, Jan 10, 1933,
pp. 87-88)
The management of the employees'retirement fund, by its president,
J A. House, is one of the most flagrant examples of the abuse and
violation of trust placed in him as a guardian of life earnings, and is
wholly contrary to the ethics of trusteeship which the Guardian Trust
Co so elegantly set forth in the " Trust investment policy and organization" approved by the trust department officers and trust committee of the Guardian Trust Co at a meeting of their board of
directors January 10, 1933.
(G-9-1, Rule 10)
The retirement fund was created July 1, 1913, for the purpose of
retiring faithful employees after certain prescribed periods of service.
Funds for this purpose were to be contributed by the employees on
the basis of 3 percent per month of their monthly salaries, provided
no employee contribute more than $10 per month, each employee
to continue his payments until he had contributed for a period of
25 years, unless he was retired sooner on account of age or sickness.
These payments were deducted from the pay roll by the bank and
above-mentioned contributing percentage continued from July 1,
1913, to July 1, 1932, with the exception of the period from July 1,
1927, to February 1, 1932. During the latter period the percentage
was changed to 5 percent and the maximum contribution was $25
a month From July 1, 1932, to February 28, 1933, no contributions
were made either by the employees or the company.
(G-9-1, Rule 11, G-9-14, a-d, G-9-4, p 6)
Under this retirement fund plan the bank was to contribute amounts
equal to the employees' contributions, as well as an additional amount
to equalize the terms of service of certam subscribing employees who
were not able to complete 25 years of service before arriving at the
retiring age. The total of all contributions and interest received up
to January 17, 1933, was $1,876,027 88.
(G-9-1, Rule 5)
The management of the fund was vested in a board of trustees
consisting of 7 members, 4 of whom were selected by directors of the
Guardian Trust Co. from their own number at the annual meeting of
the said board, and 2 of whom were selected by the employees from
their own number by ballot to be taken contemporaneously with the
holding of the annual meeting of said board of directors of the Guardian Trust Co. The rules also required that the president of the
Guardian Trust Co be ex officio a member of said board of trustees
and president thereof, this Mr J A House, as president of the
Guardian Trust Co , automatically became president of the board of
trustees of the employees' retirement fund
STOCK EXCHANGE PBACTICES
8081
(G-9-1, Rule 4)
The faith placed in Mr House by the contributors to the retire*
ment fund, and which he so grossly violated, was shown by the powers
they delegated to the trusteeship of the fund in giving them absolute
control of the management of the funds and arbitrary interpretation
of the rules of the fund without any personal liability or responsibility
other than an oath to which they were obliged to subscribe, stating
that they would faithfully perform their duties as trustees of the*
fund during their terms of office.
The utter disregard with which trustees of this fund treated this,
oath will be found in the acts of Mr. House as president of the retirement fund board While these acts of his were approved by the other
directors at their regular meetings, it was only a complete arbitrary
domination of this board by Mr. House that secured such approval,,
for it is only natural that a subordinate obey the dictates of a superior >
especially when that superior is the president of the institution for
which the subordinate is employed.
Prior to 1930 investments of the funds of the retirement fund were
confined to real-estate mortgage participations, with the one exception of $5,000 par value Hydraulic Pressed Steel Co. notes which were
acquired in 1918 for $4,751 80 and sold in 1920 for $5,025, the entire
amount realized then being invested in participations.
(G-9-2)
In 1930 Mr. House saw the possibilities of diverting funds from the
retirement fund to his own and the Guardian Trust's interests by
virtue of the powers granted him m the management of the fund,
thus on June 27, 1930, at a meeting of the pension fund trustees, the,
chairman reported that
For some time consideration had been given to investing part of the fund m
capital stock of the Guardian Trust Co
(G-9-2)
A motion was duly passed authorizing the trustees of the fund to
purchase up to 500 snares of the capital stock of the Guardian Trust
Co. at a purchase price not to exceed $400 per share.
(G-9-3)
The minutes of November 10, 1931, show that 522 shares of the
capital stock of the Guardian Trust Co. were purchased, or 22 shares
in excess of the amount approved, so a motion was immediately made
and earned to approve the purchase of an additional number of shares
to bring the total holdings up to 1,000 shares.
(G-9-4-A, 4r-B)
Having been granted power, under the minutes of June 27, 1930,
to purchase stock m the Guardian Trust Co, Mr House conceived
the idea of forming what was referred to as a directors' syndicate as
mentioned in the correspondence to Mr W. R. Green, former secretary of the employees' retirement fund, from Mr. C H. Force, of the
175541—34-—PT 18
8
8082
STOCK EXCHANGE PRACTICES
stock transfer department of the Guardian Trust Co , and dated
April 7, 1933 Mr. C. H. Force was stock transfer agent and vice
president of the Guardian Trust Co at the time Mr House formed
this syndicate.
, 4-B)
The syndicate was predicated on the plan that each director and
various other officers of the Guardian Trust Co were to subscribe
to a certain number of shares in the syndicate and the syndicate was
to acquire from the outside market or from other sources capital stock
of the Guardian Trust Co According to the letter of Mr Force each
participant was notified by Mr House of his share in the syndicate
and agreed to purchase his allotment Purchases of the stock were
made beginning November 22, 1930, to and including April 30, 1931,
totaling 243 shares
(G-9-4-A, 4-B)
Beginning then with May 6, 1931, up to and including August 31,
1931, stock was purchased both for the retirement fund and the directors' syndicate. On this latter date there had been acquired 587
shares for the retirement fund and 329 shares for the directors'
syndicate The subscriptions to the directors' syndicate totaled 394
shares with 329 shares purchased, a difference of 65 shares which the
directors' syndicate purchased from the retirement fund at an average
cost of $311 20 a share This left the retirement fund with 522
shares. It was stated in Mr. Force's letter that the reason this
purchase was made from the retirement fund was that some of the
directors wished to close their syndicate and the stock was not
available on the open market at that price.
(G-9-4-A)
Some of the directors refused to be coerced by Mr. House into
entering the syndicate, so that certain cancelations followed, the canceled shares amounting to 66 in number. Mr. House then unloaded
these into the retirement fund on August 1, 1932, at an indicated
average of $312.90 a share.
(O-9-4-A, 4-B, U-9-3)
The purchase of thesre 394 shares of stock was effected by a series
of loans made from the retirement fund, notwithstanding the fact
that neither the retirement fund nor any of its contributors were to
participate in any profits that might accrue from the directors' syndicate. Mr Force, acting as agent for the syndicate, pledged the shares
purchased by the syndicate as collateral for his loans. Such a procedure was made possible through the foresight of Mr. House, as
evidenced in his having approved a motion at the November 10,1931,
meeting in winch he got the trustees of the retirement fund to approve
loans secured by Guardian Trust Co stock.
The syndicate was never completed and was left with these 287
shares of Guardian stock. On July 6 the balance due the retirement
fund from Mr Force as agent or trustee of the proposed syndicate,
amounted to $79,867 97.
In his letter of April 7,1933, Mr Force stated, regarding his market
activities;
STOCK EXCHANGE PRACTICES
8083
(G-9-4r-B)
My instructions regarding the execution of market orders came directly from
Mr House without any written form of authorization
(O-9-13-A, O-9-13-B, G-9-5, G-9-&)
It seems that Mr House always had a remedy for situations involving losses to himself or projects m which he was personally interested,
so again taking advantage of the powers vested m him as president of
the retirement fund, he secured the approval of the trustees of the
retirement fund on July 6, 1932, at their regular meeting, to purchase
back from Mr Force as agent, the 287 shares of the Guardian stock
and a cancelation of the notes of Mr Force as agent of the syndicate,
for $76,122 56. This was at the rate of $265.23 per share, notwithstanding the fact that the retirement fund purchased from brokers
on July 5, 1932, 49 shares at an average price of $69.72. This
$76,122.56 also represented a markdown of $3,745.41. If this chargeoff is included, the cost per share to the retirement fund for these
287 shares was $278.28.
In view of the fact that this so-called "syndicate" was a brain
child of Mr House, it would appear that a personal responsibility
attaches itself to him for the losses sustained by the retirement fund
on these stock purchases.
(G-9-7, G-9-10, G-9-11)
Another example of Mr. House's arbitrary price-fixing on the
Guardian stock is shown in his conduct involving the sale of Guardian
Trust stock to the employees On February 15, 1929, the Guardian
Trust Co sold its stock to the employees at $250 a share on a partialpayment plan. The cost of the stock was secured by the employees'
notes and the principal and interest on these notes were deducted
from the employees' salary monthly at the rate of $3 a share subscribed The stock was held for the employees in negotiable form
for a period of 5 years from February 15, 1929, under the control of a
trustee who was the president of the Guardian Trust Co. and the
stock was voted by that trustee In the event of a subscriber ceasing
to be an employee of the bank the employee was to be refunded the
amount paid on his note. The stock was thenceforth subject to
•control and disposition of the president for reallotment.
(G-&-8-A)
At a meeting of the retirement fund trustees, on July 6, 1932, Mr
House reported that he had as trustee repurchased 218 shares of
the Guardian Trust Co stock under the terms of this agreement and
was carrying same at a cost of $55,041 59 Again seeing the possibilities of the retirement fund to further his own ends, he got the trustees
at the said meeting to approve the acquisition of this stock payment
to T>e made from the bank's contributions to the fund Between
that time and February 1, 1933, 40 more shares of employees' stock
were acquired by the retirement fund under like conditions
The purchase price represented the original subscription price by
employees of $250 per share for stock which had not sold for over
$100 on the open market at the time of those purchases by the retire
8084
STOCK EXCHANGE PRACTICES
ment fund See exhibit G-9-9-A for market prices of Guardian
Trust Co. stock
(G-9-14-A, G-9-14-D)
Another deplorable feature of Mr House's stewardship of the
retirement fund was his original recommendation of the purchase of
Guardian Trust stock when he knew that such stock was subject to
assessment by the State banking department in the event of said
trust company's failure Subsequent to January 17, 1933, such an
assessment was made in the amount of $100 per share by the State
banking department According to the books of the retirement fund
it was holding 1,565 shares of Guardian Trust stock at this time and
this assessment further depletes the funds of the retirement fund in
the amount of $156,500
(G-9-&-A)
Mr House's complete domination of the board of trustees of the
retirement fund is further shown by the ease with which he obtained
the passage of certain motions, such as the motion to take in the 287
shares of the directors' syndicate and the 218 shares for which he was
responsible as trustee at prices far in advance of the open market
value, all this in spite of the fact that the other trustees on the board
of the retirement fund were fully cognizant of the way these transactions would jeopardize and affect their savings and if left to their
own resources would never sanction such action.
The Ohio State banking laws have no provisions covermg the conduct of an officer or trustee in a position corresponding to that held
by Mr House in the retirement fund, but it is the writer's belief that
legislation should be effected coveimg management and conduct of
any funds deposited with any department of a bank or trust company
where the purpose of such account is for savings or retirement annuities
WALTER H SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner M W. Firth
Mr PECORA I now show you what purports to be another report
made by Mr- Seymour, entitled "The Guardian Trust Co —Membership on Board and Management Committees " It is for the period
1927 to 1933 Do you recognize that as being a copy of another
report made by Mr Seymour based upon his mvestigations made
under your immediate supervision?
Mr
MEEHAN. Yes; I do
Mr PECORA. Mr Chairman, I offer the report in evidence, together
with the exhibits referred to therein
Senator COSTIGAN (presiding) The report and exhibits offered,
by counsel to the committee will be received in evidence
(The report entitled "The Guardian Trust Co.—Membership on
Board and Management Committees, 1927-33", together with the
exhibits referred to therein and now at the Government Printing
Office, was received in evidence and marked "Committee Exhibit No.
16, May 3, 1934," and is as follows:)
COMMITTEE EXHIBIT N O . 16—MAY 3,
Board of directors
1934
Finance committee
Executive committee
Trust committee
Semor loaning officers
Name
1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933
*
*
*
•
*
*
•
#
4.
*
4>
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
4c
•
*
*
*
*
*
*
*
*
*
*
*
*
4t
4t
*
*
*
*
4i
I ! !*
*
*
*
*
*
*
*
{•
*
*
J
*
*
! I* !
*
*
*
i
*
i
*
*
•
*
! I* !
Arter, Charles K
Ayers, Allan F
Bicknell, Warren
Billings, Frank
Bishop, Robert H , Jr.
Bishop, Robert H
Bolton, Charles C
Bolton, Irving Co
Bond, S M
Bowman, George H . .
Brand, Carl W
Brooks, Arthur D
Brown, Harvey H ,
Jr
Carlton, H A
Case, George S
Cook, Allan B
Daley, W A
Dalton, H Q
Dean, A W
Deasy, John F
Deitz, William G
Durell, George B
Eide, Randolph
Foote, L B
Force, C H
Fuller, Ralph L
Fish, John
Gill, K F
Griffiths, E S
Grossman, Louis J
Hall, R S
Hanna, Dan R , Jr
Hanna, L C , Jr
Harmon, F S
Heer, Charles G
Hme, Charles P__
Holding, S H
House, J A
Hunt, William H
Inglis, Richard
Kellogg, F D
Board of directors
Executive committee
Finance committee
Trust committee
Senior loaning officers
Name
1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933 1927 1928 1929 1930 1931 1932 1933
4c
4s
4c
4c
4c
#
4c
*
*
4c
*
4s
4>
*
4c
8
*
4s
*
4s
4s
*
4s
*
E
*
4s
4c
4c
4s
#
4c
4s
*
j •*
Khne, Selden
Khng, John D
*
Klmg, John A
Marlatt, W H
Marshall, G G
Marshall, W G
4s
Mather, W G
McGowan, F S
Mclntosh, H P , Jr._
Mclntosh, H P
Mills, James R
Monks, T E
—.
Murfey, 0 L
Murfey, L A
Oakes, H K
_—
Patterson, Proctor. ._
PetrecLUin, E A
4c
Pomerene, Atlee
Prentiss, F F
Prescott, Orville W—
Purdon W D
4s
Quarrie, B D
Robinson, H 0
Rogers, E D
Rogers, E S
Rossiter, W T
Sanders, William B...
Seais, R P
Shepherd, H I
Stewart, H B
Stone, Arthur L
Taylor, Alexander S-Tillitson, E G
Wade, George Garretson
Wallace, Robert B.
Warner, Worcester R.
Warwick, James W
Whelan, George J~
4>
•
4c
V
4c
*
*
*
*
*
4s
*
NOTE —Board of directors Regular meetmg, at least once each month Executive committee Meetings, twice each week
Trust committee Meetings, at least once a month,
Finance committee Meetmgs, at least once a week
1
STOCK EXCHANGE PEACTICES
8087
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner C. H. Horton.
Mr. PECORA. NOW, Mr. Chairman, there is another report prepared
by Mr. Seymour and entitled "The Guardian Trust Co.—Officers'
and Directorate's ^Representation in other Concerns." The only
copy of that report which we bad here in Washington is now in the
hands of the Government Printing Office. Have you seen that report,
Mr. Meehan?
Mr. MEEHAN. Yes, sir.
Mr. PECORA. DO you know it now
to be in the hands of the Government Printing Office?
Mr. MEEHAN. I do, for I sent it to them.
Mr. PECORA. Having sent it do you recognize it to be a copy of
another report made bj Mr. Seymour as a result of his investigations
conducted under your immediate supervision?
Mr. MEEHAN. Yes, sir
Mr. PECORA. Mr. Chairman, I ask that that report be received in
evidence, together with the exhibits therein referred to.
Senator COSTIGAN. The committee will receive in evidence the
report and exhibits offered by committee counsel, with the explanation
he has made.
(A report entitled "The Guardian Trust Co.—Officers' and Directorate's Representation in other Concerns ", together with the exhibits
referred to therein, both now being at the Government Printing Office,
were received in evidence and are to be marked "Committee Exhibit
No. 17, May 3? 1934", and are as follows:)
COMMITTEE EXHIBIT N O . 17—MAY 3, 1934
(This exhibit, together with the accompanying papers offered by
Mr. Pecora, are now at the Government Printing Office and will be
inserted at this point by the Government Printing Office.)
Mr. PECORA. I now show you what purports to be another report
made by Mr. Seymour, entitled "The Guardian Trust Co.—Guardian
Securities Co.—Stock-market activities." Do you recognize it as
being a copy of a report made by Mr. Seymour as a result of his investigations conducted under your immediate supervision?
Mr. MEEHAN. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer that report in evidence, together with the exhibits referred to therein.
Senator COSTIGAN. The report and exhibits offered by committee
counsel will be received in evidence.
(The report entitled "The Guardian Trust Co.—Guardian Securities Co. —Stock-market activities", together with the exhibits referred
to therein and now at the Government Printing Office, were received
in evidence and marked "Committee Exhibit No. 18, May 3, 1934,"
and are as follows.)
COMMITTEE EXHIBIT N O . 18—MAY 3, 1934
STOCK MARKET ACTIVITIES
While the Guardian Securities Co. was organized as the security
affiliate of the Guardian Trust Co. it never engaged very extensively
in the securities business. Its records consist of a small journal and
8088
STOCK EXCHANGE PKACTICES
a ledger about 14 by 8 inches We have carefully checked its affairs
and find that it never participated in any large underwritings or
trading accounts Its largest smgle activity seemed to be in the
stock of the
INLAND INVESTORS, INC.
(G-17-la)
This company, the Inland Investors, Inc , was organized under the
laws of DelawarQ on June 24, 1927, with 100,000 shares of common
capital stock authorized The function of the company was as an
Investment trust of the management type
(G-17-la)
The original board of directors of the company included J A. House,
president of the Guardian Trust Co.; H C Robinson, vice president
and executive vice president of the Guardian Trust Co.; J O. Eaton,
later replaced as president by H C. Inglis; Floyd Anderson, and Paul
J. Bickel.
(G-17-la, G-17-2a, G-17-3, G-17-4)
Immediately after the formation of the Inland Investors, Inc., Otis
& Co was employed as selling agent to dispose of 40,000 shares of the
common stock at $52 50 per share payable 50 percent at time of
purchase, 25 percent September 1, 1927, and the remaining 25 percent
November 1, 1927. A contract was executed wherein Otis & Co.
received a commission of $2 50 on each share sold and a supplementary
contract wherein the Guardian Securities Co. underwrote the sale of
10,000 shares of the 40,000 shares which Otis & Co. undertook to sell,
the $2 50 commission on the 10,000 shares accruing to the Guardian
Securities Co.
Thereafter, beginning on July 19, 1927, and extending to September 27, 1927, the Guardian Securities Co. purchased this Inland stock
from the Guardian Trust Co. and sold it to individuals as follows:
(G-17-5)
Purchased 5,278 shares, at $47 50 per share
Sold 3,274 shares, at $52 50 per share
Sold 2,004 shares, at $50 per share to employees.
As stated above, all of the stock was purchased from the bank and
all except 2,004 shares were sold to outside customers at $52.50 per
share.
(G-17-6)
On August 31,1927, 2,004 shares of Inland Investors, Inc , was sold
to the employees of the Guardian Trust Co , at $50 per share, on a partial payment plan. This plan evidently was fostered by J A. House,
president of the Guardian Trust Co , as appeared in a letter from
W. K. Green to C. R. Mergerth, both of the Guardian Trust Co., dated
July 19, 1927, outlining the plan as follows:
Mr House desires that the Guardian officers and employees be permitted to
buy Inland Investors, Inc, stock on a partial payment plan; namely, the stock
is selling for $52 50 per share and it is proposed to sell the stock on a downpayment of $2 50 a share and $2 50 per share per month, until paid
This will be purchased through the Guardian Securities Co, who will borrow
"the money on its note from the Guardian Trust Co at 5 percent and will take
notes of the employees at the same rate
STOCK EXCHANGE PBACTICES
8089
From the foregoing it will be seen that the Guardian Trust Co.
loaned the money to its subsidiary7 for the purchase of Inland Investors
stock based upon the employees individual notes.
Regarding the bank employees' participation in the stock purchase,
in conversation with several of former bank employees they indicated
that the transaction was profitable for them. One said that he had
purchased his stock at $50 and sold it at $67, an appreciation of $17.
This is probably not true of all the employees, however, especially
those who have retained their stock which at the present date (Mar»
21, 1934) is quoted by Hornblower & Weeks at from $9 to $11 per
share.
(G-17-7, G-17-5)
The Guardian Securities Co., during 1928, purchased 5,000 more
shares direct from the Inland Investors, Inc , at $52 a share and by
November 2, 1928, had disposed of all of the original 10,000 shares
and the additional 5,000 shares at $56 per share.
(G-17-5)
From January 7,1929, to April 25,1929, 830 shares were purchased
at various prices ranging from $60 to $67 per share. As of September
23, 1929, the number of shares remaining unsold in the Guardian
Securities Co. inventory was 132 at a total value of $7,123 or $53.97
per share. The value of these shares at the present-day market price
of from $9 to $11 per share would show them as $1,188 and $1,452,
respectively, a reduction of approximately $5,000.
(G-17-9)
An analysis of the declining condition of Inland Investors, Inc., as
shown in an analysis prepared from Moody's Investors Manual by
years from 1928 to 1933, inclusive, is submitted herewith as an
exhibit.
WALTER H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner J. H. Winchester.
Mr. PECORA. I now show you what purports to be another report
made by Mr. Seymour, entitled "The Guardian Trust Co., re Hotel
Hollenden Co. and DeWitt Hotels.Co." Do you recognize it as beingf
a copy of a report made by Mr. Seymour, based upon his investigations conducted under your immediate supervision?
Mr. MEEHAN. I do.
Mr. PECORA. Mr. Chairman,
I offer that report in evidence,
together with the exhibits referred to therein.
Senator COSTIGAN. The report and exhibits offered by committee
counsel will be received in evidence.
(The report entitled "The Guardian Trust Co., re Hotel Hollenden
Co, and DeWitt Hotels Co.", together with the exhibits referred to
therein and which are now at the Government Printing Office, were
received in evidence and marked "Committee Exhibit No. 19, May
3, 1934," and are as follows:)
8090
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT N O . 19—MAY 3,
1934
R E HOTEL HOLLENDEN CO. AND D E WITT HOTELS CO.
The stock of the De Witt Hotels Co , a holding company for
several hotels including the Hotel Hollenden, is owned principally
by the New England Co , the main subsidiary of the Guardian Trust
Co.
The history of the Guardian Trust Co 's participation, or engagement, in the hotel business began back in early 1923.
(G-15-1)
In April 1923 Herman Mack, a well-known hotel operator in
Chicago, obtained an option for the purchase of the Hotel Hollenden
in Cleveland from the Hollenden Hotel Co.
The Hollenden is a second-grade hotel located in a rather favorable
section of the city. It does not generally attract the better cl^ss of
guests, but caters mostly to a "sporty" and "racy" type.
Under the terms of this option Mack had agreed to:
(G-15-6-3)
a. Lease the land for a term of 99 years at an annual rental of
$150,000.
b. Maintain a "security fund" of $500,000 by making quarterly
payments of $6,250 to April 1, 1943. This fund to be used in erecting a new building at a cost of $3,000,000.
c. Pay $1,726,000 to the Hollenden Hotel Co , for which he was to
receive the building and furniture, etc.
Mack's option required an immediate payment of $100,000 down and
the balance of $1,626,000 to be paid before June 30, 1923.
(G-15-1)
Mack entered into an agreement with the Chicago brokerage firm of
Hyney, Emerson & Co , whereby he would form a new corporation
called the Hotel Hollenden Co., which was to issue $2,000,000 in bonds,
selling the entire issue to the Chicago brokerage firm at 92 percent.
The new corporation was to use the proceeds of the bond issue to
purchase the Hollenden Hotel.
(G-r5-65)
On April 2, 1923, Herman Mack opened a personal account at
the Guardian Trust Co after being introduced by H. C Robinson.
Herman Mack's initial deposit was in the amount of $100,000; and 3
days later (Apr 5, 1923) he deposited an additional $50,000. This
seems to have been the first connection between Mack and the
Guardian Trust Co.
On May 8,1923, Herman Mack entered into a purchase agreement
with the Hollenden Hotel Co, the terms of which we have already
outlined.
(G-15-3)
In accordance with his agreement with Hyney, Emerson & Co.,
Mack formed the Hotel Hollenden Co. on May 9,1923. The company
STOCK EXCHANGE PRACTICES
8091
had an original capitalization of 5,000 shares of $100 par value
preferred stock; 10,000 shares of no par value common, the subscription price of the common being $1 per share
The incorporators and original common stockholders were:
(O-15-3, G-15-4)
Incorporators
Irwin N Loeser *
Frank G Mooney 1
Monroe A Loeser *
H Stewig
I L Nichols
Common stockholders
Herman Mack
Roscoe Tompkins
Earl W LeFever
Edgar A Hahn 1
Irwin N Loeser *
Shares
9,996
1
1
1
1
10,000
* The individuals so indicated are members of the law firm of Mooney, Hahn, Loeser & Keough referred
to in the agreement between Mack and Hyney, Emerson & Co , as the attorneys for Herman Mack
The original directors of the company and the officers as well were:
(G-15-6-1)
Herman Mack, president and treasurer; Irwin N. Loeser, vice president;
B A Hahn, secretary; Roscoe J. Tompkins, assistant secretary; Earl W LeFever.
(G-15-92)
Early in May of 1923 (May 3) Mack and the firm of Hyney,
Emerson & Co. were having difficulty in getting the bond issue
floated. It should be borne in mind that this $2,000,000 issue
represented 100 percent of the cost of the hotel and the first year's
rent; which feature alone would make the bonds unattractive.
Obviously, in a case of forfeiture or liquidation the bondholder could
not hope to realize the full amount of his bond from a forced sale
The urgency for speed in the sale of the bond issue can be fully
appreciated from reading a letter of Mr E. A Hahn (of Mooney,
Hahn, Loesser & Keough), counsel for Herman Mack, to Messrs.
Ohapman, Cutler & Parke, counsel for Hyney, Emerson & Co.,
stating that—
(G-15-92-1)
* * * Because of the extremely limited period of time and the fact that
no extension of time can be procured, and because Mr Mack has deposited
$100,000, which will be lost if the balance of the money is not available on the
stipulated day Mr. Mack has asked me to urge you to give this matter your
immediate attention * * *
From this it would seem that counsel was as fully aware of the
scheme and as conscious of the need for speed as was Mack himself,
in his gamble that the bonds would be sold in time to take up his
option
It was evidently decided by Mack and his brokers that the bonds
<5ould not be issued and sold unless the property was appraised by
reputable Cleveland appraisers at a value far in excess of the bond
issue. Therefore it was decided to do business with the Guardian
Savings & Trust Co. (the Guardian Trust Co.),
8092
STOCK EXCHANGE PEACTICES
(G-15-50-2)
On May 15, 1923 a conference was held between Mack, Hyney,
and officials of the Guardian. At this conference it was decided
that the bonds were to be issued as originally planned at 92 percent
but that the purchasers would be Hyney, Emerson & Co., and the
Guardian Sayings & Trust Co., participating equally. It was also
decided at this conference that—
(G-15-20-2)
As the appraisals of the property are one of the mam selling features, it is
necessary that the names of the appraisers be the strongest obtainable.
and that the appraisers should be the following: H. C. Robinson,
executive vice president Alex. S. Taylor; Craig-Curtiss Co.
(G-15-50-1)
Thereupon the Guardian Savings & Trust Co. and Hyney, Emerson
& Co. entered into an agreement to jointly purchase the Hotel
Hollenden Co. bonds at 92 percent and accrued interest. These
bonds were later advertised (the Guardian appearing as the first name
on the circular) as
(G-15-11)
Hotel Hollenden Co., $2,000,000 first-mortgage leasehold 6K percent seria
gold bonds.
(G-15-6-12)
The bonds were secured by a first mortgage deed of trust upon the
leasehold estate of the Hotel Hollenden Co.
The purpose of issue, as advertised in the bond circular, was that—
(G-15-11, O-15-67)
The proceeds of this bond issue—which will constitute the only lien, or mortgage indebtedness of any nature on the property—will provide funds for completing the purchase of the Hotel Hollenden, Cleveland, by a new ownership an<$
for the cost of various alterations and improvements
APPRAISAL
OF
PROPERTY
(G-15-49)
On May 23,1923, Herman Mack agreed to pay the cost of securing
an appraisal of the real estate and leasehold equity and of the buildings by—
* * * Messrs H. C Robinson and A S. Taylor and
Curtiss Company
(G-15-49)
* *
*
Craig-
Copies of the several appraisals accompany this report, each of
which bears the same date as the agreement of Herman Mack. Attention is called to this coincidence, which, together with other detail
set out below, savors of "rubber stamp" operations
Craig-Curtiss Co. appraised the property and, in their letter to*
Mack, stated:
STOCK EXCHANGE PRACTICES
8093
(G-15-49, p 2)
We have made a careful examination of the building and checked its dimensions
and in our opinion a fair market value of the same is $3,500,000.
Messrs. Robinson and Taylor, jointly, also appraised the property
and stated:
(G-15-49, p 3)
We have carefully checked the value of property m the immediate vicinity of
the land herein appraised and have determined that the fair market value of the
same today is $3,250,000
On the same day, May 23,1923, the three appraisers together wrote
Herman Mack in the official appraisal, as follows.
(G-15-49-4)
We have carefully checked the value of property in the vicinity of the above
property, have made a careful examination of the buildings upon the land and
have estimated their present value and in our opinion the value of the leasehold
estate is $4,250,000.
(G-15-72, G-15-49-9)
Attention is also drawn to the fact that H. C. Robinson was the
executive vice president of the Guardian Savings & Trust Co. and
that he later handled all matters at the bank pertaining to the Hotel
Hollenden, also that he personally received an appraisal fee of $1,200,
a fact which he denied when he testified before the Ohio State Senate
banking committee on July 26, 1933
The Guardian Trust Co.'s bond circular advertising these bonds
stated that—
(G-15-11)
The leasehold estate has been appraised by Messrs H C. Robinson and
Alexander S Taylor of V C. Taylor & Son and The Craig-Curtiss Co at
$4,250,000 * * * This issue, therefore, constitutes a loan of less than 42
percent of the appraised value of the property.
Also, the circular stated, regarding the class of the hotel and its
service:
It is a favorite headquarters for conventions and for gatherings representative
of the leading activities of Cleveland, and because of its central location and
high standards of service it has attained permanent popularity with a wide transient patronage from aU sections of the United States.
(G-15-49)
Here we would like to interrupt the continuity of this report to call
attention to a change in Mr. Robinson's opinion. A trifle over 2
years after these bonds had been issued and sold (Nov. 18, 1925)
and after the Hotel Hollenden Co. had been in receivership Mr.
Robinson filed an affidavit for a reduction in State taxes In this
affidavit he swore that the total actual fair value of all of the assets
of the Hotel Hollenden Co amounted to only $2,050,187 59 which is
quite a contrast to the value of the leasehold alone, set out in the
bond circular of June 1923.
In the affidavit (referring to the assessed value of the land) Mr.
Robinson stated that—
8094
STOCK EXCHANGE PKACTICES
(G-15-49-12)
It should be clearly understood that the above item of $2,668,250 represents
the value of property not owned by this company; merely rented under lease;
one of the provisions of said lease being that the leasee pays the taxes on said
land.
(G-15-49-18)
On November 14, 1925, Mr. Robinson wrote the county auditor
complaining of the assessed value of the improvements to the hotel
building, in which letter he described the hotel in the following
manner
(G-15-49-19, G-15-49-20)
You are probably aware that the Hollenden Hotel proper is made up of a series
of buildings erected at different intervals. It is, in effect, patchwork Some
portions of the hotel are modern and have an earning capacity per square foot
equal to that of Hotel Cleveland or The Statler, which are up-to-date hotels, but
tajke, for example, the original portion of the hotel, namely, that fronting on
Superior Avenue and East Sixth Street, which, by the way, is the portion m which
the improvements in question were installed, it was erected in 1890 at a time
when the public was not demandmg the conveniences that it is at present A
large number of the rooms have no bath facilities, thefloorsare sagging, the plaster
is falling, and it requires the most constant vigilance and outlay of money on
the part of the management to keep many portions of this building in an inhabitable condition The earning power of the rooms per square foot is very low
as certain parts of this building are only used or acceptable to the public when
there is a crowded condition m the city when any kind of a room is called mta
use, for example, the last Republican Convention held in the city.
(G-15-49-3)
It is very difficult to reconcile the description above, which happens
to be a true one, with that outlined in the circular and on which
Robinson placed a "fair" valuation, 2 years previously, of $3,250,000.
(G-15-20-2)
From the above it can be readily seen why the underwriters realized
that:
As the appraisals of the property are one of the mam selling features, it is
necessary that the names of the appraisers be the strongest obtainable.
BOND PURCHASE AGREEMENTS
(G-15-50, G-15-37, p. 4)
A letter agreement was signed by Hyney, Emerson & Co. of Chicago
on May 16, 1923, covering the purchase of the bond issue, with the
Guardian Trust Co. on a 50-percent basis at 92 (although H. S Hyney
of Hyney, Emerson & Co. had a secret agreement with Mack to
"cop" an additional 2 percent).
(G-15-57, G-15-37 (4 to 7), G-16-16)
From correspondence, etc., which has been uncovered during the
course of our mvestigation, it is evident beyond any question of doubt
that R. S. Hyney of Hyney, Emerson & Co. and Herman Mack were
" crooks", the two appearing to have worked together for their
mutual gain. We call particular attention to exhibit G-15-37,
pages 4 to 7.
STOCK EXCHANGE PRACTICES
8095
On May 22, 1923 G. B. Johnson, manager of the Guardian bond
department, wrote to Hyney
You understand that our executive committee has not as yet approved this,
issue and they will not approve it until we are able to substantiate the earning
figures which have been submitted by you
Mr. Johnson then outlined the syndicate plans and stated:
(G-15-102)
We further agreed that the better way to syndicate this issue was by personal
contact and that you were not to mail syndicate agreements broadcast
Mr. Kobinson in a letter to Herman Mack, on May 23, 1923,
stated:
(O-15-102-2)
* * * Mr. Thompson, the present manager, stated he believed the new
company would have a hard time making money in the operation of the hotel,
* * * he believed you were anticipating a higher rental per day from the
rooms than could be obtained in Cleveland, * * *.
Mr. Kobinson apparently did not take the above advice seriously
as in the same letter he informed Mack that
* * * Whatever his (manager of Hotel Cleveland) conclusions are, I do
not believe it will have any bearing upon our final opinion * * *.
(G-15-7)
On June 1,1923, a new agreement was signed between the Guardian,
Hyney, Emerson & Co , and Herman Mack covering the purchase of
the bond issue, which was substantially the same as the previous
agreement. The bonds were allotted out to the syndicate members
to be sold
(G-15-102-6)
On June 13,1923, Mr. Johnson was informed by the T. H. Saunders
Co., a member of the selling syndicate, that they had received a
commumcation, a quotation from the letter being as follows:
I would advise that I have just learned from apparently reliable sources that
this issue of bonds amounting to $2,000,000 is upon a property which has changed
hands within 2 or 3 months at $1,700,000 I regard such a transaction as an
exercise of bad faith I cannot refrain from saying that it is singular conduct on
the part of the able appraisers who have fixed a value on the Hollenden Hotel
property at figures several times beyond the recent selling price of the same.
T. H Saunders further stated.
(G-15-102-6)
You are, of course, familiar with the stories that are gomg around and, of
course, are familiar with the actual facts Right from the beginning we have
heard the issue alluded to as a "high-finance" proposition
On June 14, 1923, Mr Johnson, in reply to a telephone inquiry,
advised Mr E B Spitzer, cashier of a bank at Medina, Ohio (who
apparently offered some criticism of the proposed issue).
(G-15-102, p 8)
* • * that this loan was made on the valuations of appraisers who stand
at the forefront of their profession * * * m addition, this loan is made to
8096
STOCK EXCHANGE PBACTICES
men in whom we have the utmost confidence as successful managers of hotel
and restaurant properties. * * *
From the above it appears that the officials of the Guardian Trust
Co were not concerned so much with the security of the issue as they
were in the profits to be derived from the sale thereof
During the operation of the selling syndicate, certain of the bonds
were sold to national banks. It is interesting to note from a memorandum in the Guardian files that as early as October 1923 an examiner objected to these bonds
(G-15-103)
It seems that Mr T E. Thomas, chief national bank examiner, and his force
have been making examinations in Columbus, Ohio, and while there objected to
the bonds in question being carried as part of the assets of a national bank
His reason therefore, so I was advised, was based upon the sale price of the hotel
property, and the amount of the bond issue
The participation and profits of the Guardian Trust Co. in the bond
issue were as follows:
(G-15-10)
Participation Purchase
price
, _ 1 group
Bankers group
Syndicate
To be sold to the public a t .
$1,000,000
1,075,000
205,000
Sale
price
94
95
98
100
Profit
$20,000 00
10,750 00
5,762 94
(
36,512.94
PREFERRED STOCK
(G-15-15)
As we have previously outlined in this report, the Hotel Hollenden
Co. at the time of its organization issued 5,000 shares of preferred
stock In a letter dated October 22, 1923, to Hyney, Mr. Johnson
stated that the Guardian would not undertake to sell the company's
preferred stock and suggested that Mack sell it to his friends. Later,
November 2, 1923, a memorandum in the bank files indicates that
Mack sold this preferred—
(G-15-15-3)
to many firms from whom they purchase supplies for the hotel, chiefly I believe
in the food line
On August 22, 1923, the company was authorized to mcrease its
common stock to 15,000 shares without nominal or par value, the
increase of 5,000 shares to be sold for cash at $1 per share
On November 5, 1923, the company was authorized to increase its
preferred stock to 10,000 shares at $100 per share, representing an
increase of 5,000 shares.
THE GUARDIAN TRUST CO. TAKES OVER HOTEL
Early in the first half of 1924, less than 1 year after the bond issue,
the Hotel Hollenden Co «got into financial difficulties and could no
longer pay its sinking fund requirements
STOCK EXCHANGE PEACTICES
8097
On September 16, 1924, the trustee (the Guardian Trust Co )
notified the Hotel Hollenden Co. by letter that—
(G-15-66-3)
* * * In view of the fact that your default has continued for more than
* * * 30 days, and is still continuing, the trustee has elected to take immediate possession of * * * the property described * * * by * * *
deed of trust * * *
(G-15-64)
Two days later, September 18, 1924, the Guardian Trust Co., as
trustee, secured control of the Hotel Hollenden Co through a voting
trust agreement wherein H. C. Eobmson, L. B. Foote, and W. E.
Guerin (all officers of the Trust Co.) were designated as the "trustees."
All of the outstanding common stock of the Hotel Hollenden Co. was
deposited thereunder and depository receipts issued in the name of
Herman Mack, the sole common stockholder (in fact).
(G-15-88)
A plan of rehabilitation of the hotel was immediately put into effect
calling for expenditures, which were duly authorized by the bank,
totaling $535,000 From this point on, the hotel became a " cesspool" for Guardian funds.
Beginning on page 18 of this report we cover in detail all the loans
and advances which the Guardian Trust Co. made to the Hotel
Hollenden. The bank literally financed the operation of the hotel.
The minutes of the meeting of the board of directors on October
16, 1924, disclose—
(G-15-21, p 1)
That the certificate of stock issued by this company evidencing 5,000 shares of
common stock of this company covered by the increase of its common capital
stock, * * * issued to Herman Mack without any corporation action whatsoever; that the officers of the company were not authorized to issue the same
and that Mr Mack had paid no consideration therefore, that the officers of this
company be authorized and directed to request the Guardian Savings & Tiust
Co to cancel its voting trust receipt which it has issued but not delivered to Mr.
Mack and to return said certificate of 5,000 shaies now m its possession, to this
company for cancelation, that upon receipt of said certificate the officers of this
company cancel the same; that said stock be not again issued until further
action of this board
(G-15-19)
Mr Mack resigned both as a director and as vice president of the
hotel company on October 8, 1924, and died (of D T 's) on November
15 following.
(G-15-60)
On August 13, 1925, a judgment was entered in the suit of the
Guardian Trust Co against Herman Mack in the amount of $78,200
to be satisfied by the sale of voting trust certificate no 1 in the name
of Herman Mack for 7,500 shares of common stock
(G-15-70)
The certificate of deposit was duly sold at a public sale and was
purchased by the Guardian Trust Co on October 20, 1925, for $750
175541—34—PT 18
9
8098
STOCK EXCHANGE PRACTICES
(10 cents per share), the purchase price being credited to the indebtedness of Mack at the Guardian Trust Co
(G-15-37, G-15-70)
The bank had acquired title to the remainder of the outstanding
common stock (2,500 shares) from Ealph S Hyney on July 9, 1925,
when a mutual release was entered into by him with the Guardian
whereby the latter released Ralph S Hyney, Emerson & Co from all
pendmg claims and causes of action.
(G-15-75-2, G-15-75-5)
The 10,000 shares of stock of the hotel company remained in the
name of the Guardian Trust Co (except for directors' qualifiying
shares) until December 13, 1928, when they were sold to the New
England Co. for $750.
Early m January of 1925 H. C. Robinson was instrumental in
employing the services of a new manager, Theodore De Witt, for the
Hotel Hollenden The details of his employment and his stewardship
are given elsewhere in this report
FORECLOSURE AND RECEIVERSHIP
(G-15-45-12, G-15-45-13)
The Guardian Trust Co (trustee) filed a petition to foreclose the
first mortgage on the Hotel Hollenden leasehold estate on May 4,
1931, when Theodore De Witt (the manager) was appointed receiver
at the request of the Guardian A bondholders7 protective committee
was formed May 11, 1931, consisting of E J Body, J B Keenan, and
Maurice Maschke To date the foreclosure has not been consummated nor has the lessor, the Hotel Hollenden Co , canceled its lease.
During all the time of the Guardian Trust Co 's stewardship it
received many letters of inquiry from bondholders Practically all
of these letters were answered by H C Robmson Elsewhere in
this report we cover these inquiries in detail
LOANS MADE TO HOTEL HOLLENDEN CO
(G-15-64)
Shortly after the organization of the Hotel Hollenden Co , the
Guardian made its first loan on August 25, 1923, in the amount of
$75,000 The line of credit remained at this amount until November
14, 1924, about 1 month after the voting trust was created, whereby
the Guardian Trust Co obtained complete stock control of the Hotel
Hollenden Co
(G-15-69)
From this pomt on, the Guardian, both as a "bank" and as
"trustee" literally "dumped" money into the hotel company, in the
former capacity for operating expenses, improvements, and principal
payments on the bonds, and in the latter, for ground rent, taxes, and
guaranty payments as well as interest on the advances so made
8099
STOCK EXCHANGE PRACTICES
LOANS
The borrowings of the Hotel Hollenden Co from the Guardian
Trust Co (bank), as reflected by the bank's books, were as follows:
(G-15-69-2, G-15-39-13)
Date
1923 Aug 26. . _ .
1924 Nov 14
1925
Jan 15
June 12
Sept 15
Oct 26
Oct 30.
1926 Mar 4
1927 Nov 30 — ..
1928
June 4
July 7
_
Sept 13-_
Oct 25
Loans
Payments
Balance
i $75,000 00
1100,000 00
$75,000 00
175,000 00
174,000
1150,000
161,000
1150,000
249,000 00
399,000 00
460,000 00
610,000 00
609,331 90
679,331 90
839,456 90
00
00
00
00
170,000 00
160,125 00
157,687 50
$688 10
32,687 50
25,000 00
30,767 67
997,144
964,456
939,456
908,689
40
90
90
23
i Each of these loans .was secured by a separate second mortgage, each subject to those preceding, and all
subject to the first mortgage indenture
(G-15-39-15, 15-39-10)
On June 25, 1930 the board of directors of the New England Co.
(subsidiary of the Guardian Trust Co —see transaction below)
"acquiesced" in the request of the Hotel Hollenden Co to refund all
of its obligations to date (excepting the trustees' advances), and
authorized the acceptance of a second mortgage for the total amount
of $1,546,189 23
The farcical nature of these gestures by the bank and its subsidiary
is more readily apparent when it is taken into consideration that the
security of the first mortgage bondholder was so obviously impaired—
that is, at least obvious to the officers of the bank, the subsidiary, and
the hotel company in their several capacities
TRUSTEES' ADVANCES
Article 8, section 1, paragraph B of the trust indenture provides
that:
(G-15-8-59)
The trustee shall not be responsible for any recitals herein or in said bonds,
* * * or payment of taxes, charges, assessments, or hens upon the same, or
otherwise as to the maintenance of the security hereof or for the use of the bonds
secured hereby or the proceeds thereof
Notwithstanding this exemption granted the trustee, from obligating itself or advancing funds for the security of the bonds, the Guardian Trust Co , trustee, saw fit to borrow moneys from the Guardian
Trust Co. (bank) for the purpose of meeting payments for " taxes,
assessments, and ground rent" on the hotel property securing the
bond issue, which later prompted a bondholder to inquire of the
trust company as follows:
(G-15-38-L, p 9, G-15-38-1)
We would also like to know what authority you, as trustee, had in advancing
money as outlined in the notice dated May 11
8100
STOCK EXCHANGE PRACTICES
A detailed summary of these advances made by the trustee is as
follows*
(G-15-44-18, G-15-69-1, G-15-69-4)
Date
1924 Sept 30..
1925
Jan 2
Jan 5
Apr 1
Do
Julyl—
Do
July 161926
Jan 20...
Do
Apr 30...
Aug 2 . . .
1927
Feb ]
Sept
Nature of payment
Debit
Balance of ground rent due Oct 1,1924
Ground rent due Jan 1,1925
Taxes for the first half of the year 1924.
Ground rent due Apr 1.1925.
Guaranty fund under the lease due Apr 1,
1925
Ground rent due July 1,1925
Guaranty fund due under lease July 1,1925.
Taxes last half of 1924
Less payment
Taxes first half of year of 1925.
Interest on above
Taxes second half of 1925
Taxes first half of 1926.
Taxes second halt of 1926
Credit
$37,234 08
$37,234 08
37,500 00
47,713 52
37,500 00
6,250 00
74,734
122,447
159,947
166,197
37,500 00
6,250 00
47,652 21
203,697 60
209,947 60
257,599 81
08
60
60
60
50,295 62
18,360 23
50,295 63
232,599
282,895
301,255
351,551
44,879 74
44,879 74
396,431 03
441,310 77
$25,000
„
Balance
81
43
66
29
GUARDIAN " D U M P S " THE HOTEL HOLLENDEN C O OBLIGATIONS ONTO
ITS SUBSIDIARY, THE N E W ENGLAND C O .
(G-15-69-1 and 2, G-15-7, G-15-7)
On December 22, 1928, the Hotel Hollenden Co.'s obligations
consisting of notes to the Guardian Trust Co (bank) $908,689 23,
advances from the Guardian Trust Co (trustee) $441,310.77, were
"sold by the Guardian Trust Co to the New England Co " for
$1,350,000, the cash represented being raised by the New England
Co. on a loan from the Metropolitan Life Insurance Co. on December
18, 1928, in the amount of $3,250,000, secured by a first mortgage on
the Guardian Bank Building.
A better term for this "sale" would be "burial" in the New
England Co. as the loans were later written off and the advances have
not been repaid by either the subsidiary or the hotel company to date,
with the prospect that they never will be, unless and until the mortgage
on the leasehold is foreclosed. Even in that event the question then
arises (if the leasehold is of value) whether or not the trustee is to be
construed as a preferred creditor over the bondholders. This question will, no doubt, have to be decided by the courts, notwithstanding
the provision of section 2 of article 8 of the indenture that
(G-15-8-62, G-15-66)
The trustee shall have a prior hen hereunder upon the mortgaged property
for—advances—incurred
* * *.
due to the misleading information conveyed to the bondholders by
H. C. Eobinson and other officers of the Guardian Trust Co concealing the fact that the bonds were actually in default since September
16, 1924
ADDITIONAL LOANS AND ADVANCES TO THE HOTEL HOLLENDEN C O .
Notwithstanding the staggering losses already sustained by the
Guardian Trust Co. (which it had successfully concealed by burying
them in the New England Co ,) both as a bank and as trustee, it
8101
STOCK EXCHANGE PRACTICES
contiilued to make loans and advances to the hotel company, as did
its subsidiary, the New England Co , direct.
The additional loans and advances, including those to date, are
reflected as follows:
(G-15-69, pp 3 to 10, inclusive, G-15-77)
By Guardian Trust Co
By New England Co
Date
Bank
1928 Dec 22 (to date)
1929
Feb 6
Mar 11
Apr 11
May 7
June 1
_
.
June 27
Oct 23
Nov 12
Dec 2, _ . .
Dec 11
1930
Jan 16
Feb 13
June 6_
.
.
..
July7_.
July 25
Aug 9 _ _
_
.
1931
Jan 16
Mar 5
Apr 11 (G E Supp Co notes discounted)
Apr 27
Apr 29
Apr 29
Trustee
$1,350,000 00
25,000 00
25,000 00
25,000 00
55,000 00
50,000 00
45,000 00
50,000 00
50,000 00
100,000 00
50,000 00
50,000 00
50,000 00
62,500 00
$25,000
75,000
25,000
_.
35,000
28,000
188,000
140,000 00
12188,000 00
$42,172 36
J$, 172 86
2 42,172 36
2,257,672 36
1 As reflected above, the additional loans by the Guardian Trust Co (bank) totaling $188,000, as well as
the additional advance of the trustee of $42,172 36, were "sold" to the New England Co on April 27 and 29,
1931, respectively The minutes of the meeting of the board of directors of the New England Co on May
5,1931 (day following hotel receivership), approves the "purchase" of the notes totaling $188,000, but the
directors appear to have forgotten to go through the formality of approving the "purchase" of the note
covering the advance of $42,172 36
2 Transferred to
(G-15-77)
ANALYSIS
Trustees advances
"Secured"1 (second mortgage)
Unsecured ..
$483, 483 13
1,546,189 23
228,000 00
Total
2, 257, 672 36
(G-15-62)
An interesting "sidelight" to the making of the above loans and
advances by the Guardian Trust Co. is contained in a letter of W.
Iccomb, hotel company auditor, dated November 13, 1929, setting
out a " statement of amount required for special purposes for the 6
months from December 1, 1929 to June 1, 1930" indicating (as
expressed by counsel in 1931).
(G-15-62, p. 3)
* * * The habit is so strongly impressed upon the employees of the hotel
to come to the Guardian for assistance * * *
8102
STOCK EXCHANGE PRACTICES
(G-15-77)
The grand finale of the Hotel Hollenden Co. financing was reached
on December 27, 1932, when the board of directors of the New England Co. decided to "write off" the company's investments in the
hotel. At this meeting Mr. J. A. House, its
(G-15-87-2)
* * * President stated we have had recent appraisals made of the land
and building owned by this company having in mind that if said appraisals were
for a sufficient amount in excess of the present amount for which they are carried
on the company's books, we would use the excess amount to write-off the notes
receivable and first mortgage bonds of the Hotel Hollenden Co , ^hich are now
carried on this company's books
The treasurer, Mr Green, reported the following appraisals of the land
(G-15-87-2)
Henry Hertel
$2, 603, 904 00
W J Purvis, special representative, Metropolitan Life Insurance
Co , as of Dec 17, 1932
2, 063, 760 00
He also reported an appraisal of the building by George L Craig
as of Dec 28, 1932 to have a present sound value of
3,137, 308 00
On motion made, seconded, and unanimously carried, the officers
are hereby authorized and empowered to place on the company's
books the value of the land and building as follows
Land
1, 939, 200 00
Building
3, 041, 099 14
Total value of land and building
4, 980, 299 14
Which land and building are now being carried on the company's books for
3, 021, 505 35
Thereby creating a credit, through revaluation of assets, of-_
1, 958, 793 79
Which is hereby authorized to be credited to an account entitled "Appraised surplus "
On motion made, seconded, and unanimously carried, the officers
are hereby authorized and directed to charge to "Appraised
surplus" notes receivable of the Hotel Hollenden Co
1, 751, 243 79
First mortgage leasehold bonds the Hotel Hollenden Co ($220,550 par)
207, 550 00
1, 958, 793 79
Attention is directed to the flexibility of the value of the Guardian
land and building, which, in this instance "took up the slack" caused
by the aforementioned write-off, to the penny. Notwithstanding the
apparent concealment of the loss on a published statement of the
New England Co., the Guardian Trust Co.'s equity in its subsidiary
(if the appraisals were based on fact) was reduced proportionately,
for had the enhancement in value actually existed, on liquidation the
benefits therefrom would have accrued to the stockholder, i e , the
Guardian Trust Co
The trustee's advances of $438,483 13 were not included in the
above "write-off", but from the present outlook they might just as
well have been included.
(G-15-45)
In the opinion of the writer, the primary motive behind the making of the loans and advances by the Guardian Trust Co. and the
New England Co. was the knowledge its officers had of the hotel
STOCK EXCHANGE PEACTICES
8103
company's precarious position Having underwritten the bond issue
to the extent of over 100 percent of the purchase price of the property,
the bank (as the underwriter) had to continually finance the company
or else allow it to go into foreclosure, which would have disclosed
the company's weak financial condition from the very day of its birth.
The Guardian did not succeed entirely m doing this, but at least it
headed off some very embarrassmg court actions and postponed the
inevitable, which occurred on May 4, 1931, when foreclosure proceedings were finally begun by the trustee and a receiver in rem
(Theodore De Witt, former manager) appointed, at the trustee's
request As we have already pointed out, however, the foreclosure
has not been consummated as yet nor has the lessor (the Hotel
Hollenden Co ) canceled its lease, the latter no doubt due to incometax reasons
(G-15-98)
The position of the Guardian Trust Co is unique in that, as
trustee, it has instituted foreclosure proceedings against itself, the
owner of all of the common stock of the Hotel Co.
The profit and loss account of the Hotel Hollenden Co for the 10year period from 1923 to 1933 shows that it suffered a loss every year
except 1929 when a profit of $10,000 was reflected These losses
with "surplus adjustments" ranged from $50,000 and $80,000 to
$500,000 each year. From 1923 to 1933 the deficit of the company
increased from $63,633 37 to $2,088,909 17, or a net loss for the period
of $2,025,275 80.
(O-15-27)
On January 28, 1925, the Hotel Co board of directors approved
the employment of Theodore De Witt as manager of the Hotel
Hollenden Co at the salary of $10,000 per annum and other considerations disclosed in a copy of the agreement accompanying this report.
(G-15-27-1)
The history of Theodore De Witt's connection with the Hotel
Hollenden Co. began when he was employed by the company on
January 23, 1925. However, the events just preceding 1925 seem to
have had a definite bearing on his being employed (at a very substantial compensation) and for this reason are being set out in detail.
PROSECUTION FOR VIOLATION OF THE NATIONAL PROHIBITION ACT
While engaged as manager-steward of the exclusive Union Club of
Cleveland (the membership of which is more or less restricted to
persons of wealth) De Witt was indicted on March 30, 1922, for his
participation in a conspiracy to violate the National Prohibition Act
The docket of the United States attorney at Cleveland discloses that
he was tried and convicted on June 30, 1922, fined $100 and sentenced
on July 3, 1922, to 2 years in the Federal penitentiary at Atlanta, Ga.
An appeal was filed on July 7, 1922, but the verdict of the lower
court was affirmed on June 30, 1923 A " petition for writ of certiorari" was filed in the October 1923, term of the Supreme Court
of the United States which was also denied, the mandate of the Circuit Court of Appeals being filed on December 7, 1923 De Witt
8104
STOCK EXCHANGE PEACTICES
began his sentence on January 2, 1924, and was paroled on September
1, 1924, after the expiration of one third of the sentence. During
the period between his conviction on June 30, 1922, and January 2,
1924, when he was admitted to the Atlanta Penitentiary, Theodore
De Witt was at liberty under bond and remained in the employ of
the Union Club.
An affidavit of one Charles Cianciolo (a coconspirator), who was
used as a Government witness in the trial of De Witt, discloses that
the former was advised when he was engaged in the conspiracy,
that—
(G-15-93-A)
* * * the Union Club would be back of us * * *
and to keep him quiet, Burney (another defendant), showed him—
(G-15-93-B)
* * * some papers he had in his possession which he stated would help
us get out of any trouble and that these papers showed * * * the names
of parties to whom the liquor was consigned, and, therefore, that the Union Club
would necessarily have to take care of everybody that was arrested * * * .
On September 15, 1922, after his conviction and while he was
awaiting the outcome of his appeal, De Witt wrote Federal Judge
D. C. Westenhaver, stating—
(G-15-93-B, p 1)
* * * the truth was never known in this matter—the district attorney's
office does not know the truth today I am convinced would your honor really
know the facts—you would not permit this case to stand in its present form.
However, Judge Westenhaver did not see fit to give De Witt an
interview, advising him that—
(G-15-93-D, p 3)
* * * If there are any matters proper to be brought to my attention, your
counsel, Mr. W. fi. Boyd, will do so m the presence, undoubtedly, of the United
States attorney * * *
A number of the officers and directors of the Guardian Trust Co.
were members of the Union Club, a few of the more prominent ones
being S. M Bond, J. A House, and H. C. Eobinson.
(G-15-93-C)
An "application for executive clemency" for De Witt was filed on
October 15,1923, the signers of which are described in a letter of Judge
Westenhaver as follows:
(G-15-93-C, p 2)
* * * Theodore De Witt is and was the steward of the most prominent club
in the city of Cleveland The names signed to his application for executive
clemency would serve in part for the roster of its membership. * * *
The application was denied by the president.
STOCK EXCHANGE PEACTICES
8105
(G-15-93-D, pp. 7 and 26)
An "application for pardon to restore civil rights" was filed by
De Witt on May 14, 1926, to which were attached affidavits and
testimonials of many of Ohio's prominent citizens (including members
of the Union Club) several of whom referred to De Witt's having
been a ''tool", a "goat", etc , for others
Mr. H C. Robinson, senior vice president of the Guardian Trust
Co , whose testimonial letter accompanied the above application,
stated therein that—
(G-15-93-D, p 17)
* * * I have known Mr De Witt for the past 10 years and am familiar -with the
circumstances resulting in his trial and conviction Whatever may have been his
degree of guilt, it is of no consequence now * * * As president of the Hotel
Hollenden Co , I was instrumental m securing for him the position of manager
of the hotel * * *
EMPLOYMENT AS MANAGER OF THE HOTEL HOLLENDEN
(G-15-27-1)
On January 23, 1925 (shortly after his release from Atlanta),
De Witt, through the instrumentality of H C. Robinson, was employed by the Hotel Hollenden Co as manager at the salary of
$10,000 per annum, plus a suite of rooms and board at the hotel for
himself, wife, and daughter, without cost and 10 percent of the nefc
profits of the hotel after all charges
The terms of his employment would seem to indicate that more
consideration was given to De Witt than he had received while in the
employ of the Union Club where he received $5,000 per year m salary
to September 1, 1923, when the following resolution was passed by
the club's board of directors*
(G-15-27-4)
The salary of the manager of the club at the present time is $5,000 per year
plus accommodations and board for himself and family His desire to maintain
living quarters away from the club was made known and it was thereupon moved
by Mr Strong, seconded by Mr Coulton and carried that his salary be adjusted
to $7,000 per year plus one room for himself and luncheon and that rooms 12 and
14 be vacated and made available for guests
Thereafter, De Witt received $7,000 per annum (including the period
of his absence while at Atlanta) to January 1925, when he entered the
employ of the Hollenden Hotel.
The above hotel employment agreement was changed on January
21,1926, when Mr. Robinson wrote De Witt setting out the new "terms
of * * * employment as follows:"
(G-15-27-3)
A You are to give your undivided time and attention to the management of the
hotel and your contract of employment is to continue for 3 years from January
1,1926, until January 1,1929
B Your salary is to be fifteen thousand dollars ($15,000) per annum including living quarters at the hotel and board for yourself and family.
C. In the event that the hotel is sold during the first year of your employment
you are to receive from the purchase price the sum of ten thousand dollars ($10,000). If the hotel is sold durmg the second year of employment you are to
8106
STOCK EXCHANGE PEACTICES
receive twenty thousand dollars ($20,000), and if the hotel is sold during the
third year of your employment, you are to receive thirty thousand dollars
($30,000)
(G-15-41)
On January 14, 1929, the board of directors of the Hotel Co.
approved a contract with De Witt dated January 1, 1929 (running for
20 years) at the annual salary of $15,000 and other considerations
such as, a suite of rooms, meals, entertainment expenses, etc , without
charge This contract also stipulated that De Witt was to receive 125
shares of the Hotel Co stock annually for the full 20 years The 2,500
shares of stock necessary to comply with this provision of the contract
was placed with the Guardian Trust Co , as trustee
The contract was practically a renewal of that of January 1, 1926,
except that De Witt was allowed to—
(G-15-41)
* * * devote portions of his time to other developments but only when
the same can be done without prejudice to the best interests * * *
A summary of all of the management contracts, etc, secured by
Theodore De Witt thereafter were.
1. The Hollenden Hotel, Cleveland, Ohio, $1,250 per month
2 The Neil House, Columbus, Ohio, $1,000 per month
3. The Mayflower HoteL Akron, Ohio, $625 per month
4 The La SaUe Hotel, Chicago, 111, $1,250 per month *
5 The Fenway Hall Hotel, Cleveland, Ohio, $166 66 per month
6. The Lake Shore Hotel, Cleveland, Ohio, $8,500 per year *
(G-15-94-A)
In November 1930, De Witt was offered a chance to purchase a
hotel in Columbus, Ohio, the Neil House The company owning this
hotel had defaulted on its bond issue and had gone mto receivership
De Witt thereupon wrote a letter to Robinson outlining the deal that
had been offered to him
At a meeting of the Hotel Hollenden Co Board of Directors on
December 1, 1930, it was—
(G-15-34)
proposed to form a holding company to which De Witt will transfer
His entire income from the said Neil House, also any and all capital stock in
said Neil House which he receives
His entire salary which he receives from the Hotel Hollenden Co also all the
capital stock now or hereafter received, in said Hotel Hollenden Co
All his income and stock from both the Mam State Holding Co , of Akron, and
the Mayflower Hotel Co , of Akron The latter proposition providing the proposed holding company assumes paying his obligation of $150,000 to the Mam
State Holding Co in payment of capital stock
Any and all other income and/or remuneration which he receives from connections to which he devotes some portion of his time in a business way
The Guardian Trust Co will transfer to said holding company 7,500 shares
common stock the Hotel Hollenden Co
De Witt would receive a salary of $20,000 from said holding company
The stock ownership of said holding company would be owned, 75 percent
by the Guardian Trust Co or its nominee and 25 percent by De Witt
Said holding company would supply the $500,000 with which to buy the proposed first mortgage leasehold bonds on the Neil House above referred to
This board is unanimous in favor of the holding company set-up approximately
as above outlined
1
In receivership when contract was signed.
STOCK EXCHANGE PRACTICES
8107
On March 3,1931, the De Witt Hotels Co. was formed and Theodore
De Witt was installed as its president
(O-15-78)
On May 4, 1931, De Witt was appointed receiver for the Hotel
Hollenden, on which date the trustee filed a petition of foreclosure
of the mortgage securing the $2,000,000 bond issue
KissuM^ OF DEMAND FOR SERVICES OF THEODORE D E WITT
(G-15-100-2, par 3, G-15-95, G-15-95-4)
The so-called " demand " for De Witt's services seems to be limited
to the Guardian Trust Co. or enterprises where the Guardian could
be influenced to put m additional capital and those where De Witt's
employment in receivership was bought, as was done in the case of the
La Salle of Chicago, which he has smce lost Robinson's letter
recommendmg De Witt to the bondholders' committee of the La Salle
(overlooking the personal interest of the Guardian in De Witt's
employment) is amusing wherein he stated that
(G-15-95-4)
* * * The Hollenden was rehabilitated and was making progress m
liquidating its obligations when it was hit by the depression and forced into
receivership * * *
The Lake Shore management deal is another example of where
De Witt seems to have in some measure bribed his way into the
receivership This is suggested in a letter dated December 24, 1931,
which he wrote to W R Green, Guardian Trust Co , vice president,
statmg in part:
(G-15-97, p 1)
Please issue a De Witt Hotels Co check for $335, made payable to myself,
and I will explain to you in person what this $335 is going to be used for
De Witt's apparent success in obtaining others to invest their
money in hotel enterprises seems to have been blocked in the Hotel
Win ton (BOW Hotel Carter) negotiations, at which time he advised
Robinson
* * * Confidentially, between you and me, if you could induce Norton
to foreclose on this property and to invest $200,000 additional capital and let me
take care of the operations of the property, we wiU make a lot of money * * *
The Winton was taken over by the Prudential Life Insurance Co.
and improvements made, but De Witt was not employed
The records indicate that the only one who benefited from the
Guardian Trust Co 's attempt to conduct a hotel business was Theodore De Witt It is inconceivable that a man with his so-called
"miraculous" ability in hotel management could suffer so many failures (see De Witt Hotels Co section, also) over so short a period of
years (from 1925 to 1933)
T H E D E WITT HOTELS CO
Notwithstanding the tremendous losses already sustained by the
Guardian Trust Co. (and the New England Co ) in the "financing"
of the Hotel Hollenden Co , the trust company (2 months before the
8108
STOCK EXCHANGE PBACTICES
receivership of the Hollenden in 1931) saw fit to become heavily
interested in other hotel projects, namely, the Neil House in Columbus
and the Mayflower Hotel at Akron, Ohio
In accordance with the proposal of the directors of the Hotel Hollenden Co on December 1, 1930, to control these "investments", the
De Witt Hotels Co was organized on March 3, 1931, its articles of
incorporation setting out as its purpose—
(G-15-59)
to""bwn, hold, manage, operate, and control hotels with the power to acquire by
purchase, lease, or otherwise real estate necessary and convenient for said purpose
and to sell, mortgage, lease, convey and acquire, and otherwise deal m shares of
capital stock, bonds, mortgages, personal property and securities in, upon, and
concerning hotels and hotel building securities, and incidental thereto; to acquire
hotel operating contracts and to receive the benefits of operating and management
contracts either m corporate name or otherwise, and to contract with hotel managers for the profits and benefits to be derived from management contracts and
to do all things necessary, convenient and incidental to said purposes
The company's authorized capital is $500 represented by 500 shares
of common stock without par value, subscribed for by—
(G-15-52, 15-58)
Stockholders
The New England Co
Shares
-
492
1
1
1
1
1
1
1
1
Theodore De Witt
Sydney A Daws
R P Sears
J A House
A W Dean..
R S Hail
W R Green
H J Coates
Total
Director and officer
Director
Director and president
Director
Do
Do
Director and vice president
Director
Director and treasurer
Secretary
500
(G-15-53)
At the first meeting of the board of directors held the day a contract
with Theodore De Witt was approved, the substance of which, in
proposal form, has already been set out.
On December 16, 1931, the balance sheet of the company disclosed
the company's—
(G-15-56-1)
TOTAL ASSETS
Cash in bank
Investments
$465,900 par the Neil House Hotel Co, first
mortgage leasehold 7's
$442, 605 00
6,644 shares the Neil House Hotel Co common
stock
44, 715 00
10,000 shares the Hotel Hollenden Co. common
stock
1,202 32
1,000 i shares the Mam State Holding Co
capitalstock
100, 000 00
$2, 776 08
588, 522. 32
591, 298. 40
1 An additional 500 shares the Main State Holding Co was also subscribed for by Theodore De Witt to
paidforout of his salary contract (See P & L reconcilement, p 44 for amounts paid)
STOCK EXCHANGE PEACTICES
8109
The investments above, all of which were acquired under the terms
of the contract with Theodore De Witt, dated March 4, 1931, are
described as follows.
THE NEIL HOUSE HOTEL CO , $465,900 PAR FIRST MORTGAGE LEASEHOLD
7-PERCENT BONDS, $442,605
These bonds plus an amount of $34,100 sold, are the $500,000 par
value purchased under resolution of the board of directors of March
4, 1931:
(G-15-52, p 3)
* * * that in accordance with the terms of said contract with Theodore
DeWitt, this company purchase the entire issue of the first mortgage leasehold
10-year 7-percent sinking-fund gold bonds of the proposed the Ned. House Hotel
Co , Columbus, Ohio, amounting to a total par value of $500,000 and secured by
all of the real and personal property of said proposed company, or as much of
said issue as is not subscribed for by others, as, if, and when the same are offered
for sale, at a price not to exceed 95 percent of their par value; that the treasurer
of this company be and is hereby authorized and directed to negotiate and complete the purchase of said bonds
Be it further resolved, That the president and secretary of this company be and
they are hereby authorized and directed to borrow from the Guardian Trust Co ,
of Cleveland, Ohio, such a sum of money, not to exceed $475,000, as shall be
required for the purchase of the said bonds in accordance with the foregoing
resolution, and to execute in the name and on behalf of this company, its promissory note as evidence of such indebtedness, for such period of tune, and upon
such terms as may to them in their discretion seem advisable, and that said
officers are hereby authorized to pledge all of said bonds, for the purpose of
securing any moneys so borrowed; to endorse the same; and that said officers
are hereby authorized to do all things and perform all acts necessary to the full
accomplishment of the spirit and intent of this and the foregoing resolutions
Six thousand six hundred and forty-four shares of common stock,
$44,715, comprise 5,000 shares of bonus stock received in the purchase
of the $500,000 of bonds above, less 221 shares disposed of in the sale
of $22,100 of the bonds to former Neil House bondholders or a net
amount of 4,779 shares of bonus stock plus 1,865 shares of common
stock received m exchange for $186,500 par first mortgage bonds of the
Neil House. The $44,715 being the "cost" of these bonds (before the
exchange) to the company when on May 19, 1931, it agreed—
(G-15-51, G-15-94 "o")
to assume and pay the liabilities of Mr. Theodore De Witt to the Guardian Trust
Co. in the amount of $44,715 and accrued interest, and in so doing become the
owner of securities pledged to the above-mentioned liabilities, which securities
are as follows Depository certificates of deposit represent $179,500 par value
first mortgage leasehold 6}4-percent bonds of the Neil House, Columbus, Ohio,
also $7,000 par value of said bonds
(G-15-52, p 4)
The Hotel Hollenden Co , 10,000 shares of common stock, $1,202 32,
was acquired under resolution of the board of directors on March 4,
1931, when the stock was puichased from the New England Co
The Mam State Holding Co , 1,000 shares of common stock,
$100,000, was acquired under resolution of the board of directors on
March 4,1931, and in accord with agreement with Theodore De Witt
of the same date reading m part that the De Witt Hotels Co was—
8110
STOCK EXCHANGE PRACTICES
(G-15-53, p. 4)
To assume and pay off as hereinafter provided the indebtedness of party of the
second part for which the said 1,000 shares of the Mam State Holding Co. have
been pledged at the Central Depositors Bank & Trust Co., Akron, Ohio, so that
said stock so pledged together with any other collateral pledged for the same
purpose may be released to party of the second part, and so that said stock may
thereupon be endorsed and transferred to party of the first part; and to reimburse
party of the second part, as hereinafter provided, for all net cash outlay and
expense together with interest at the rate of 6 percent per annum thereon which
party of the second part has made or been subjected to in the purchase of said
shares of stock so agreed to be assigned by party of the second part to party of
the first part.
(G-15-53, exhibit B, p 1)
The files of the Guardian Trust Co contain no record of any transactions of Theodore De Witt with the Main State Holding Co other
than the management contract of De Witt's dated April 2,1931, setting out the terms of the latter's proposal of April 12, 1929, covering
the purchase of the holding company's stock.
(Exhibit 15-101-6)
However, the loan department records disclose that De Witt borrowed from the Guardian Trust Co on July 31, 1929 (approximate
date of purchase of above stock) $30,000, which was paid off in installments of approximately $3,000 per month.
(G-15-98)
The Guardian Trust Co.'s interest in the Neil House appears to
have been created through the salesmanship of Theodore De Witt,
who at the time was the receiver for the Neil House His attempts
at successful hotel managements seem to be limited to prospectuses,
as distinguished from actual operating reports. His record of operation of the Hollenden fails to substantiate his reputation of a "superhotel manager" or the "miracles" he wrought m putting the Hollenden on its feet, unless those subscribing thereto misunderstood the
significance of "red ink" figures on accounting statements and reports.
From January 1925 when De Witt took charge of the Hollenden, the
operating deficit increased from $384,061 63 to $1,083,372 26 on
October 31, 1930, a net increase of $699,310.63, in the face of the
costly improvements to the hotel.
(G-15-94-a, pp. 1-4)
Notwithstanding this past record, De Witt succeeded in selling the
bank officers (House and Robinson) on the contents of his prospectus
letter of November 26, 1930, in which he estimated the annual earnings accrumg from this hotel to be $42,000 How far this actually
iefi short can be seen from the reconcilement below.
RECONCILIATION OF EARNINGS DE WITT HOTELS CO.
(Estimated to actual)
In sharp contrast to the prospectus of Mr. De Witt under date of
November 26, 1930, to—
STOCK EXCHANGE PEACTICES
8111
(G-15-94-A, pp 1-4)
* * * bring to the Hotel Hollenden Co the following (annual) earnings
Columbus (Neil House)
-_ $42, 000
Akron (Mayflower)
68, 000
Saving in advertising
25, 000
Combined buying power
25, 000
160, 000
(G-15-56, pp 5 and 7)
The profit and loss account of December 31, 1933 (approximately
3 years), reflects the result of operations as follows:
Net loss 1931
Net profit 1932
Net loss 1933
$1, 243 42
U6,
997 11
2
4, 137 06
Surplus Dec 31,1933
-
11,616 63
(G-15-56-7)
Balance sheet, Dec. SI, 1933
ASSETS
Cash in bank
Neil House Hotels Co
First mortgage L H and 7's ($452,000 par)
Common stock, 7,074 shares
Hotel Hollenden Co common stock, 10,000 shares
Mam State Holding Co common stock, 1,075 shares
Payments on the Mam State Holding Co capital stock
$166 44
429,400
46, 275
__ 1, 202
107,500
10, 937
00
03
32
00
50
595,481 29
LIABILITIES
Notes Payable
The Guardian Trust Co
The First Central Trust Co
Vendor's hen
Accrued salary
Capital stock
Surplus paid in
Profit and loss
471,781
28, 750
66, 250
14, 583
500
2, 000
11, 616
32
00
00
34
00
00
63
595,481 29
It will be seen that the Guardian Trust Co through its loans, etc , to
the De Witt Hotels Co. has an interest in the latter, at present, of
approximately $475,000 without considering the trust company's
additional interest (including approximately $2,000,000 charged off)
in the Hollenden Hotel Co (loans and advances) of approximately
$2,500,000.
CONDITION OF HOTEL OPERATING COMPANIES
(G-15-98, G-15-100-4 and 7, G-15-101-1)
All three of the hotel operating subsidiaries of the De Witt Hotels
Co. are at present in financial difficulties, the Neil House and the
Mayflower facing the problem of reorganization or refinancing, with
the Hollenden hopelessly insolvent
1 Includes $4,687 50 income on management contracts applied on stock of the Main State Holding Co
Includes $6,250 income on management contracts applied on stock of Mam State Holding Co
2
8112
STOCK EXCHANGE PRACTICES
NEGOTIATIONS OF THEODORE DE WITT TO PURCHASE THE DE WITT
HOTELS CO
Since the closing of the Guardian Trust Co. and due to the financial
embarrassment of the De Witt Hotels Co , the management fees from
the various hotels of which De Witt is the manager are being retained
by him for the reason—
(G-15-100-2, p 3)
* * * that the Guardian Trust Co cannot render to me that service contemplated by our original plan * * * based upon the Guardian Trust Co.
financing hotel projects in which I could obtain management contracts * * *
On July 11, 1933, De Witt offered—
(G-15-100-5, p 4)
* * * to purchase the De Witt Hotels Co stock for a consideration of $25,000
cash * * * if the liquidator is willing to consider * * * plan for the
Neil House * * * refinancing
On October 11, 1933, F. K. Hanrahan, liquidator, accepted the
above offer—
(G-15-100-6)
* * * subject to the approval of I. J Fulton, superintendent of banks, Reconstruction Finance Corporation, National City Bank, and the necessary approval
of the common pleas * * *
(G-15-100-6)
Mr. Hanrahan accepted this agreement, however, with the provision
that the Neil House bonds were to be refunded and the De Witt
Hotels Co note due the Guardian Trust Co. be partially liquidated.
(G-15-100, pp 9-13)
The approvals referred to have since been secured by the liquidator
and the sale is expected to be consummated by him at an early date.
INQUIRIES OF BONDHOLDERS, HOTEL HOLLENDEN CO. BONDS
During 1924, before the Guardian took control of the Hotel
Hollenden Co , there had been—
(G-15-3&-A, p 1)
* * * a great deal of rumor from time to time about the Hollenden
situation * * *
(G-15-38-A)
circulated; and this became the basis for inquiries from bondholders
and their representatives. From the correspondence it appears that
these letters were replied to by various officers of the Guardian Trust
Co From the tenor of the replies the attitude of the bank in "lulling"
the bondholders into,a sense of security is readily apparent.
(G-15-38-B, p. 1)
On April 3, 1925, Mr. Emerson of Hyney, Emerson & Co. (counderwriters) wrote the Hotel Hollenden Co. calling attention to the
STOCK EXCHANGE PEACTICES
8113
nonreply to his letter of February 7, in which letter the hotel company
was notified—
that the annual audit of your company for the year of 1924 would be due on
March 1, 1925, in accordance with the trust indenture.
Mr. Robinson, as vice president of the Guardian Trust Co., replied
to the second letter, when he stated that—
(G-15-38-B, p 2)
You know the situation as well as any one We did not go to the expense of
employing a certified public accountant to make an audit of the Hollenden books
for the year ending December 31, 1924
The company lost approximately $180,000 for the period. The Guardian
Trust Co , trustee, has advanced carrying charges for ground rent, interest, and
taxes Furthermore, it has advanced certain sums of money to rehabilitate the
property and put it on a better earning basis
It is our conclusion you ougLt to satisfy those owning Hollenden bonds who
are your customers when inquiries are made without presenting a formal audit
which, of course, I suppose they are entitled to under the terms of the bond issue.
The more quiet we can keep the real situation heie, in reference to the security
back of the bonds, the better it will be for all persons interested in the long run.
On April 10, 1925, Mr. Robinson wrote to L. B. Foote giving in
the letter his
* * * idea of answering the inquiry of Arthur J. Straus Co
of April 8, by stating that—
(G-15-38-C)
We have every reason to believe that the $75,000 due June 1 of this "year will
be paid
Mr Robinson made this reply notwithstanding his knowledge
that the net, loss for 1924 of $185,000 (operating only—without
considering the deficit for 1923 of $63,633 37) more than wiped out
the company's total invested capital of approximately $135,000.
The deficit reflected by the books of the hotel company at December
31, 1924, was $384,061 63 (See inquiry of Aug 27, 1925, below.)
(G-15-38-D)
It seems from a letter of H C Robinson's under date of April 21,
1925, the Guardian was forced to do some explaining as to its position
in the Hotel Hollenden At least Mr Robinson was consistent in
his attempt to mislead the person making the inqtiiry by attempting
to conceal the Guardian Trust Co 's stock interest (through its
officers being trustees of voting trust) in the hotel company, which
in October 1925 became a direct stock ownership If the tragic
phase of the bank's course could be overlooked, the following paragraph of Mr Robinson's letter might be considered humorous.
(G-18-38-D)
* * * The affairs of the Hollenden Hotel Co are administered by a board
of directors that takes independent action on all matters pertaimng to the hotel
management and the Guardian Trust Co does not interfere in any course of
action which the directors of the hotel determine to be just and proper You
can readily see why this distinction is maintained, not only because it is a legal
one but also because as a bank we could not afford to be diawn into corporate
matters where we simply acted as trustee If we did permit ourselves, as a
banking institution, to be influenced in all cases where we acted as trustee for
this or that kind of an enterprise we would be in difficulty more or less all the time.
175541—34—PT18
10
8114
STOCK EXCHANGE PRACTICES
On August 27, 1925, H. C Robinson replied to an inquiry of the
Ohio Savings Bank & Trust Co , stating that—
(G-15-38-A, p 6)
$75,000 of the first mortgage bonds matured on July 1, and were promptly
paid and undoubtedly other maturities will be cared for in the same manner by
the hotel company
(G-15-91-1)
At the time this letter was written, the sinking fund account shows
that although the Guardian Trust Co. had paid these bonds at
maturity, the hotel company had only paid into the fund $45,000, the
balance of $30,000 not having been paid until September 5, 1925.
The files of the credit department of the bank contain a memorandum under date of January 9, 1926, instructing that—
(G-15-38-F)
* * * Any inquiries regarding Hotel Hollenden Co and until further notice
to be referred to Mr Robmson in whosefilesall recent data are kept
From this memorandum and the fact that thereafter all replies to
inquiries were answered by him, it appears that Mr. Robinson assumed
the complete job of "stalling" the bondholders. In these replies he
consistently stated that—
(G-15-38-J, p 2)
* * * The Hotel Hollenden Co has not published any financial statement,
but it has promptly taken care of all its obligations and, in our opinion, will continue to do so
or that—
(G-15-38-H, p 2)
The hotel company has been meeting interest and principal maturities of the
bond issue promptly * * * but refuses to issue a financial or earnings statement. * * *
Replies of the above nature persisted until as late as April 1931,
less than a month before the filing of the foreclosure petition and the
appointment of the receiver on May 4, 1931 It will be noted also
that as late as March 13, 1931, Mr Robinson had the temerity to
advise the American State Bank of Sagmaw, Mich, that—
(G-15-38-T)
The Hotel Hollenden Co is following its usual policy of not giving out any
figures with reference to its operations and that it has taken care of its interest
and principal payments promptly when they became due * * *
The falsity of the statements relating to payments by the company
of bond maturities, mterest, etc , are readily apparent, but this
breach of trust on the part of the trustee and the brazenness of the
writer to withhold the operating and financial statements is unforgivable in the face of the indenture which specifically states that the
company shall furnish the "trustees and * * * bankers' 7 ,
which was doneregularly—
STOCK EXCHANGE PBACTICES
8115
(G-15-8-30)
* * * withm 60 days * * * after the close of each calendar year,
full audits and reports * * * covering the operations of the company for
the * * * preceding fiscal year, showing * * * the financial condition
of the company as of the close of such year, and its assets and liabilities, gross
earnings, and expenses
The fact that the Guardian Trust Co acted as trustee, banker, and
as the sole stockholder of the hotel company, and H. C. Robinson as
vice president of the Guardian and president of the hotel company
only adds to the ridiculous or ludricrous nature of the above replies.
Why so many of the bondholders' representatives (bond houses,
tanks, etc ) accepted the explanation as to the nonpublication of statements is a mystery.
FIRST NATIONAL BANK OF BAY CITY, MICH
(O-15-38-L, p 1)
As early as March 10,1927, the above bank (a member of the underwriting syndicate group) requested information of a "recent nature"
as to the Hotel Hollenden bonds—in reply to which they were advised
by Paul H Sihler, manager of the bank's bond department, that—
(GML5-38-L, p 2)
* * * we regret that we have no statement from which we can quote any
figures as this company is not giving any statements out and we are therefore
unable to comply with your request on this specific point * * *
On April 18, 1927, the First National Bank of Bay City, Mich,
wrote the Guardian requesting—
(G-15-38-L, p 3)
* * * your opinion concerning the Hotel Hollenden 6H-percent bonds, as
to their position, security earnings, etc * * *
Again the bond department manager replied and after endeavoring to put over some of the usual salesmanship advised—
* * * that this property is being looked after and that the interest of the
bondholders * * * are being guarded to the fullest extent
In the next sentence (illustrating how these interests were being
guarded), he told the bondholder a deliberate lie in stating—
* * * There is no earning statement available and we cannot therefore
comply with your request for this information * * *
On April 19, 1927, the Bay City Bank again wrote the Guardian
Trust Co. asking if—
(G-15-38-L, p. 4)
* * * the sinking fund requirements have been lived up to promptly and has
there ever been any doubt as to the ability of the hotel company taking care of
the different maturities * * *
to which the bond-department manager replied that—
(G-15-38-L, p. 6)
The sinking fund requuements and the interest have been met promptly and
all maturities falling due have been met in the past We do not expect that any
change will take place in this direction in the future As stated to you before,
8116
STOCK EXCHANGE PRACTICES
this issue has the best sponsorship possible, 1 e , the Guardian Trust Co of
Cleveland We think we have had an enviable record in looking after this
property and do not believe that anything will occur which will in any way affect
this past record
(G-13-38-L, p 7)
From the correspondence record of the Guardian Trust Co it
seems that the Bay City Bank did not again make inquiry until June
25, 1930, when more information was requested. Mr Robinson
answered the letter and stated*
(G-15-3&-L, p 8)
* * * The Hotel Hollenden Co is following a policy which it adopted several
years ago of not giving out financial statements pertaining to the operation of
the hotel * * *.
After having received the notice of default, the Bay City Bank, in
a letter dated May 4, 1931, asked to be advised, in view of the prior
information furnished—
(G-15-38-L, p 9)
* * * what provisions have not been fulfilled
Furthermore, we notice that $525,000 has been paid off, but $483,483 13 had
been advanced by yourselves, as trustee, for the purpose of payment of taxes
and ground rent It would seem to us that this bond issue should have gone into
default a long time ago, because funds used to pay the principal of the bonds
should have been used to pay taxes and ground rent From the report, principal
had been paid beginning June 1, 192S, or 6 years ago, and if the bonds had been
allowed to go into default at that time, conditions would have been far different
than they are now, and the deal could have been worked out We would also
like to know the responsibility and integrity of the men representing themselves
as the bondholders' protective committee We are certainly not impressed with
the method of handling this deal m the past We would also like to know what
authority you, as trustee, had in advancing money as outlined m the notice
dated May 11.
(G-15-38-L, p 10)
R. C Lee, assistant vice president, replied to the above letter
supplying the desired mformation in a general way.
(G-15-38-L, p 12-29)
Since this time the Bay City Bank filed a claim against the Guardian
Trust Co , which is still pendmg
During the course of handling the claim, Mr Thompson (of Thompson, Hine & Flory) attorneys for the Guardian Trust Co , had occasion
to state in his letter of December 10, 1931, to the attorney for the
Bay City Bank, that—
(G-15-38-L, p 25)
* * * I am thoroughly convinced that no officer of the Guardian Trust Co
had any knowledge on this point until some years after the deal was closed I
am quite confident that some of the officers acting in this matter in May 1923,
did not know anything about the purchase price until the fall of 1931 * * *
Mr. Thompson (semor partner of one of the leading law firms in
Cleveland and held m high esteem m this locality) could not have been
m possession of all the facts when he made this statement as from the
records of the bank, it is next to impossible that the officers could
escape knowing the facts surrounding the purchase of the Hotel
STOCK EXCHANGE PEACTICES
8117
Hollenden, for the reason that the purchase was made through the
medium of accounts at the Guardian Trust Co , in the following
manner*
(G-15-2, G-15-65-2, G-15-69-1)
1 The total purchase price under contract between the Hollenden Hotel Co.
and Herman Mack dated May 8, 1923, was $1,726,000
2 The option of $100,000 under this contract was paid by Herman Mack with
"official check no 225848" of the Guardian Savings & Trust Co dated and
charged to Mack's account on May 7, 1923
(G-15-68-1, G-15-6&-2)
3. The balance of the purchase price of $1,626,000 (plus prepaid
charges of $50,000) was paid by a certified check of the Hotel Co. on
the Guardian Savings & Trust Co from the proceeds of the issue ol
bonds sold on June 15, 1923. We were unable to secure the original
certified check from the Hotel Co. (it being lost or mislaid) but were
able to secure a copy of the auditor's slip at the bank reflecting the
certification
(G-15-49-3)
In view of the fact that the funds covering the purchase had been
disbursed through the Guardian Savings & Trust Co. and that Messrs.
H. C Robinson and Alexander Taylor in their joint appraisal report
of May 23, 1923, stated—
* * * We are familiar with the terms of the 99-year lease covering the * * *
property * * *.
(G-15-2)
the position taken by Mr. Thompson appears untenable, the lease
settmg out the purchase price.
(G-15-65-3)
Further evidence of the knowledge of the officers of the Guardian
Trust Co of this purchase price of the hotel is contained in a resolution of the executive committee on May 8, 1923 (the day Mack
posted his option) to approve—
The loaning up to $100,000 to the Interstate Hotel Co , Chicago, 111, in connection with said company's proposed purchase of the Hollenden Hotel property,
is left to the president and first vice president Robinson "with power to act.
and the following excerpt from a letter received by the Guardian
Trust Co. on June 14, 1923*
(G-15-102-6)
I would advise that I have just learned from apparently reliable source that
this issue of bonds amounting to $2,000,000 is upon a property which has changed
hands within 2 or 3 months at $1,700,000 I regard such a transaction as an
exercise of bad faith I cannot refrain from saying that it is singular conduct on
the part of the able appraisers who have fixed a value on the Hollenden Hotel
property at figures several tunes beyond the recent selling price of the same
WALTER
H. SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner A. S. Cranston.
8118
STOCK EXCHANGE PRACTICES
Mr PECORA. Mr. Meehan, did you see a copy of another report
made by Mr. Seymour, entitled "The Guardian Trust Company—
Loans from Reconstruction Finance Corporation"?
Mr. MEEHAN Yes, sir.
Mr PECORA. DO you know
whether that report is here, or where
it now is?
Mr. MEEHAN. That report is also in the Government Printing
Office.
Mr PECORA. Did you recognize it to be a copy of a report made by
Mr Seymour based upon his investigations conducted under your
immediate supervision?
Mr. MEEHAN. I did
Mr. PECORA Mr. Chairman, I offer that report in evidence,
together with the exhibits referred to therein.
Senator COSTIGAN. The report and exhibits offered by committee
counsel will be received in evidence.
(The report entitled "The Guardian Trust Company—Loans from
Reconstruction Finance Corporation", together with exhibits referred
to therem, both of which are now at the Government Printing Office,
were received in evidence and are to be marked "Committee Exhibit
No. 20, May 3, 1934", and are as follows )
COMMITTEE EXHIBIT N O 20—MAY 3, 1934
(The report comprising this exhibit, together with the exhibits
referred to therem, both of which are now at the Government Printing Office, will be mserted by the Government Printing Office in the
record at this point )
Mr PECORA Mr Meehan, do these reports that have been received in evidence this morning, and which comprise 20 in number,
include all the reports setting forth the results of mvestigations of
the practices and methods employed in the Guardian Trust Co , of
Cleveland, Ohio, in the direction not only of its own affairs but the
affairs of subsidiary corporations?
Mr MEEHAN Yes; of the Guardian group of Cleveland, Ohio
Mr PECOBA Mr Chairman, I think that is all that I have to
offer today If it will suit the convenience of the subcommittee to
hold a session tomorrow I will be prepared at that time to present
reports similar in character and form to these but relatmg to the
Union Trust C o , of Cleveland, Ohio, and its affiliates and subsidiaries
Senator COSTIGAN The subcommittee will now adjourn subject to
call by the chairman
(Thereupon, at 11.35 a m , Thursday, May 3, 1934, the subcommittee adjourned subject to the call of the chairman )
STOCK EXCHANGE PEACTICES
FRIDAY, MAY 4, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OP THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D O
The subcommittee met at 10 30 a m , pursuant to call following
adjournment on yesterday, in room 301 of the Senate Office Building,
Senator Duncan U Fletcher presiding
Present Senators Fletcher (chairman) and Adams
Present also: David Saperstein, associate counsel to the committee,
and Frank J Meehan, chief statistician to the committee
The CHAIRMAN The subcommittee will come to order, please.
Mr. Saperstein, you may proceed with the matter that you want to
present this morning
Mr SAPERSTEIN Mr Chairman, I should like to place upon the
record this morning the reports prepared by our examiners and accountants in Cleveland, under the direction of Mr Meehan, in relation to the Union Trust Co , together with the exhibits which support
those reports Those exhibits have already been placed in the Government Printing Office, and consequently will not be physically
produced here this morning However, I should like the record to
indicate that they will be submitted in evidence
The CHAIRMAN The reports refer to the exhibits so they may be
clearly understood, as I understand
Mr SAPERSTEIN The reports being submitted this morning refer
to the exhibits, now at the Government Printing Office Each exhibit
has a letter and a number indicating the corresponding letter and
number appearing on the report. That is, a letter and a number
appear opposite the paragraph or paragraphs in the reports which
relate to the particular exhibits
The CHAIRMAN Very well It will be understood that the exhibits
are offered and received at the same time the reports are offered and
received in evidence
Mr. SAPERSTEIN. I will ask Mr. Meehan to take the stand again.
TESTIMONY OF FRANK J. MEEHAN, NO. 215 EAST FOURTH STREET,
BROOKLYN, N.Y.; CHIEF STATISTICIAN TO THE COMMITTEE
Mr. SAPERSTEIN. Mr. Meehan, in addition to the reports which
were introduced in evidence on yesterday referring to the Guardian
Trust Co , of Cleveland, Ohio, were there also prepared by the investigators and accountants of the staff under your immediate direction
8119
8120
STOCK EXCHANGE PEACTICES
and supervision, reports relating to the Union Trust Co , of Cleveland,
Ohio?
Mr. MEEHAN. Such reports were prepared and are now in my
possession.
Mr. SAPERSTEIN. HOW many such reports are there?
Mr. MEEHAN. There are 22 such reports.
Mr. SAPERSTEIN. And are those the reports which I have here
before me, with the exception of those numbered 15 and 19, the only
copy of each of which m now at the Government Printing Office;
which reports relate to the Union Trust Co. of Cleveland, Ohio?
Mr. MEEHAN. Yes
Mr. SAPERSTEIN. They
were prepared by the investigators and
accountants of the committee under your supervision?
Mr. MEEHAN. Yes.
Mr. SAPERSTEIN. NOW I have
Senator ADAMS (interposing).
a report
Cannot they all be identified, practically in the form of a group, without having to go through the
individual indication as to each report?
Mr SAPERSTEIN That could be done.
Senator ADAMS. That is merely an inquiry made in order to save
time. If it is preferable that it should be done the other way, of
course, I have no objection
Mr. SAPERSTEIN I suppose that could be done, Senator Adams,
except that I think the committee's record ought to show the titles
of the respective reports, so that the exhibits may be related to the
particular title under which they may fall.
Senator ADAMS I was simply thinking of saving time. There
was no question as to whether you might not inquire about the fact
as to how the reports were made, and have them marked as exhibits,
as to each individual report, and have it understood that in each case
it was prepared under the immediate direction of Mr Meehan
Mr. SAPERSTEIN. I think that can be done very readily
The CHAIRMAN YOU may proceed to present the reports and the
exhibits that are to accompany them.
Mr SAPERSTEIN Mr Meehan, I show you a report entitled
"Union Trust Co , Cleveland, Ohio—Summary", and ask you whether
you can identify it as being a report prepared by members of the staff
of investigators and accountants of the committee, under your immediate direction and supervision.
Mr. MEEHAN Yes; this is the report so prepared
Mr SAPERSTEIN I ask that the same will be received in evidence,
together with the exhibits which are now at the Government Printing
Office
The CHAIRMAN The report and exhibits will be received in evidence
and appropriately marked by the committee reporter.
(The report entitled "Union Trust Company, Cleveland, Ohio—
Summary", together with the exhibits now at the Government
Printing Office relating thereto, were received m evidence and marked
"Committee Exhibit No 1, May 4, 1934", and are as follows*)
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT NO 1, MAY 4,
8121
1934
UNION TRUST CO., CLEVELAND, OHIO
SUMMARY
In the individual reports covering the various phases of our investigation into the affairs of the Union Trust Co , we have submitted in
detail the history and facts regarding the respective subjects We
shall endeavor in this report to summarize as briefly as we can the
mam facts as disclosed by our investigation
(Report re Corporate History)
The corporations making up the Union Trust Co group are the
following
1 Union Trust Co
2 Union Cleveland Corporation
3 Union Lennox Co
4 P A Frye Co
5 Akers-Folkman Co
6 Cleveland & Boston Co
The Union Trust Co was organized in 1920 by a consolidation of
the First Trust & Savings Co and the Citizens Savings & Trust
Co It has a combined capital of $35,000,000 consisting of—
914,000 shares, $25 par value each
Surplus
Total capitalization
$32, 850, 000
12,150, 000
~
35, 000, 000
The Union Cleveland Corporation was organized in July 1929, as
the security affiliate of the bank. Each bank stockholder has Union
Cleveland Corporation stock to the amount of one tenth of his bank
stock, ownership being evidenced by endorsement on his bank stock
certificate
The Union Lennox Co. is a wholly owned subsidiary of the bank
and was formed to hold title to the main bank building.
(Report re Corporate history)
P. A. Frye Co. is also a wholly owned subsidiary of the bank and
was used to manage, operate, and dispose of the foreclosed properties
turned over to it by the bank.
The Akers-Folkman Co. was another wholly owned subsidiary and
was simply a travel agency bureau.
The Cleveland & Boston Co. is owned 62 percent by the bank and
was formed to be a holding company for assets taken in the foreclosure
of the Cleveland-Akron Bag Co.
MANAGEMENT
The management policies of the Union Trust Co. were dictated by
a small group of men. Chief among these men was the bank's first
president—Joseph R. Nutt—later elected chairman of the board.
8122
STOCK EXCHANGE PRACTICES
Others associated with Mr. Nutt in the domination of the bank's
policies were:
Wilbur M Baldwin, president
George A Coulton, vice-president
Frank H Gmn, director
Kenyon V Painter, director
Otto Miller, director
As we have pointed out in our "Van Sweringen loan" report, there
is very little doubt that the affairs of the Union Trust Co. were
dictated by Mr. Nutt, and, too, that there is very little doubt but
that the policies and acts of Mr. Nutt were, in a great measure,
influenced and dictated by the Van Sweringens.
(Minutes of directors7 meeting, pp 1040, 1045)
Certain of the directors of the Union Trust Co , being entirely
"fed u p " with the domination of the bank's affairs by this group,
rebelled Although the minutes of the bank do not show the true
reasons, the dissentmg directors forced the resignation of Joseph R.
Nutt as chairman of the board on May 24, 1932, to be effective as of
June 30, 1932 Mr Joseph R Kraus was elected chairman on that
date.
Later in 1932, these dissentmg directors insisted upon a thorough
examination bemg made of the Union Trust Co Thereupon, three
of the directors were appointed to conduct this examination, viz:
E P Lenihan, R C. Norton, and R T King
These directors completed their examination early in 1933 and submitted their report to the board of directors. The report is filled with
criticism of Messrs Nutt, Baldwin, Carlson, U P , Painter, et a l ,
and the conduct of each. We have a complete copy of this report
(U-l)
Shortly after arriving in Cleveland and after having read the
"Lenihan report", the writer attempted to contact Mr Lenihan to
discuss with him certain aspects of the report Mr. Lenihan was out
of town; but the writer succeeded m obtaining an interview with Mr.
Robert C. Norton instead He is one of the partners of OglebayNorton & Co , engaged in the steel busmess
Attached is a memorandum of the interview between Mr Norton
and the writer Mr. Norton corroborated what we have already
pointed out in this report and what we pomt out and substantiate in
practically every single report written in connection with the investigation of the Union Trust Co .
That the management of the Union Trust Co was dominated by
this small group of men. Messrs Nutt, Baldwin, Carlson, Gmn, et a l ,
and that behind this group, at all times, was the influence of the Van
Sweringens.
(Report re Compensation to officers)
The salaries of the principal officers of the Umon Trust Co. were as
follows:
J. R Nutt
$50,000
J R Kraus
--50,000
W M Baldwin
G A Coulton
Allard Smith
—
_
_
-
50,000
50,000
40, 000
STOCK EXCHANGE PRACTICES
8123
FAILURE OF THE UNION TRUST CO
(Report re Financial condition, 1929-33)
Opinions have been orally expressed in and around Cleveland by
certain individuals, as in Detroit, that the closing of the Union Trust
Co in particular and the Cleveland banks in general was due to "a
political plot" and to the "Michigan bank holiday " These charges
are grossly untrue The failures of both the Union Trust Co and the
Guardian Trust Co were not the result of the "Michigan holiday",
"The national bank holiday", or any sudden disturbance of economic
conditions; nor were they caused by any "plot", political or otherwise The failure of the Union Trust Co was the result of unsound
banking practices over a period of years
(Report re Financial condition, 1929-33)
The reasons for the failure of the Union Trust Co. may be summarized as follows
1. Heavy investment in real estate owned.
2 Bad loan policy.
(a) Excessive concentration of loans to the Van Sweringen and
Eaton interests
(b) Loans to officers, directors, and their affiliated corporations
(c) General loans.
(d) Real ;estate loans
3. Poor mvestment policy.
4 Inadequacy of reserves for losses.
5. Bad dividend policy in the face of impaired capital.
6 Rapid decline m deposits.
7. Exhaustion of ability to borrow.
(Report re Financial condition, 1929-33, p 5)
1 Real estate owned.—Even prior to 1929, more than 50 percent of
the bank's capital and surplus was invested in real estate. In January 1929 this investment represented 50.3 percent of the total capitalization, and by January of 1933 the figure had grown to 57 7 percent.
In this one item of "Real estate owned", the Union Trust Co. had
invested almost $18,000,000
(Report re Financial condition, 1929-33, p 9)
Although the bank owned considerable real estate in addition to the
mam bank building, it did not pursue a conservative policy of setting
up provisions for physical depreciation for each year on its books,
other than depreciation on the main bank building. However, on its
Federal income tax returns the bank did take the benefit of such depreciation on all its properties, regardless of the fact that it was not
recorded on the bank's general books. As of December 31, 1932, the
accumulated amount of depreciation reported on income tax reports,
and not recorded on the books, was $747,941.86.
We intend to point out later in this report the fact that the bank did
not write off sufficient amounts each year as a reserve for losses. The
net effect of those failures to record the true facts was an inflation of
the assets on the statements of the bank and an annual inflation of
the earnings statements.
8124
STOCK EXCHANGE PRACTICES
(Report re Financial Condition, 1929-33, p 20)
2 Loans —The percentage of total loans to total deposits, exclusive
of trust deposits, was as follows*
Percent
January 1929
March 1931
December 1932
January 1933—
76 2
75
87 3
91
(Report re Financial Condition, 1929-33, p 20)
From March 1931 to December 1932 the deposits of the bank
dropped in the amount of $123,000,000, while the loans for the corresponding period dropped only $70,000,000. Even as long ago as
March 1931, there were $43,000,000 of unsecured loans open on the
books of the Union Trust Co.
(Report re Financial Condition, 1929-33, p 15)
On December 20, 1932, the total nonaccrual loans were $23,000,000,
and by January 20, 1933, had increased by more than another million
dollars.
(Report re Financial Condition, 1929-33, p 13)
The loans to directors and officers and their affiliated corporations,
exclusive of the loans to the Van Sweringens, totaled*
January 1929
March 1931
$15, 000, 000
34, 000, 000
January 1933
30, 000, 000
(Report re Financial condition, 1929-33)
The relation of real-estate loans to total loans was as follows*
Date
Jan 25,1929...
Mar 27,1931..
Dec 20,1932...
Jan 24,1933...
Percent
Real-estate loans of total
Total loans
$220,346,080
222,808,076
152,404,226
151,8?1,516
63
90
63
39
$76,846,3^)9
74,168,249
66,429,477
66,157,760
10
06
43
91
34
33
43
43
9
3
6
5
Correspondingly, reserves for losses on loans were as follows:
Jan 25,1929
Mar. 27, 1931
Jan. 20, 1933
....
$404,335 42
360, 440. 59
1,196,389 07
3. Investments.—Monthly schedules were submitted to the officers
and directors of the bank showing in detail the securities and investments of the Union Trust Co. Pencil notations appear on these
schedules, indicating the shrinkage of the market value of these investments from the figures at which they were carried on the books. The
following shows the amount of this shrinkage, according to the bank's
own records, and the reserve being carried to offset the losses
STOCK EXCHANGE
8125
PEACTICES
(Report re Financial condition, 1929-33, p. 21)
Shrinkage in
investments
Bate
July 1932
September 1932
January 1933
$16,500,000
15,000,000
15,000,000
Reserve carried
$3,891,487 15
3,819,553 97
3,704,071 92
In their December 1932 report to the board the directors' examining
committee pointed out:
(U-l-39)
A schedule of all investments held by the bank was priced according to market
values on all listed securities, and where no market value was available an estimated value was given
(U-l-39)
On our books, total $40,276,013.45; market value, $23,856,913 40; shrinkage, $16,410,100 05; reserve for investment variation
$3,704,071.92
(U-l-40)
Also in this same report the committee pointed out the results of
a "privately arranged deal" which had been handled by W. M.
Baldwin, president of the bank. This deal was regarding bonds of
the Van Sweringen Co. owned by the bank and was made possible
by Mr. Baldwin's close relationship with the Van Sweringens. However, like practically all deals involving the Van Sweringens, the bank
came out second best and lost money on the transaction. The
committee, in its report, states:
In looking over the securities held by our securities and investment department
out attention was drawn to $200,000 Missouri-Pacific Railway convertible h%
percent bonds on our books at $119,000, and having a market value of $16,500.
Upon further questioning, we found that these bonds came to us on an exchange
of securities upon which the committee desires to comment further.
(U-l-40)
The committee then traces the events that actually happened
and sets out the losses, following through with what the results would
be if the remaining securities should be sold and setting out the
further losses. In comparison with this the committee reviews what
should have transpired had Baldwin not "privately arranged" the
deal, and shows that the bank suffered a greater loss of $209,221.37
than it would otherwise have suffered. The committee then concludes with the statement.
(U-l-40)
It is evident that the best interests of the bank were not served when this
exchange was negotiated
(Report re. Financial History, p. 3)
Dividend policy.—In the face of the shrinkage in value of its investments and the large uncollectible loans which were standmg on the
bank's books, the board of directors voted large dividends year after
year. The dividend rate of the Union Trust Co from 1921 to 1927
8126
STOCK EXCHANGE PRACTICES
was 10 percent The rate was changed in 1927 to 12 percent and continued until 1932 when it was reduced to 8 percent From 1921 to
1932 the Trust Co has paid cash dividends of $27,904,750
WINDOW DRESSING
(Report re Window Dressing)
While considering the facts regarding "window dressing" practices carried on by the Union Trust Co , it might be well to bear one
very important point in mind, i e , that these "window dressing"
transactions were consummated prior to the "call" dates This supports the conclusion that notice was given to the Union Trust Co.
sufficiently in advance to permit the officers to negotiate the transactions necessary to carry out their desires.
In order to aid the Trust Co. to publish a report showing a good
liquid position, the Van Sweringens, in 1931, were prevailed upon ta
"lend" $10,000,000 of United States Government securities to the
Union Trust Co through one of their corporations, namely, the
Van Sweringen Corporation These bonds were "loaned" for "window dressing" purposes only, and the "loan" was reversed 9 days
after it was made.
(Report re Window Dressing)
The bonds were in the possession of J. P. Morgan & Co. and were
being held by them for safekeeping. The "window dressing" transaction was arranged by letter agreements, by which the Trust Co.
agreed to purchase the bonds from the Van Sweringen Corporation,
crediting a special checking account of the latter with the purchase
price, and pledging the bonds as security for the "deposit " Actually, the whole transaction was handled through book entries, physical possession of the bonds not changing hands, nor was there any
exchange of cash.
(Report re Window Dressing)
Another method of "window dressing" employed by the Union
Trust Co was the sale of loans under repurchase agreements. In
September 1931 the Union Trust Co. sold to certam New York
banks, through the facility of repurchase agreements, various loans
for which the Trust Co. received cash totaling almost $12,500,000.
When the statement of condition of the Trust Co. was published,
"Total loans" was reduced and the item "Due from domestic correspondent New York banks" was correspondmgly increased. However, the contingent liability of the Trust Co , due to the repurchase
agreement, was not shown.
VAN SWERINGEN LOANS
As we have stated previously in this report, one of the chief causes
of the ultimate failure of the Union Trust Co. was the excessive concentration of loans to the Van Sweringen interests
(Report re Van Sweringens, p 11)
The loans due the Union Trust Co. from the Van Sweringens and
their controlled companies may be summarized as follows.
STOCK EXCHANGE PEACTICES
Commercial and collateral loans
Mortgage loans
Land contracts
8127
$11, 412, 908 54
772, 064 57
1, 000, 000 00
Total
Interest delinquent to May 1, 1933
Total
13, 184, 973 11
1, 089, 045 83
14, 274, 018 94
At times during the past few years the loans to some one of the
individual compames or to the Van Swermgens themselves exceeded
the legal limits of the bank's loaning powers When this was questioned by the State examiner, the bank simply arranged to transfer
part of the loans from the name of one of the Van Sweringen companies to the name of another company
(U-119)
Certam of the directors and senior officers had realized the unsoundness of so great a concentration of loans and had complained. On
December 10, 1931, Mr D L Johnson, a director of the bank, wrote
a letter to Mr Crawford, secretary of the bank, dissenting from the
making of any more loans to the Van Swermgens and asking that his
dissent be noted on the bank's minutes
(Minutes of Directors' Meeting, p. 971, 987)
The record of the minutes shows this dissension Mr Johnson
agam dissented from another loan to the Higbee Co (a Van Sweringen
corporation) on December 8, 1931; but the loan, nevertheless, was
made
Early in 1932 Mr Johnson was not reelected to the board of
directors of the Union Trust Co
(Report re Van Sweringen Loans, p 7)
However, sentiment among some of the directors was so strong that
no more loans should be made to the Vans, that an unsecured loan to
the Daisy Hill Co was refused in the mam office This refusal m the
mam office did not prevent the loan from bemg made, however. It
was made through the termmal office on the oral approval of Mr.
Nutt
(Report re Van Sweringen Loans, pp 20-25)
In 1930, the Van Swermgens had borrowed every dollar from the
Cleveland banks that it was possible for them to borrow. In October
of 1930 they found it necessary to make large additional borrowings.
Accordingly, arrangements were made to borrow from J. P. Morgan
& Co $39,500,000, but to do this substantial collateral had to be
pledged Every bit of collateral securing the loans made from the
Cleveland banks was sorely needed if those loans were to be adequately
secured. The Union Trust Co. was trustee for the other Cleveland
banks which had participated m these loans and as such was responsible for the collateral However, the Vans needed help and the Union
Trust Co. supplied it Practically all of the collateral having any
market value was released from the Cleveland loans and given over
to the Van Swermgens to pledge against the loans they were receiving
8128
STOCK EXCHANGE PEACTICES
from J. P. Morgan & Co and this switch was evidently done without
the knowledge of the other participants.
LOANS TO DIRECTORS
(Report re Loans to Directors)
When the bank closed in February 1933 the directors were indebted
to the bank in the amount of $8,148,788 38 Due principally to sale
of collateral, these loans have been somewhat reduced since the bank
has been in liquidation However, there still exists $6,129,491 36 of
unpaid loans made to the directors. Many of these loans will suffer
very large losses
If the laxity of effort to collect and reduce these directors' loans
had existed in all loans, the results would have been disastrous. Undoubtedly, the directors, because of their being directors, were given
undue leeway in making and in repaying their loans.
(Report re Painter Loan)
Painter loan —When the Union Trust Co. closed on February 25,
1933, Mr K V Painter, a director, was indebted to the bank in the
amount of $3,000,000—an indebtedness that has never been repaid.
Mr Painter has been a director and a member of the executive committee for more than 10 years
Our investigation discloses that virtually all of this indebtedness
resulted from unlawful collusion between Painter, Baldwin, and
Carlson, for the purpose of wilfully misapplying the moneys, funds,
and credits of the bank for the direct use, benefit, and advantage of
Painter, and indirectly for the use, benefit, and advantage of Baldwin
and Carlson Kecently, Messrs. Baldwin and Painter were indicted
by the Common Pleas Court of Cleveland for their acts in regard to
the Painter loans
(Report re Painter Loan)
In substance, the general scheme of operation was as follows:
Painter would convey to the bank certam real-estate holdings, leaseholds, and real-estate equities together with certam unlisted and unknown stocks of doubtful worth, all to be held by the bank in trust as
collateral security for future borrowings Subsequently, Pamter
would execute his demand note, or notes, for sums averaging about
$300,000 each These notes would not immediately be recorded on
the bank records for their face amounts and like credits passed to
Painter's account, but instead would be withheld by Baldwin or
Carlson and used only at such times and in such amounts as would be
necessary to avoid an overdraft m Painter's personal account
By this arranges: ent, each note was recorded as constituting a
series of loan transactions rather than as one independent borrowing.
Furthermore, such irregular procedure was decidedly beneficial to
Painter, in view of the fact that at no time was he required to pay
interest on any unused portion of his loans He also enjoyed a
preferential interest rate on his loans, being charged a lesser rate of
interest than other borrowers were required to pay
STOCK EXCHANGE PEACTICES
8129
(Report re: Painter Loan)
The loans to Painter began in July of 1930 and continued until
October 1931. All of the funds were used to purchase the stock of
the Union Trust Co in an effort to maintain the market. Baldwin
handled all of the transactions for Painter—arranging the loans and
purchasing the stock. Whether Baldwin was acting for himself as well
as Painter we do not know
However, the advances to Pamter ceased rather abruptly in October 1931. Obviously, Baldwin had no intentions of extending
further credit to Painter, as is evidenced by a $300,000 note of
Painter's dated August 31,1931, having an unused balance of $235,000.
Upon the note there is an unsigned notation: "No more advances."
(Report re: Painter Loan)
We do not know who insisted upon there being "no more advances"
to Painter, but whoever it was, he, at the time, had more authority
than the bank president. However, Baldwin and Painter were not
to be prevented from obtaining more money. Although the loans to
Painter at the Union Trust Co. were undercollateralized, Baldwin
released collateral of $315,000 and arranged a loan in the name of
Painter at the Chemical Bank & Trust Co. of New York.
(Report re: Loans to Mather)
Loan to William G. Mather.—Among the largest of loans to directors
were those made to William G. Mather. On June 15, 1932, Mather
owed six different banks a total of $2,500,000. He is indebted to the
Union Trust Co. for a direct loan of $857,523.99. In addition, the
trust company has loaned Otis & Co $725,000 because of Mather's
being a director of the trust company and prominent in the Otis &
Co. group of companies.
(Report re* J. P Harris Loan)
J. P . Harris Loan.—There seems to be little doubt that J. R. Nutt
was directly responsible for a loss of over $165,000 being suffered b;
the Union Trust Co. because of loans made by the bank to J. ^
Harris, formerly a vice president.
Mr. Harris had been operating a rather active brokerage account
at a local broker's office. Evidence in our possession seems to indicate that this brokerage account was probably a joint account belonging to Messrs. Nutt and Harris and that it was being managed by
the latter. At any rate, the account was collateralized by certain
stock which belonged to Mr. Nutt. The brokerage firm finally
insisted an additional collateral, and upon the instance and approval
of Mr. Nutt a loan was arranged at the Union Trust Co. in the name
of J. P. Harris. Mr. Nutt loaned additional stock to Mr. Harris
and then approved this loan from the bank in the amount of $263,000,
the proceeds of which were used to pay off the brokerage account*
No payments were made on the loan, and on January 3, 1934, the
liquidator of the Union Trust Co. sold the collateral at public auction,
the bank suffering a loss of $165,056.61.
175541—34—PT18
11
8130
STOCK EXCHANGE PBACTICES
Subsequently, the superintendent of banks has filed an action
against Mr. Nutt to recover the amount of this loss, Mr. Harris
having gone into voluntary bankruptcy.
LOANS TO OFFICERS AND DIRECTORS OF OTHER BANKS
(Report re Loans to officers and directors of other banks)
The Union Trust Co loaned a great deal of money to officers and
directors of other Cleveland banks Many of these loans should
never have been made and obviously were made mostly as a matter
of business policy
There is one loan of $68,000 to J. Arthur House, president of the
Guardian Trust Co Mr House was indebted to practically every
bank in Cleveland, including his own bank, and is now "broke" and
cannot make any payments on his loans The Union Trust Co. also
loaned $18,000 to Mr Monks, senior vice president of the Guardian
Trust Co , the collection of even a part of which is doubtful
However, the Guardian was not the only bank represented F. H
Hobson, vice president of the Cleveland Trust Co , still owes the
Union Trust Co $55,000 Two directors of the Cleveland Trust Co ,
Belden Seymour and M J Mandelbaum, owe $38,000 and $110,000
respectively
UNITED MILK PRODUCTS CORPORATION
(Report re United Milk Products Corporation)
In 1925, Mr Nutt was given the opportunity of purchasing at
$100 per share 25,000 shares of the preferred stock of a newly formed
milk company—United Milk Products Corporation. Mr. Nutt,
not desiring to take up all this stock himself, allotted portions of his
option to his friends, to outside customers of the bank, and to the
individual trust estates of the bank He personally approved and
arranged loans from the bank at 100 percent of the value of the
collateral in order to bring about these purchases
Trading accounts were maintained in the name of C. W. Carlson
for almost 2 years after the original issue.
Subsequently, Mr. Nutt, and probably most of his friends did the
same, disposed of the greater part of his holdings. No warning was
given to the small investor, and he was "left" holding the stock, with
the market on the stock having dropped very badly. The Union
Trust Co. still has several loans unpaid with the principal collateral
being the stock of United Milk Products.
(Report re* United Milk Products Corporation)
The charge has been made repeatedly that Mr. Nutt and his
associates organized this company for their own personal gain.
CORRIGAN-MCKINNEY STEEL CO.
(Report re Corngan-McKmney Steel Co )
In May 1925, J R Nutt was instrumental m the formation of a
corporation known as the McKinney Steel Holding Co., which purchased control of the McKinney Steel Co. For the purchase by the
STOCK EXCHANGE PRACTICES
8131
McKinney Steel Holding Co of a certain block of McKinney Steel
Co stock, Mr Nutt received a commission of $130,000, which,
although turned over to the bank by Mr Nutt 7 months after he had
received it, has been a transaction causing very much dispute and
discussion
(Report re Corngan-McKmney Steel Co )
Mr. E. S Burke, owner of 13% percent of the stock of the McKinney
Steel Co , approached Mr. Nutt and offered the latter a 2 percent
commission if Mr. Nutt would arrange the sale of Mr. Burke's block
of stock. E. S. Burke, in his agreement with Mr. Nutt, insisted
that the commission was to be paid to Nutt personally.
(Report re Corngan-McKmney Steel Co )
In accordance with the plan worked out for the sale, the McKinney
Steel Holding Co. was formed and issued its $7,250,000 par value
referred stock for the 13% percent stock interest of McKirmey Steel
!o., then owned by Burke. Burke then entered into an agreement
with the Union Trust Co. to sell to the bank the entire issue of
McKinney Steel Holding Co. preferred stock at $6,500,000. From
this $6,500,000, Burke paid the $130,000 to Mr. Nutt, and evidently
it was from the participation of the Union Trust Co. instead of Nutt
in the transaction that the other directors felt the commission belonged to the bank and not to Nutt personally. This preferred stock,
which was purchased at 89 655 percent a share, was finally sold by
the bank to the public at $100 per share
?
(Report re Corngan-McKmney Steel Co )
We have heard rumors expressed around the bank that Mr. Nutt
considered this $130,000 as a personal transaction and that it did not
belong to the bank—an opinion that was pot shared by the other
senior officers and directors. According to these rumors, Mr. Nutt
refused to turn the $130,000 over to the bank, but on the other hand
was afraid to take it himself, with the result that he held the check
for 7 months before he turned it over to the bank. Mr. Nutt claims
this is all untrue and that he always considered that he was acting as
president of the Union Trust Co. in this transaction and that he did
not "hold" the check at all, but turned it over to the bank immediately. Further, Mr. Nutt states that it was a personal check of Mr
Burke's that he had and turned over to the bank. Actually, Mr.
Burke purchased Union Trust Co. official check no. A-83106 in the
amount of $130,000, payable to the order of J. R. Nutt, and that
check was dated May 16, 1925, but not /credited to income on the
bank's books until December 24, 1925.
(Report re: Corngan-McKmney Steel Co )
Yie have carefully reviewed the files and records of the Union Trust
Co. and can find no reference whatever showing that this check was
turned over to the bank prior to December 1925 Messrs Nutt and
Baldwin have both written letters to the liquidator attempting to
explain this 7-months' delay. The open attitude expressed in these
letters might be disarming if it were not for the facts as we have presented them in our detailed report. To a man such as J. R. Nutt,
8132
STOCK EXCHANGE PEACTICES
accustomed to making important decisions frequently and quickly,
it does not appear reasonable or creditable that it would take 7
months for him to decide whether he should keep the commission or
turn it over to the bank. It does appear, however, that J. R. Nutt
would like to create the impression of a magnanimous gesture,
whereas the elapsed time would indicate the contrary and after much
indecision
(Report re. Corrigan-McKinney Steel Co.)
In 1930, the Union Trust Co., in participation with several other
banks, arranged a loan of $25,000,000 to the Cleveland Cliffs Iron
Co. in order that the Iron Co. might purchase the McKinney Steel
Co stock. No payments have ever been made on these Cleveland
Cliffs Iron Co. loans. The Umon Trust participation was $3,387,500.
In renewal of the loans to Cleveland Cliffs Iron Co., the Union
Trust Co. charged certain commissions for the renewals. As a result
of these commissions, usury was paid by the Iron Co. Subsequently,
in December 1933, the Iron Co. forced the Trust Co to pay back the
$145,000 of usury An officer of the bank testified in court that it
was known when the commissions were being charged that it was
usurious.
UNION CLEVELAND CORPORATION
(Keport re* Union Cleveland Corporation)
The Umon Cleveland Corporation, as the security affiliate of the
bank, engaged in many stock and bond issue underwritings. Very
little of this participation was as the sole underwriter, and in practically all cases the corporation was a participant in "Banking
groups" formed by one of the large New York financial houses. In
order to carry on its operations the affiliate consistently borrowed
from the Trust Co. In October 1933, the corporation had a deficit
of almost two million dollars and was indebted to the bank in the
amount of an additional five million.
The details of this corporation's affairs are outlined fully in a
report titled "Union Cleveland Corporation "
The corporatipn did not actively trade through any pool participation in the stock of the bank.
Union Cleveland Corporation tax evasion.—The General Code of
Ohio levied, in 1930 and 1931, a personal-property tax upon the assets
of corporations such as the Union Cleveland Corporation. Taxable
under this code were such assets as cash, accounts receivable, investments (stocks and bonds), etc. However, the securities representing
Ohio corporations were exempt from this taxation.
The Union Cleveland Corporation was, because of the nature of
its business, in possession of large investments in the stock of out-ofState corporations and, therefore, would be subject to a substantial
tax. The Union Trust Co. as a bank was not subject to this tax,
principally, we assume, because by law the Trust Co. was prevented
from owning the stocks
In order to avoid this taxation the Union Cleveland Corporation
would, on December 30, sell the taxable securities to the Union
Trust Co. for cash. As the cash itself was taxable, the corporation
would then pay the amount of the cash it had received to the Trust
Co in reduction of its ever-existent loans. This transaction allowed
STOCK EXCHANGE PEACTICES
8133
the Trust Co, to show on its published statement an increase in
"Investments" and a decrease in "Advances to subsidiaries", and
allowed the Union Cleveland Corporation to avoid a large payment
of tax.
The following is a comparison of the tax the corporation paid to
the amount it should have paid, in the years 1930 and 1931:
Amount actual tax
Year
ai
1930..
1931..
Amount of
tax paid
$54,244 94
76,786 82
WALTER H
$27 69
SEYMOUR,
Senior Examiner
Mr. SAPERSTEIN. I now hand you a report entitled "The Union
Trust Company—Corporate History", and ask you whether that is a
report made by the investigators and accountants of the staff, undet
your direct supervision.
Mr. MEEHAN. It is.
Mr. SAPERSTEIN. Mr.
Chairman, I offer the report in evidence,
together with the exhibits now at the Government Printing Office,
which support the report.
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately marked.
(The report entitled "The Union Trust Company—Corporate
History", together with exhibits to support same but which are now
at the Government Printing Office, are received in evidence and
marked "Committee Exhibit No. 2, May 4, 1934/' and are as
follows:)
COMMITTEE EXHIBIT N O . 2, MAY 4,
1934
CORPORATE HISTORY
COMPANIES INVOLVED
1. The Union Trust Co., Cleveland, Ohio.
AFFILIATED COMPANY
2. Union-Cleveland Corporation, Cleveland, Ohio.
SUBSIDIARY COMPANIES, 100 PERCENT OWNED
3. Union Lennox Co., Cleveland, Ohio.
4. P. A. Frye Co., Cleveland, Ohio.
5. Akers-Folkman Co., Cleveland, Ohio.
SUBSIDIARY COMPANY OWNED THROUGH CONTROL (62 PERCENT)
6. Cleveland & Boston Co., Cleveland, Ohio.
8134
STOCK EXCHANGE PBACTICES
THE UNION TRUST CO.
(U-82)
Reference is made to exhibit entitled "The Union Trust Family
Tree" showing the development and growth of the two constituent
companies
(U-83, minutes of stockholders' meeting, pp 1, 2)
The Union Trust Co was organized December 31, 1920, by consolidation of the First Trust & Savings Co. and the Citizens Savings
& Trust Co. (both Ohio companies). The capital stock of the Union
Trust Co. was the combined capital of the two institutions, namely,
$13,333,333 33 divided into 133,333}£ shares of $100 each
(U-84, minutes of stockholders' meeting, pp 20, 21)
On January 17, 1921, the Woodland Avenue Savings & Trust Co,
and the Broadway Savings & Trust Co were consolidated m the name
of the Union Trust Co. with an authorized capital stock of not less
than $14,833,333 33 divided into 148,333% shares of par value of $100
each
(Minutes of meeting of board of directors, pp 32, 33, 34)
On March 11, 1921, the authorized capital stock was increased
from $14,833,333.33 to $22,250,000 and to stockholders of record
March 14, 1921, a 50 percent stock dividend of 74,166% shares
($7,416,666 67) was declared and distributed. There was concurrently an entry made transferring from surplus account to capital
account the par value of shares so distributed.
On December 31, 1921, $375,000 was transferred from undivided
profits account to surplus account making the surplus $11,125,000.
(U-85)
On April 17, 1926, the consolidation of the State Banking & Trust
Co. was effected and accordingly the capital stock of the Union
Trust Co. was increased by $600,000 to $22,850,000 and surplus
increased hj $625,000 to $11,750,000, and on January 8, 1927, the
surplus was increased by $400,000 to $12,150,000 making a combined
figure of capital and surplus of $35,000,000, which figure remained
until the bank closed
(U-86)
On August 3, 1929, the stockholders of the Union Trust Co. approved a "plan and agreement" which had been*submitted to them
by the directors to form a security affiliate and to reduce the par
value of the bank stock.
(Minutes, stockholder' meeting, pp 786-790)
The par value of the Union Trust Co. stock was reduced from
$100 to $25 per share. As a result of this reduction in par value,
914,000 new shares were exchanged for 228,500 shares then outstanding The split-up of bank shares, the plan stated, was made to
increase the number of stockholders.
STOCK EXCHANGE PRACTICES
8135
(Minutes of a meeting of the board of directors, p. 764, U-86)
Bank shares are today being recognized for their investment character and
possibilities, and the smaller units which we now propose to create should enable
many of our fnends and customers, who may not now be stockholders, to become
such.
The security affiliate, the formation of which was approved by the
stockholders, was Union Cleveland Corporation. It was formed to
deal—
(U-86)
To a large extent m stocks which the bank is unable lawfully to handle
At the time of the closing of the bank in February 1933 there were
approximately 4,250 stockholders
UNION CLEVELAND COBPORATION
(U-88)
The Union Cleveland Corporation was organized on July 24, 1929,
as a security and investment company to be owned by the stockholders
of the Union Trust Co
(U-89)
The Union Trust Co.'s stockholders are the owners of the Union
Cleveland Corporation, as investment company affiliate. By individual subscription, the bank's stockholders supplied the capitalization
of $2,285,000 for the company in direct proportion to their stockholdings in the bank Each bank stockholder has Union Cleveland
Corporation stock to the amount of one tenth of his bank stock, ownership being evidenced by endorsement on his bank stock certificate.
(IT-87A)
Tbus, ownership of the investment company was identical with
that of the bank; its executive control was vested in the bank's
directorate, and its affairs were, in effect, part and parcel of the bank
itself.
This corporation was organized "for the orgamzation and operation
of a securities and investment company", and took over the major
portion of the business of the bank's bond department
The plan and agreement which was approved by; the stockholders
at their meetmg on August 3,1929, vested the voting control of the
Union Cleveland Corporation in five "voting trustees," all of whom
were directors of the bank and some of whom were officers of the bank.
By the terms of this agreement these voting trustees were given the
right to name the officers and the management, and direct the operations of the corporation, and in case of the resignation of any trustee
to even elect his successor. As provided in the agreement:
(U-87C)
The trustees and/or such other persons as they may designate shall constitute
the first board of directors of the Securities Co This board will name the officers
and management and will direct the operations of the Securities Co The charter
regulations and bylaws of said corporation will be as determined by the trustees.
8136
STOCK EXCHANGE PEACTICES
THE TBT7STEES
Messrs H G. Dalton, G. W. Grandin, Wairen S. Hayden, Wm. G. Mather
and J. R. Nutt have been suggested by the officers, approved by the board of
directors of the bank, and have agreed to act, as trustees under this plan and the
agreement herein referred to. There shall be five trustees Any trustee may
resign at any time and in case of any vacancy in the number of trustees it shall
be filled with the trustees remaining No person shall be named a trustee who
shall not be an officer or director of the bank and any trustee who shall cease to
be a director or officer of the bank shall also cease to be a trustee hereunder. The
trustees shall be under no liability whatever for their acts or the acts of others.
The trustees in all cases may act by a majority of their number either at a meeting
or by writing with or without a meeting
THE UNION LENNOX CO.
(U-90, U-90C)
The Union Lennox Co. was incorporated May 9,1922, in the State
of Ohio, with 1,000 shares of no par value. On May 11, 1922, a
stated value of $200 per share was declared. The Union Trust Co.
accepted 995 shares of stock for warranty deed and transfer to Union
Lennox Co ownership in fee and leasehold to certain properties on
which it was proposed to build the present bank building, and also
a stock of structural steel and supplies to be used in its proposed
building constructions.
(Minutes of stockholders' meeting, Jan 8, 1925)
On January 1, 1925, the capital stock of Union Lennox Co. was
reduced from $200,000 to $100,000 No reason for such a change
has been determined.
p. A. FRYE co.
(U-91, U-92)
The P A. Frye Co was incorporated May 23, 1930, for the purpose of buying and holding, leasing and dealing generally in real
estate, land contracts, leaseholds, etc. Its real function, however,
was to manage, operate, and/or dispose of foreclosed properties turned
over to it by the Union Trust Co.
The authorized capitalization was 50 shares of no par value and
the Union Trust Co. subscribed to all of the stock for $5,000 or $100
per share.
THE AKERS-FOLKMAN CO.
This company was incorporated June 8, 1919, with an authorized
capital stock of $10,000. The amount subscribed was $1,000, all
subscribed by the Union Trust Co or its nominees. The actual
amount paid in was $100.
This company was wholly owned by the Union Trust Co. and dealt
in the purchase and sale of steamship tickets and transportations,
the reason for its formation being to assume this class of service
and remove the bank from a direct participation in a nonbanking^
enterprise.
(U-93)
The capital stock of this company was sold on October 30, 1933,
to Mr. Joseph Folkman for $75. The minute books are in the
STOCK EXCHANGE PEACTICES
8137
hands of Mr. Folkman and they are not deemed of sufficient importance to review in connection with the corporate history.
THE CLEVELAND-BOSTON CO.
(U-94, U-95)
This company was organized in Ohio on October 9,1928, to be the
holding company for the assets taken in foreclosure from the Cleveland
Akron Bag Co. It was capitalized at 500 shares of no par value, the
value of which was declared to be $100 per share. The Union
Trust Co.'s proportionate share represents 53 eighty-fifths of the
balance of $740,183.88 remaining unliquidated as of December 31,
1931. The other 32 eighty-fifths is owned by the following:
The Central United National Bank, Cleveland, Ohio, 15 eighty-fifths;
the Bank of Manhattan Trust Co., New York, N.Y., 17 eighty-fifths.
The Union Trust Co. was trustee, along with Isaac H. Orr on
$2,000,000 first mortgage, 15-year 8-percent sinking fund gold bond
issue of the Cleveland Akron Bag Co. and subsidiaries, dated April 1,
1921, which was eventually foreclosed, and the Cleveland-Boston
Co. represents the assets taken at the foreclosure.
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner Frank H. Ensign.
Mr. SAPERSTEIN. Next, Mr. Meehan, I hand you a report entitled
"The Union Trust Company and Affiliated Companies—Nature of
Business and Financial History", and ask you if that report was
made by members of the staff of the committee under your immediate
direction.
Mr. MEEHAN. I t
was.
Mr. SAPERSTEIN. Mr. Chairman, I offer in evidence the report, as
well as the exhibits supporting the report, which exhibits are now in the
Government Printing Office.
The CHAIRMAN. The report and exhibits will be received and
appropriately marked by the committee reporter.
(The report entitled "The Union Trust Company and Affiliated
Companies—Nature of Business and Financial History", together
with exhibits now at the Government Printing Office, were received
in evidence and marked "Committee Exhibit No. 3, May 4, 1934/'
and are as follows:)
COMMITTEE EXHIBIT N O . 3, MAY 4,
1934
NATURE OF BUSINESS AND FINANCIAL HISTORY
THE UNION TRUST CO.
(U-82)
The banking institution known as the Union Trust Co. was the
result of a series of 30 separate consolidations and mergers. The
original bank (Bank of Commerce) was organized in 1853. The
8138
STOCK EXCHANGE PEACTICES
principal business of the Union Trust Co. was conducted at the main
bank institution.
At the time the bank was closed there were 22 branches operating
in the city of Cleveland and suburban districts. The company was to
operate a general banking business within the limitations prescribed
in its charter and has been under the supervision of division of banks,
State of Ohio. The wide latitude covered in the business career of
the Union Trust Co. will be noted from the business activities of the
various affiliated and subsidiary companies. After the formation of
these various companies and the withdrawal of that particular line of
activity from the bank's regular business it finally evolved itself into
the situation where its business consisted principally of general commercial banking and the management of trust estates and the necessary operations attached to foreclosure of real estate properties.
The bank's activities have been very intricate and involved, and
the various phases which ultimately brought about the closing of the
bank and its liquidation will be discussed under separate subjects.
The business affairs of the Union Trust Co. were directed by a
board of directors consisting of 60 prominent business men in the
city of Cleveland. The affairs of the bank, however, were practically dominated by a small group of men
There are several officers and directors who have served the bank
since its organization in 1920 and who have been actively interested
in its management. In the course of our examination the following
names recur many times, and in connection with many phases of the
bank's operation W. M Baldwin, George A. Coulton, Frank H.
Ginn, Joseph R. Kraus, J. E. Nutt.
With the exception of J. R. Nutt, who resigned in May 1932 (May
24 to be exact), these men have been active in the bank from 1920
until the time of its closing During this entire period they have
held the most important positions and it is believed that they practically governed the management of the Union Trust Co.
(U-98)
I t will also be noted later, covering the operation of the Union
Cleveland Corporation, that these men were active in its affairs from
its organization up to the time of the closing of the bank.
The main bank building is a very imposing institution and is a part
of a building 20 stories in height. The banking space used by the
Union Trust Co. occupied the first three floors and the actual banking
floor is reputed to be the largest of any bank in the world.
The financial transactions, except as to certain subjects, have not
been traced prior to 1929.
(Mmutes of stockholders' meeting, pp 20, 21)
The capital stock and surplus of the Union Trust Co. at the time
of its organization in 1920 consisted of capital stock in the amount of
$13,333,333.33, and its surplus $10,750,000.00. Total, $24,083,333.33
The capital between 1920 and December 31, 1932, has been increased
through the purchase of the various banks taken into the organization
and by a contribution from undivided profits to surplus account and
by a stock dividend to $35,000,000.
STOCK EXCHANGE PRACTICES
8139
(U-96)
A stock dividend of $7,416,666.67 was declared in 1921, which
amount was appropriated from surplus and undivided profits at the
time of the declaration. This left remaining in undivided profits at
this time $129,736.60.
(U-96-A)
The profits from operation before any write-off for depreciation in
value of securities for the period from 1921 to 1932 inclusive have
amounted to $49,342,949.17
(U-97)
Cash dividends of this same period have amounted to $27,904,750
It should be noted that the total amount of cash dividends exceeds
the total amount of cash invested by a very substantial amount
Dividends from 1921 to 1927 were paid at the rate of 10 percent.
The rate in 1927 was changed to 12 percent and continued until 1932
when it was reduced to 8 percent. An analysis of undivided profits
from January 1, 1928, to December 31, 1932, shows that while the
earnings were substantial in these 5 years, the undivided-profits
account has been decreased, in the amount of $606,160 07, through
)ayment of dividends and amounts appropriated for a reserve for
osses
The Union Trust Co was closed by the superintendent of banks
of the State of Ohio on February 28, 1933 Shortly after, from the
cash reserves on hand, a 5 percent dividend was paid to depositors
Subsequent thereto, from proceeds received from the Reconstruction
Finance Corporation, a further dividend of 35 percent of the balance
of the account was paid, making a total dividend to depositors since
the closing of the bank of 40 percent.
From February 28 to June 15, 1933, the bank was operated under
a conservator appointed by the superintendent of banks It being
apparent that the bank could not reopen and that the only solution
was a liquidation of its assets, a liquidator was appointed by the
superintendent of the banks on June 15,1933, and has been m charge
of its affairs since that date
All pertinent matters pertaining to the closmg of the bank and the
eventual appointing of a liquidator are discussed under separate
headings
f
UNION CLEVELAND CORPORATION
(U-88)
Union Cleveland Corporation was organized July 24, 1929, under
the laws of the State of Ohio with an authorized capital consisting
of 228,500 shares having no par value The purpose of its incorporation was simply to carry on the business of dealing in securities
which the Union Trust Co could not legally do
(U-88, U-100, U-101)
The 228,500 shares of its capital stock were given a stated value
of $10 per share and were set up on the books of the corporation as:
Capital
Paid in surplus
__-
$2, 000, 000
285, 000
8140
STOCK EXCHANGE PKACTICES
On August 20, 1929, the Union Trust Co. sold to the Union Cleveland Corporation stocks and bonds in the amount of $407,202,51
Among other investments made by the corporation were purchases
of 6,072 shares of the Union Trust Co. stock from April 11, 1930, to
June 13,1930, ostensibly to maintain a market in the Union Trust Co
stock For this and other financing the Union Trust Co. loaned
large sums of money, which illustrates how, tinder the guise of an
affiliate, the bank maintained and supported the market with its own
stock and with its own money. This matter will be discussed under
a separate subject.
(U-102)
Another of the activities of this corporation was the acquiring of
the stock of the Chagrin Falls Banking Co. The purchases of this
stock began in September 1929 and extended through November
1929; all at $650 a share. It will be noted that this period of time
extends beyond the stock market decline of October 1929 with the
price of $650 still being maintained. This is true in spite of the fact
the apparent book value of the stock in September 1929 (the 23d) was
$365 92 This subject, too, will be covered fully in a separate report.
The operations of the Union Cleveland Corporation from its incorporation in August 1929 to December 31,1932, showed the following
results
Year
1929 (8-20 to 12-31), loss..
1930, profit..
1931, l o s s . .
1932, l o s s - . .
-..
_-
Total profit for period
$50, 290. 65
311, 687. 80
_. 23, 577. 75
165, 784. 99
69, 034 41
(U-99)
In 1931 securities were written down to a market value at December
29 in the amount of $1,517,748.14. Further adjustments in 1932
followed, and the corporation showed a deficit at December 31,1932,
of $1,960,999.14. There was owing to the Union Trust Co. on December 31, 1932:
Secured.Unsecured
-
_
$2, 214,008. 79
993, 426. 64
Represented in the above figures is the investment in the Chagrin
Falls Banking Co of ,$757,423 98, which is regarded by the bank
examiner as being a total loss.
The Union Cleveland Corporation rented space from the Union
Trust Co. in the same building, and, to all appearances, operated as
if it were part of the bank. Rental was paid for space until 1932 and
apparently this charge has been waived since that time.
The corporation has handled for the bank many security dealings,
refinancing companies wiiich were debtors of the bank, and has
absorbed from time to time some of the investments of the bank.
Various activities of the Union Cleveland Corporation will be discussed as separate subjects.
Attention is called to the following extract of the articles of incorporation of the Union Cleveland Corporation.
STOCK EXCHANGE PRACTICES
8141
(U-88)
No contract or other transaction between the corporation and any other
corporation and no act of the corporation shall in any way be affected or invalidated by the fact that any of the directors of the corporation are pecuniarily or
otherwise interested in, or are directors or officers of, such other corporation;
any director individually or any firm of which any director may be a member,
may be a party to, or may be pecuniarily or otherwise interested in, any contract
or transaction of the corporation, provided that the fact that he or such firm is
so mterested shall be disclosed or shall have been known to the board of directors
or a majority thereof; and any director of the corporation who is also a director
or officer of any such other corporation or who is so interested may be counted in
determining the existence of a quorum at any meeting of the board of directors
of the corporation which shall authorize any such contract or transaction and
may vote thereat to authorize any such contract or transaction with like force
and effect as if he were not such director or officer of such other corpoiation
or not so interested.
THE UNION LENNOX CO
(U-103)
At the time of the incorporation of this company the Union Trust
Co. accepted 995 shares of stock for warranty deed and transfer to
Union Lennox Co., ownership in fee and leaseholdtto certain properties
on which it was proposed to build the present bank building, and
also a stock of structural steel and supplies to be used in the proposed
building constructions.
(Minutes, meeting of stockholders, p 36 to 40, inclusive)
On January 8, 1922, there was authorized a loan of $6,500,000
from the Northwestern Mutual Life Insurance Co. of Milwaukee,
Wis., to be secured by first mortgage on building equipment, the loan
to be for 20 years at 5}i percent per annum, payable semiannually.
It was also agreed to give the insurance company the assignment of
the lease to the Union Trust Co for the building as additional security.
This lease is dated January 31, 1923, and is between the Union
Lennox Co., lessor, and the Union Trust Co., lessee.
(U-104)
The records of the Union Lennox Co. show that $6,300,000 was
the actual amount of money received from the mortgage and that
the first repayment on the principal was made January 30, 1925 in
the amount of $300,000. Thereafter, a similar amount was paid
every year until at December 31, 1932 there remained a balance due
on this loan of $3,900,000.
The books of the Union Lennox Co. were opened on May 10, 1922,
by an entry setting up capital stock $1,000. On July 10, 1922, there
is an entry setting up on the books cost of real estate, leaseholds, and
contracts taken over from the Union Trust Co. in the amount of
$4,942,070 59 and the credit is capital stock issued for the same
amount
From July 10, 1922, to June 28, 1923, the capital stock account
shows additions as the result of advances and payments made by the
Union Trust Co The total amount appearing in the capital stock
account on June 28 was $9,560,000. On June 29, 1923, there appears
a journal entry transferrmg $4,616,929.41 from the capital stock account to an account called "Accounts payable of the Union Trust
8142
STOCK EXCHANGE PRACTICES
Co " The explanation for this entry is as follows* "To convert to
accounts payable as per resolution of board of directors on account
advances by the Union Trust Co have been credited to capital stock
in error "
(U-105, U-106)
On January 1, 1925, there appears another transfer from the capital
stock account in the amount of $4,843,070 59 to the account called
"Accounts payable of the Union Trust Co " explained as follows:
"To reduce capital stock by converting to accounts payable " After
these two journal entries the balance remaining in the "Capital stock
issued" is $100,000 Thereafter the account called "Accounts payable to the Union Trust Co " reflects all further advances made by
the Union Trust Co and is reduced regularly by the amount of
depreciation charged against the building Payments on account of
reduction of the mortgage liability to the Northwestern Mutual Life
Insurance Co , namely, $300,000 each year, are also credited in a
similar manner as other advances to the account "Accounts payable
to the Union Trust Co " and do not appear as credits to the account
"Rent mcome "
Until December 31, 1925, the records of the Union Lennox Co.
reflect income and expense operations; in other words, there is an
account called "Interest on mortgage" and the charges to this account
are offset by similar credits to rent mcome. After December 31,1925,
no detailed accounts appear on the books of this company reflecting
expenses and mcome of the Union Lennox Co
The operations of the Union Lennox Co after December 31, 1925,
were all absorbed by the Union Trust Co and reflected directly in
their statements without any entries in the books of the Union Lennox
Co. At no time does there appear on the accounts of this company
the item of rent mcome in the amount of $300,000, being the payments on account of principal, which should be credited as rent in
accordance with the terms of the lease.
On the books of the Union Trust Co there is carried an account
called "Union Lennox Co " which corresponds in detail to the account
on the Union Lennox Co books called "Accounts payable to the Union
Trust Co.", except for the item of $100,000 capital stock which is
also included in the account "Union Lennox Co "; in other words,
on December 31, 1931, the "Accounts payable to the Union Trust
Co " on the Union Lennox books reflected a credit in the amount of
$10,583,357.53 and the account "Capital stock issued" reflected a
credit of $100,000, and on the same date the corresponding account
called "Union Lennox Co." on the books of the Union Trust Co.
reflected a debit balance in the amount of $10,683,357.53.
(U-107)
On December 31,1932, on the Union Lennox Co. books the account
called "Accounts payable Union Trust Co." reflected a credit balance
of $10,611,255.85 and the capital stock issued a credit of $100,000
and on the same date the Union Trust Co. books reflected in the
account called "Union Lennox Co." a debit balance of $10,711,255.85.
On December 31, 1932, the records of the Union Lennox Co. disclose the following analysis of the building account*
STOCK EXCHANGE PBAOTIOES
Cost of land Euclid-E 9th property
Cost of leaseholds
Cost of construction
Architect fees
_
8143
$3, 493, 501. 49
21,127.42
13, 180,086 62
425, 000 00
Total cost of the buildings and land in the amount of
17,119, 715. 53
Deducting therefrom the reserve for depreciation to Dec. 31,
1932, in the amount of
-_« 2, 508, 459. 68
There remains a net book figure of land and building
(real estate) in the amount of..
_-_ 14,611,255.85
(U-107)
As of this date the balance due on the mortgage payable was
$3,900,000, so that the total equity of the Union Lennox Co. in its
real estate as of December 31, 1932, was $10,711,255.85.
(U-107)
The Umon Trust Co, on December 31, 1932, in its published
statement carries the item "Bank buildings and real estate owned"
$19,828,783 61 and on December 31, 1931, $18,588,116 32. As part
of these totals the Union Trust Building is carried on December 31,
1931, as $10,683,357.53 and on December 31, 1932, as $10,711,255 85,
This method of reflecting the Union Trust Co 's advances to the
Union Lennox Co is misleading, inasmuch as it is carried as bank
buildings and real estate owned, whereas, in fact the Union Trust Co.
did not and does not ovsm the main bank building and only has an
account due it for advances in the amount of $10,611,255 85 on
December 31, 1932, and the amount of $10,583,357 53 on December
31, 1931, and it further owns capital stock m the amount of $100,000
which rightfully belongs in its account " Securities and investments "
In absorbing the properties of the Union Lennox Co. (a 100-percent
owned company) the Union Trust Co. in effect assumes the position
of a consolidated company and its published statements being headed
"Statement of condition as of December 31, 1931. The Union Trust
Co, Cleveland, Ohio", is a misrepresentation, inasmuch as these
statements are consolidated statements of the Union Trust Co., the
Union Lennox Co., and the P. A. Frye Co.
Further, in setting up these advances ta the Union Lennox Co. as
"Bank buildings and real estate owned" the Union Trust Co. does
not show the total cost of the real estate and the partial offsetting
liability on account of the mortgage payable which is a very substantial amount The amount of this mortgage at one time was $6,300,000
and as of December 31, 1931, was $4,200,000 and on December 31,
1932, $3,900,000 This method of setting up the statement is subject
to criticism insofar as a very substantial liability is concealed and the
cost of the real estate misstated.
(U-108)
As further evidence that this company was a separate entity the
records disclose that on January 2, 1924, the Union Lennox Co.
borrowed $50,000 from the commercial loan department of the bank
on which a discount of $148.89 was charged. This loan was repaid on
February 11,1924. The record of the loan and the interest appears in
the general ledger of the Union Lennox Co.
8144
STOCK EXCHANGE PBACTICES
The Union Trust Co. in its bank earnings included each year the
earnings from the Union Lennox Co. Building, which was the main
bank building. The net profits from the operations of the Union
Trust Building as reflected on the annual statements which are part
of the financial reports of the Union Trust Co., are as follows:
1926-1927
1928
1929
(U-109)
$219,852 80 1930-448,468 94 1931
543, 508. 60 1932
584,392 10
$601, 672.14
537, 275. 11
402, 996. 81
It is very evident, therefore, that the net profit from the building
was a very material item in the earnings of the bank for all the years
listed. At no time does the $300, 000 annual amortization of the
rincipal of the mortgage appear as rent expense to the Union Trust
!o. and nowhere on the records of the bank is there an account
"Mortgage payable."
P
THE P. A
FRYE CO.
The Union Trust Co. owns all the capital stock of the P. A. Frye
Co., which was formed to take over the bank's foreclosure real estate.
No dividends have ever been paid. The company sustained losses
in each year of operation, which losses have been absorbed by the
bank so that the company's capital remains unimpaired
The following extract of a letter dated July 26, 1930, sets forth
clearly the intent and purpose of this company:
The undersigned desires to transfer to your company the legal title to certain
parcels of real estate and from time to time hereafter plans to transfer to your
company the legal title to additional parcels of real estate, all to be held by your
company subject to the following understanding:
You are to hold said legal title for the account of and subject to the order of
the undersigned Unless and until specific direction shall be given your company
as to the disposition of the title to the properties thus conveyed, your company
ib authorized to manage for the undersigned all of said properties, to effect such
changes, alterations, or improvements in or upon said properties as m your judgment may be desirable with a view to the ultimate disposition thereof, to negotiate and consummate sale of said properties on such basis as in your judgment
is desirable (subject always to the right of the undersigned to give your company
binding instructions in connection therewith), and to make necessary conveyances
in connection with such sale. Upon the consummation of any sale involving conveyance of title by you, to the extent that the proceeds shall be represented by
net cash payments and obligations secured by mortgage, you are to account
immediately to the undersigned for such proceeds, but to the extent that such
proceeds shall be represented by other real estate you are to hold the title to said
real estate m the same manner and subject to the same terms as are herein provided with reference to the title to the real estate transferred to you by the under-r
signed In cases of sale under land contract you are to account monthly to the
undersigned for the payments received on such contracts until such time as title
shall be conveyed by you, at which time you are to account to the undersigned
for the entire balance of the proceeds of such sale.
This arrangement is to be subject to termination or modification at any time
%t the pleasure of the undersigned.
(U-110)
The balance sheet of the company shows at December 31, 1931,
"fteal estate Union Trust Co." as an asset $1,898,971.61 and shows
as a liability Union Trust Co. m a similar amount. At December
31, 1932, it shows an asset "Keal estate Union Trust Co." $2,941,100.97 and shows as a liability Union Trust Co. in a similar amount.
8145
STOCK EXCHANGE PRACTICES
The Union Trust Co. carries the same amounts upon their books; as
"Real estate, buildings, leaseholds, etc."
The same criticism applies as that in, the case of the Union Lennox
Co., wherein the Union Trust Co., owning stock of a subsidiary company, shows upon its statement of condition as of December 31,1931,
the assets of this subsidiary company listed under bank buildings and
real estate owned.
THE AKERS-FOLKMAN CO.
This company was owned 100 percent by the Union Trust Co.
and operated a traveling service operated by the bank as an added
service to its clients. It specialized in steamship tickets.
Formation of a subsidiary company to assume this service was to
remove the bank from direct participation in a nonbanking enterprise.
Dividends were declared and paid to the Union Trust Co. in
amounts totaling all the profits for each year, as follows:
(U-lll)
Year
1923
1924
1925
Year
Amount
$1,000 00
7,65101
9,520 60
Amount
$10,234 12
12,000 00
9,695 65
1926
1927.
1928
Year
1929
1930
Amount
$4,184 14
1,072 26
In the year 1931 a loss of $4,257.96 was sustained. In the year
1932 a profit of $40.72 was shown so that there was at December 31,
1932, a deficit of $4,217.24. There was also due the Union Trust Co.
in the form of notes payable at this same date $2,000.
THE CLEVELAND-BOSTON CO
There is no further comment in connection with this company
other than that stated in the caption "corporate structure", and
supplemented by a statement taken from the superintendent of
banks report of January 20, 1933, which reads:
It is apparent that the liquidating value of the Cleveland-Boston Co is almost
entirely a slow work-out proposition of undeterminable value at this time.
UNION CLEVELAND CO , INC.
(U-112)
This company is mentioned merely because of its similarity in
name to the Union Cleveland Corporation
This company was organized in February 1920, and acted principally as a messenger service and an information office for the Union
Trust Co. at 120 Broadway, New York City.
The company was formally dissolved on October 31, 1932, and is
no longer in existence.
WALTER H. SEYMOUR,
Senior Examiner,
This report is based upon preliminary report and complete investigation by committee examiner Frank H Ensign.
175541—34—PT 18
12
8146
STOCK EXCHANGE PEACTICES
Mr. SAPERSTEIN. I now hand you a report entitled "The Union
Trust Company—Financial Condition, 1929 to 1933", and ask you
if that is a report made under your immediate supervision by the
members of the investigating statt of the committee
Mr. MEEHAN.
Yes.
Mr. SAPERSTEIN. Mr. Chairman, I now offer in evidence this
report, together with the exhibits at the Government Printing Office
which support same.
The CHAIRMAN. The report and exhibits will be received in
evidence and appropriately marked.
(The report entitled "The Union Trust Company—Financial
Condition, 1929 to 1933", together with the exhibits now at the
Government Printing Office, were received in evidence and marked
"Committee Exhibit No. 4, May 4, 1934", and are as follows:)
COMMITTEE EXHIBIT N O . 4, MAY 4,
1934
FINANCIAL CONDITION 1929 TO 1933
(U-5-1, U-5-2, U-5-3, p 4)
A detailed analysis of the Ohio State bank examiner's reports
rendered as of January 25, 1929, March 27,1931, January 20, 1933
and the special directors' examination as of December 20, 1932,
known as the "Lenihan report", discloses the fact that the seeds for
the final closing of the bank in February 1933 were sown as far back
as 1928.
Before reporting on the results of our analysis, however, we should
like to point out one thing relative to the above-mentioned State
examinations. Section 710-19 of the Ohio State bank laws requires
that the superintendent of banks make an examination of each bank
(Ohio bank law, sec 710-19)
At least twice each year and as often as the superintendent of banks may deem
necessary
except that in cities having a clearing house association only one
examination each year is required
(Ohio bank law, sec 710-19)
*
*
* when the superintendent of banks deems a second examination unnec-
It will be noted from the above that the Union Trust Co. was
examined approximately once every 2 years by the State banking
department. The regulations of the Clearing House Association
require that each bank be examined by the association at least once
each year and the Federal Keserve Bank had the right to make an
examination once each year. The Clearing House Association made
its last examination of the Union Trust Co. in 1926. The Federal
Keserve has never made an independent examination of the Union
Trust Co.
While we believe that the officers and directors of the Union Trust
Co. are responsible for their own acts and for allowing the bank to
drift into its present condition, we do feel that the State banking
STOCK EXCHANGE PBAOTIOES
8147
department is in a great measure responsible for the fact that examinations were not made often enough, and that when they were made,
corrective measures were not taken to arrest the threatening doom of
the Union Trust Co
We are not trying in any way to lay at the door of the State banking
department the responsibility for the closing of the Union Trust Co.
We believe that bankers have a great deal more knowledge about the
banking business than State officials, and, therefore, know what is and
what is not good banking practice; and we do not believe that because
Government banking department officials have not called to the
attention of bankers the latter's wrongful or imprudent acts the responsibility of the bankers is in any way relieved or removed. Neither
do we subscribe to the belief that a banker has a right to jjerform some
act simply because it is not legally wrong to do so, but is morally or
ethically wrong After all, the bankers have had the benefit of eminent and astute counsel before performing their acts to see that they
were within the law In other words, we feel that the Ohio State
Banking Department has a great deal to answer for in the closing of
the Union Trust Co , but that its responsibility is wholly apart from
that of the bank's directors and officers.
UNION TRUST'S FAILURE
In summary, the reasons for the bank's extremely nonliquid condition, which resulted in its failure to reopen, were as follows*
1. Heavy investment in real estate owned.
2. Bad loan policy and inadequacy of reserve for losses.
a. Excessive concentration of loans to the Van Sweringen interests
and Eaton interests.
b. Loans to officers, directors, and their affiliated corporations.
c. General loans.
d. Real estate loans.
3. Poor investment policy.
4. Bad dividend policy in the face of impaired capital.
5. Rapid decline in deposits
6. Exhaustion of ability to borrow.
(U-5-a, consisting of U-5-1, p. 3; TJ-5-2, p. 4; U-5-8, p. 2; U-5-3, p. 1)
For the purpose of convenient reference, there is submitted a comparative statement of condition as per State bank examiner's reports
and directors' report (Lenihan report), which embody the statements
of resources and liabilities appearing in each of the above-mentioned
State bank examiner's reports and directors' examination.
(U-5-B)
It should also be noted that the Ohio State bank examination,
dated as of January 20, 1933, was not completed by the examiner as
the bank holiday was declared before its completion, and the bank
was denied a license to reopen.
The reports of the State examiner consist of some 300 or 400 sheets
and we have not taken photostatic copies. We have requested the
bank officials to have these reports in Washington in case they be
needed during the committee hearing and we shall refer to the reports
8148
STOCK EXCHANGE PEACTICES
frequently in our report, exhibits U-5-1, U-5-2, and U-5-3 being
the State bank examiner reports.
1. Heavy investments in real estate owned,—The item of real estate
owned, as carried on the books of the bank and reflected in statements,
represents the Union Trust Co. main bank building, which is a building
of 20 floors, its other branch bank buildings, and other real estate
owned.
The main bank building was built shortly after the consolidation
of the banks forming the Union Trust Co. in 1922, when a separate
corporation was formed, called the Union Lennox Co , wholly owned
by the bank—title to the bank building being placed in the name of
the Union Lennox Co. The Union Lennox Co. leased the bank building to the bank and also procured a mortgage loan of $6,300,000
from the Northwestern Mutual Life Insurance Co. of Milwaukee.
The bank carries this real estate on its books and in its statements
each year at the net amount of its advance to the Union Lennox
Co., less annual depreciation. The mortgage liability, however, is not
reflected on the books of the bank, the total cost of the building being
thereby understated by the amount of the mortgage.
Confining ourselves in this report, however, to the valuations of
real estate owned as reflected on the above mentioned four bank
examinations, the following appears as a summary
(U-5-a)
Percent
Banking prop- of capital Percent
of total
and sur- deposits
erties
plus
Jan
Mar
Dec
Tan
25,1929 $13,008,872 03
27,1931 13,600,994 17
20,1932 13,622,038 00
20,1933 13,614,480 66
37 2
388
389
4 5
46
78
82
Othei leal
estate owned
Total real
estate owned
$4,581,517 27 $17,590,389 30
5,976,445 04
19,577,439 21
6,464,045 48 20,086,084 48
6,569,343 89 20,183,824 55
Percent
of capital Percent
of total
and sur- deposits
plus
50
55
57
57
3
9
4
7
6 1
66
11 5
12 1
From this analysis it will be seen that over 50 percent of the bank's
capital and surplus was at all times invested in real estate, without
taking into consideration the fact that the actual mvestment in real
estate was considerably greater by reason of the mortgage liability
not reflected on the books of the bank or on its statements. This
obvious element of unhealthy condition prevailed from the very
organization of the Union Trust Co. in 1922. Such large real-restate
investments denote lack of conservative banking inasmuch as such
investments are definitely nonliquid; and it is considered generally
to be very poor banking policy to have such a large percentage of the
capital and surplus, and the correspondingly large percentage of total
deposits, tied up in assets of this nature.
It should be noted, however, that the bank was entirely within its
legal rights in constructing its main office building in 1922, although
it did come perilously close to the 60 percent limitation of its paid-in
capital and surplus Reference is here made to section 710-108 of
the Ohio banking laws.
Sixty percent of its paid-in capital and surplus of $35,000,000
would set a limitation of real estate owned for banking quarters in
the amount of $21,000,000.
STOCK EXCHANGE PRACTICES
8149
The actual cost of the construction of the main office building at
Euclid and East Ninth Street, according to the books of the Union
Lennox Co., was as follows
Cost of land, Euclid and East 9th Street property
Cost of leaseholds
...
Cost of construction
Architect fees
$3, 493, 501 49
21,127 42
13,180, 086 62
425, 000. 00
Total cost of the main office buildings and land in the amout of. 17,119, 715. 53
Against this cost the Union Lennox Co. placed a mortgage of $6,300,000
as mentioned above
The bank, of course, on its own books and in its statements did
not carry this building at the actual total cost of $17,119,715.53,
but carried it, as indicated before, at a figure representing the net
advance made to the Union Lennox Co.
However, going behind the book figures to actual facts, we find
that the bank had an investment of $17,119,715.53 in its main office
building at the time of its construction That, together with its other
banking properties at cost, made its actual investment in real estate
owned for banking purposes, a sum not much short of its legal limitation of $21,000,000.
(TJ-5-1)
It is interesting to note the comments of the State bank examiner in
Ms report of January 23, 1929, regarding real estate:
Question 1. State whether banking house is owned or leased.
Answer. Owned
Question 3. Is deed m name of the bank?
Answer. Union Lennox Co
Question 6. Is property encumbered? If so, is bank liable on encumbrance?
Answer Yes. Mortgage to Northwestern Mutual Life Insurance Co. for
$5,100,000 at 5% percent, amortization $300,000 yearly.
(U-5-2, p. 100)
Similar questions and answers appear also in the report dated
March 27, 1931, except that the answer to question 6 is "$4,200,000
balance due on mortgage held by Northwestern Mutual Life Insurance Co., rate 5}£ percent "
However, in 1929, the State bank examiner did point out that the
real estate holdings were unwarranted^ high and in his confidential
report to his department stated.
(TJ-5-4)
REAL ESTATE
Main office and branch buildings are apparently worth book value This
amount, however, should be watched very closely in the future or else it will soon
reach a staggering figure The mam office will be necessarily increased $300,000
each year as this amount is each year's amortization figure This alone is a
sufficient amount for the real estate to be increased. Regarding the other real
estate, it is practically impossible to rate the actual amount of loss which will be
suffered by this bank On certain pieces of real estate, the examiner is positive
that a loss will be suffered; but it is impossible to determine that amount The
law has been disregarded in certain instances regarding the outright purchase of
various pieces of real estate This was brought to their attention, and it is the
opinion of the examiner that this practice will be discontinued in the future.
Also, some parcels of real estate have been held longer than the allotted time;
this was brought to their attention and a requirement was made. The condition
8150
STOCK EXCHANGE PBACTICES
of the other real estate is probably the most unsatisfactory item m the bank at
this time; they are taking their losses as they see fit, and are earnestly trying
to place all real estate on the books at actual value
Although the bank owned considerable real estate in addition
to the main bank building, it did not pursue a conservative policy
of setting up provisions for physical depreciation for each year
on its books, other than depreciation on the main building.
On its Federal income tax reports, however, the bank took the
benefit of such depreciation on all its properties, regardless of the
fact that they were not recorded on the bank's general books; 1929
was the only year in which depreciation was charged off, and that in
the amount of $250,000, indicated as depreciation "for prior years."
The accumulated depreciation on the real estate owned which was
not recorded on the books as of December 31,1931, totaled $569,877.54.
For the year 1932 an amount of $178,064 32 was claimed in a
deduction on the income-tax return, but not charged off on the books.
As of December 31, 1932, the accumulated amount of depreciation
reported on income-tax reports, and not recorded on their books,
was $747,941.86.
The net effect of this method of accounting is that the real estate
owned assets were inflated by the amount of the depreciation not
deducted, and the earning statements were also inflated by such
amounts of depreciation applicable to each year not deducted.
Nowhere in the State bank examinations is there any criticism
relative to this inaccuracy and misrepresentation in the accounts
of the bank.
(Ohio bank laws, sees 710-122)
2 Bad loan policy and inadequacy of reserve for losses—(a) Excessive
concentration of loans to the Van Sweringen and Eaton interests:
As far back as early 1929, the State bank examiner's report shows
that the bank loans to the Van Sweringen interests were in excess of
the statutory limitation, which is 20 percent of the total capital and
surplus (in the case of this bank this limitation being $7,000,000) •
(U-5-1, p 98)
In the State examiner's report dated January 25, 1929, the examiner found that total loans made to the Van Sweringen interests
amounted to $8,069,890 25, being excessive thereby in the amount of
$1,069,890 25.
(U-5-2, pp 45, 46)
On March 27, 1931, the loans to the Van Sweringen mterests
amounted to $11,623,928 92, and to Cyrus S Eaton mterests
$4,579,862 Nevertheless, in the confidential report of the examination the bank examiner, Mr Thomas McEldowny, states as follows.
(U-5-5)
COLLATERAL LOANS
This department with its tremendous activity is well managed
Regardless
of the downward swing in the stock market, this department has admirably met
the situation. Short loans have been kept to a minimum amount. The collateral loan department is not subject to any criticism at the present time.
STOCK EXCHANGE PBACTICES
8151
Further under confidential comments headed "General" he states:
(U-5-5)
Management appears to be of the highest grade. The Van Swenngen con*
centration of credit and the real-estate situation appear to be the only items of
worry at this time. However, no definite stand can be taken on these items at
the present. The officers are well aware of this situation and are keeping in
constant touch with it The general condition of this bank with the above two
exceptions is satisfactory The examiner's requirement will not be taken care
of immediately, but will be complied with as soon as possible.
Nevertheless, in spite of these comments, indicating apparent dangers, the following appears in the body of the report of the bank
examiner
(U-5-2, p 6)
Question 10 and answer are as follows
Q What elements of danger or weakness are in the bank?
A None—apparent.
(U-5-6, p 7)
Also reference is made in a special report of the examining committee of directors, dated November 14, 1930, to the subject of
excessive loans, indicating excessive loans to the Van Sweringen
interests in the amount of $2,249,455 03. Total amount of these
loans was as follows.
Collateral loans to O. P . and M. J. Van Swenngen
Endorsers on collateral loan
Endorsers on unsecured loan
Guarantors on collateral loan to Metropolitan Utilities, Inc
Total
$7, 800, 000 00
20, 000. 00
6, 955 03
1, 422, 500 00
9, 249, 456. 03
Excess
2, 249, 455 03
(U-5-6, p 7)
The following note also appears thereon*
The loan to Metropolitan Utilities, Inc , was paid off November 26, 1930.
(U-5-7)
This statement appears to be only partially true, as the records of
the bank indicate that whereas the loan to Metropolitan Utilities,
Inc , in the amount of $1,422,500, was paid off on November 26,1930,
a new loan on the same date was made to the same company in the
amount of $1,632,500 Both these loans were certificates of participation, and the only difference between them was that the loan of
$1,422,500 was guaranteed by O P. and M. J Van Sweringen, while
the loan of $1,632,500 was guaranteed by the Vaness Co
The above-mentioned large loans to the Van Swenngen interests
and Eaton interests finally resulted in their inclusion, to a substantial
extent, in the total loans considered as bad at the closing of the bank.
(6) Loans to officers, directors, and their affiliated corporations
(c) General loans
(d) Real-estate loans.
(U-5-1, p. 7)
As of January 25, 1929: Loans to officers and directors,
$5,550,198 55; loans to corporations with which the directors were
affiliated, $9,351,147.41.
3152
STOCK EXCHANGE PEACTICES
(U-5-2, pp. B and F)
As of March 27, 1931* Loans to officers and directors,
$9,325,059.94; loans to corporations with which they were affiliated,
$24,345,442.12.
(U-5-3, p 16)
As of January 20, 1933. Loans to officers and directors,
$9,165,677.11; loans to corporations with which they were affiliated,
$20,510,620.43.
It should be noted that in these figures the State bank examiner
did not consider the Van Sweringen loans in the category of loans
to corporations affiliated, whereas J. R Nutt owned a 10-percent
interest in the Vaness Co.
(U-l-lOc)
On December 20, 1932, the total nonaccrual loans were
$22,715,190 46.
(U-l-8)
These were loans on which the bank ceased accruing interest; or,
in other words, loans which in the opinion of the bank's officers were
bad, or at least very doubtful of collection They were loans which
were, perhaps, properly collateraled at their inception, but were
permitted to become "sour" and delinquent in interest payments
because the management apparently did not have the ability to
collect on the collateral, or refused to embarrass what might have
been preferred borrowers Of the above figure $4,719,200 were nonaccrual loans of officers and directors.
The following comments by the directors' committee regarding loans
to directors are very pertinent:
(U-l-8)
Committee comment.—While these loans should be among the best loans in the
bank and be predicated upon the highest type securities, in some cases the reverse
is true and the bank now finds itself with loans greatly undersecured or secured
by other items for which there is no market whatsoever. Further, some of these
loans have necessarily been placed on a nonaccrual basis.
The committee knows that in some cases, even though our loan is still undersecured, the borrower has come forward and offered such other security as he
may have had and such action is highly commended. However, there are other
loans on which we should bring pressure to get a mortgage on their homes and
insist that they arrange for the payment of delinquent interest and reduction of
the principal
(U-l-10)
The estimated losses on account of these loans, on December 20,
1932, were $13,560,556.70.
(U-5-3, p. 183; U-5-3, pp 41 and 75)
As of January 20, 1933, the nonaccrual items, exclusive of bonds
and securities, were $24,119,748.65, and the estimated losses on loans
were $11,582,275.82.
\ In estimating the above two mentioned losses appearing on the
examiner's reports, it is definitely stated that these losses do not
include any possible real-estate losses on account of real-estate loans
or real-estate owned, as no proper estimate could have been made of
such
losses.
8153
STOCK EXCHANGE PRACTICES
(U-l)
In fact, the directors' examining committee stated:
Because of extremely abnormal conditions affecting real-estate, the committee
made no attempt to place an mdependent value on real-estate loans or on realestate owned by the bank.
Reference is also made to the state bank examiner's report as of
January 20, 1933, regarding real-estate mortgage loans:
(U-5-3, p. 248)
In attempting to classify loans none was classified as absolute loss unless the
bank expressed an intention of abandonmg the property or where a loss was
apparent from a reappraisal of the subject property.
Half the delinquent loans are over a year past due in interest and nearly all
such loans are delinquent in taxes—with such delinquency increasing At an alarming rate—thus weakening the equity that may exist to the property owned
The bank now has 103 suits in foreclosure and the officer m charge of real-estate
loans stated that the bank expected to be forced to bid in at least 81 of these
properties. As the delinquent interest and taxes increase it is bound to result
in one thing—the property owner will move out and turn the property over to the
bank. In most cases the properties have been reappraised since the loan was
granted. Some startling facts are revealed m the reappraisal. From the
appraisals of 1927 to 1929 the 1931 and 1932 appraisals show a reduction in value
from 20 to 50 percent And the balance due on the bank's loan in a great many
cases equals the 1932 appraisal Unless some relief is granted or business conditions change I believe the bank will be forced to take over at least 300 of these
delinquent loans
Another bad feature is the fact that the bank has over $2,000,000 loaned on
vacant property. No attempt is now made to foreclose on such loans All are
delinquent in taxes The bank will suffer most on allotment loans The delinquent taxes are increasing and eating away the values back of the bank's mortgage.
Analyzing the loans further, the following is the relation of realestate loans to total loans:
(U-5-a)
Real-estate loans Percent
of total
Total loans
Date
Jan 25,1928..
Mar 27,1931..
Dec 20,1932..
Jan 24,1933...
$220,346,080
222,808,076
152,404,226
151,821,516
63
90
63
39
$76,846,359
74,168,249
66,429,477
66,157,760
10
06
43
91
349
33 3
436
435
Correspondingly, reserves for losses on loans were as follows:
Jan. 25, 1929
Mar. 27, 1931
Jan. 20, 1933
(U-5-1, p. 130; U-5-2, p. 77; U-5-3, p. 299)
-
$404, 335. 42
360, 440. 59
1,196,389. 07
Loans were classed as slow, doubtful, and losses, as follows:
Date
Jan 25,1929..
Mar. 27,1931.
Slow
$9,734,141 90
8,838,165 90
Doubtful
$298,262 11
1,193,915 86
$44,428 00
254,834 92
(U-5-2, pp 14,77)
As of March 27, 1931, the bank examiner also found real-estate
loans in the amount of $5,185,215.43 delinquent in interest; and
8154
STOCK EXCHANGE PRACTICES
collateral and unsecured loans in the amount of $3,313,248 14, delinquent in interest Reserves for losses on March 27, 1931, were only
$360,440 59.
The following notation appears in the examiner's report of March
27, 1931, regarding the mortgage loans:
(U-5-2,p 14)
Mortgage loans listed as being delinquent as to interest have been in such a
condition for a period of 6 months or longer.
(U-5-2, p. 73; U-5-a)
In this connection it is important to note that the classification of
loans mentioned above as of March 27, 1931, covers only the analysis
of unsecured loans of $13,114,457.65; whereas the total unsecured
loans on that date were $42,804,615.32.
(U-5-2, p. 138; U-5-a)
The analysis of the collateral loans covers only $11,677,332 98,
whereas the total collateral loans was $94,348,212.30. In other
words, the Bank Examiner's report on March 27, 1931 reflects an
analysis of only small protions of the loans outstanding at that time.
It should also be noted that no comment whatever appears in the
report of March 27, 1931, regarding the large loans to O.P. and M. J,
Van Sweringen which, as of that date, totaled $6,900,000, except in
the confidential report to the State superintendent under "General,"
which we have referred to previously m this report.
I n spite of the amount of loans to the Van Sweringens and the
general condition of the bank, the examiner answered the following
questions thusly:
(U-5-2, p 15; U-5-2, p 6)
3. Q. Do corporations or enterprises in which any director or officer is interested borrow to an undue extent?—A. Apparently none.
10. Q. What elements of danger or weakness are in the bank?—A. None
apparent.
These answers to questions certainly appear in a very poor light
in view of the acknowledged questionable condition of the real-estate
loans as indicated in the confidential comments of the examiner as
follows.
(U-5-5)
REAL-ESTATE LOANS
The real-estate loans comprise 33 2 percent of the total loans Delinquent
loans in both mam office and branches total $5,185,215 43, or 6.9 percent of the
total loans After taking into consideration the prevailing unsatisfactory condition of the real-estate situation in the city of Cleveland, the abovefiguresappear
satisfactory. The bank is foreclosing on a number of properties at the present
time. Any loss that is suffered in the real-estate department is immediately
written off The real-estate situation is probably the most troublesome one
in the bank. Additional losses will unquestionably be suffered The general
depression, lack of employment of our borrowers, and a tremendous decline in
the present day value of real estate are the chief reasons for the unsatisfactory
condition in this department.
A comparison of the total loans and the total deposits, exclusive of
trust deposits, indicates the following:
8155
STOCK EXCHANGE PKACTICES
(U-5-a)
Bate
Jan 25,1929
Mar. 27,1931
Dec 20,1932
Jan 20,1933
A drop in percentage of.
Total deposits
Total loans
$220,346,080
221,808,076
152,404,226
151,821,516
63
90
63
39
31 1
$289,021,704 05
296,928,523 08
174,528,029 55
166,864,901 17
423
From these figures it will be seen that whereas the deposits dropped
between March 27, 1931, and December 20, 1932, in the amount of
$122,400,493.53, loans for the corresponding period dropped only in
the amount of $70,403,850 27; and that whereas the deposits further
dropped between December 20, 1932 and January 20, 1933 in the
amount of $7,663,128.38, the loans for the corresponding period
dropped only in the amount of $582,710.24.
The percentages of total loans to total deposits, exclusive of trust
deposits, were as follows
Percent
Jan 25,1929
Mar. 27, 1931
Dec. 20, 1932
Jan. 20, 1933
76
75
87.
91
2
0
3
0
3. Bad investment policy inadequate reserves.—From examination
of monthly schedules of securities and investments which we have
reason to believe were regularly placed before the executive committee
and directors it is very evident that the senior officers and executive
committee were cognizant for some time past that the value of their
securities and investments were shrinking progressively.
(U-5-10)
Pencil notations appear on these monthly schedules, indicating
that on November 30, 1931, there was a shrinkage in the values of
mvestments in the amount of $14,771,051 08 agamst which there was
«, reserve for security variations of only $2,200,000. Similarly, on the
following dates corresponding figures were as follows.
(U-5-11, 12, 13, 14, 15)
Date
July 31,1932..
Aug 31,1932..
Sept 30,1932.
Dec 31,1932..
Jan 31,1933...
Shrinkage in
investments
$16,467,013 29
13,945,578 11
14,896,132 77
14,710,285 75
14,757,080 74
Reserve
carried
$3,891,487 15
3,852,879 55
3,819,553 97
3,704,071 92
3,704,071 92
4 Bad dividend policy in the face of impaired capital —It is apparent
that the executive committee and directors were aware of the serious
impairment to the capital by reason of a large shrinkage in investment
values m 1931 and 1932, and by reason of a large shrinkage in the
values of loans during these periods
8156
STOCK EXCHANGE PEACTICES
(U-97)
In spite of this knowledge they nevertheless continued to pay cash
dividends in substantial amounts during the year 1931 and the full
year of 1932. Prior to 1927, the Union Trust Co paid dividends at
the rate of 10 percent. The rate in 1927 was changed to 12 percent
and continued until 1932, whea it was reduced to 8 percent
Conservative banking would have dictated that dividends should
be omitted and larger reserves set up to provide for losses on account
of loans and investments.
In the case of this bank it is very evident that additional contributions of capital should have been made, even in 1931 and certainly
in 1932
It must be remembered that in reflecting estimated losses on loans
as set up by the State bank examiner, no attempt was made to
evaluate the real-estate loans on which, unquestionably, large losses
were obvious.
5. Rapid decline in deposits.—Comparative decline of deposits has
already been indicated in the report above under the caption "General
Loans as Compared to Deposits."
6. Inability to borrow.—During the years 1931 and 1932, the pledged
assets of the Union Trust Co were increasingly large As indicated
by the State bank examiner's reports, public funds on deposit and
bills to the Federal Reserve bank were secured by assets of the Union
Trust Co , pledged as follows:
(U-5-1, p 70)
Jan. 25, 1929
Public funds
Bonds pledged
Federal Reserve bills
Assets pledged
Mar 27, 1931
Public funds
Bonds pledged
_
$4,097,400
7, 543, 000
3,000,000
7, 000, 000
27
00
00
00
(U-5-2, p 78)
_
_
8,130, 980. 67
12, 835, 000. 00
(U-l-42)
As of December 20, 1932, a total of $58,466,312.38, consisting of
bonds, mortgages, and other assets, were pledged to secure public
funds and bills payable to the banks and the Reconstruction Finance
Corporation; and as of January 20, 1933, total assets pledged were
$60,142,577.62, consisting of the following:
Unsecured loans
Mortgages
Bonds
(U-5-3, p 8)
$5, 293, 398. 07
41, 505, 679. 55
-_ 13, 343, 500. 00
Alfred P. Leyburn, in his testimony on January 11, 1934, given
before the committee (speaking of the general banking situation)
stated:
(Testimony of Leyburn, Jan 11, 1934)
Then we go to the Union Trust Co of Cleveland, with deposits of $194,000,000
on the 31st of December, 1932; bills payable of $15,878,000; cash $35,000,000.
In addition to borrowing that $15,000,000 they had borrowed through an affiliated
mortgage company about $21,000,000. They had just about exhausted their
STOCK EXCHANGE PRACTICES
8157
borrowing power After the bank holiday, that bank, with the aid of the Reconstruction -Finance Corporation, paid out 35 percent.
The additional $21,000,000 stated above as being borrowed through
an affiliated mortgage company is the money borrowed through the
medium of the Western Reserve Mortgage Co., organized to meet
the requirements of the Reconstruction Finance Corporation, on the
subject of which a separate report is being written.
It is believed that the purpose in borrowing from the Reconstruction
Finance Corporation through the medium of the Western Reserve
Mortgage Co. was twofold:
1. To obviate the necessity of reflecting on the bank statements
such large additional bills payable, which would result in an increased
alarm on the part of the public;
2. To enable the bank to borrow money in excess of its borrowing
limit.
The details of the borrowings by the Union Trust Co. from the
Reconstruction Finance Corporation both before and after the bank's
closing will be covered fully in a separate report
CONCLUSION
Concluding this report, it is believed that as much as the officers
and directors may have been largely responsible for allowing the
bank to get in so bad a condition that it could not reopen, the Ohio
State Banking Department too must shoulder the responsibility for
allowing this condition to prevail. It is further believed that the
State banking department did not perform its duties diligently and
fearlessly, and definitely violated the law by not making examinations
at least once a year as prescribed by law, and further, by condoning
practices in the bank which were subject to severe criticism. These
practices, if criticized in time, could have been checked, and the
result would have been that the bank would not have sunk to as bad
a condition as it did. The final result would have been that the
depositors would not have been faced with so large a loss in the tying
up of their assets; as turned out to be the fact.
It is a very sad commentary that the State banking department, in
the light of definite poor banking practices, should give the bank's
officers and directors what amounts to a pat on the shoulder and in
effect tell them what amounts to "Your bank is in excellent condition
and you have a very fine management."
A true conclusion of the State bank examiner's reports would have
indicated severe criticism and severe requirements for ending the
practices which resulted in the bank's final closing. It is also bdieyed
that if the State banking department would have made an examination
early in 1932 (which it did not do) it would have disclosed a serious
impairment of capital, and if the examination were conducted properly and fearlessly, it should have resulted in a demand for additional
capital on the part of the stockholders, or in case of refusal or inability
to meet such assessment, it would have been the duty of the State
banking department to step in and save the institution from subsequent additional losses.
WALTER H. SEYMOUR,
Senior Examiner.
8158
STOCK EXCHANGE PBACTICES
Mr. SAPERSTEIN. Mr. Meehan, I hand you a report entitled
"Schedule of directors and officers, years 1929 to 1933, inclusive, of
the Union Trust Company and the Union Cleveland Corporation,"
which I will ask you to identify and state whether it was prepared
under your immediate supervision by the members of the investigating
staff of the committee
Mr. MEEHAN It is and
was
Mr SAPERSTEIN Mr Chairman, I wish to offer this report in
evidence, and I do not believe there is any reference to any exhibits
in connection therewith
The CHAIRMAN The report will be received in evidence and appropriately marked
(The report entitled "Schedule of directors and officer, years 1929
to 1933, inclusive, of the Union Trust Company and the Union
Cleveland Corporation," was received in evidence, marked "Committee Exhibit No 5, May 4, 1934," and is as follows-)
COMMITTEE EXHIBIT N O . 5, MAY 4,
1934
Schedule of directors and officers, years: 1929-88, inclusive
[Asterisk (*) indicates year serving]
UNION TRUST 0 0
Directors
Name
W M Baldwin, president, Union Trust Co. _.
E 8 Barkwill, secretary, Cleveland Builders
Supply & Brick Co
George Bartol, chairman of executive committee, Otis Steel Co
W P Belden, Belden, Young & Beach.
Alexander C Brown, president, Industrial
Brownhoise Corpoiation
Geo P Comey, president, the Comey &
Johnson Co
Henry W Corning
Geo A Coulton, vice chairman of the board,
The Union Trust Co
W J Crawford, Jr, president, Crawford
Kealty Co
H G Dalton, Pickands, Mather & Co.
F B Fretter, president, the National Refining Co
W H Gerhauser, president, the American
Ship Building Co
F. H Ginn Tolles, Hogsett & Gum, attorneys
Tom M Girdler, chairman of board and president the Republic Steel Corporation
Geo C Gordon, president the Park Drop
Forge Co
G W Grandin, secretary the Missouri Lumber & Mining Co
E R Grasselh, director Grasselh Chemical
Co
Thos S Grasselh, director E I Du Pont
De Nemours & C o , president Grasselli
Chemical Co
Geo Gund, Gund Realty Co
J A Hadden, Andrews, Hadden& Burton—
H M Hanna, chairman of board, The M A
Hanna Co
W A Harshaw. president Harshaw Chemical
Co
F H Haserot, president the Haserot Co
W S Hayden, Hayden, Miller & Co
Parmely W Herriek, New York City
Geo H Hodgson, chairman of board, the
Cleveland Worsted Mills Co
Officers
Office held
President
STOCK EXCHANGE PRACTICES
8159
Schedule of directors and officers, years 1929-33, inclusive—Continued
Directors
Officers
Name
Officelbeld
David L Johnson, M B & H H Johnson,
attorneys
Emil Joseph, attorney
Adrian D Jovce, president, the Ghdden C o . .
Ealph T King, vice president, the Realty
Investment Co
John A Khng, president, the Cleveland
Builders Supply Co
J R Kraus,1 chairman of board, the Union
Trust Co
E J Kulas, president, Midland Steel Products Co , president, Otis Steel Co
E A Langenbach, chairman of board, Mitchell, Hemck & Co , Canton Ohio
E P Lemhan, Lenihan <fe Co
Bascom Little, Crowell & Little Construction Co
Samuel Mather, Pickands, Mather & Co
Philip R Mather, Pickands, Mather & Co—
William G Mather, president, Cleveland
Cliffs Iron Co
Otto Miller, Hayden, Miller & Co
T. W Miller, chairman of board, Faultless
Rubber Co , Akron, Ohio
Ralph D Mitchell, Mitchell & Co
R V Mitchell, president, Mitchell, Hernck
&Co
Herman Moss, general agent, the Equitable
Life Assurance Society of N Y
P A Myers, president, the F E Myers &
Bros Co , Ashland, Ohio
Laurence H Norton, Oglebay, Norton & Co
Robert C Norton, Oglebay, Norton & Co
J. R. Nutt, chairman of the board, the Union
Trust Co
OarlN Osborne, treasurer, the M A Hanna
Co
Kenyon V Painter, real estate
N G. Richman, the Richman Bros Co
Thos. P Bobbins, vice president, the Cleveland Hardware Co
Jos E Rogers, president, the American Multigraph Corporat on
F. P. Root, president, E P Root Co
Allard Smith, executive vice president, the
Union Trust Co
Samuel Lewis Smith, vice president, National
Malleable & Steel Castings Co
Andrew Squire, Squire, Sanders & Dempsey,
attorneys.
Henry G Tremmel, president, the North
American Fibre Products Co
J H. Wade, Jr, Wade Realty Co
Whitney Warner, W H Warner & Co.J
Fred R White, Baker, R & L Co
Thos H White
Windsor T White
R W Woodruff, chairman of board, the
White Motor Co, president, the Coca Cola
Co
Vice chairman
board
of
Executive vice president
UNION CLEVELAND CORPORATION
W M Baldwin.
E F Carter
A C Coney..
G A Coulton
H . G Dalton
G W Grandin
Warren S Hayden
John A Klmg
J. R. Kraus
E J Kulas-. •
1 T R Krau* elected chairman of board June 30,1932
2 President after July 12,1932.
Vice president.8
Vice
president
and
8160
STOCK EXCHANGE PEACTICES
Schedule of directors and officers, years: 1929-88, inclusive—Continued
UNION CLEVELAND CORPORATION—Continued
Directors
Officers
Office held
Name
C B
J R
Wm
E N
Vice president
President
Lincoln
Nutt
G Mather..
Wagley....
Assistant 3secretarytreasurer
Windsor T White.
L C West*.
C C Memfield—R C Hyatt
Henry Ranft
L J Roeder.
Assistant treasurer
Secretary-treasurer
Treasurer
Assistant treasurer
AKERS-FOLKMAN CO
President
Secretary
Director
Jos Folkman..
Grover Hull...
Allard Smith..
CLEVELAND-BOSTON CO
Secretary.
President
Vice president and
treasurer
Secretary-treasurer.
Vice president
President
L O Gilger
Grover H Hull
W J O'Neill
JohnC McOonnell.
A L Wieland
James S Royan.*
P A. FRYE CO
President
Secretary-treasurer
Vice president and i
sistant secretary.
Vice president
P. A. Frye
Charles M Knight..
L H Stofer
A . W Lewis—
.—
THE UNION LENNOX CO.
W M.Baldwm.
President and treasurer
Vice president.
Do
President
Assistant secretary and
Allard Smith
M S Halhday...
O W Carlson
Grover H Hull
H E Hills
S J.Blair
Charles M Knight.
James S Rogen
C B Anderson ...
P W Jewell
Secretary
Vice president
Secretary
Treasurer
Secretary.
WALTER H. SEYMOUR,
Senior Examiner.
Mr. SAPERSTEIN. Mr. Meehan, I now hand you a report entitled
"The Union Trust Company—Compensation to officers", and ask
you if that was prepared under your supervision by members of the
investigating staff of the committee.
Mr. MEEHAN. It
8
was.
Secretary m 1929
< Elected director July 31,1933, also elected president.
8161
STOCK EXCHANGE PRACTICES
Mr. SAPERSTEIN. Mr. Chairman, I offer the report in evidence,
together with the exhibits referred to on the report and which
exhibits are now at the Government Printing Office
The CHAIRMAN The report and exhibits will be received and
appropriately marked
(The report entitled "The Union Trust Company—Compensation
to officers", together with exhibits referred to therein and which
exhibits are at the Government Printing Office, were received in
evidence and marked "Committee Exhibit No 6, May 4, 1934", and
are as follows )
COMMITTEE EXHIBIT N O . 6, MAY 4,
1934
COMPENSATION TO OFFICERS
It is interesting to note in analyzing the income and expenses of
Union Trust Co , that while earnings (before depreciation) decreased
over $2,000,000 from 1928 to 1932, the decrease in compensation
paid to officers was less than $300,000
(U-17-1, 5, 6, 9)
According to bank records, the total compensation paid to officers
for the year 1928 was $1,304,409, and for the year 1932, $1,008,605,
indicating a decrease of $295,804, whereas, the net operating income
before depreciation for the year 1928 was $4,997,152 67, and for the
year 1932, $2,929,636 57, indicating a decrease of $2,067,516 10.
Considering each decrease from a percentage viewpoint, earnings
decreased 41 percent plus, officers' compensation decreased 22 percent
plus
Below is a comparative statement compiled from the bank records
showing for the years 1928 to 1932
(U-17-1 to 5, 6 to 9)
Compensation paid
to officers
$1,304,409 00
1,345,901 08
1,296,132 00
1,286,910 00
1,008,605 00
1928.
1929.
1930.
1931.
1932.
Total operating
expenses
$5,135,926 70
5,642,469 72
4,249,744 65
5,211,016 28
4,252 310 59
Net operating income before depreciation
$4,997,152 67
5,026,480 37
4,566,259- 33
4,355,605 13
2,929,636 57
The head of this banking institution should be questioned as to the
efforts made to decrease compensation paid to officers so as to be in
line with the correspondmg decrease m earnmgs
In 1932 there appears to have been a general decrease in officers'
salaries of from 10 to 20 percent, which, m our opinion, and m view
of the vast decrease in earnmgs, was insufficient
There were no bonuses paid to officers during the years under
review.
175541—34—PT 18
-IS
8162
STOCK EXCHANGE PRACTICES
Comparative salaries of the "key men" for the years under review
are as follows
W. M Baldwin
Q A Coulton
J R Krans
J E Nutt
..
- -
„
Allard Smith
1928
1929
1930
1931
$45,000
50,000
45,000
50,000
35,000
$48,333
50,000
48,333
50,000
37,500
$50,000
50,000
50,000
50,000
40,000
$50,000
50,000
50,000
50,000
40,000
1932
$44,166
40,916
44,166
122,916
33,333
i For half year only
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner M. J. La Padula.
Mr SAPERSTEIN. I now hand you a report entitled "The Union
Trust Company—Loans to directors", and ask you if that report
was made by members of the investigating staff of the committee
under your immediate supervision
Mr. MEEHAN
It
was.
Mr SAPERSTEIN. Mr. Chairman, I offer the report in evidence,
together with the exhibits mentioned thereon, which exhibits are now
at the Government Printing Office
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately marked
(The report entitled "The Union Trust Company—Loans to
directors", together with the exhibits connected therewith and which
exhibits are now at tLe Government Printing Office, were received in
evidence and marked "Committee Exhibit No. 7, May 4, 1934",
and are as follows:)
COMMITTEE EXHIBIT NO 7, MAY 4,
1934
LOANS TO DIRECTORS
(U-6-54-a, b)
According to an analysis prepared and furnished to us by the
liquidator of the Union Trust Co , directors of the Trust Co. were
indebted to the bank on February 25, 1933, the day the bank closed,
as follows:
Direct liability
Contingent liability
Total
Less duplications account of 3 omt liability
Total
$7, 393, 805 63,
859,460 12
8, 253, 265 75
104, 477 39
8,148, 788 36
On February 17, 1934 (this date was selected as being nearest to
the termination of our investigation), the liability of directors to the
bank was as follows:
(U-6-54r-a, b)
Direct liability
Contingent liability
Total
Less duplications account of 3 omt liability
Total
$5, 549, 384 41
589,940 67
6, 139, 325. 08
10, 833 72
6,128, 491. 36
STOCK EXCHANGE PRACTICES
8163
Special reports have been prepared on the following directors:
William G. Mather, Kenyon V. Painter, hence no specific comments
relative to these directors are contained in this report
LENIHAN REPORT
(U-l-1 to 45)
Conditions in regard to loans to directors of the Union Trust Co.
were brought to the attention of directors in the so-called "Lenihan
report/' dated February 3, 1933 This report was the result of
an examination as of December 20, 1932 Page 9 of this report
indicates the directors7 liability as of that date amounted to
$9,252,586 80, made up as follows
(U-l-7)
Direct
$8, 470, 478 05
Contingent
782, 108. 75
Total
9, 252, 586. 80
(U-l-8)
Page 10 of the report contains the following comments:
Loans to
directors—undersecured
Wm P Belden
Geo. P. Comey
T M Girdler
G W Grandm
T S Grasselh
John A Haddan
W S Hayden
Adrian D Joyce
Ralph T. King
Bascom Little
R V Mitchell
C N. Osborne
Whitney Warner
A
Total
,
Now on nonaccrual basis
W. J. Crawford, Jr
Parmely W. Herrick
Otto Miller
K. V Painter
$12, 700. 00
82, 000 00
10,000 00
313,000 00
371,530 70
16,839 00
90,900 00
709,500 00
38, 743. 64
37, 343. 44
15,400 00
90,000 00
149, 143 20
1, 937, 099 98
61, 400. 00
808, 800 00
* 919, 000. 00
2,930,000.00
Total
-
4, 718, 200. 00
(U-l-8)
Committee comment.—While these loans should be among the best loans in the
bank and be predicated upon the highest type securities, in some cases the reverse
is true and the bank now finds itself with loans greatly undersecured or secured
by other items for which there is no market value whatsoever Further, some
of these loans have necessarily been placed on a nonaccrual basis
The committee knows that in some cases, even though our loan is still undersecured, the borrower has come forward and offered such other security as he
may have had and such action is highly commended. However, there are other
loans on which we should bring pressure to get a mortgage on their homes, and
insist that they arrange for the payment of delinquent interest and reduction of
the principal
1 Only $520,000 on nonaccural basis.
8164
STOCK EXCHANGE PBACTICES
It will be noted that at that time (February 3, 1933), out of totaj.
loans to directors of $9,252,586 80, the total undersecured amounted
to $6,655,299 98, or over 71 percent of the total loans to directors
If this laxity were followed in the case of all loans, the results
obviously would be disastrous However, the fact that the borrowers
were directors of the bank undoubtedly influenced the policy in regard
to these loans
(U-l-2)
The total amount of collateral loans on December 20, 1932, were
$64,876,214 05 With the possible exception of $100,000 the direct
loans to directors of $8,470,478 05 were collateral loans, indicating
that directors were borrowing approximately 12 percent of the total
collateral loans
COMMENTS ON INDIVIDUAL LOANS
Below is a brief history of individual directors7 loans Those loans
which have been paid since the closing of the bank February 25, 1933,
have been eliminated
Otto M%ller —On January 20, 1933, the date of the last examination
by the Ohio State Banking Department, Otto Miller was indebted
to the Union Trust Co in the amount of $894,000 We quote from
the bank examiners' report.
(U-5-3, p 107)
Otto Miller (director) $894,000—Iroquois Securities Inc , $50,522 25 —Miller's
personal loans amount to $805,000, $420,000 of this amount is delinquent in
interest since April 1, 1932, and $100,000 is delinquent in interest since July 1,
1932 His personal loans are collateraled by various listed and unlisted securities
having a present estimated market value of $328,000 The bank also holds 1,578
shares of Malvery Land Co , which had a book value of $72 per share on July 11,
1932 This company is a real-estate holding company whose holdings consist
principally of Shaker Heights properties It is impossible to determine the true
value for this stock No reductions have been made on Miller's personal loans
in more than 1 year He is probably broke and it is apparent that a substantial
loss must eventually be taken For the purpose of this examination $475,000
has been classed doubtful The balance of the loans charged agamst Miller, which
amount to $89,000, are obligations of Hayden Miller & Co , of which he is a
partner These loans are being kept in current condition but the value of the
collateral pledged against them amounts to only $28,000 It is believed, however,
that the other partners in this firm are financially responsible The Iroquois
Securities, Inc , is owned equally by W S Hayden, L B Williams, D W Myers,
and Otto Miller The value of the marketable collateral pledged agamst this loan
is $35,000 Other collateral pledged is 3,520 shares Wood Chemical Products Co ,
class B stock, and 135 shares Cushman Willis Co It is believed that these two
latter stocks have sufficient intrinsic value to cover the loan
(U-6-54)
On February 25, 1933, the date the bank closed, Mr. Miller owed
$805,000, and on December 31, 1933, $726,920.71 Since that date
and to the present writing there have been principal reductions of
$8,647.20 These reductions were the results of sales of collateral
pledged for the loans.
Attention is directed to the examiner's comments above, wherein
he declared that the bank will eventually sustam a loss of approximately $475,000.
STOCK EXCHANGE PEACTICES
8165
(U-l-8)
In the so-called "Lenihan report", dated December 20, 1932, page
10, loan to Otto Miller, in amount of $919,000, is shown under the
caption " Loans to directors—Under-secured—Now on nonaccrual
basis," to the extent of $512,000 This caption is followed by
several comments of the committee on the general policy of loans to
directors
(U-6-55)
The attached exhibit from the files of the receiver clearly indicates
that a large loss will eventually be mcurred by the bank m the liquidation of this loan
Adrian D. Joyce —On January 20, 1933, date of last examination
by Ohio State Banking Department, Mr Joyce was indebted to the
bank in the amount of $709,500 In commenting on the loan tire
exammer stated
(TJ-5-3, p 100)
Adrian D Joyce $709,500 loan —Maker is president of the Glidden Co Loans
is collateraled by various listed stocks worth approximately $168,000 at the
present market prices, together with an assignment of a living trust which has
an estimate worth of $265,000 The pimcipal item of collateral held is a block
of 700 shares of Glidden Co , which is currently quoted at $16 per share The
loan depends largely on a recovery in market value of Glidden stock Two
hundred and seventy-five thousand dollars is the approximate shortage at this
time, and this portion has been classed undetermined
(U-6-71 to U-6-74)
On February 25, 1933, Mr Joyce owed $708,841 50, and on December 31, 1933, $707,539 06 No other reductions have been
made since June 30, 1933; Mr Joyce's liability at this writmg bemg
$707,539 06
The so-called "Lenihan report" dated February 3, 1933, shows the
total loans $709,500, secured by collateral valued as follows
Securities
$353,297
100 shares Joyce Realty Co capital stock, being entire capitalization of
company whose mam asset is a 153-acre farm and equipment valued
at
200,000
Life insurance assigned
150, 000
(U-l-16)
Committee comment —We do not approve of personal holding companies such
as Joyce Realty Co Why not get a mortgage on the farm instead of the capital
stock and additional collateral?
Whitney Warner —On January 20, 1933, the date of the last examination by Ohio State banking department, Whitney Warner was
indebted directly m the amount of $9,925 20, and indirectly in
amount of $590,082 49 We quote from the bank examiner's report
(U-1-28-, 28a)
W H. Warner Coal Co
Warner Collieries Co , end W H Warner Coal Co
Whitney Warner
Ralston Fox Smith, end Whitney Warner
Ohio River Edison Coal Co , end W H Warner Coal Co
W H Warner & Co
K B Whitworth, end Whitney Warner
Total
-
$103,980 00
300, 000 00
9, 925 20
20, 000 00
120, 000 00
36,227 49
9,875 00
600, 007 69
8166
STOCK EXCHANGE PRACTICES
(TJ-5-3, p 125)
The W H Warnei Coal Co is a holding company for a number of coal companies W H Warner & Co is a partneijship which owns the majonty of the
stock of W H Warner Coal Co , and- also functions as a sales company for the
vanous subsidiary coal companies The above detailed lines of credit have
been m the bank for a number of years, but are being gradually worked out under
the direction of vice president Steele The various loans are collateraled by
stocks and obligations of the various subsidiary companies Due to the interlocking nature of the various companies and the interdependence of one company
on another it is impossible to determine any dollar values for these stocks In
discussing the above loans with vice president Steele, he stated that the companies are ably managed and feels confident that reductions will continue on
same proportion that they have in the last few years
Balances of these loans as of February 19, 1934, are as follows
W H Warner Coal Co
Feb 25, 1933
Feb 19, 1934
Warner Colleries Co
Feb 25, 1933
Dec 31, 1933
Feb 19,1934
(U-6-54)
$103,980 00
103,980 00
(U-6-54)
300,000 00
203,887 52
199,887 52
(U-6-54)
Ralston Fox Smith
Feb 25, 1933
20,000 00
Feb 19,1934
20,000 00
This note entered the assets of the bank Nov 10, 1924, m
the amount of $26,000 Only reduction May 12, 1928
(4 years later) Still m assets of bank, $20,000
(U-6-54)
K. B Whitworth:
Feb 25, 1933
9,875 00
Feb 19, 1934
9,875 00
George P Comey —On January 20, 1933, date of last examination
by Ohio State Banking Department, Mr Comey was mdebted to the
bank in the amount of $32,000 In commenting on the loan the
examiner stated
(U-5-3, p. 86)
$32,000 loan —George P Comey, value of collateral pledged is $20,000, which
includes 400 shares of the Union Trust Co It is impossible to obtain any
additional collateral and payment depends on recovery of stocks held
(U-6-75)
The liability of $32,000 of Mr Comey has existed since January 2,
1932, the only reduction is $645.84 on June 30, 1933, which makes
his liability at this writing $31,354 16.
(U-l-12)
The so-called "Lenihan report", dated February 3,1933, shows the
total loan $32,000, secured by collateral valued at a total of $18,340,
undersecured at that time $13,660.
STOCK EXCHANGE PRACTICES
8167
(U-5-3, p 87)
W. J Crawford, Jr —On January 20, 1933, date of last examination
by Ohio State banking department, Mr Crawford was indebted to
the bank in the amount of $59,100 In commentmg on the loan the
examiner stated:
W J Crawford, Jr , $59,100 —Interest is delinquent since April 1, 1932 The
loan is collateraled by listed stocks worth $9,000, together with various other
real estate, stocks, and bonds of undetermined value Maker is heavily in debt
at practically all of the other local banks A creditors' agreement has been made
and all of his unpledged assets are held for the pro rate benefit of the banks interested Outcome of this loan cannot be determined at this time.
(U-6-76, 77, 78)
On February 25, 1933, Mr. Crawford owed $59,100, and on December 31, 1933, $57,997 24. Since that date and at the present writing
there has been only one small reduction in the amount of $71.25.
(U-l-ll)
The so-called "Lenihan report" dated February 3, 1933, shows the
total loan $59,100, secured by collateral valued at a total of $15,200,
undercollateraled at that time $43,900
Parmely W. Herrick.—On January 20,1933, date of last examination
by Ohio State Banking Department, Mr. Herrick was indebted to the
Trnnk in amount of $805,642 50. In commenting on the loan the
examiner stated
(U-5-3, p 98)
Parmely W Herrick loan of $805,642 50 —Interest is delinquent since July 1,
1932 Value of collateral pledged is $517,000 On November 7, 1932, Herrick
owed $1,069,000 to various Cleveland banks At that time an extension agreement was signed by all the banks and the above borrower His worth is represented largely in stock ownership m the Union Carbide & Carbon Co , and there
are 10,525 shares of that stock pledged on this loan Although the borrower is
greatly overextended at this time, it is believed that he can work out of his present
difficulties Loan is classed as undetermined at this time
(U-6-54)
On February 25, 1933, Mr Herrick owed $805,642 50, and on
December 31, 1933, $751,499 12 Since that date and to the present
writing there have been principal reductions of $42,245 41. The
liability of Mr. Herrick at this writing is $709,253 71.
(U-l-15, U-6-79, 80, 81)
The so-called "Lenihan report" dated February 3, 1933, shows
the total loans $808,800, secured by collateral valued at a total of
$499,212, under-collateraled at this time $309,588.
(U-5-3, p. 94)
G W Grandin—On January 20, 1933, date of last examination
T>y Ohio State Banking Department Mr Grandm was indebted to
the bank in the amount of $312,000 In commenting on the loan
the examiner stated.
G W Grandin, $812,000 —Loan is collateraled by various marketable stocks
worth $123,000> together with 865 shares of the Grandin Coast Lumber Co,
8168
STOCK EXCHANGE PRACTICES
which has a book value of $116, and 950 shares of Louisiana Central Lumber
Co , which has a book value of $283 per share Collateral is believed to have
sufficient value to protect the loan and substantial reductions have been made
during the last 2 years
(U-6-54a)
On February 25, 1933, Mr Grandin owed $312,000, and on December 31, 1933, $206,935 75 The total reductions of $105,064 2&
were cash payments
His total liability at the present writing is $206,935 75, secured by
collateral valued on February 10, 1934, in the amount of $265,563
(U-l-13)
The so-called "Lenihan report" dated February 3, 1933, shows the
total loans $313,000, secured by collateral valued at a total of $131,000
undercollateraled at this time, $182,000
(U-l-13)
Committee questions the value of stock in privately conducted enterprise as*
collateral to loan, therefore classes this loan as undersecured Recommends
securing other collateral
WALTER H
SEYMOUR,
Senior Examiner
This report based upon preliminary report and complete investigation by Committee Examiner M J LaPadula
Mr SAPERSTEIN I hand you a report entitled "The Union Trust
Company—Loans to Officers and Directors of Other Banks'', and
ask you if that report was made by members of the investigating staff
of the committee under your immediate supervision
Mr
MEEHAN It
was.
Mr SAPERSTEIN Mr Chairman, I offer the report in evidence,
together with the exhibits referred to therem, which exhibits are
now at the Government Printing Office.
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately marked
(The report entitled "The Union Trust Company—Loans to Officers and Directors of Other Banks'', together with the exhibits connected therewith and now at the Government Printing Office, were
received in evidence and marked " Committee Exhibit No. 8, May 4,
1934", and are as follows )
COMMITTEE EXHIBIT NO
8, MAY 4,
1934
LOANS TO OFFICERS AND DIRECTORS, OTHER BANKS
(U-il-l, 2)
In a consideration of loans made by the Union Trust Co , to officers
and directors of other banks, consisting of over 6K percent of the total
loans, it is noted that in most instances other collateral was presented
in addition to bank stock Consequently, it would appear that it
was much easier to obtam loans through the Union Trust Co than
through the bank with which the officer or director was connected. If
the loans were based only on capital stock of these other banks for
collateral, the situation could be readily understood, inasmuch as a
STOCK EXCHANGE PRACTICES
8169
director or officer may not borrow from his own bank, using that bank's
capital stock as collateral.
There is no doubt that a large number of these borrowers from the
Union Trust Co , were also borrowers from other banks, and from
what files have been reviewed, this fact had very little consideration in
determining whether a loan was acceptable to the Union Trust Co.
The loan history of several of these borrowers is given in the following as representative of the group
J A HOUSE, PRESIDENT, GUARDIAN TRUST CO.
Among the officers of other banks who borrowed heavily from the
Union Trust Co was J Arthur House At the time the Union closed
in February 1933, Mr. House was indebted to the bank in the amount
of $67,900 In January of 1933 when the Umon Trust was examined
by the State Banking Department, the examiner, commenting on
this loan, stated*
(U-5-3)
Value of listed collateral pledged is $13,000 Bank also holds 500 shares of
M A Hanna Co common stock which has book value of $30 per share House
is known to be heavily in debt, and is unable to make reductions or furnish additional collateral; $55,000 has been classed doubtful and will probably result in
a loss.
(U-ll-3b, 4)
Since the bank has been closed the liquidator has credited the loan
with the amount of dividends (totaling $157 55) received from the
collateral and has sold some of the collateral, realizing $4,875 25.
The balance of the loan still unpaid is now $62,840 40. On January
23, 1934, Mr Cox, bank liquidator, wrote to Mr House stating that
an undue insurance premium was due m the amount of $207 40.
House, using the unused portion of the letter, replied
(U-ll-5)
I regret to advise that I am at present unable to pay the premium due on the
policy in question. I have heretofore explained my situation to you, namely,
that I am unemployed—all of my securities are pledged to various loans at
different banks—and all dividends and income are impounded. * * *
On January 25, 1934, Mr House called the Union Trust and—
(U-ll-4)
He is rather indignant about our having sold the Industrial Rayon stock, which
he claims caused him a loss of approximately $5,000, and asked that in the future
before we sold any of his securities to get in touch with him * * *
(U-ll-4)
* * * He said that the Cleveland Trust loan to him is secured entirely
by Guardian stock and that his loan in New York with the Chemical is also
undercollateralled, but that institution permitted him to make a switch in his
securities in order that he could buy some Industrial, inasmuch as he was a
member of the executive committee of the latter company Our action in selling
the Industrial Rayon caused him considerable embarrassment * * *
8170
STOCK EXCHANGE PKAOTICES
The conservator has adequately expressed the situation upon an
analysis of the financial condition of J A House, as appears in a
memorandum from a report dated August 25, 1933, as follows*
Mr House, formerly president of the Guardian Trust Co , appears to be m a
hopelessfinancialcondition His obligations are m excess of $800,000, and all his
assets are pledged thereunder He is not able to make interest payments, nor
even keep up insurance premiums on policies pledged with various institutions
THOMAS E. MONKS, VICE PRESIDENT, GUARDIAN TRUST CO
The indebtedness of Mr Monks to the Union Trust Co is $18,000.
Comments from State bank exaimnei's report of January 20, 1933,
regarding this loan was as follows
Maker is a vice president of the Guardian Trust Co Loan is collateraled by
stock of a local real-estate holding company, value questionable Bank also has
a $38,000 note andfirst-mortgagerequest-allotment property located in Cleveland
Heights No appraisal of this property is on file Maker is unable to make any
reductions at this time An asset of undetermined value.
This loan of Mr Monks is dated January 31, 1931, and was originally due on July 31,1931 There have been five renewals of the loan
and no payments have ever been made of the principal The last
interest payment was January 20, 1933
A perusal of the credit file regarding the borrowings of Thomas E.
Monks revealed loans to him as early as August 1921 These loans
were evidently
paid The conservator in an attempt to liquidate
Monks7 indebtedness of $18,000, reports*
(U-ll-8)
He states he is without immediate funds to make payments at this time as h&
has been without employment since the closing of the bank, and income from his
real-estate investments is practically ml
(U-ll-8)
Besides our loan, he is owing a considerable sum to the Guardian Trust Co r
and the Society for Savings, which he stated would be paid within a reasonable
length of time.
It should also be noted that Thomas E Monks holds stock of
Guardian Trust Co. which will mean a double liability, further establishing his inability to pay
BELDEN SEYMOUR, DIRECTOR, CLEVELAND TRUST CO
Mr. Seymour is indebted to the Union Trust Co in the amount
of $37,215 from loans originating in October 1928 He last paid
interest on his loan on April 1, 1932
In his report of January 20, 1933, the State examiner stated:
(U-5-3)
Loan is delinquent in interest since April 1, 1932 Maker is a director of the*
Cleveland Trust Co Value of the collateral pledged is $12,000. Payment
depends largely on collateral held; $25,000 is classed as doubtful
STOCK EXCHANGE PEACTICES
8171
The liquidator has tried to collect some payment from Seymour
but without success A memorandum dated October 10, 1933,
states
(U-ll-10)
Mr Seymour called at our request He stated he is still unable to make
payments, but his insurance business has picked up considerably and he has
hopes of selling three unencumbered lots within the next short while and that
we will receive our proportionate share of the net amount realized He has
previously refused to give iis mortgages on these lots or the assignment of any
life insurance
M
J MANDELBAUM, DIRECTOR, CLEVELAND TRUST CO
(U-ll-lla, lib)
Mr Mandelbaum is indebted to the bank for two loans, one dated
June 23, 1930, with a balance in the amount of $7,000 and the other
dated July 1, 1932, in the amount of $102,812 68 Concerning these
loans the State examiner stated m his January 20, 1933, report
(U-5-3)
Maker is a director of the Cleveland Trust Co Collateral pledged is 273
shares Cleveland Trust Co stock, together with 8% shares Manning Realty Co.
Latter company owns a leasehold on property located at 2020 Euclid Avenue,
but the value of the stock cannot be determined Maker is unable to make any
reductions, and claims that he has no additional collateral which can be pledged.
For the purpose of this examination, $78,000 has been classed doubtful
A perusal of the correspondence in the credit files of M J Mandelbaum shows his first loan connection m December 1916 His borrowings were frequent and were paid, consequently, he was considered
a good customer This favorable attitude continued until it was
discovered he could not pay on his latest loans totalling $109,812 68
On May 31, 1932, a letter to G B Bhss, Canadian Bank of Commerce, reflects the changed opinion in a sentence as follows
(U-ll-12)
Confidentially, we are of the opinion that he, like other large investors, has felt
very keenly the present condition of the securities market
(U-ll-13)
Subsequent inquiries on the part of the conservator have disclosed
that there is little possibility of recovery on this loan aside from the
pledged collateral
F. H. HOBSON, VICE PRESIDENT CLEVELAND TRUST CO.
Mr Hobson is indebted to the Union Trust Co. in the amount of
$54,193 07 Concernmg this the examiner pomted out on January
20, 1933:
(U-5-3)
Value of collateral pledged is $20,000, of which the principal item of collateral
is 147 shares of Cleveland Trust Co , and payment depends largely on the future
of that bank Hobson is unable to make any payments at this time, $35,000 is
classed as doubtful
8172
STOCK EXCHANGE PEACTICES
On June 7, 1933, the value of collateral had dropped to $15,829 00;
this would increase the doubtful amount to $39,271 00 Hobson's
income for 1933 was from his salary as vice president of the Cleveland
Trust Co —$20,000 Of this, he stated in a statement required by
the liquidator on June 15, 1933, $7,000 would go for interest, $3,000
for msurance, and $6,000 for alimony to his divorced wife This
would leave a balance of $4,000 for living expenses and other obligations This would seem to prove the doubtful character of the loan
and undoubtedly substantiate the State examiner's conclusions
Certainly the examples presented in this report cannot be construed
as loans of good policy Granted that the declining period has its
effect, nothing can justify anything but a conservative policy for a
bank or its bankers No liberal attitude was shown the "man in the
street" nor the small depositor, the mask of conservatism was donned
for them, but to a bank president the vaults were open, a situation
apparently justified because of the borrower's connections.
WALTER H SEYMOUR,
Senior Examiner
Mr SAPERSTEIN I next hand you a report entitled "The Union
Trust Company—Loan to J. P. Harris", and ask you if that report
was made by members of the mvestigatmg staff of the committee under
your immediate supervision
Mr
MEEHAN It was
Mr SAPERSTEIN Mr Chairman, I offer the report m evidence,
together with the exhibits referred to therein, which exhibits are now
at the Government Printing Office
The CHAIRMAN. The report and exhibits will be received in evidence
and appropriately marked
(The report entitled "The Union Trust Company—Loan to J P
Harris," together with the exhibits referred to therein, which exhibits
are now at the Government Prmtmg Office, were received in evidence
and marked "Committee Exhibit No 9, May 4, 1934", and are as
follows )
COMMITTEE EXHIBIT NO 9, MAY 4, 1934
LOAN, J P HARRIS
In reference to the loan made December 22, 1930 by the Union
Trust Co. to J. P Harris, former vice president of the Umon Trust
Co , your examiners are of the opmion that J R Nutt, formerly
chairman of the board of directors of the Umon Trust Co , was directly
responsible for a loss of $165,056 61 suffered by the bank m the abovementioned loan
(U-22-7)
Mr Harris m December 1930 was carrying a brokerage account with
Hornblower & Weeks, and included in the collateral were 1,500 shares
F E Myers & Bros stock which had been " loaned" to him by
Mr Nutt The brokers were pressing Mr. Harris for additional collateial, whereupon Mr Nutt "loaned" Harris 500 additional shares of
8173
STOCK EXCHANGE PRACTICES
F. E. Myers & Bros, stock and transferred Harris' loan in the amount
of $263,000 to the Union Trust Co.
When the loan was placed with the Union Trust Co., the collateral
was valued at $291,300 as follows
Shares
10
1,000
500
600
2,000
100
6,200
Security
Approximate
market value
73
25b-28a
No market.
4H
Ghdden prior preferred
United States Fidelity & Guaranty..
Insurance shares
Thatcher Manufacturing
Pennsylvania Dixie Cement
United Fruit
F E Myers & Bros
Total..
Total
$730
26,500
8,400
2,750
4,850
248,000
291,230
(U-22-4)
Mr. Harris gave his promissory note dated December 22, 1930, to
the Union Trust Co. in the amount of $263,000. This note bears the
following notation: "O.K. J R N . " , which notation refers to J. R.
Nutt, formerly chairman of the board of directors of the Union Trust
Co.
(TJ-22-5, 5a, 6)
The proceeds of the note, $263,000, were deposited on December
22, 1930, to the account of J P. Harris and on the same day Harris
paid Hornblower & Weeks, stockbrokers, the amount of $264,344 52.
The collateral pledged for the loan, with the exception of 2,000 shares
of F E. Myers & Bros. Co. stock, was the property of J. P. Harris
(U-22-7, 8)
The 2,000 shares of Myers & Bros Co stock, as above, were the
property of J R. Nutt This is supported by a written memorandum
furnished your examiners by Mr. Nutt on February 13,1934, in which
he gives his veision of the transaction under review and by a letter
from J. P. Harris to Oscar L Cox, conservator of the Union Trust
Co , in which Mr. Harris' attempts to explain the transaction
At a meetmg of the finance committee of the Union Trust Co. held
December 19, 1930, the following comment appears:
(TJ-22-1)
It was agreed to loan J. P. Hams $263,000 secured by collateral
At the meetmg held December 23, 1930, the loan was approved in
the following notation:
(U-22-2)
Loans made at the main office under date of December 22, 1930, as described
below, were approved
Collateral loans nos 80553 to 80635, $1,643,036 49
8174
STOCK EXCHANGE PEACTICES
(U-22-3)
Reference to the attached exhibit " Demand Collateral Loan Register " of December 22,1930, indicates loan no 80609 in the amount
of $263,000 was made to J P Harris on the following collateral.
Shares
F E Myers & Bros Co
Thatcher Manufacturing Co
Insurance Share & General Management Union Trust Co
United Fruit Co
Pennsylvania Dixie Cement
United States Fidehty & Guaranty Co
GhddenCo
_
6,200
600
500
100
2,000
1,000
10
The comments in the so-called "Lenihan Report" dated February
3, 1933, state as follows in reference to the loan:
(U-l-38)
J P Harris- Value of collateral, $61,000, amount of loan, $284,000.
(U-22-9)
Committee comment—We should get life insurance Committee was under
the impression Mr J R Nutt guaranteed this loan, but has not been able to
find such a guarantee on files
On January 3, 1934, the collateral to the loan was sold at public
auction and the sale resulted m a loss to the bank of $165,056 61
(U-22-9)
On February 15, 1934, the superintendent of banks of the State
of Ohio instituted suit against J R Nutt for recovery of the loss
sustained by the bank, J P Harris having gone into voluntary
bankruptcy
In commentmg on this loan, the Ohio State banking department
m its report of January 20, 1933, page 96, stated as follows
(U-22-14)
J P Harris, $284,000 Maker, a former vice president of the bank, is now
unemployed. The loan is collateraled by various listed stocks worth $54,000
at the present market prices Other collateial held is 356 shares of the Georgian
Apartment Co Value undetermined Payment depends entirely on the collateral
held and on the future ability of the borrower to earn For the purpose of this
investigation $100,000 has been classed as a loss and an additional $120,000 has
been classed as doubtful
(U-22-15, 16)
There are several factors in this case which indicate that J. R. Nutt
should reimburse depositors of the Union Trust Co. for the loss
suffered
There have been insinuations that Mr. Harris' account at Hornblower & Weeks was a joint account between Nutt and Harris and
when it was transferred to the Umon Trust Co the joint participation
(U-22-10)
still existed. A letter written by Harris to Nutt on January 11, 1928,
states as follows:
I hereby acknowledge receipt from you of your check for $10,000 which is to
account as discussed in our conversation this morning
be used m our joint
STOCK EXCHANGE PRACTICES
8175
(U-22-11)
Further there is a letter addressed to Nutt by Harris under date of
July 22, 1928, which discusses the advisability of selling certain securities. These securities were apparently in the bank's portfolio, but
the letter is an indication of the relationship existing between Nutt
and Harris in regard to stock market conditions and seems to indicate
Nutt relied on Harris as to market forecasts, hence the handling of a
joint brokerage account by Harris.
If the account at Hornblower & Weeks was a joint account and this
fact was not disclosed to the bank when the loan was made, Nutt is
^certainly responsible for the deficiency in the account,
(U-22-12)
Further, in our opinion, the loan at the time it was made was not
properly collateraled. It will be noted that the total value of the
collateral was $291,230 and that 6,200 shares of F. E. Myers Co.
stock were valued at 40K or a total value of $248,000 Thus 85 percent of the value of the collateral was in one block of stock. It is
quite obvious that if the stock, which was a very inactive and closely
held stock, had been sold it would not realize a market value of 40 %
since the unloading of a 6,200-share block would undoubtedly knock
down the market price to much lower levels The price range in
December 1930 was 37%-41
The loan was undoubtedly made on the strength of Mr. Nutt's
approval and it was the opinion of the Lemhan committee as» noted
above "that Mr. Nutt had guaranteed the loan", though no such
guarantee was foujid in the credit files
The bank's major contention is that Mr Nutt transferred the loan
to the baqk to protect his own interests in the loan, namely, the 1,500
shares F E Myers stock which he had loaned Mr Harris Had
Hornblower & Weeks "sold out" Hams' account Mr Nutt would
have suffered to the extent of some $60,000 His being chairman
of the board of the Union Trust Co , and since it was the general
belief among directors of the bank that he had an interest in the loan,
undoubtedly influenced the granting of the loan
There is no written evidence that Mr Nutt advised directors or
officers of his interest in the Hams loan
At the time the loan was made Harris was in no way financially able
to meet any deficiency in the loan if such did occur, his only method of
repayment would have been an enhancement in the value of the
collateral, which to our minds was entirely speculative Mr Nutt,
of course, was entirely familiar with this when he "saddled" the loan
onto the depositors of the Union Trust Co
WALTER H SEYMOUR,
Senior Examiner
This report based upon preliminary report and complete investigation by committee examiner, M J LaPadula
Mr SAPERSTEIN. Mr Meehan, I now hand you a report entitled
"Union Trust Company, Loans to Directors—William G Mather",
and ask you if that report was made by members of the investigating
staff of the committee under your immediate supervision.
Mr
MFEHAN It
was
$176
STOCK EXCHANGE PEACTICES
Mr SAPERSTEIN Mr Chairman, I offer the report in evidence^
together with the exhibits referred to therein, which exhibits are now
at the Government Printing Office
The CHAIRMAN The report and exhibits will be received in evidence
and appropriately marked by the committee reporter
(The report entitled " Union Trust Company, Loans to Directors—
William G. Mather", together with the exhibits referred to theiein,,
which exhibits are at the Government Printing Office, were received
in evidence and marked " Committee Exhibit No 10, May 4, 1934,"
and are as follows )
COMMITTEE EXHIBIT N O . 10, M A Y 4, 1934
LOANS TO DIRECTORS
WILLIAM G. MATHER
Mr. William G Mather, a director of the Union Trust Co., Cleveland, Ohio, was considered one of the wealthiest n?en in Cleveland.
He was associated with many large companies, including the following:
Cleveland Cliffs Iron Co , president; Mumsmg Paper Co ; Mesaba Cliffs Iron
Mmmg; Negaunee Mine Co ; Cleveland Steamship Co ; Trumbull Cliffs Furnace
Co ; Kelly Island Lime & Transport Co , director; Otis Steel Co , director;
Central Steel Co , director; Central Furnace, director
(U-6-4A)
On June 15, 1932, ^ m G Mather had direct liabilities of $2,282,546 39 and indirect liabilities of $61,240 89, or a total of $2,343,787.28
due do six different banks.
The greater part of his collateral was stock of Cleveland Cliffs
Iron Co , the value of which haa decreased greatly and consequently
the banks found themselves facing the possibility of incurring heavy
losses on the loans made to Mather in the event the loan had to be
liquidated.
COLLATERAL TRUST INDENTURE
On July 21, 1932, a collateral trust indenture was entered into
between William G. Mather and the Union Trust Co. of Cleveland,
Ohio, the Union Trust Co to act as trustee The purpose of this
trust indenture was to rearrange the personal assets and liabilities of
Mr. Mather. It is based upon the principle of utilizing bis total
assets to secure the payments of his total liabilities, and so provide as
to insure the regular payment of his current interest obligations to
banks and trust companies as they mature
(U-6-1, pp 1 and 2)
Mr. Mather's obligations to banks and trust companies as shown
m the collateral trust indenture as of that date are as follows
Union Trust Co , Cleveland
Cleveland Trust Co , Cleveland
Central United National Bank, Cleveland
Guardian Trust Co, Cleveland
Miners National Bank, Ishpemmg, Mich
Irving Trust Co , New York, N Y
Total
$800, 000 00
125, 000 00
250, 000 00
348,031 39
50, 000 00
9, 000 00
_. 1,582,031 39
8177
STOCK EXCHANGE PRACTICES
(U-6-lp 1)
The indebtedness of $800,000 to the Union Trust Co. consists of
the following promissory notes
(U-6-2, 3)
Date
Amount
Mar 9,1932
Do —
$450,000
350,000
Interest
rate
Percent
Maturity
6 Demand.
6
(U-6-1, p 1)
The above notes were secured by a promissory note of the Cleveland
Cliffs Iron Co. in the amount of $200,000, issued under and secured
by a trust agreement dated March 23, 1932, between said company
and th§ Union Trust Co ; a $2,000 promissory note of the Cleveland
Cliffs Iron Co.; 31,253 preferred shares of the Cleveland Cliffs Iron
Co.; and 8,000 common shares voting trust certificates of the Cliffs
Corporation
(TJ-6-4, 4A)
The annual interest accruing on these notes beginning 1933 amounts
to approximately $102,000, and as appears from the exhibit attached
taken from the credit file of W. G. Mather, Mr Mather would not
be able to meet these interest obligations without additional borrowings from the banks.
Additional loans were made by the Union Trust Co to Mr. Mather
subsequent to the trust agreements and were also secured by the
collateral trust indenture, and are as follows
(U-6-5 and U-6-10)
Amount
Date
Jan 1,1933
Oct 1,1933
Apr 18, 1933
July 1,1033
Jan 1,1934
Sept 30,1932
$12,322 50
10,474 11
12,322 50
6,777 39
2,811 70
24,645 00
_
Interest rate
Percent
Matunty
6 Time loan.
6
Do
6
Do
6
Do
6
Do.
6
Do
69,353 20
Total
(U-6-1, p 3)
In addition, Mather is indebted to colleges and universities on
unsecured notes as follows
Trinity College
Kenyon CoUege
Diocese of Marquette, Mich , musical arts
Association Western Reserve University
Cleveland Museum of Art
Total
175541—34—PT 18
$75,000
75, 000
21, 000
216, 000
3, 265
390,265
14
8178
STOCK EXCHANGE PEACTICES
(U-6-1, p 3)
Also, a note to Trinity College for $60,000, secured by 5,000
preferred shares of the Cleveland Cliffs Iron Co.
(TJ-6-1, p 3)
To individuals and corporations he is indebted on unsecured notes
as follows.
Katharine L. Mather
Marian S Bower
Cleveland Cliffs Iron Co
The Union Trust Co , Burgwin
$36, 000
100, 000
4, 250
10, 000
Total
150,250
(U-6-11 to U-6-17)
An analysis of the notes to the Union Trust Co which total the
$800,000 promissory note under the collateral trust indenture indi
cates the following:
Notes Union
Proceeds.
x
Interstate Foundries, Inc
Wm G. Mather, personal
To purchase Continental shares
Cashier's check, W G Mather
Total
Tnut Co
$174, 000
425,000
200, 000
1,000
800,000
(U-6-17A)
The note of $174,000 is a consolidation of three notes which entered
the assets of the Union Trust Co in 1922, 12 years ago, m a total
amount of $220,000 secured by Interstate Foundries, Inc first-mortgage bonds. The only reduction on the loans, were on February 7,
1928, of $20,000, and on November 16,1929, in the amount of $26,000
The note of $425,000 is a consolidation of three notes secured by
Cleveland Cliffs Co which entered the assets of the Union Trust Co.
m 1928, 1929, and 1931 No reductions were ever made on these
loans.
The note of $200,000 entered the assets of the Union Trust Co
May 23, 1931 The proceeds were used to purchase 40,000 shares of
Continental shares No reduction was ever made on this loan
In 1931, Mr. Mather agreed with his associates to purchase shares
of Continental stock which were up as collateral for Otis & Co 's
loans at banks and trust companies.
OTIS & CO PARTICIPATION LOAN
In order to explain the loan of $200,000, it is necessary to review the
general history of the participation loan made to Otis & Co. by a
number of Cleveland banks
Otis & Co , investment bankers, were founded in 1900 and in 1931
operated 21 offices in the larger cities of the United, States. The
Cleveland members of the firm were M C Harvey, C. S Eaton,
Richard Inglis, J O Eaton, S E Kline
8179
STOCK EXCHANGE PRACTICES
Otis & Co is a national organization engaged in underwriting and
distribution of investment securities, is a member of the principal
exchanges in the country, including New York and Chicago
In April 1931 Otis & Co., disposed of their commission brokerage
business by selling it to E. A. Pierce & Co , but continued to do
business in the brokerage line as agents of E. A. Pierce & Co.
This was done in an effort to take Otis & Co. out of the difficulties
gotten into during the boom years.
(U-6-18 to 26)
On May 21, 1931, the total liability of Otis & Co. to the Union
Trust Co. amounted to the sum of $950,823.31, consisting of eight
notes as follows. $163,429.50, $68,680, $631,329, $4,940, $2,900,
$2,200, $43,000, and $34,344.81, totaling $950,823 31; which notes on
May 22, 1931, were consolidated into a participation loan in the
amount of $3,684,000 distributed among four Cleveland banks as
follows
Union Trust Co
Cleveland Trust Co
Guardian Trust Co
Central United National Bank
(U-G-27 to 30)
Total
$1, 252, 560
1, 252, 560
736, 800
442, 080
3, 684, 000
(U-6-31, 32)
These banks agreed to loan Otis & Co. up to a total of $4,182,000
secured by collateral which has been valued at approximately
$4,716,968. This collateral includes 179,226 shares of Continental
Shares, Inc., common, valued at $3 per share on May 22, 1931.
(U-6-33)
In addition to the assistance granted by the four Cleveland banks
to Otis & Co., on May 21, 1931, Mr. Wm. G Mather in behalf of
himself and his associates agreed to purchase from Otis & Co 300,000
shares of the fully paid and nonassessable common stock of Continental Shares, Inc., at $5 per share.
The bank's records indicate 300,000 shares were taken up by the
following persons in the proportion indicated below
Delivered to—
Wm G Mather
Seaboard By-Products
Coke Co
-Y
Southern Ohio Power Co—
H A Hanna Co
Newberry Investment Co
Finance Corporation of
America
Number
of shares
Amount
65,000
$325,000
100,000
20,000
20,000
25,000
500,000
100,000
100,000
125,000
30,000
150,000
Delivered to—
Number
of shares
Amount
E B Green
J H Wade,Jr
G G Wade
Helen W Green
4,000
6,000
15,000
15,000
$20,000
30,000
75,000
75,000
Total
300,000
1,500,000
8180
STOCK EXCHANGE PRACTICES
The above 300,000 shares were released from loans of Otis & Co.
at the following banks:
(U-6-34 to 39)
Name
Shares
Amount
Union Trust Co—
Philadelphia National
Bank Philadelphia, Pa_._
Commercial Exchange National Bank & Trust Co ,
Philadelphia, Pa
179,226
$896,130 00
6,300
31,500 00
10,460
52,300 00
Name
Shares
Amount
Cleveland Trust Co, Cleve- } 62,000 f $250,729 17
land
\ 59,270 83
Chase National Bank, New
York City._
42,014 210,070 00
Total
300,000 1,500,000 00
In order to accomplish this, the following associates of Mather
borrowed from the Union Trust Co. to pay in part for the Continental
Shares, Inc.
(U-6-40 to 44)
Name
Southern Ohio Power C o . . .
Newberry Investment Co..
G Q Wade
J H Wade,Jr
Number
shares
Amount of
note
20,000
25,000
15,000
6,000
$50,000
62,500
37,500
30,000
Name
Number Amount of
shares
note
Edward B Green
Wm G Mather
4,000
40,000
$20,000
200,000
Total
110,000
400,000
The balance of $1,100,000 for the remaining 190,000 shares of
Continental shares was paid for by checks drawn by Mr. Mather and
his associates
There was additional collateral to secure the above loans when
made, all of which loans have been paid with the exception of the
$200,000 loan of Wm. G. Mather, which note at this time is a part
of the $800,000 collateral trust indenture as explained above.
The following are excerpts taken from the State bank examiner's
report of January 20,1933, m regard to the loans of Mr. W. G. Mather
and Otis & Co.:
(Complete copy of State bank examiner's report to be in Washington if needed)
Wm G Mather, $857,528 99 —Loans are based principally upon preferred
stock of the Cleveland Cliffs Iron Co , and common stock of the Cliffs Corporation Bank also holds $204,000 notes receivable of the Cleveland Cliffs Iron Co
It is impossible to make an accurate appraisal of any of the securities held as collateral Quotations on the Cleveland Cuffs Iron preferred stock vary all the
way from $5 per share to $25 per share Mather's total indebtedness to all banks
is known to be in excess of $2,000,000 Under the terms of a creditors' agreement
between Mather and his various creditor banks his mdebtedness was extended
to January 1, 1936 Mather m turn has trusteed all of his tangible assets for the
prorata benefit of the various creditor banks The outcome of this credit depends
largely upon the future of the Cleveland Cliffs Iron Co Officers believe that the
line can eventually be worked out
Otis & Co , $713,967 65 —Interest paid to May 1,1932 A former local brokerage house whose activities have now been practically discontinued This loan
is a participation with other local banks in a total loan of $2,100,000 It is collateraled by marketable stocks having a present market value of approximately
$143,000, together with a great many other issues which are unlisted and on which
the value cannot be determined A loss of $450,000 is estimated, and this estimate was agreed upon by officers of the bank.
Excessive loans to directors, we believe, were a contributing factor
to the eventual collapse of the Union Trust Co. This case clearly
indicates that the bank was absolutely negligent in its loan policy and
was guided principally by the fact that Mather was a director of the
STOCK EXCHANGE PRACTICES
8181
bank and that he was prominent in many companies in which other
directors and officers of the Union Trust Co. had heavy interests
(U-6-17A)
The loan of $174,000 was allowed to run for 12 years in the assets
of the bank
The loan of $425,000, 50 percent of the entire Otis & Co. participation was withdrawn from the institution by Mather and used for
his personal use
The loan of $200,000 was loaned to him for his participation in a
speculative venture and involved the bailing out of a brokerage firm
with funds of the bank
The action of the bank in this particular loan is subject to severe
criticism
The $200,000 was used to liquidate part of his participation in the
purchase agreement to acquire 300,000 share of Continental Shares
Inc
WALTER H. SEYMOUR,
Senior Examiner
This report based upon preliminary report and complete investigation by committee examiners, M. J. La Padula and T. A Donaldson.
Mr SAPERSTEIN I now hand you a paper entitled "The Union
Trust Company—Loans—K V Painter", and ask you if that report
was made by members of the investigating staff of this committee
under your immediate supervision.
Mr. MEEHAN. It
was
Mr SAPERSTEIN Mr Chairman, I offer the report in evidence,
together with the exhibits referred to therein, which exhibits are now
at the Government Printing Office
The CHAIRMAN. The report and exhibits will be received in evidence
and appropriately marked
(The report entitled "The Union Trust Company—Loans—K V.
Painter", together with the exhibits referred to therein, which exhibits are at the Government Printing Office, were received m evidence
and marked "Committee Exhibit No. 11, May 4, 1934," and are as
follows )
COMMITTEE EXHIBIT NO
11, MAY 4,
1934
LOANS
K v PAINTER
Kenyon V Painter has been a director and a member of the executive committee of the Union Trust Co for more than 10 years As
we pointed out in our report regarding the "Painter, Bradley, Nutt
Syndicate", Mr Painter has been very closely associated with Mr
Nutt for a great many years
When the Union Trust Co closed on February 25, 1933, Mr
K. V Painter was indebted to the trust company in the amount of
$2,930,000—an indebtedness which has not as yet been paid
8182
STOCK EXCHANGE PRACTICES
(U-4-1)
Mr Ira J Fulton, superintendent of banks of Ohio, appointed a
Mr Robert M Huston as "special deputy" to make an investigation
of certain transactions of the Union Trust Co Among the matters
investigated by Mr Huston were the loans made to K V. Painter
Mr Huston completed his task and submitted his report to Mr.
Fulton on September 18, 1933 We have obtained a copy of this
report and shall refer to its comments, as made by Mr Huston,
frequently in our report
Regarding Mr Painter's loans and his acts as director, the report
states.
(U-4-la, p. 1)
Ken yon V Painter is 66 years of age and has been a director of the Union Trust
Co for approximately 10 years He has also been a member of its executive
committee for about the same period of time From the evidence at hand it
appears that Painter has never seriously recognized the responsibilities of a bank
director, but has construed his official position with the Union Trust Co as one
of unusual and irregular liberties and privileges It further appears that both
Wilbur M Baldwin and Charles W Carlson, president and vice president, respectively, of the Union Trust Co, had the same mistaken idea regarding the
duties of their respective positions as well as the courtesies and privileges due a
director
(U-4-la, p. 1)
Wilbur M Baldwin is 58 years of age and has been a director of the Union
Trust Co for approximately 10 years March 25, 1930, Baldwin was elected
to the presidency of the Union Trust Co. and continuously served in that capacity until the early part of this year (1933).
(U-4-la,p. 2)
Charles W Carlson is about 48 years of age and was a vice president of the
Union Trust Co from January 11, 1928, to the date of failure Cailson was
never a director of the bank nor was he ever considered a senior loaning officer
or a member of any important committee
At the date of failure of the Union Trust Co , Painter was indebted
to that bank to the enormous amount of $2,930,000, only a small fraction of which sum was adequately or properly secured Our investigation discloses that virtually all of this indebtedness resulted from
unlawful collusion between Painter, Baldwin, and Carlson for the
purpose of willfully misapplying the moneys, funds, and credits of
tne bank for the direct use, benefit, and advantage of Painter and
indirectly for the use, benefit, and advantage of Baldwin and Carlson.
(U-4-la, p 2 )
In substance the general scheme of operation was as follows Painter
would convey to the bank certain real-estate holdings, leaseholds, and
real-estate equities together with certain unlisted and unknown stocks
of doubtful worth, all to be held by the bank in trust as collateral
security for future borrowings. Subsequently, Painter would execute
his demand promissory note, or notes, for sums averaging about
$300,000 each. These notes would not immediately be recorded on
tne bank records for their face amounts and like credits passed to
Painter's account, but instead would be witaheld by Baldwin or
Carlson and used only at such times and in such amounts as would
be necessary to avoid an overdraft in Painter's personal account.
STOCK EXCHANGE PRACTICES
8183
(U-4-la, p 2)
By this arrangement each note was recorded as constitutmg a
series of loan transactions rather than as one independent borrowing.
Furthermore, such irregular procedure was decidedly beneficial to
Painter in view of the fact that at no time was he required to pay
interest on any unused portion of his loans He also enjoyed a
preferential interest rate on his loans, being charged a lesser rate of
interest than other customers of the bank were required to pay
(U-4-la, P 5)
The indebtedness of Painter began on July 1, 1930, and continued
up to and including October 1931, and totaled, as we have already
pointed out, $2,930,000 at the time the bank closed There was also
due the Trust company accrued mterest, delinquent as of April 1,
1933, of $224,411 55.
(U-4r-5, 8, 4)
The Union Trust Co , through its president, Mr Baldwin, and
vice president, Mr Carlson, loaned these moneys to Pamter to be
used by him for the most part m the purchase of the stock of the bank.
The shares of stock were purchased almost daily and registered in
Painter's name
(U"4r-18)
During our investigation rumors were expressed around the bank
that the loans to Painter and the stock market activities of Pamter
were really for the account of Mr. Nutt and Mr Painter, an allegation we have been unable to substantiate. However, we do know
that Mr. Baldwin personally handled the transactions for Painter,
and that Baldwin, it has been claimed, was Mr. Nutt's right-hand
man.
(U-l-22, 22a)
In their December 1932 report the directors' examining committee
devoted a great deal of space to the Pamter loan and showed that the
$2,930,000 was made up of about 78 separate advances ranging,
generally, from $10,000 to $50,000 each. It is also noted m this
report that the interest rate being charged to Painter was as follows:
(U-l-22, 22a)
Date
July
Dec
July
Nov
Jan
1,1930
10,1930
1,1931
10,1931
1, 1932
_
5H
5
4H
5
6
$950,000
1,050,000
2,210,000
2,930,000
2,930,000
(U-l-23)
The committee also states the value and the details of the present
collateral and of the collateral released They value, as of December
13, 1932, the collateral at $1,131,960 but we will take this particular
item up later in this report.
8184
STOCK EXCHANGE PEACTICES
(U-l-21)
Committee's comment —The directors' examing committee, in
reporting the facts of the Painter loan, made, in part, the following
comments.
Your committee submits herewith the result of its investigation
into the K. V. Painter loan, which is now on a nonaccrual basis:
Balance due on pnncip^
Accrued interest due from Jan 1, 1932, to Dec 31, 1932
$2, 930, 000 00
183, 613 37
We submit various data in connection with this transaction in the
order named:
(U-l-22, 23, 24, 25, 26)
1. Transcript of his loan record.
2. List of present collateral.
3. Itemized list of collateral released.
4. Copy of release dated September 30, 1931.
5. Transcript of Union Trust stock record of borrower.
6. Transcript of the commercial account of W. M. or John Wyeth
(K. V Painter's brother-in-law)
(U-l-21)
Your committee wishes to call your attention to the transcript of
the loan account and a comparison of it with the stock record purchase
of the borrower. By a comparison of the two accounts it is the conclusion of the committee that the funds advanced by the bank from
frme to time were used to purchase Union Trust Co. stock, and further, from an investigation of the receipts for the stock certificates
that the officers in charge of the loan had full knowledge that the
funds were bemg so used
(U-l-21)
From November 24,1930, to September 30, 1931, Mr. Painter purchased 13,680 shares at an approximate cost of $860,000
(U-l-21)
The loan records also show a release on October 3, 1931, of marketable securities, having an approximate market value of $316,000, to
K V Pamter without payment, approved by W. M B. We are
unable to find that the finance committee approved the release of
this collateral before it was made
The loan department register shows that the transaction was approved by the finance committee on October 13, 1931 (sheets are
initialed F P E ) (F P Root, a director )
(U-l-21)
Your audit committee fully realizes that some releases must be
made before bemg formally approved by the finance committee.
However, the committee does not believe that releases such as the
above come under this classification, inasmuch as the loan was greatly
under-secured before any collateral was released, and, therefore, the
borrower should have been asked to pledge additional security instead
of receiving collateral already pledged.
STOCK EXCHANGE PRACTICES
8185
Other facts found by the committee are that on June 15, 1931,
Mr Painter's fairmount boulevard estate was deeded to his brotherin-law, W M Wyeth On October 7, 1931, our bookkeeping department opened a new account m the name of W M or John Wyeth
with a check of Vickers operatmg and running expense account,
which is a K. V Painter account Further investigation of the
transcript of this account shows other credits from the same source and
likewise, charges against this account and credits to Vickers operating
and running expense account It would appear that these are K V.
Painter's funds.
On December 15, 1931, the Pamters closed their safe-deposit box
here
(U-4-3, 6, 7, 10, 14, 15, 16, 25)
We have carefully perused the files of The Union Trust Co regarding Kenyon V. Painter and have taken photostatic copies of several
letters typical of hundreds in the files These letters are simply
confirmation letters written by Mr Baldwin and addressed to Mr
Painter saying that he had purchased a blank number of shares of
Union Trust Co stock for blank dollars However, as an indication
to whether or not the transactions of Painter were for the sole account
of Painter, the following are excerpts of some of the letters between
Mr. Baldwin and Mr. Painter A longhand letter, dated November
23, 1930, on the stationery of Mr Kenyon V. Painter and addressed
to Mr. Baldwm, states, m part, as follows
We are leaving this morning for St Joseph I see yesterday about 400 Union
Trust sold Would it not be a good thing to lower our bid As I said, I am very
glad to try to take up all Union Trust sold, but of course we do not want to give
more than necessary for it
(U-4-13)
On January 15, 1931, Mr Baldwin wrote to Mr Painter in care
of the Biltmore Hotel after having talked with Mr Painter over the
long distance telephone Mr Baldwin stated
Briefly, my reason for wanting to talk to you was the sudden break in the
market price of Union Trust stock yesterday
(U-4r-13)
Mr Baldwin stated that there were 1,000 shares offered at 74 and
that when it was offered to him he knew of no one interested at that
price, and that the price had kept droppmg until it reached 6934,
of which I bought for you 474 shares at that price
(U-4-13)
It is quite apparent to me that this particular holding was some distressed
stock—that the owner had to have some money quick
(U-4-17)
And on April 6, 1931 Mr Baldwin wrote a memorandum to Mr.
Carlson m which he stated
I wish you would say to Mr Painter that I am very glad that he reduced the
bid on the remaining block of 193 shares to 68J4 because I had a memorandum
8186
STOCK EXCHANGE PEACTICES
to talk to him about that this morning, but was not permitted to come to the
office or use the telephone; and for the next week or 10 days I would not feel
adverse to having the bid reduced to even 68, and then watch the market so
that if a block of 200 shares or more should be offered, drop the bid a full point
at once and let it stay down for a few days to see if the stock is purchased
elsewhere
(U-4-23)
As we have stated above, the borrowings of Painter began on July
1, 1930, with a loan of $950,000, and continued, increasing bit by
bit, until October 1931, when the balance had reached a total of
$2,930,000.
However, the advances to Painter ceased rather abruptly in
October 1931. Obviously, Baldwin had intentions of extending
further credit to Painter, as is evidenced by a $300,000 note of
Painter's, dated August 31, 1931, having an unused balance of
$235,000. Upon this note there is an unsigned notation* "No more
advances", which, we understand, is in the handwriting of a loan
clerk (one R. J Rutenbeck) Mr Rutenbeck claims not to remember
by whose authority the advances were stopped.
(U-4-l-a, p. 20)
Mr Huston claims that there was also another note in the amount
of $300,000 signed by Painter, as of October 5, 1931, "in Baldwin's
possession".
We have not been able to find any copy of this note in the files of
t i e Union Trust Co and have not contacted Mr Baldwin. However, we have definite knowledge that Baldwin did have the note
and that he returned it to Painter on October 8, 1931, a transaction
to be taken up later in this report.
COLLATERAL PLEDGED AND COLLATERAL RELEASED
(U-4r-2-a, p 1)
On July 13, 1931, Mr. Painter executed a new agreement with the
Union Trust Co , pledging certain real estate. With this pledge agreement Mr. Painter submitted a financial statement showing his estimate of the value of his holdings. Messrs. M. G. Lutsch and P. A.
Frye, of the bank, each made appraisals of Painter's property, and
Mr. R,. Huston, State investigator, submits a comparative statement
of the Pamter, Lutsch, and Frye appraisals, the totals of each of
which are as follows
(U-4-2-a, p 2, U-4-l-a, p 14, 15)
Pamter appraisal
Lutsch appraisal
Frye appraisal
_
$5,127,714 50
1, 056, 090 00
1, 253, 930 00
(U-4-l-a, p. 15)
As pointed out in Mr Huston's report, Mr Painter valued (as of
July 13, 1931) 8,000 shares of Akley Camera stock at $138 a share,
while a statement of the company as of December 31, 1931, shows a
book value for the stock of $12.08 a share. Mr. Huston states that
Baldwin claims to have no knowledge of these appraisals; but a
STOCK EXCHANGE PRACTICES
8187
memorandum found m the files of the Union Trust Co. from one
officer to another states, in part*
(U-4-21)
I am also returning for your loan files the appraisal Mr Painter signed on the
21st of May, 1931, together with some appraisals of Mr Stuber and other data
Mr Baldwin handed to me
On October 3, 1931, certain of the collateral securing the Painter
loan was released. We quote Mr. Huston's comments regarding this
release, in full
(U-4-l-a, p 18)
October 3, 1931, the bank released a large block of listed securities as collateral to Painter's indebtedness, without consideration or payment on his indebtedness These securities were, in substance, the same as those securities
received from the New York Trust Co July 13, 1931, at the tune Painter borrowed $575,000 from the Union Trust Co with which to pay a note in that
amount held by the New York Trust Co We have caused these securities to
be valued as of October 3, 1931, by the Directors' Research Association, Inc,
of Cleveland, Ohio, located m the Federal Reserve Bank Building
(U-4-l-a, p 19)
The following schedule shows the securities released, the amount
of each, and the valuation placed thereon by the Directors' Research
Association, Inc , as of October 3, 1931:
4,800 shares Manufacturers Trust Co of New York
$154, 800 00
6,684 shares the Glidden Co comiron
34,250 50
2,000 shares the White Motor Co capital
16, 000 00
1,100 shares Chesapeake & Ohio Ry common
28, 600 00
600 shares the Midland Steel Products common
4, 500 00
400 shares the Gillette Safety Razor Co
4, 450 00
100 shares the Midland Steel Products Co 8-percent cumulative
preferred
4,500 00
100 shares the Am encan Chicle Co common
3, 300 00
800 shares the Richman Bros Co
28,000 00
200 shares the Missouri Pacific Ry preferred
5, 400 00
100 shares United States Steel common
6, 800 00
100 shares the Goodyear Tire & Rubber Co common
2, 100, 00
400 shares Chesapeake Corporation
6, 800 00
100 shares the New York, New Haven & Hartford Ry
3, 600 00
500 shares the United Corporation common
6, 000 00
100 shares the New York Central capital
5, 500 00
Total
314, 600 50
With the exception of 3,300 shares of Manufacturers Trust Co stock and 2,684
shares of Glidden Co. common, all of the aforementioned securities were sent to
the Chemical Bank & Trust Co. of New York City, to be held by that bank as
additional collateral to Painter's note for $305,000 to that bank.
(U-4r-23)
In connection with the above release of collateral, it should be
borne in mind that the bank held Painter's note, with an unused
balance of $235,000, and Baldwin had in his possession another note
in the amount of $300,000, but someone, evidently with higher authority than the bank president, said, "No more advances "
Therefore, Baldwin arranged a loan for Pamter m the amount of
$305,000 from the Chemical Bank & Trust Co , New York, taking
the necessary collateral from that securing the Painter loan at the
8188
STOCK EXCHANGE PBACTICES
Union Trust Co Mr Baldwin then wrote a letter to Mr Painter,
dated October 8, 1931, stating
(TJ-4^22)
Referring to your letter of October 3, I wish to report that under date of
October 6 I arranged a loan at the Chemical Bank & Trust Co of New York of
$305,000, which loan is dated October 6, 1931, and payable April 6, 1932, with
interest at 4 percent per annum
Mr Baldwin then states
(U-4r-22)
I return herewith your note dated October 5, 1931, for $300,000 which you
gave me to use
(U-4r-la, p 21)
Again, on October 26, 1931, the bank released 7,000 shares of
Manufacturers Trust Co. capital stock in consideration of Painter's
paying $150,000 on his loan. According to a valuation made for
Mr. Huston, this stock was worth, on October 26, 1931, $38 a share,
a total of $266,000
GENEKAL
As of January 20, 1933, the State banking department made an
examination of the Union Trust Co , and the examiner stated, regarding the Painter loan*
(U-4-ll)
In passing this loan at the time of previous examination, the examiner was
compelled to rely solely upon verbal information furnished by bank officers.
The examiner has classed $1,000,000 as doubtful and believes that he is very
charitable in this classification
In the files of the liquidator at the bank there is a memorandum of
a conference between Mr Cox, the liquidator, and Mr Nutt This
memorandum states
(U-4-12)
Mr Nutt never trusted Painter fully He told the bank's income-tax man
to "watch his step" in preparing Painter's documents in connection with taxes,
and was impelled to this caution because Painter was notonously a small incometax payer, "paying less than my young son "
In conclusion we wish to call attention to exhibit U-4-20, which is
a copy of section 13105-1 of the General Code of Ohio. We believe
that the acts of Mr. Painter in submitting his financial statement on
May 21, 1931, with his appraisal, and the acts of Mr Baldwin in
accepting this statement and allowing Painter to borrow Union Trust
Co funds, were direct violations of the Ohio law We also believe
that Mr Baldwin violated his duties as an officer and director of the
Union Trust Co. throughout the transactions with Mr Painter, and
especially m allowing the release of the collateral and the arranging
of a loan from another bank witib. the collateral released, after further
credit was refused by the Union Trust Co
WALTER H
SEYMOUR,
Senior Examiner
STOCK EXCHANGE PEACTICES
8189
Mr SAPEESTEIN. Mr. Meehan, I hand you a report entitled
Loans Made by the Union
Trust Company to Van Swenngens and
Controlled Companies7', and ask you if that report was prepared by
the members of the investigating staff of the committee under your
immediate supervision
ii
Mr MEEHAN It was.
Mr. SAPERSTEIN. Mr
Chairman, I offer the report, together with
the exhibits referred to therein, which exhibits are now at the Government Prmtmg Office in order to facilitate prmting, in evidence and ask
that same be received
The CHAIRMAN The report and exhibits will be received in evidence
and appropriately marked
(The report entitled " Loans Made by the Union Trust Company to
Van Swermgens and Controlled Companies," together with exhibits
referred to therein, which are now at the Government Prmtmg Office,
were received m evidence, marked " Committee Exhibit No 12, May
4,1934 ", and are as follows )
COMMITTEE EXHIBIT NO 12, MAY 4,
1^34
LOANS MADE BY THE UNION TRUST CO TO VAN SWERINGENS AND
CONTROLLED COMPANIES
(Brought out in detail; pp 7, 23 to 25, 27, 28, 30, and 36)
The troubles and the closing of the Union Trust Co are due, in a
large measure, to the loans made by the Umon Trust Co to and the
investments it made m the Van Sweringen enterprises There is
little doubt that the policies and business management of the Union
Trust Co , as will be shown in almost every report, were dictated by
Mr Joseph R Nutt Neither is there much doubt but that the
policies and business management of Joseph R Nutt were influenced
and dictated by the Van Swermgens As nominal head of this large
institution, Nutt allowed the Vans to borrow in excess of the legal
limit; he allowed them to substitute worthless collateral for good,
and when a loan to the Vans was refused in the main office of the
Union Trust Co it was granted at a branch of the Umon Trust Co.
upon the oral approval of Mr. Nutt.
In the report, "Van Sweringen Enterprises", written in connection
with our examination of J P. Morgan & Co , we covered fully the
details regarding the formation of the Vaness Co and the voting trust
agreement of the Van Sweringens However, at the expense of repeating, we believe that the details should again be brought out in this
report m order to show the relationship between the Van Sweringen
brothers and certain officers and directors of the Union Trust Co.
VANESS CO AND VOTING TRUST
(U-2-2)
The Vaness Co was incorporated under the laws of Delaware on
January 9, 1922, as a personal corporate vehicle for O. P. and M. J.
8190
STOCK EXCHANGE PRACTICES
Van Sweringen and their associates. The original shareholders were
as follows*
Shares
J R Nutt, chairman of the board, the Union Trust Co
C L Bradley, director, the Union Trust Co
W. S Hayden, director, the Union Trust Co
Otto Miller, director, the Union Trust Co
O P and M J Van Swermgen
Total
16,250
16,250
16, 250
16, 250
97,500
162,500
On July 15,1922, a Voting trust agreement was entered into between
the above-named persons and the Union Trust Co., as trustee—
(U-2-2, 2-3)
Whereby the trustee, held, as trustee, all the voting common stock for the
lives of the six persons named and for 21 years after the death of the last survivor.
The trustee was required to deliver proxies to vote the stock to the two Van
Swermgens, Nutt, Bradley, Hayden, and Miller for the stock deposited by them
respectively during the life of the agreement, regardless of who owned the " certificate of interest "
(U-2-2)
On January 11, 1934, the Messrs, Hayden and Miller sold their
interest in the Vaness Co. to the Van Swerigen brothers Since then
the stock of the Vaness Co. has been owned as follows
Shares
J R Nutt
C L Bradley
O P and M. J. Van Swermgen
16,250
16,250
130,000
Total
162, 50G
(U-2-3)
At the time of the sale of their holdings by Hayden and Miller to
the Van Swermgens a new voting trust agreement was entered into.
Provisions of the new voting trust agreement were substantially the
same as those contained in the previous agreement This second
agreement terminated in 1927 at which time options were granted by
J. R. Nutt and C L Bradley to O P and M J Van Swermgen covering the purchase by the Van Sweringens of the interests owned by
J R Nutt and C. L. Bradley in the event of their death.
(U-57)
In addition to the above-named directors of the Union Trust Co
associated with the Van Sweringens there are others, two of whom
stand out rather prominently, viz, the Messrs F H Ginn and W M.
Baldwin
(Committee hearings, J P. Morgan & Co), (Exhibit with directors and officers)
Mr. Ginn, as evidence already presented before the committee
clearly states, has for a good many years actively represented the
various Van Sweringen corporations as counsel. Evidence has also
been presented to show that Mr Ginn has acted as counsel and was a
director of the Union Trust Co and was a member of the so-called
Morgan & Co. "preferred list " It should also be borne in mind that
STOCK EXCHANGE PRACTICES
8191
Mr Ginn was a member of the board of directors (1925 through 1933),
executive committee (1925 through 1933) of the Union Trust Co
(Related orally by Mr. Norton to Mr Seymour)
Mr Robert C Norton, another director of the Union Trust Co.
and member of the examining committee of December 1932, informed
the writer that Mr Gum had been very active around Cleveland for
the Van Sweringens, and by gettmg himself appointed to this important committee (executive) had aided Mr. Nutt a great deal in his
domination of the trust company busmess
(Minutes of meeting of board of directors, May 24, 1932, p 1041)
Wilbur M Baldwin was formerly vice president and later president
of the Union Trust Co He is, we understand, m some way related
to the Van Sweringens and, as it has been very adroitly expressed, is
Mr Nutt's "Man Friday" J K, Nutt put Baldwin in the trust
company and when Nutt resigned the presidency and was elected
chairman of the board, he had Baldwm elected president The association of Nutt and Baldwin will be shown m several of the reports on
the affairs of the Union Trust Co The Van Sweringens, individually
and through their various corporations, were constant borrowers from
the Union Trust Co almost from the formation of the trust company.
J R Nutt was one of the organizers of the trust company and was
its first president He retained the position of president of the Union
Trust Co until December 30, 1931, when he was elected chairman of
the board, which he resigned on June 30, 1932
The Van Sweringens borrowed heavily from the Union Trust Co.
and later borrowed even more heavily from J. P. Morgan & Co and
other New York banks In order to make these New York loans,
valuable collateral had to be pledged. All the collateral of any value
whatsoever was taken from the loans of Cleveland banks and used as
security for the New York banks Conditions in Cleveland kept
gettmg worse and worse and finally, early in 1933, the Umon Trust
Co , loaded down with loans of all kinds (the Van Sweringens being
the prmcipal borrowers), was forced to close We shall review the
loans made to the Van Sweringens in detail, taking each loan separately and following through its history, feeling that to report on the
total loans chronologically would only complicate the report. Before
giving the details of each loan, however, we should lite to give a summary of the loans as shown by a report of examination as of December
1932 and a summary as prepared by the staff of the liquidator of the
trust company
(Related by Mr. Norton to Mr. Seymour)
BOARD OF DIRECTORS' EXAMINATION COMMITTEE, DECEMBER 20, 1932
Certain directors of the Union Trust Co. had been "fed u p " for
some time wifch the domination of its management and its business
by Mr Nutt and his associates In June of 1932 they had been successful m forcing Mr Nutt to resign as chairman of the board, and
late in December 1932 insisted on a committee being formed to examine the affairs of the trust company
8192
STOCK EXCHANGE PRACTICES
(U-l-1)
As of December 20, 1932, an examining committee was appointed
by the board of directors to make an examination and report on the
condition of the Union Trust Co The committee completed and
submitted its report on February 3, 1933 The committee was composed of the following directors.
(U-l-4-45)
E P Lenihan, B, C Norton, E, T. King
In its report, the committee pointed out to the board the status of
the Van Swenngen loans J R Nutt was no longer with the bank and
evidently the committee felt that for once it could speak freely The
committee listed total loans made to the Van Swermgens and their
various interests and enterprises, with delinquent interest as of
January 1, 1933, as follows
(U-l-30, 1-9)
Collateral loans to Van Sweringens and controlled companies
[n addition, there was listed in "doubtful" loans Higbee Co and "undersecured"
Pittsburgh & West Virginia R R land contract
O P and M J Van Sweringen
- - .
.
Total
Principal
Interest
delinquent
Jan 1,1933
$11,702,594 15
$1,009,964 50
317,000 00
450,000 00
1,000,000 00
13,469,594 15
We quote the committee's comment regardmg these loans to the
Van Sweringens m full
(U-l-30)
The above loans, totaling over $11,000,000 have been the subject of public
criticism against the Union Trust Co , and in our opinion, have done more than
any other single factor to undermine public confidence in this institution
(U-l-30)
Owing to the various ramifications in interlocking companies, your committee
admits that it is at a loss to establish m a reasonable time without considerable
expense, the value behind these loans However, it is of the opinion that these
loans cannot be classed as being worth more than 25 cents on the dollar at the
present time; this is more or less of a guess
(U-l-30)
These immense loans, we understand, were sponsored by Mr J R Nutt,
C L Bradley, and their associates in the Van Swenngen deals, who, although
connected with the bank in an official capacity, were also prominently connected
with the Van Swermgen operations
(U-l-30)
It is your committee's recommendation that the bank employ a capable
independent attorney, without anv present or past connection with the Van
Sweringens, to thoroughly investigate the entire situation and to take any
action necessary to protect the interests of this bank without delay
(Related orally by Mr Norton to Mr Seymour)
During the course of our investigation, the writer attempted to
contact Mr Lenihan to discuss with him the various matters brought
out in the committee's report. Mr. Lenihan was out of town
STOCK EXCHANGE PEACTICES
8193
Therefore, the contact and discussion were had with Mr Robert C.
Norton When asked for a little more explanation regarding the last
aragraph quoted above, Mr Norton stated that the Van Sweringens
ad made a habit of "throwing" cases now and then to practically
every law firm in Cleveland and that it was almost impossible to get
any lawyer of Cleveland to take a case agamst the Van Sweringens
P
(U-1-30-A)
Daisy Hill Go loan.—The Daisy Hill Co. is the name of the corporation through which the Van Swermgen brothers own the "farm"
on which they live in Shaker Heights, Gates Mills, Cleveland. The
Union Trust Co had loaned to this company $51,000 on March 7,
1930, and $487,000 later in the same year—the details of which will
be given later in this report The committee, commenting on these
loans to the Daisy Hill Co , stated:
(U-1-30-A)
This bank has loaned to the Daisy Hill Co. $538,000 Besides the questionable
value of the collateral, interest has not been paid The Van Sweringens occupy
these premises as their residence and therefoie should pay some manner of rent.
As we understand it, they receive a substantial income
We are informed that the loan of $51,000 made at the terminal office on March
7, 1930, was declined at the mam office and subsequently made through the
terminal office on the authority of Mr Nutt
(Related orally by Mr. Norton to Mr Seymour)
During our discussion with Mr Norton, we asked for the name of
the officer at the mam office who had refused this loan to the Daisy
Hill Co. When asked the name of the officer who had made the
refusal, Mr. Norton stated that it was probably himself, that he and
a few of the other directors had at various times expressed a very
strong dislike and disapproval of any more Van Swermgen loans
being made until after they had been approved by the finance committee (the efforts of the dissenting directors—if seriously made,
were unsuccessful in preventing loans to the Van Sweringens, as will
be shown later m this report No mention was made of any dissension in the mmutes of the trust company). At any rate, it is claimed
by Mr Norton and the other members of the exammmg committee
that the loan of $51,000 to the Daisy Hill Co was refused at the
main office but was granted by Mr Armstrong of the terminal office
of the trust company Mr. Norton stated that the examining committee called upon Mr Armstrong to appear before the committee
and that he (Armstrong) stated that he had accepted this loan upon
the instructions of Mr Nutt and that it is believed by the committee
that subsequently to this (the appearance of Armstrong before the
committee) Mr. Nutt had a talk with Mr Armstrong and encouraged
Armstrong to deny any participation by Nutt in this transaction
Mr. Norton stated that the committee had thought of obtaining an
affidavit from Armstrong regardmg this matter, but had not done so,
feeling that he was right here in the city of Cleveland and that if any
court action was taken, he could be sworn.
Other committee comments—The committee in its report then
pointed out that the total capital stock of the Vaness Co consisted
175541—34—PT 18
15
8194
STOCK EXCHANGE PRACTICES
of 50,000 shares of preferred and 162,500 shares of common and that
the Union Trust Co had:
(U-l-33)
Pledged on loans
Preferred stock
The Daisy Hill Co
O P &M J VanSwermgen
John Hecker
J J McGmty
S J Gibbs (terminal)
Total (0 3612 of total outstanding)Common stock:
O. P. & M. J. Van Sweringen
Do
Total (0 70 of total capitalization)
8hare
s
7, 935
9,000
150
225
750
18, 060
97, 500
16,250
113, 750
(U-l-34)
With holdings of this size, why are we not controlling the board of directors?
Do we know the salaries paid to officials?
Regarding other corporations m which the Van Sweringens were
interested, and stock of which had been pledged securing loans, the
committee stated:
METROPOLITAN SECURITIES CO
By pledge of stock of the above company we control 10,296 shares.
Why did we permit a vote m favor of the Vans' control for another 3 years?
Why do we not control the board of directors?
Do we know what salaries are paid?
CLEVELAND BASEBALL CLUB
Total capital—500,000% at $100 per share
Alva Bradley loan, 378 shares
Vaness Co loan, 1,250 shares
CALUMET TRUST
Total certificates of interest outstanding, 25,203}^
O P Van Swermgen, managing trustee
Otto Miller, trustee
Mitchell D Follansbee, trustee
We hold as collateral 17,999K shares, or 0 7142 of total outstanding
Statistical department file contains a copy of a letter to Otto Miller, February
2, 1932, from L M Nicholson, secretary of trust, stating that he checked assets
and liabilities with the idea of determining the actual or real value of the trust
certificates, shows
Assets
$841, 166 32
Liabilities
55, 000 00
Net worth ($31 19 per share)
786,166 32
Comment Why do we not have representation on or control board of directors?
By the time the examining committee bad an opportunity to present
its leport to the board of direetois, the bank was closed, and it was too
late to answer the above questions
(U-34, 34-A)
However, Mi Nutt, answeiing the references made to him in the
committee's report, wrote a letter to the Union Trust Co on April 13,
STOCK EXCHANGE PRACTICES
8195
1933, which be requested be filed with the report of the examining
committee
Referring to the charge that he had sponsored the Van Sweringen
loans, Mr Nutt said.
(U-34-A)
The understanding of the Committee is not correct I never sponsored loans
to the Van Sweringen interests These loans were approved by the finance committee, of which Mr J R Kraus is chairman (of which I have never been a
member) before being made
Mr Nutt also demed any knowledge of approving the Daisy Hill
loan, stating, in part
(U-34-A)
If Mr Armstrong at the terminal office asked me about the loan, I doubtless
told him I thought it was all right, but I do not remember that he ever made any
inquiry
APPOINTMENT OF LIQUIDATOR
The Union Trust Co closed on February 25, 1933, and on April 8,
1933, Mr Oscar L Cox was appointed conservator, which title he he]d
until June 15, 1933, when he was appointed liquidator Immediately
after his appointment as conservator, Mr Cox designated a Mr C C
Mernfield, who was assistant treasurer of the Union Trust Co , to
make a study and report on the Van Sweringen loans Mr Mernfield
completed his task and submitted his report on June 3,1933. He submitted a detailed analysis of all of the Van Sweringen loans covering
some 25 pages of schedules (exhibits U-69 to U-69-X), copies of
which we have Howe\ er, each of these schedules and each of several
memoranda written in connection with them bears a statement from
Mr Cox that the memorandum or schedule is not part of the Trust
Co 's records, that it was prepared by a "junior" member of the staff,
and that it has not been verified as to facts Mr Mernfield was assistant treasurer of the Union Trust Co and could hardly be classed as a
"junior" member of the staff not capable of making up a coirect
statement Incidentally, so far as we have been able to check his
statements, they are a true statement of the facts
Mr Mernfield classes the loans due from the Van Sweringens and
their controlled companies as follows
(U-69)
Commercial and collateral loans
Mortgage loans
Land contracts
Total
With interest delinquent May 1, 1933
Total
$11, 412, 908 54
772, 064 57
1, 000, 000 00
13, 184, 973 11
1, 089, 045 83
14, 274, 018 94
We shall refer to these memoranda in closing the history of each of
the several loans.
8196
STOCK EXCHANGE PEACTICES
$2,800,000 PARTICIPATION IN TOTAL DEMAND COLLATERAL LOAN
$9,000,000 DUE FROM O. P AND M J VAN SWERINGEN
OF
(U-2-10)
A loan to the Van Sweringen brothers, personally, in the amount
of $9,000,000, is still unpaid and is participated in by four Cleveland
banks, as follows
(U-2-10)
The Union Trust Co
The Guardian Trust Co
The Cleveland Trust Co
The Midland Bank
$2, 800, 000
2, 500, 000
2, 500, 000
1, 200, 000
Total
9, 000, 000
(U-20-A; U-69-T to 69-X)
This obligation of the Van Sweringens grew out of some loans that
had originally been made to the Vaness Co We shall detail the
history of this loan from July 1928 until the present, and show just
how Mr. Nutt allowed the Van Sweringens to use the Umon Trust
Co Even as far back as 1928 the Van Sweringens were allowed to
substitute collateral havmg no market value for that which was
marketable The Vaness Co had made many loans prior to 1926,
but on April 19, 1926, was entirely paid out at the Umon Trust Co.
(U-69-A, 2-3)
On July 21, 1926, the Vaness Co started its borrowing again with
a loan of $225,000 The loans increased gradually, reaching a peak
on July 1, 1927, of $2,250,000 There was $1,900,000 paid off on
October 4, 1927, after which loans again increased until they reached
a total of $4,350,000 on June 23, 1928 The million dollars was paid
off at the end of June 1928, and on July 28, 1928, with the debts
totaling $3,350,000, the loans were revamped in respect to $2,000,000.
The remaining $1,350,000 was gradually paid off to July 23, 1929
On July 27, 1928, there were five loans exclusive of the $1,350,000
mentioned above unpaid, in the name of the Vaness Co , as follows:
(U-20-A, 77)
Date
Loan no
Dec 28,1927.
Feb 17,1928.
Feb 20,1928.
Jan 14,1928—
Mar 1,1928-
29160
29162
27338
29700
Total—
Amount
$250,000
500,000
600,000
500,000
250,000
2,000,000
On that day (July 27, 1928) the above loans were canceled and a
new loan, no 36759, was set up in the name of the Vaness Co. m the
amount of $2,000,000
(U-2-4)
In November 1933 special investigators for the Ohio State Bankmg
Department made an exammation of certain loans at the Union Trust
8197
STOCK EXCHANGE PEACTICES
Co In their report on loans made to the Van Sweringens and their
controlled companies, the examiners detailed these loans and the
collateral carefully Referring to the above transaction by which
the five loans were refunded and a new one set up; the examiners
pointed out that—
(U-2-4)
Comparison of the collateral given to secure the loans which were refunded
for that given to secure the new note is stated below
Loans nos
27,1928,
26399, 29160, July
loan no
29162, 2733S,
36759,
and 29700
amount,
total amount, $2,000
000
$2,000,000
Shares
18,000
New York Chicago & St Loins R R common
The Terminal Properties Co
First preferred
Second preferred
_
Common.- .
_
>
>
__ _
32,600
27,300
93,300
Shares
32,631
30,255
95,600
(U-2-4)
The collateral security covering the new note did not include the 18,000 shares
of New York, Chicago & St Louis Railroad common which, together with the
Terminal Properties Co stock, was pledged on the refunded loans The Nickel
Plate shares, having a market value of $2,263,500, were released to the Vaness Co
and additional shares of the Terminal Properties Co stock were substituted as
follows
First preferred, 31 shares, par value
$3, 100
Second preferred, 2,955 shares, par value
295, 500
Common, 2,300 shares, par value
230,000
Total, par value
The above Terminal Properties stock pledged was owned as follows
Vaness Co
Shares
First preferred
Second preferred
_
___
._
23,044
29,425
43,*>60
528, 600
0 P &
M J Van
Swermgen
Share*
9,587
830
51,980
The common stock of Terminal Properties Co was owned on July 27, 1928,
as follows
(U-2-4)
8to**
Vaness Co
44, 045
O P &M J VanSwermgen
51,980
Others
3,975
Total
The unpaid dividends on the preferred stock totaled $5,505,510
100,000
(U-2-4)
Here we have a case as far back as 1928 (and,incidentally, as far back
as we have gone) where good collateral was released for that of less
value when The Union Trust Co released stock with a market value
of $2,263,500 and received in return stock of a closely held corporation
8198
STOCK EXCHANGE PRACTICES
on which there was no market whatsoever Not only that, but
Terminal Properties Co had continually operated at a loss and a
consolidated balance sheet as of December 31, 1927 showed a deficit
of $19,696,007 16
Approval of $2,000,000 loan—The acts of the officers of the Trust
Co in making loans were ratified and approved by two committees
namely, the discount or finance committee, and the executive committee, before bemg approved by the board of directors In analyzing
the minutes of these meetings, some curious facts present themselves,
which we will try to outline as clearly as possible
(Minutes of discount committee, The Union Trust Co , p 2655)
At the meeting of the discount committee held July 30, 1928 the
loan to The Vaness Co was approved This meetmg was attended
by the following Messrs Otto Miller, Thomas P Robbins, G. A.
Tomlinson, Whitney Warner, J. R. Kraus, W M Baldwin, J. G.
Geddes, vice president, John Sherwin, Jr vice president, George P,
Steele, vice president; W Tonks, vice president, R S Crawford,
vice president
(Minutes of executive committee, p 695)
It will be noted that five of the persons that were present at this
meetmg were officers of the bank, who, accordmg to the bylaws m
effect at that time, were not qualified to act as members of the
discount committee Therefore, only four votes were necessary to
ratify the loan On August 6, 1928, the executive committee ratified
all loans approved by the discount committee on July 30, 1928
Accordmg to the executive committee minutes there were nine
members present, which constitutes a quorum (there were also
present the Messrs Farnsworth and Harris, who were not qualified
to vote) Included in the nine qualified to vote were five members
who had acted upon the loan as members of the discount committee
and J R Nutt, who was financially interested m the borrower
The five members of the executive committee who had previously
voted on this same loan were as follows W M Baldwin (J B,
Nutt's lieutenant), Otto Miller (Van Swermgen associate), J E.
Kraus, Thos P Robbms, Whitney Warner
(Minutes of board of directors, the Union Trust Co p 704)
On August 14, 1928, the board of directors approved and confirmed
the action of the executive committee, but there was not a quorum
present
(Board of directors p 704)
On September 11, 1928, the following resolution was adopted by
the board of directors*
Upon n>otion duly irade, seconded and unanimously carried it was
Resolved, That the minutes of the meeting of June 26, 1928, be and the same
are hereby approved, and the actions taken at the meetings of July 10, 1928,
July 24, 1928, August 14, 1928, and August 28, 1928, at which quorums were
not present, are hereby ratified, adopted, and confirmed as the actions of this
boaid
An analysis of the directors present at the meeting set forth in the
gives the following information:
above resolution
8199
STOCK EXCHANGE PRACTICES
Voted as member Voted as member Voted as member
of discount com- of executive com- of board of direcmittee July 30, mittee Aug 6,
tors Sept 11,
1928
1928
1928
Name
W M Baldwin
Otto Miller
J B. Kraus__
T P Robbing
Whitney Warner
Emil Joseph
E J Kulas
J R Nutt
O A Tomlmson
Yes .
Yes
Yes
Yes
Yes
_
.
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
YPS
(a) Seven of the directors who voted on September 11,1928, for the
above resolution were not present at any of the four meetings, the
actions of which they ratified.
(b) Fourteen of the thirty-five directors who voted for the foregoing resolution were not present at the meetmgs held on July 10
and July 24, 1928
(c) Of the 14 members of the board who were present at both of
the directors7 meetings on August 14, 1928, and September 11, 1928,
4 (Messrs Nutt, Joseph, Baldwin, and Bobbins) had previously
voted at least once on the merits of this particular loan Of those
present at the board of directors' meeting on September 11, 1928, 4
had voted twice previously in favor of this loan, and 3 had voted once
previously as members of either the executive or discount committees.
No payments were made on this $2,000,000 loan during 1928 and
1929 On November 1, 1929, the Vaness Co negotiated a new and
larger loan, canceling the $2,000,000 loan
(Committee hearings, J P Morgan & Co )
Brokerage loan paid off—It will be remembered from other data
previously acquired and from the reports previously written in connection with our examination of the Van Swenngens that the Vaness
Co had maintained an active brokerage account with the New York
Stock Exchange firm of Paine, Webber & Co It would also be
recalled that one of the senior partners of this brokerage firm, Mr
Kenneth Steere, was included on J P Morgan's so-called " selected
list" in the sale of Alleghany Corporation common stock At the
committee's hearmgs held in the sprmg of 1933, information was
presented (with Mr O P Van Swermgen as the witness) showing
that large borrowings had been made by the various corporations
controlled by these two Van brothers, the proceeds of which have
been used, in part, to pay off the indebtedness of the Van Swenngens'
margin account at Paine, Webber & Co
(U-59, 69-B; U-59-A)
In studying the data pertaining to loans made by the Cleveland
banks to the Van Swenngens' interests, one finds the same situation
existing The Van Swenngens, operating an active margin trading
account with Pame, Webber & Co , evidently in an effort to support
the market of the Chesapeake Corporation and the Alleghany Corporation stocks Their tradings during 1929 were very heavy and
during the stock market crash they lost heavily and incurred an
indebtedness at Pame, Webber & Co runmng well over $30,000,000.
8200
STOCK EXCHANGE PRACTICES
On December 31, 1929, the Van Swenngens owed Paine, Webber &
Co $25,031,736 In order to pay off the indebtedness of their
margined account, the Van Sweringens had to obtain money somewhere; and so they increased their loan from 2 to 9 million dollars,
using the proceeds to pay off some of the Vaness Co indebtedness to
a large extent, at Paine, Webber & Co The Union Trust Co took
a $2,000,000 participation in this total loan of $9,000,000, the
remamder being split up by three other Cleveland banks
(U-2-5)
The Union Trust Co was trustee for the participants in this loan.
The participants and the amount of their respective participations
were as follows*
The
The
The
The
Union Trust Co
Guardian Trust Co
Cleveland Trust Co
Midland Bank
(U-78)
Total
$2, 000, 000
2, 500, 000
3, 300, 000
1, 200, 000
9, 000, 000
(TJ-2-6)
The collateral securing the above loan was almost the same as that
securing the $2,000,000 loan, with the addition of 122,000 shares of
Van Sweringen Co. common stock and 100 shares of Cleveland
Terminal Building Co common Both of these latter companies
were wholly owned subsidiaries of the Terminal Properties Co It is
difficult to figure out how this additional collateral materially strengthened the security behind this loan.
APPROVAL OF PARTICIPATION IN $9,000,000 LOAN
(Minutes of the Union Trust Co finance committee, p 5161; executive committee
p 820; board of directors, p. 737)
The finance committee approved this loan on November 2, 1929;
and the executive committee approved and confirmed the action of
the finance committee on November 4,1929. There were 11 members
present at the meeting of the executive committee. The vote of the
executive committee was unanimous, however Approval offcheloan
to the Vaness Co was assured, because 4 of the 11 members present had
previously voted favorably on the loan as members of the finance
committee, and the vote of these 4, together with the vote of J R.
Nutt (who was interested in the borrower) and W. M Baldwin
(Nutt's right-hana man) constituted a majority On January 9,1929,
by action of the board of directors, the bylaws of the Union Trust Co.
were amended m several respects one of which was as follows*
Article 2, section 8, to read as follows
"Certain loans No loans shall be made to an officer of the bank, or to a
syndicate or partnership in which an officer is a participant or a partner, unless
first approved by the executive or finance committee When a loan is applied
for or has been currently made, by or to a corporation in which an officer has a
substantial interest, it shall be the duty of that officer to state immediately the
fact of his interest therein to the executive or finance committee "
Mr Joseph R Nutt was 1 of the 4 stockholders of the Vaness Co ,
owning 16,250 shares The records of the finance and executive com-
STOCK EXCHANGE PRACTICES
8201
mittees failed to show any mention of this fact's being made by Mr.
Nutt when the question of these loans was discussed
(U-2-8)
Although in May 1930 the Alleghany Corporation earned out some
new financing, through J P Morgan & Co and the Guaranty Trust
Co of New York (issuing $12,500,000 par value of preferred stock,
and the $25,000,000 third bond issue of the Alleghany Corporation)
the Vaness Co was unable to pay off its $9,000,000 indebtedness in
Cleveland; and on May 13, 1930, the total loan was renewed
(U-39, 72)
The Union Trust Co increased its participation by $800,000. The
participation of the Cleveland Trust was reduced from $3,300,000 to
$2,500,000 and the participation of the Union Trust Co was mcreased
from $2,000,000 to $2,800,000 When this new loan of $9,000,000 was
renewed May 13, 1930, the Terminal Properties Co stock and the
100 shares of Cleveland Terminals Building Co. were released, 600,000
shares of Van Swermgen Corporation stock being pledged instead.
Comparison of the collateral securing this $9,000,000 obligation on
November 1, 1929, and May 13, 1930, is as follows
(U-2-8)
Loans by the Union Trust Co to the Vaness Co
Nov 1,1929, May 13,1930,
loan no 61949, loan no 70739,
$2,000,000 par- $2,800,000 participation in
ticipation in
$9,000,000 loan $9,000,000 loan
The Terminal Properties Co
First preferred
Second preferred
Common
The Van Swermgen Co Common
The Cleveland Terminals Building Co
Van Swermgen Corporation Common
Shares
Common.
0
0
0
122,000
0
600,000
(U-33)
On May 10, the other participants with the Union Trust Co. agreed
to the renewal of this loan and the substitution of 600,000 shares of
Van Swermgen Corporation stock in place of the 100 shares of Cleveland Terminals Bunding Co. stock, but, as was pointed out by the
State Banking Department examiner in his special report of November
13, 1933—
(U-2-8)
* * * no mention is made regarding the release of 32,893 shares of the Terminal Properties Co first preferred; 33,187 shares of the Terminal Properties Co
second preferred, and 99,222 shares of the Terminal Properties Co common,
which shares have been pledged to secure the loan being refunded However,
consent was given to the substitution of 600,000 shares of Van Swermgen Corporation common for 100 shares of the Cleveland Terminals Building Co
(U-2-8)
No reasons are given in the directors' minutes of the Union Trust Co. or the
Guardian Trust Co for refunding of this loan at this time or for the release of the
8202
STOCK EXCHANGE PRACTICES
collateral security consisting of the Cleveland Terminals Building Co stock and
substitution therefor of 600,000 shares of Van Swermgen Corporation common
stock
The substitution of collateral was made because the Van Sweringen brothers had formed the Van Sweringen Corporation to acquire
the assets of Terminal Properties and Cleveland Terminals Building
Co The Van Sweringen Corporation then (May 15, 1930) sold
through the Guaranty Trust Co of New York $30,000,000 5-year
6-percent gold notes and issued 1,744,800 shares of its common stock
at $25 a share (or $43,620,000) to the stockholders of Terminal
Properties Co for the assets acquired The Examiner pointed out
that—
(U-2-9)
(3) On or about May 13, 1930 the Cleveland Terminals Building Co (wholly
owned by the Terminal Properties Co) caused an entry to be placed on their
books setting up the appraised value of certain building sites (air rights) in the
Terminal group at $16,285,000, which apparently had not previously been carried
on the books as an asset
These "air rights7' were the principal assets which the Van Swermgen Corporation received and, as was pointed out by the State
examiner—
(U-2-9)
The collateral released, namely, the Terminal Properties Co. and the Cleveland Terminals Building Co stock, was valued by the stockholders thereof at
approximately $43,620,000 on or about May 13, 1930, at which time the assets
of the company were sold to the Van Sweringen Corporation
(U-2-9)
The value of the collateral substituted (600,000 shares Van Sweringen Corpora-1
tion common), valued on the same basis, would have been worth $15,000,000
However, both valuations are arrived at after adding $16,285,000 appreciation
covering an appraised value of "air rights "
(U-2-9)
To have secured the new loan as fully as the loan which was refunded, there
should have been a pledge of approximately all of the Van Sweringen Corporation
shares issued (1,744,800) instead of only 600,000
(Committee hearings, J P Morgan & Co , May 1933; U-79)
No payments were made on the principal of this loan from the
date it was made to October 30, 1930 On that day the Van Sweringens, through their two companies, the Vaness Co and the Cleveland
Terminals Building Co , borrowed from a group of New York banks,
headed by J P Morgan & Co , $39,500,000 In making this loan
in New York, the Van Swermgens pledged, among other collateral,
all of the assets of the Vaness Co Also, the Vaness Co agreed with
J P Morgan & Co that it would not mcur any other indebtedness
of more than $1,000,000, than that due to Morgan In order to do
this, a "switch" or substitution of collateral had to be made with the
security pledged on the Cleveland loans In accordance with the
Morgan agreement, the Vaness loan at the Union Trust Co had to
be paid off This was easily handled—not by the payment of any
money to the trust company but by simply transferring the debt to
one in the name of the Van Sweringen brothers.
i The examiner based this $15,000,000 on the fact that the stock was sold at $25 a share in the trade with
Terminal Properties
8203
STOCK EXCHANGE PBACTICES
(U-2-9)
Accordingly, on October 30, 1930, this $9,000,000 obligation of the
Vaness Co was canceled and a new note signed by O P. and M J.
Van Swermgen It might be well to state at this point that on the
same day (Oct 30, 1930) there was another loan of the Vaness Co
in the amount of $5,000,000 transferred to the name of the Van
Sweringen brothers with the "switch" of unmarketable collateral for
marketable security. The details of this switch will be given later
in connection with the $5,000,000 loan This $9,000,000 loan of the
Vaness Co was credited m full, and a new loan, no 78310, was set
up in the name of O. P. and M. J Van Sweringen This new loan was
participated m by the other banks m the same ratio as the old loan;
that is
The Union Trust Co
The Guardian Trust Co
The Cleveland Trust Co
The Midland Bank
(U-2-9)
$2, 800, 000
2, 500, 000
2, 500, 000
1, 200, 000
.
Total
9, 000, 000
(U-2-9)
The collateral pledged to secure the new note was as follows*
(U-79)
97,500 shares the Vaness Co common, issued in the name of Winifred C Bloom
Comparison of the collateral security for each of the foregoing loans
is set forth as follows
(U-2-10)
Nov 1,1929,
loan no
July 27,1928,
61949, by
loan no
the Union
37659, by
Trust Co
the Union
to the
Trust Co
Vaness C o ,
to the
Vaness C o , $2,000,000
Participation
amount
$2,000,000 m $9,000,000
loan
The Terminal Properties Co , first preferred- _.
The Terminal Properties Co , second pieferred—
The Terminal Properties Co , common
The Van Sweringen Co , common
The Cleveland Terminal Building Co, common.
V<&n Swermgen Corporation, common
The Vaness Co , common
Shares
32,631
30,255
95,600
Shares
32,893
33,187
99,222
122,000
100
May 13,1930,
loan no
70739, by
the Union
Trust Co
to the
Vaness C o ,
$2,800,000
Participation
in $9,000,000
loan
Oct 30,1930,
loan no
78310, by the
Union Trust
CotoO P &
M J Van
Sweringen,
$2,800,000
Participation
in $9,000,000
loan
Shares
Shares
122,000
600,000
97,500
(Minutes of finance committee, the Union Trust Co , p 6359)
We have carefully checked the minute books of the finance and
executive committees and the board of directors regarding the approval of this loan No specific reference is made in either the finance
or executive committees' minutes to this loan, and no reasons are given
in any of the mmutes of the Trust Co for the retirement of the Vaness
Co note and the substitution thereof of a note of like amount signed
by O. P and M J Van Swermgen, or for the release of the stock
pledged to secure the Vaness Co and the substitution of the Vaness
Co stock on the new loan, except at a meetmg of the finance committee on October 28, 1930, 2 days before the transaction
8204
STOCK EXCHANGE PEACTICES
(Minutes of finance committee, the Union Trust Co , p 6359)
It was agreed to accept participation of $2,800,000 in a loan of $9,000,000 to
O P and M J Van Swermgen, to be secured by 60 percent of the entire issue of
common stock of the Vaness Co The other participants in this loan are the
Cleveland Trust Co , the Guardian Trust Co , and the Midland Bank
No payments have ever been made on the principal of the 9 milliondollar loan. Unpaid interest accrued by the Union Trust Co on their
$2,800,000 participation totaled $391,774 64 on September 1, 1933.
(U-16)
On January 18,1933, Mr O'Neil, vice president of the Union Trust
Co., wrote to the other participants in the $9,000,000 loan regarding
the 97,500 shares of Vaness Co. stock, stating that—
(U-37)
Messrs O P. and M. J. Van Swermgen have now requested that we execute
and deliver to Mr Charles W Stage, secretary of the Vaness Co , a proxy for
said stock
Mr. Robinson, executive vice president of the Guardian Trust (3o.,
answered on January 23, 1933, stating:
(TJ-38)
It seems to me that owing to the fact that the trustee has such a large stock
interest he should be represented in some manner in a corporation set-up for 1933,
especially in view of the fact that no payments are being made upon the interest
or principal of the participated loan
I am aware of the fact that most of the securities in the Vaness portfolio, upon
which we depended when we made the loan, have been shifted to New York.
Whether or not the pledging of these securities was done with or without the
knowledge of the trustee I am not advised, but, irrespective of that, it may be
that in the future some policy may be taken by the Vaness management which
would be harmful to our interests, and I feel that the banks should have some
one representing them on the board who would know in advance of the establishment of any policy which might affect our loan one way or another and advise
the interested banks promptly in reference thereto
Mr. O'Neill answered Mr Robinson on January 26, 1933, in part,
as follows
Referring to the suggestion in your letter of the 23d instant as to the pledging
of Vaness Co stock in New York, it appears that on or at>out October 30, 1930,
the note of the Vaness Co for $9,000,000, representing a loan m which the banks
had participated, was canceled and the collateral surrendered, and there was substituted therefor the note of O P and M J Van Swermgen, with 97,500 shares
of stock of the Vaness Co as collateral, and certificates of participation in this
new loan were issued to the banks Therefore, the banks, as participants in this
loan, would not be in a position to object to the pledge made by the Vaness Co.
in New York, and it is my understanding that all of the local banks knew at
that time that the New York pledge was being made
We have been unable to find, anywhere in the files of the Union
Trust Co , any notice to the participants by the trustee of this collateral switch.
O P AND M J VAN SWERINGEN COLLATERAL LOAN, $4,100,000
(U-l-30)
There is also still due the Union Trust Co from O P and M J
Van Swermgen personally a direct demand loan in the amount of
$4,100,000 Interest on this loan has not been paid since July 1,
STOCK EXCHANGE PRACTICES
8205
1931, and there was delinquent on May 1, 1933, interest accrued of
$408,012 17 This loan, like the $9,000,000 loan, arose out of onginal
borrowings by the Vaness Co The Union Trust Co had loaned to
the Vaness Co. the sum of $5,000,000 on October 29, 1929, secured
by collateral having a market value of $7,295,750, as follows.
(U-20-C)
Price pet Market value
share Oct 29 1929
32,000 shares Cleveland Railway Co
,
6.500 shares Midland Bank
30,000 shareo Alleghany Corporation, common
>
8,000 shares United Corporation, common
3,000units Western Reserve Investment Corporation, 6 percent preferred.
100
465
$3,200,000'
3,022,500618,750
154,600"
300,000
U00
Total.
i No market
7,295 750
Indicated value $100.
(U-20-C, 11-A)
On October 30, 1930, when all the other financing was being done
for the Vaness Co and the 9-milhon-dollar loan was being lenewed
in the name of the Van Sweringen brothers, this $5,000,000 loan in
the name of the Vaness Co was refunded by a new loan of the same
amount m the name of O P and M J Van Swermgen The collateral which had been pledged on the Vaness Co loan and which
had an estimated market value ol $4,942,000 was released, and collateral havmg a market value of approximately $672,000 was accepted
as security for this $5,000,000 loan to the Van Swermgens The following i& the collateral accepted*
(U-ll-A, U-79)
Market value
Oct 30,1930
4,000 shares Niagara Hudson Power Corporation, common, at 12%
5,000 shares Standard Brands, Inc , common, at 16%
3,000 units Western Reserve Investment Corporation, common, at 85-_
1,400 units Newton Steel Co , common, at 20y2
33,000 units Peerless Motor Car Corporation, common, at 3%
6,000 units United Corpoiation common, at 22%
9,000 units Vaness Co , preferred, no market
16,500 units Vaness Co , common, no market
3,000 units Western Reserve Investment Corporation, no market
17,999>£ units Calumet Trust certificates, no market
10,296 units Metropolitan Utilities, Inc , common, no market
Total
-
$50, 000
81, 250
255, 000
28, 700
123, 750
133, 500
672,200
and equity in the following, held in corporate trust department subject to previous pledge under Metropolitan Utilities, Inc $3,100,000
loan:
(U-ll-A, U-79)
100 shares Traction Stores Co , common, no market.
5,800 shares Cleveland & Youngstown R R , common, no market.
100 shares Cleveland Traction Terminal, common, no market
1,465 shares Cleveland Interurban R R Co , common, no market.
Previously in this report we have shown how the Van Swermgens
were able to substitute 97,500 shares of the stock of the Vaness Co r
8208
STOCK EXCHANGE PEACTICES
which had no market value, for other marketable collateral, securing
the $9,000,000 obligation Not only was this Vaness Co stock
unmarketable but practically all of the assets of the Vaness Co , had
been pledged with J P Morgan & Co
(U-II)
The "switch" of collateral on this $5,000,000 loan was covered
fully by the Ohio Senate banking committee during its hearings in
September 1933 In order to be sure that a clear picture of the
"switch" would be printed in the daily press, the committee issued a
statement explaining the transaction Mr. W M Baldwin, formerly
president of The Union Trust, and, as we have pointed out previously
in this report, Nutt's "Man Friday," then issued a statement
(U-II)
* * * with the desire of giving the committee more complete information
regarding this subject and to present more accurately the information which was
before the officers of the bank and which entered into their decision in approving
this transaction
In his statement, Mr Baldwin said:
(U-12, 12-B)
It was apparent to the officers of the bank that the stock of the Cleveland
Railway and of the Midland Bank, being salable only on the local stock exchange,
would not under the then conditions realize the quoted prices and that the proposed arrangement with the New York banks which contemplated the use of
certain of the collateral then pledged under the Vaness Co loan and the payment
of this loan by the personal note of O P and M J Van Swermgen had the
advantage of the personal responsibility of O P and M J Van Swermgen,
which we consider very substantial, as well as the additional collateral offered
to back up this note, which included all of that then securing the Vaness Co loan
except the 32,000 shares of Cleveland Railway stock and 8,260 shares of Midland
Bank stock, and 50,000 shares of Van Swenngen Corporation stock—the latter
being an unlisted security and entirely held by the Vaness Co
(U-12, 12-B)
Although the stock of the Vaness Co pledged on this loan was not listed, it
was considered to have substantial value at the time in excess of $7,272,000 above
stated The Calumet land tiust certificates, representing ownership in valuable
Chicago real estate, also had substantail intrinsic value, although no market
quotations were available because it was not listed on any exchange
(U-12)
In his statement, Mr Baldwin claimed that the value of the Vaness
Co. stock was not difficult to estimate and that its value was a great
deal greater than that of the listed stock that was released. J. P.
Morgan & Co. evidently did not agree with Mr Baldwin or thpy
would have accepted some of the Vaness Co. stock as collateral themselves and would not have demanded this other collateral that had
been pledged at the Union Trust Co
(U-5)
On December 16, 1930, Mr O'Neill, vice president, wrote a letter
to Mr Coulton, vice chairman, regardmg the stock of Cleveland
Interurban Railway Co., Cleveland Tractions Terminals, and Traction Stores Co. pledged to secure the Van Sweringen loan. Mr.
STOCK EXCHANGE PEACTICES
8207
O'Neill pointed out that all this stock was in the name of Metropolitan
Utilities, I n c , and that there was no authorization for the Van
Sweringens to use this stock He stated in his letter
(U-5)
I talked to Mr Murphy on the telephone last night and he said that the Van
Sweringens had borrowed the money on our $5,000,000 loan and others, to enable
the Vaness Co to pay off certain obligations He mentioned specifically one
obligation of $4,200,000 He also said that he thought this action warranted the
Vaness Co m allowing the Van Sweringens to pledge the stock in question for
the $5,000,000 loan Even this does not show what warrant there is for usmg the
asset of Metropolitan Utilities, Inc , which is a subsidiary of the Vaness Co
Mr. Murphy then promised to obtain the proper authorization.
(U-70, 20-D)
On November 20,1930, the Union Trust Co. loaned $800,000 to the
Vaness Co. and the $5,000,000 loan to the Van Swermgen brothers
was reduced by a like amount—$800,000 All the collateral having
any market value at all was released from the Van Sweringen loan to
be pledged as security on the Vaness Co. loan. This collateral had a
market value on November 20, 1930, of approximately $671,450
securing a loan of $800,000
This loan to the Vaness Co , m the amount of $800,000, came about
m the following manner Examiners foi the State banking department
had found the loans to O P & M J Van Sweringen to be in excess of
the legal limit, which was a violation of section 710-122 of the Ohio
banking act The examiner evidently spoke to the officers about this
matter while he was conducting the examination
(U-59)
Mr Herzog, an aide of Mr Cox, the liquidator, stated, after a conference with D S. Barrett, a Van Swermgen representative:
(U-59)
The switch of $800,000 from the debt of O P & M J Van Sweringen to an
obligation of the Vaness Co was at the lequest of the bank The Van Sweringens owed $7,800,000, which was $800,000 in excess of the legal limit
On January 3, 1931, the superintendent of banks wrote to the Union
Trust Co and stated that on November 14, 1930
(U-23)
We note an excessive line of credit to O P & M J Van Swermgen It is set
up as excessive to the extent of $2,249,455, which amount has been reduced since
November 14 in the sum of $2,222,500, leaving $26,955 in excess of the loan limit
or 20 percent of the bank's capital and surplus
(U-80)
The above reduction of $2,222,500 is made up of the $800,000 and
81,422,500 loaned to Metropolitan Utilities, Inc., on January 8,1931.
Mr. Baldwin answered the superintendent of banks, stating that:
8208
STOCK EXCHANGE PRACTICES
(U-81)
Referring again to your letter of January 3,1 wish to advise that the excess loan
has been closed
Actually, the excess loan was simply transferred from the Van
Sweringens to the Vaness Co and Metropolitan Utilities, their corporations
The remaining $4,200,000 loan, after the above $800,000 payment,
of the two Van Sweringen brothers was then secured by the following:
(TJ-20-D)
Shares
Vaness Co preferred (no market)
Vaness Co., common (no market)
Metropolitan Utilities, Inc , common (no market)
9,000
16,250
10, 296
On January 24, 1931, the Van Sweringens paid off $100,000 of
their loan, leaving a balance of $4,100,000, which is outstanding today
(January 31, 1934)
APPROVAL OF BOTH 9- AND 5-MILLION DOLLAR LOANS
(Minutes of the Union Trust Co finance committee, p 6359, Executive Committee, p 941)
The agreement to participate to the extent of $2,800,000 in the
total loan of $9,000,000 to O P & M J Van Sweringen and the
agreement to loan O P. & M J. Van Sweringen another $5,000,000 was
approved by the finance committee on October 28, 1930 The Action
of the finance committee was approved by the executive committee
on November 10, 1930, at which meeting there were 13 members
present, 5 of whom had attended and voted at the finance committee
meeting, and 1 of whom (J B, Nutt) was personally interested in
the Van Sweringens.
(Minutes of Board of Directors, p 885)
The action of the executive committee was approved by the
board of directors on November 12, 1930, which meeting was attended
by 31 members Of these 31, the following members had voted in
favor of this loan with either or both the finance committee and the
executive committee
Voted
Voted
Voted
finance
executive board of
committee committee directors
Name
W M Baldwin
G A Coulton—
Otto Miller
T P Bobbins
F P Root
Emil Joseph - J R Kraus
K V Painter
W T White
„_
-._>_____
_
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
In his report to Mr. Cox, liquidator, Mr. Merrifield, assistant
treasurer, speaking of the position of the Union Trust Co. as creditor,
recommended—
Securing, if possible, a rescramble of the collateral held by the various creditors,
paiticularly obtaining the Cleveland Railway stock given up in 1930.
STOCK EXCHANGE PRACTICES
8209
(U-58)
To help accomplish these ends, the Cleveland banks, and in particular the
Union Trust, should have closer contact with the affairs of these companies
(U-35)
Ohio State bank examiners classed the loans due from the Van
Sweringen brothers as an entire loss.
VANESS CO. DEMAND COLLATERAL LOAN, 304,183.75
(TJ-70)
As mentioned previously in this report regarding the $4,100,000
loan to O. P. & M. J. Van Sweringen, the Vaness Co. borrowed from
the Union Trust Co on November 20, 1930, the sum of $800,000—
the proceeds of which were applied against the Van Swenngens' loan.
Collateral having a market value of $671,540 was taken from tl^e
Van Sweringen brothers7 loan and pledged as security on this Vaness
Co. loan. Three payments have been made to the Union Trust"Co.
on the principal of tins loan; one on November 19,1931, in the amount
of $95,222.25, when 33,000 shares of Peerless Motor Car Corporation,
common were released from the collateral, one in the amount of
$400,000 on November 31,1931; and the third on December 12,1931,
when $594 was paid The $400,000 payment resulted from the Van
Sweringen Co. borrowing from the Union Trust Co. on November 31,
1931, the amount of $400,000—pledging as collateral a $645,000 note
secured by deeds to real estate.
(U-l-30)
There remains due from the Vaness Co $304,183 75 prmcipal
amount and interest from January 1, 1932, which, on Januarv 1,
1933, amounted to $18,979 60 The collateral securing this loan and
its market value just prior to the closing of the Union Trust Co was
as follows:
Marketmlut
May 81,19SS
1,333 shares Niagara Hudson Power Corporation, common
5,000 shares Standard Brands, Inc , common
560 shares Corrigan McKmney Steel Co , voting common
140 shares Corrigan McKmney Steel Co nonvoting common
6,000 shares United Corporation, common
3,000 shares Western Reserve Investment Corporation
3,000 units Western Reserve Investment Corporation
17,999)£ shares Calumet Trust ceisfcificates
1,250 shares Cleveland Baseball Co
Total market value
$13, 330
100, 000
5, 600
1, 400
54, 000
No market
No market
No market
No market
174, 330
(U-45)
The banking department classed this loan as having an undeterminable value, and Mr Merrifield stated that—
(U-62)
* * * information submitted by the company to date indicates that Vaness
Co securities could at no time in the past 4 years have been considered satisfactory collateral in large amounts for commercial bank loans
175S41-—34—PT 18
16
8210
STOCK EXCHANGE PRACTICES
TERMINAL BUILDING CO AND VANESS CO , COLLATERAL LOAN, $557,000
(XJ-75, 67, 47)
On January 20, 1928, the Union Trust Co loaned to the Terminal
Building Co. and the Vaness Co the sum of $557,000 This borrowing was made by the Van Swenngens in order that they might exercise
an option to purchase the property on which has been erected the
Nickel Plate freight terminal No payments have T^een made on the
principal of this loan and interest has not been paid since January
11, 1932. The delinquent mterest to May 1, 1933, amounted to
$45,626 08
METROPOLITAN UTILITIES, INC , PARTICIPATION LOAN, $ 5 5 7 , 0 0 0
(TJ-74)
Metropolitan Utilities, Inc , was incorporated under the laws of the
State of Ohio on March 21, 1929, and is a wholly owned subsidiary of
the Vaness Co It has general powers to participate in every kind
of commercial, mercantile, mining, or industrial enterprise, etc., in
the United States or any foreign country It is through the Metropolitan Utilities, Inc, that the Van Sweringens own and control the
Cleveland Interurban Kailroad Co , the Cleveland & Youngstown
Railroad Co , the Traction Stores Co., and numerous other corporations owning and operating real estate in the downtown section of
Cleveland
The Metropolitan Utilities, Inc , borrowed in four separate advances—on August 14,1930, September 15,1930, November 26, 1930;
and December 15,1930—the total amount of $4,500,000. These were
participated in by three Cleveland banks, as follows:
(U-74)
The Union Trust Co
The Guardian Trust Co
The Midland Bank
Total
$2, 100, 000
1, 400, 000
1, 000, 000
4, 500, 000
(U-74, U-69-I, J)
This total loan was secured by the following collateral:
(a) $4,331,444.72 note of the Cleveland Interurban Railroad Co.
(b) $989,069 86 note of the Cleveland Traction Terminals Co.
(c) $73,569 95 note of the Traction Stares Co
(d) 1,465 shares of the Cleveland Interurban Kailroad Co.
(e) 100 shares of the Traction Terminals Co , capital stock.
No payments have been made on the principal of this loan, and
there was delinquent interest due on the Union Trust Co.'s participation of $2,100,000 from November 14, 1932, to May 1, 1933, in
the sum of $229,799.24.
Regarding the value of the collateral pledged to secure this loan, a
memorandum in the confidential files of the liquidator states*
(U-69-I, U-63)
" While there does not appear to be any possibility of Metropolitan
earning sufficient money to pay interest
Utilities and its subsidiaries
STOCK EXCHANGE PRACTICES
8211
on the above bank loans, the collateral securing the bank loans undoubtedly has some value because of the necessity of mamtammg the
Cleveland Interurban Railroad for the present need and further
development of Shaker Heights "
THE DAISY HILL CO., DEMAND LOAN, $487,000
(U-76)
The Daisy Hill Co , as we have mentioned before in this report, is
the corporate vehicle by which the Van Swermgen brothers own their
country estate or "farm" m the Shaker Heights section of Cleveland.
On November 1, 1930, the Daisy Hill Co borrowed from the Union
Trust Co $387,000; and on January 24, 1931, borrowed an additional $100,000. This total loan of $487,000 is secured by 7,935
shares of the Vaness Co preferred stock, which has no market value
(U-1-30-A, U-69-E)
About March 7, 1930, the Van Sweringens attempted to obtain an
unsecured loan at the main office of the Union Trust Co in the
amount of $50,558 33, but were refused Upon being refused at the
mam office the Van Sweringens applied at the terminal office of the
Union Trust Co for this loan, and upon the verbal approval of
Mr Joseph R Nutt, the loan was granted
No payment has been made on the principal of either of the above
loans On May 1, 1933, the two loans were delinquent m interest
in the amount of $48,101 58.
HIGBEE CO LOAN
(U-27)
The entire common stock of the Higbee Co is owned by the Cleveland Termmals Building Co , which is a subsidiary of the Van
Sweringen Corporation
(U-27-J)
On November 17, 1931, five banks participated in a loan to the
Higbee Co , with the Cleveland Trust Co as trustee The five
banks and the amount of the respective participation of each was as
follows
Union Trust Co
Guardian Trust Co
J P Morgan & Co
Midland Bank
Cleveland Trust Co
(U-28, U-27-J)
$317, 000
200, 000
533,000
250, 000
300, 000
1, 600, 000
No payments have ever been made by the Higbee Co on the principal of this loan Interest has been paid to June 1, 1933.
Exhibit U-27 is a complete history of the Higbee Co. and its bank
borrowings We quote below the first two pages of this report, which
gives as complete a picture as any analysis we might make.
8212
STOCK EXCHANGE PRACTICES
CONTROL
(U-27)
Entire common stock is held by the Cleveland Terminals Building Co which
is a subsidiary of the Van Swenngen Corporation Voting control at the present
time, however, is entirelv vested m the first and second preferred stock issues due
to the defaults m dividend payments This voting control is, of course, subject
to the rights of the creditors of the company who are in a position to dictate
policies
MANAGEMENT
Asa Shiverick, president, W T Higbee, vice president, G E Mernfield, vice
president and treasurer, E H Pierce, vice president and secretary, G P Mitchell,,
assistant treasurer
(U-27)
The officers with the exception of G E Mernfield, have been with the concern,
for a number of years Asa Shiverick, the president, has been with Higbee's
for more than 17 years while W T Higbee, a former president, is the son of E C
Higbee, one of the founders of the business G E Mernfield became associated
with the company in November, 1932 and has taken charge of financial matters.
He is understood to be a representative of the Morgan interests and has had long
experience in the department store field His previous associations were with.
Franklin Simon & Co and Associated Dry Goods Co
DIRECTORS
Gardner Abbott, attorney, Tolles Hogsett & Gmn, representing Van Sweringen
interests; T E Borton, Borton & Co, representing preferred stock interests;
G E Mernfield, Morgan interests; E H Pierce, W T Higbee, and Asa Shiverick« management
HISTORY
(TJ-27)
The Higbee department store business was originally established in 1860 as a
partnership of John G Hower and Edwin C Higbee The Higbee Co was
incorporated in Delaware in May 1913, and the charter amended in March 1929.
The company has three subsidiaries Renee, Inc , and Langley, Inc , organized
in December 1929, and the Twelve Seventy Seven Euclid Realty Co , organized
in 1919 The first two concerns were organized to carry on certain phases of
the meichandismg business but they discontinued operation on December 24,
1932, and their remaining assets were transferred to the Higbee Co
(TJ-27)
The Twelve Seventy Seven Euclid Realty Co succeeded to the business of
the Higbee Realty Co on June 9, 1932, by change of name The Higbee Realty
Co was originally organized in 1919 as a realty holding company, subsequentlyconstructing a building on leased properties on Euclid Avenue at Thirteenth
Street which it in turn leased to the Higbee Co The lease from the Higbee
Realty Co to the Higbee Co expired May 31,1932, and was not renewed The
lease of the Higbee Realty still has some years to run but that company has no
assets other than the store property which it is unable to rent and has not been
in a position to keep its lease in good standing The holder of the fee has given
notice to its intention to forfeit the lease and can do so at any time The name
Higbee Realty Co was probably changed to prevent as much stigma as possible
from attaching to the Higbee name by reason of the default of this subsidiary
and the consequent default in the payment of rental on the Euclid East Thirteenth
Chester Leasehold Trust certificates which at one time were commonly known
as the Higbee Corner Leasehold Trust certificates
(U-27)
The Higbee Co has been engaged in a general department store business and
for many years was a direct
competitor of Halle Bros Co with its store
located at Euclid Avenue1 i*nd East Thirteenth Street Higbee's did not carry
a complete line of men's furnishings, sport goods, and similar lines but specialized
STOCK EXCHANGE PRACTICES
8213
in women's furnishings, household goods, and related products As contrasted
"with the Halle Bros Co reputation for quality of merchandise and service,
Higbee's emphasized a combination appeal of price and quality and used sales
forcing methods
(U-27)
Early m 1929 the Vaness Co, a Van Swenngen affiliate, purchased the entire
common stock of the company for $7,500,000 The stock was subsequently sold
to the Cleveland Terminals Building Co m May 1930 This change in ownership
was a forerunner of the removal of the Higbee Co from its location on Euclid
Avenue to a specially constructed building m the terminal area where it is now
located The actual shift m location did not come until September 7, 1931
(U-27)
In making this change the Higbee Co occupied a store building with 1,000,000
square feet of floor space which compared with about 315,000 square feet m the
.Euclid Avenue store The rental requirements were increased very substantially
as weie taxes which aie payable by the Higbee Co In addition, the occupancy
of the larger floor space tended to make a larger personnel and larger inventory
necessary All of these factors combined made it imperative that the Higbee Co
change the character of its business materially It was necessary to extend the
scope of the business with the addition of the lines of merchandise commonly
found m the modern department store, and in general, to increase the volume of
business to the point where the larger oveihead and operating expenses could be
earned
(U-27)
Obviously, the Higbee Co needed additional capital to accomplish its purposes
Somefinancingwas originally contemplated but it was never carried through and
no capital was provided on a permanent basis
(U-27)
The capitalization of the company at the present time is nominally as presented
below Actually the company is beingfinancedby its various classes of creditors
subject to a number of agreements establishing their respective priorities Everything, however, is on a purely temporary basis pending the consummation of some
plan of reorganization or permanent financing
CAPITALIZATION—MARCH 31, 1933
(U-27)
Term indebtedness (due Oct 20, 1933, renewable for a period of one
year)
First preferred stock, 7 percent*
Second preferred stock, 8 percent cumulative 1
Common stock, 100,000 shares
Profit and loss deficit
$1, 551, 042
1,140, 000
454, 900
1, 900, 000
3, 852, 328
CREDIT INFORMATION GIVEN OUT
(U-29, U-31)
In perusing the credit files of the Union Trust Co. we came upon
numerous memoranda stating that the Higbee Co. was in a good
financial position and that it had always been successful Exhibits
U-29 and U-31 dated May 20,1932, and June 25,1932, respectively,
are copies of a form letter the Union Trust used in answer to inquiries
regarding the Higbee Co , which stales m part*
We know of no reason why the Higbee Co should not be considered at this
time as worthy of its mercantile requirements The present management is
experienced and has always been successful
1
No dividends have been paid on either class of stock since 1931 and at the annual meeting m June 1933
sole voting rights will rest in the preferred stock by reason of the default in dividend payments and other
provisions of the preferred issues
8214
STOCK EXCHANGE PEACTICES
(U-30)
On June 23, 1932, which was between the dates of the above two
letters, Mr. Kraus wrote to Mr. Frick, vice-president of the Irving
Trust Co., m which he states
(U-30)
Now, we are not in a position to give any very pretty picture of the Higbee
Co They started in last year before the holidays in the new location The Van
Swermgens bought the Higbee Co and paid a large price for it, built a building
on the public square and moved the company into it The rental is too high
for any store to be able to pay and show a profit
The company has lost money ever since they have been in business
I am giving you more than I would give to an outside inquiry, and will ask you
to treat it as confidential,
(U-30)
There must be some reorganization of this company, either by new capital or
a readjustment of their current debt, but how that is to be accomplished I don't
know "
Mr Kraus' letter hardly reconciles with the general form letters
that were being sent out at the same time.
CHANCES OF BANK COLLECTING
(U-19, U-21)
On September 1, 1933, Mr. Herzog, an assistant of Mr. Cox, liquidator of the Union Trust, held a conference with Mr Barrett, an
associate of the Van Sweringens, regarding the " whole Van Sweringen
picture." Mr. Herzog seems to be fairly well sold on the "Vans."
He states in a memorandum written after this conference that
(U-19)
The two chief factors with which O P and M J Van Swermgen have to contend at the present time in connection with their railroad operations are the
Alleghany reorganization Concerning the former, Mr Barrett said that with the
increased dividends payable by the Chesapeake & Ohio to the Chesapeake Corporation and the possibility of an increase in the disbursements of the Chesapeake
Corporation, the total income in all three issues of the Allgehany Corporation
would be sufficient to take care of necessary charges, provided that the specific
income were not held for specific issues Under these circumstances he feels that
the Messrs Van Sweringen will not have much difficulty in borrowing m New
York City to pay the interest on the Alleghany Corporation bonds due in 1950
Mr Barrett feels that the time will be reached in the comparatively near future
when the collateral securing the 44 and 49 issues will be adjudged at 50 percent of
the bonds outstanding and as a result the income impounded will be released.
This would enable the Alleghany Corporation to pay the funds borrowed with
which to meet the interest on the 50's Mr Barrett feels that the longer the reorganization of the Missouri Pacific can be put off the better will be the position
of the equities and it is primarily the equities in which the Messrs Van Sweringen
are interested It is not to the advantage of O P and M J Van Sweringen to
endeavor to rush through a reorganization at this tune
It will be noted in the above that " I t is not to the advantage of O P
and M J Van Swermgen * * * " to cause an immediate reorganization of Missouri Pacific We have not made a study of the
Missouri Pacific's Railroad troubles (except that we do know they
received a large loan in 1932 from the R F C to pay off Morgan) and
are in no position to judge, or possibly even comment, on a contemplated reorganization However, the general tenor of the above does
bear out so much that it is a Van Sweringen plan
STOCK EXCHANGE PKACTICES
8215
" I t is not to the advantage of the Van Sweringens", no mention is
mide as to what would be to the advantage of the bondholders and
the stockholders that have invested their life savings and now must
depend on the Van Swenngen brams (which have always worked
"to the advantage" of the "Vans") for a possible return of their
investments
It will also be noted from the above quotation that, as usual, the
Van Sweringens plan on gettmg out of trouble by borrowing from the
banks It hardly takes the power of a seer to foresee that some
one or more of the Van Sweringen corporations will more than likely
issue bonds or preferred stock and transfer some of these bank debts
to the public After all, the "Vans" have been successful at that sort
of thing for more than 20 years
WALTER H. SEYMOUR,
Senior Examiner.
Mr. SAPERSTEIN I hand you a report entitled "The Union Trust
Company—Window Dressing", and ask you if that report was prepared by the members of the investigating staff of the committee
under your immediate supervision
Mr
MEEHAN. It
was
Mr. SAPERSTEIN. Mr Chairman, I offer the report, together with
the exhibits mentioned therein and which are now at the Government
Printing Office, in evidence
The CHAIRMAN The report and exhibits will be received in evidence and appropriately marked
(The report entitled "The Union Trust Company—Window Dressing", and exhibits mentioned therein, which are now at the Government Printing Office, were received in evidence, marked "Committee
Exhibit No. 13, May 4, 1934", and are as follows )
COMMITTEE EXHIBIT NO 13, MAY 4,
1934
The purpose of this report is to present evidence that distortionary
measures termed "window dressing" were resorted to during the year
1931 in the operations and functions of the Union Trust Co for the
effect of presenting a financial statement of sound, liquid appearance
which would place the bank in a very favorable position in the minds
of the depositors and stockholders
(U-9-1, 2, 3)
The superintendent of banks of Ohio issued a "call" or demand
upon the Union Trust Co for a statement of its condition as of September 29, 1931 At this point it might be well to observe that these
"window dressing" transactions were consummated prior to the
"call" date, as is shown, in the instance of "Government securities",
by correspondence dated September 29, 1931, and, in the instance of
"Repurchase agreements", appearing later m this report, by bank
records dated as early as September 22 and 25,1931 These circumstances support the conclusion that notice was given to the Union
Trust Co. sufficiently in advance to permit them to negotiate these
8216
STOCK EXCHANGE PRACTICES
transactions for the desired effect on their published financial statements of September 29, 1931 The "call" statement was requested
on a form of the State of Ohio, division of banks, dated October 6,
1931, establishing the date of "call" as of September 29, 193L
Following this, a statement was submitted by the bank to the State
department of banks and banking dated October 13, 1931, and a
more condensed form published in the Cleveland News on October
15, 1931 It will be noted that the elapsed time between the earlier
transaction and the call date was 7 days
Government securities—In order to aid the Trust Co to publish
a report with a good liquid position, the Van Swermgens were prevailed upon to "lend" 10 million dollars of United States Government
certificates to the Union Trust Co through one of their corporations;
namely, the Van Sweringen Corporation These bonds were "loaned"
for "window dressing" purposes only, and the "loan" was reversed
9 days after it was made
This "window dressing" transaction was arranged by letter agreements between the Union Trust Co , Van Swermgen Corporation,
and J P Morgan & Co United States Government Treasury certificates and Treasury notes totaling at least 10 million dollars were
being held by J. P. Morgan & Co m safekeepmg for the account of
Van Swermgen Corporation The Union Trust Co agreed to purchase these 10 million dollars of bonds from the Van Swermgen
Corporation, creditmg a special checking account of the latter with
the purchase price, and pledging the bonds as security for the "deposit " Actually the whole transaction was handled through book
entries, physical possession of the bonds not changmg hands, nor
was there any exchange of cash
(U-9-4)
The effect of the above transaction on the balance sheet of the
Union Trust Co as of September 29, 1931, shows an mcrease in the
assets under United States Government bonds owned by $10,000,000
and a corresponding increase of demand deposits
(U-9-7, 6, 5)
On September 29, 1931, the date of the published financial statement of the bank, the Union Trust Co "purchased" from the Van
Sweringen Corporation $10,000,000 of United States Government certificates and notes for $10,030,000, plus accrued interest of $82,540.98,
or a total purchase price of $10,112,540.98 Payment was made for
the bonds by a journal entry on the books of the Trust Co. crediting
an account called "Van Sweringen Corporation special account" in
the amount of $10,112,540 98.
The Union Trust Co addressed a letter to the Van Sweringen
Corporation, dated September 29, 1931, confirming this "purchase",
stating in part.
(U-9-8)
* * * and we have today credited your checking account with the proceeds
of such sale in the amount of $10,112,540.98
This deposit is subject to demand withdrawal, and as security for such deposit
we have simultaneously transferred to J P Morgan & Co for your account the
above mentioned $10,000,000 par value of United States Government Treasury
certificates and Treasury notes.
STOCK EXCHANGE PEAOTICES
8217
The Van Sweringen Corporation addressed a letter dated September
29, 1931, to J P Morgan & Co. as follows*
(U-9-9)
We have today sold to the Union Trust Co. of Cleveland $10,000,000 principal
amount of United States Government Treasury certificates and Treasury notes
now held by you for our account Please hold these subject to the instructions
of the Umon Trust Co of Cleveland
The Union Trust Co also wrote a letter to J. P. Morgan & Co. confirming the purchase and the pledge of the bonds and asked Morgan &
Co. to—
(U-9-10)
Kindly hold these Treasury certificates and Treasury notes for the account of
the Van Swermgen Corporation as security for this demand deposit with us, all
in accordance with the terms of the annexed letter
(U-9-3)
The Union Trust Co published its statement of condition on September 29, 1931, declaring the Government bonds as being assets of
the bank. No mention was even made in the statement that these
bonds had been specifically pledged.
(U-9-2)
Nine days after the above "purchase" the Van Sweringen Corporation repurchased these bonds from the Union Trust Co by an exchange of letters and a reversal of book entries. The Van Sweringen
Corporation wrote a letter dated October 7, 1931, to Morgan & Co.
stating that the bonds had been "purchased" from the Union Trust
Co and that—
(U-9-11)
Payment of the purchase price therefor is to be (has been) made by withdrawal
of said deposit.
And instructing Morgan & Co. that—
(U-9-11)
Upon receipt of appropriate instructions from the Union Trust Co , please hold
these United States Government obligations for our account
The Union Trust Co. then addressed a letter to Morgan & Co.
dated October 7, 1931, and altered by hand to October 8, 1931, as
follows
(U-9-12)
We have today sold to Van Sweringen Corporation the $10,000,000 principal
amount of United States Government Treasury certificates and Treasury notes
now held by you as security for demand deposits made by the Van Sweringen
Corporation with this company in accordance with advice to you contained in
our letter dated September 29, 1931, signed by J R Nutt, chairman of this
company.
(U-9-12)
We have received from the Van Sweringen Corporation payment in full for the
above mentioned United States Government obligations, and wish you would,
therefore, kindly hold them for the account of the Van Swermgen Corporation.
8218
STOCK EXCHANGE PEACTICES
It is perfectly obvious that this whole transaction was arranged
and carried through for no other purpose than to "window dress"
the statement of the Union Trust Co This is borne out, not only
by the fact that the Union Trust Co published its statement with
the additional—
U.S. Government bonds owned
Accrued interest receivable
Demand deposits
$10,030,000 00
82, 540 98
$10,112,540 98
and then reversed the above entries 9 days later, but by the fact that
interest was not charged by the Union Trust Co to the Van Sweringen Corporation for the intervening time between September 29
and October 8, 1931, the period during which the Union Trust Co
claimed ownership of these Government securities
(U-9-25, 20-A, B)
Repurchase agreements—When an agreement is entered into
between a buyer and a seller wherein the seller agrees to repurchase
the consideration at the same price as that at which it was originally
sold, and, in turn, the buyer receives whatever income accrues on the
consideration, it is very evident that the matter becomes one of
convemence accruing to the seller That this convenience was
resorted to by the Union Trust Co m order to increase its liquidity
by exchanging loan paper, under agreement to repurchase, for cash,
and thus issue a financial statement on September 29, 1931, affected
thereby, is shown by the fact that on SeptemberJ22 and September 25,
1931, the Union Trust Co sold to certain New York banks,through
the facility of repurchase agreements, various loan instruments for
which was received cash totaling $12,296,422 44 and recorded on its
books as $3,555,141 19 from the Guaranty Trust Co , $6,741,281 25
from the National City Bank, and $2,000,000 from the Bankers Trust
Co , all New York banks The effect of this transaction appeared
under "resources" on the records of the Union Trust Co , on September 22 and 25, 1931, as a reduction of "Total loans and discounts"
of principally "time collateral loans" and "notes and bills" and also
an increase of amounts "due from domestic correspondent New
York City banks "
Again employing the post-datmg policy on transactions for "window dressing" purposes, was the dating of the repurchase agreements
as of October 6, 8, and 9, 1931; a period of about 14 days after the
actual sale of the loans, and about 10 days after the issuance of the
call statement of September 29, 1931
The first post-dated repurchase agreement occurred in a letter dated
October 6,1931, the part " 6 t h " by handwntmg, confirming the agreement with the Bankers Trust Co on a $2,000,000 loan, stating in part*
(U-9-21)
This con Inns agreement made by the Union Trust Co, of Cleveland, with
Bankers Trust Co , of New York, upon request to repurchase from Bankers Trust
Co , at their face value, the loan and the certificate of participation in loans which
you have to date purchased from us in the aggregate of $2,000,000
On October 8, 1931, a form of agreement was rendered to the Guaranty Trust Co regarding the sale and purchase of a loan in the amount
of $3,520,480.63. This refers to the $3,555,141 19 transaction, the
STOCK EXCHANGE PEACTICES
8219
difference being due to adjustments and part payments during the
intervening period The agreement was substantially as follows:
(U-9-22a, 22b)
An agreement dated, by hand, the 8th day of October, 1931, between Union
Trust Co , of Cleveland, Ohio, and Guaranty Trust Co , of New York, consisting
of five articles which relate to the sale and subsequent repurchase of various loans
totaling $3,520,480 63 and the liability of one party to the other
There then was a letter dated October 9,1931, to the National City
Bank confirming the repurchase agreement on a loan of $3,387,500
This was part of the $6,741,281 25 transaction, of which $3,500,000
was repurchased on October 7,1931, details of which are given further
on in this report The apparent difference, aside from the repurchased
item, was due to adjustments and part payments The letter states
in part
(U-9-23)
This is to confirm our repurchase agreement covering Certificate of participation of the Union Trust Co , of Cleveland, Ohio, in loan to the Cleveland Cliffs
Iron Co , dated September 23, 1931, payable 6 months after date, in the amount
of $3,387 500 "Pursuant to our understanding, "which -we hereby confirm, you
have agreed to resell the above certificate of participation to us and we hereby
agree to repurchase same from you on or before December 23, 1931, on a 4^
percent per annum discount interest basis
These repurchase agreements were a costly convenience and only
resorted to because of the desirability of presentmg a financial statement of sound appearance on September 29, 1931 An idea of the
cost is shown in a letter dated October 7, 1931, from the National
City Bank to the Union Trust Co , as follows
(U-9-24)
Upon receipt of your telegram this afternoon with reference to the Cleveland
Cliffs Iron Corporation, notes for $3,500,000 payable on March 23, 1932, we
charged your account with $3,434,666 69 under advice The notes are returned
to you herewith along with a memorandum covering the debit to your account
(U-9-26)
The apparent difference between the larger and smaller amounts
is the discount charged by the National City Bank during the elapsed
time between the original sale and later repurchase, an amount of
$65,333 91 The payment of such discounts as this was evidently not
too much to pay in an emergency such as existed on September 29,
1931.
An illustration of the extremity of the situation was the disregarding
of the Ohio banking act, which reads as follows
SEC 710-126 No bank may borrow money, bonds, or other securities in any
sum exceeding the amount of its capital stock and surplus, except with the written
consent of the superintendent of banks, provided that the rediscount of notes,
bills of exchange, and acceptances shall not be considered money borrowed.
Every such rediscount shall be entered upon the books of the bank, and the total
amount thereof shall appear as a contingent liability on every report of condition
made to the superintendent of banks oi published by said bank
In accordance with this section of the law the Union Trust Co at
the time of making these sales to the New York banks should have
recorded the contingent liability of $12,296,422 44 on its books and
on its published statement of September 29, 1931. That they understood the law and complied with it later that year is evidenced by the
8220
STOCK EXCHANGE PEACTICES
fact that on the published statement of December 31,1931, the Union
Trust Co showed among its liabilities " loans with repurchase agreement, $5,772,320 63."
(XT-9-27a, 27e)
We have carefully checked the files of the Union Trust Co. for
letters or memoranda regarding the subsequent repurchase of these
loans and could find none However, we obtained copies of the loan
ledger sheets which show the continuing reduction of the " collateral
loans sold under repurchase agreements" indicating that the loans
were repurchased over an extended time
Secured deposits —The Union Trust Co as of September 29, 1931,
held on deposit certam public funds and United States Government
funds shown on the call statement of that date m the amount of
$15,124,218 11 This total was made up of
(U-9-2, 14)
Demand deposits
United States deposit other than postal savings
Public funds (except postal savings)
Time deposits
Public funds
United States postal savings
Total
$2, 081, 945 19
5, 783, 105. 39
6, 363, 457 86
895, 709 67
15, 124, 218.11
(U-9-28a, 28m, 4)
On a statement prepared by the bank dated September 30, 1931r
entitled "Bonds Pledged to Secure Public Funds", a description is
given of the deposits and security for same and showing the amount
of each as of September 30, 1931 No similar record being available
as of September 29, 1931, this record was used to determine to what
extent these public and United States Government deposits were
secured by Government, municipal, or depository bonds The daily
consolidated financial statement of September 30,1931, showed public
aud United States Government deposits totaling $15,438,276 13, and
the statement of bonds pledged to secure public funds showed bonds
pledged to be $22,237,000, which established the ratio to be in excess
of 100 percent It was determined, therefore, that on September 29,
1931, the same ratib applied, to be understood, as the bank agreed to
pledge securities to at least 100 percent against amount of deposit a&
a guarantee of payment
(U-9-14)
Based upon the foregoing, it will appear that again the bank
employed a window-dressing transaction in that on the published
financial statement of September 29, 1931, the Union Trust Co did
not show in a total of $50,603,752 43 United States Government and
other bonds and securities any portion as having been pledged to secure
deposits of public and Government funds. To the depositors it was,
therefore, made to appear that he could look to this entire amount
of $50,603,752.43 as being behind his deposit however great or meager,
whereas m reality he was being misled in this mstance to the extent
that $15,124,218.11 were pledged securities.
STOCK EXCHANGE PBACTICES
8221
(U-9-2, 3, 14)
Bank building and real estate —The ^Union Trust Co carried on its
books bank building and other properties which it assumed by foreclosure and otherwise On its financial statement of September 29,
1931, it was not disclosed that there existed a mortgage liability on
the main bank building This resulted in the cost of the property
being understated, and by the same token the mortgage liability was
not disclosed In brief, only the equity in the property was shown
It should also be noted that the budding values were not shown less
depreciation. This had the effect of inflating the values by the amount
of depreciation accrued to September 29, 1931. It is well to observe
that for income-tax purposes, m which case depreciation is an allowable deduction, the bank kept a subsidiary record of its depreciation,
so that it would lose no benefits from obtaining the maximum of
deduction
A true statement embodymg the foregoing criticisms would show
under resources, mcluded m the bank-building item, the total cost of
the property (not simply the equity) less the deduction of the accrued
depreciation to September 29, 1931, and as a liability the unpaid
balance due on the mortgage, as an encumbrance under the caption
of mortgage payable on the real estate
It is interesting to note some details on these transactions as they
applied to the statement of September 29, 1931
(U-9-15)
The mortgage on the main bank building of the Umon Trust Co.
was held by the Northwestern Mutual Life Insurance Co , m an
original amount of $6,300,000 On September 29, 1931, the balance
due on this mortgage stood at $4,200,000, by virtue of annual payments of $300,000 each This amount of $4,200,000, therefore,
should have appeared as a mortgage payable item under liabihfcies,
thereby disclosing the encumbrance agamst the banking property
(U-&-16, 16a)
The depreciation sustained by the bank to September 29, 1931,
was approximately $553,764 55. This amount, as mentioned before,
was deducted on the income-tax report as an allowable deduction,
but not deducted on its statement of condition as of September 29,
1931. The resource item, bank buildings and real estate owned,
was, therefore, overstated by approximately $553,764 55, as also was
the income as reported to the depositors and stockholders on the
published statement of condition under the caption of " Surplus and
Undivided Profits", $17,222,943 60.
See icport on financial history of Union Lennox Co. for details of
United Trust Co. building transactors
Union-Cleveland corporation —There is an element of window dressing in the transaction between the UmQix
Trust Co and the UnionCleveland corporation, in the latter?s attempt to evade its personal
property tax. This is fully described in the report on tax evasion
Briefly, the Union Trust Co purchased from the Union-Cleveland
-corporation securities of approximately $2,000,000 m December 31,
8222
STOCK EXCHANGE PRACTICES
1929, and $2,780,000 in December 31, 1930 The Union-Cleveland
coiporation paid the Union Trust Co upon the result of this sale
approximately the same amounts in reduction of their loans, and it
is believed that the Union Trust Co acquired a much better asset
for balance-sheet purposes by purchasing securities than it would
have had if the transaction had not occurred, and it had shown as an
asset loans receivable of an affiliated company
The loans by the Union Trust Co to the Union-Cleveland corporation were in the category of unsecured loans
Adjusted statement —It will be interesting to observe the effect of
the transactions pointed out in this report had they been properly
considered
(U-9-29, 30)
We have prepared a statement which offers an opportunity to compare the financial statement as issued by the Union Trust Co. as of
September 29, 1931, with one that shows the actual condition. I t
will be readily seen to what extent certain items were misrepresented,
and to what extremes the bank went m establishing these misrepresentations
(U-9-31)
Extent of distortion —An interesting exhibit appears in the special
report entitled volume II, on the call statement of September 29,1931,
prepared by a Mr. Robert Huston, special deputy of the superintendent of banks In this report Mr. Huston shows a comparison
of the statement issued by the Umon Trust Co on September 29,
1931, and a true statement showing how it should have appeared if
there had been mcluded the transactions as of the correct date on the
Government securities and repurchase agreement transactions. He
also illustrates that the liquidity of the bank was distorted to the
extent of 7 55 percent. His exhibit was as follows
(U-9-31)
Statement as
published by
bank
True statement
DEPOSIT LIABILITIES
Total demand deposits
Total time deposits
- -
-
_—
- _-
Total all deposits
Bills payable
_
$124,699,552 90
142,136,274 58
$114,587,011 92
142,136,274 58
266,835,827 48
256,723,286 50
12,431,903 12
3,998,080 77
10,685,511 89
44,471,671 71
3,998,080 77
10,685,511 89
44,471,671 71
59,155,264 37
59,155,264 37
12,431 903 12
22,117,016 83
46,723,361 25
12,087,016 83
81 272,281 20
58,810 378 0*
QUICK LIQUID ASSFTS
Cash and cash items
Legal reserve, Federal Reserve bank
_
Due from banks and bankers, exchange, etc
-
_
Less bills payable
U S Government securities
Comparison of liquidity
Published statement
True statement
Percentige of distortion
•—.—.
.••.
-
.••._.....
Percent
— 80 45
22 90
7 55
STOCK EXCHANGE PRACTICES
8223
As early as February 1930, methods were sought that would enable
the Union Trust Co to present a moie favorable appearing financial
statement I t would appear that even at that early date the officers'
thoughts were being waiped into a channel which was so devious in
its route that they failed to see its eventual return to engulf them.
On February 15, 1930, M r Lewis, vice president, wrote a letter to
the State superintendent of banks requesting an opmion as to whether
or noi they " would be criticized for showing amounts due from bankers" a resource item, " a n d balances due to bankers" a liability item,
" a t their gross amounts without any deduction for compensating
balances " This plan "would", to quote the superintendent's reply
of February 28, 1930, "have a tendency to undue inflation of resources " The letter of February 15, 1930, requesting the opinion,
stated m part
(U-9-17)
As the Union Trust Co is a State bank, I am wondering if we would be criticized by showing the amount due from bankers and the balances due to bankers
at their gross amounts without any deduction for compensating balances The
objection we find to the present practice is that the total amount shown on our
daily statement as due from bankers does not show the total amount invested in
such bank balances In our case, it makes a difference on the average of from 3
to 5 million dollars. 1 will be pleased to have your opinion in this regard
I n a reply dated Februaiy 28,1930, M r O C. Gray, superintendent
of banks, pointed out the inflationary character of the plan m a
paragraph of the reply as follows.
(U-9-18)
In reply we beg to advise it is the custom of this department, as well as of both
the national department and Federal Reserve, to have the published statements
show only the net To do otherwise would have a tendency to undue inflation
of resources There can be no objection to a set-up as you suggest for your own
convenience, but we respectfully request the published calls of condition be compiled as m the past
A casual observer perhaps would consider the inquiry quite innocent, but viewing the matter in the light of the transactions as illustrated m this report on "Window Dressing", it is clear that situations
of similar intent could have been considered and evidently were
It is a matter of conjecture as to what the attitude of the depositors
would have been had they been enlightened to the true condition of
the Union Trust Co as of September 29, 1931, but the fact remcms
that they were not adequately informed, nor were they given the
opportunity to form their own opinion.
WALTER H SEYMOUR, Senior Examiner.
This report based upon preliminary report and complete investigation by committee examiner John H Winchester
Mr SAPERSTEIN. I hand you a report entitled "Union Trust Company—Trust accounts", and ask you if that report was prepared by
the members of the investigating staff of the committee under your
immediate supervision
Mr MEEHAN It was
8224
STOCK EXCHANGE PRACTICES
Mr SAPERSTEIN Mr Chairman, I offer the report in evidence,
and I believe there is no mention of any exhibits in connection
therewith.
The CHAIRMAN. The report will be received m evidence and appropriately marked
(The report entitled "Union Trust Company—Trust accounts",
was received in evidence and marked "Committee Exhibit No 14,
May 4, 1934", and is as follows )
COMMITTEE EXHIBIT N O . 14, MAY 4,
1934
TRUST ACCOUNTS
An examination of the estate trust department of the Union Trust
Co disclosed the fact that sales of securities to the trust clients at a
profit was not wide-spread It could be found in only a few isolated
cases The profits were made on issues in which the Union-Cleveland
Corporation had participated m syndicates. Tne Union-Cleveland
Corporation sold securities to the estate trust department at a profit.
This department, in turn, sold said securities to its trust client at
cost This profit between the Union-Cleveland Corporation and the
estate trust department was passed on to the trust client
When the Union-Cleveland Corporation participated m a syndicate,
it incurred not only a contingent liability for its commitment, but
also had a penalty imposed on it for all the securities of its commitment that were sold in the market before the expiration date of the
syndicate This penalty was imposed by the underwriting house
which evidently was supporting the maiket during the syndicate
period This penalty would be applied to the Union-Cleveland
Corporation syndicate profit so that in some cases the penalty cut
deeply into its profit.
The Union-Cleveland Corporation sold a comparatively small
amount of its securities to the estate trust department. The bulk
of its sales were to small Ohio banks and the general public.
Following are specific cases in winch profits were made
On January 5, 1931, J C -Hanna, trust no 133, and F H Moore, trust no 131,
were sold $100,000 of National Steel Corporation at $99 These bonds the
Union-Cleveland Corporation acquired at $95%, a profit of 3% points on $100,000
worth of bonds, resulting in a profit of $3,250 to the Union-Cleveland Corporation.
It is interesting to note that the Union Trust Co had authority
to make investments in these two trusts, and that it selected securities
in which the Union-Cleveland Corporation had a participation Due
to the fact that the Union-Cleveland Corporation's participation of
$1,778,000 m this issue, it is only logical for it to be m a better position
to buy these bonds cheaper than the individual trust client.
No evidence of any investment charges to the trust clients was
found
WALTER H
SEYMOUR,
Senior Exarmner
This report based upon preliminary report and complete investigation by Committee Examiner R. F, Muir.
Mr SAPERSTEIN Mr. Meehan, the next report on my list would be
no. 15, but I believe it is a report of which we have only one copy
and that one copy was sent down to the Government Printing Office,
STOCK EXCHANGE PEACTICES
8225
being entitled "Final Report, Union Trust Co.—Union Trust's
directorate in other concerns." Is that the reason we have not a
copy of that report here?
Mr. MEEHAN. Yes
Mr. SAPERSTEIN. Did you have a copy of that report, and do you
know that it was sent down to the Government Printing Office?
Mr. MEEHAN Yes.
Mr. SAPERSTEIN. And
that was a report prepared by members of
the investigating staff of the committee under your immediate
supervision?
Mr. MEEHAN. Yes.
Mr. SAPERSTEIN. Mr.
Chairman, I wish to offer that report, which
I believe, does not have any exhibits accompanying it, and which
report is at the Government Printing Office, in evidence.
The CHAIRMAN. The report will be received and appropriately
marked by the committee reporter.
(A report entitled "Final Keport, Union Trust Co.—Union Trust's
directorate in other concerns", was received in evidence, marked
" Committee Exhibit No. 15, May 4, 1934," and is as follows )
COMMITTEE EXHIBIT N O . 15, MAY 5,
1934
FINAL REPORT, UNION TRUST CO.
UNION TRUST'S DIRECTORATE IN OTHER CONCERNS
Among the business affiliations of the bank's directors and officers,
as shown by authoritative records of directorships, are the following:
John C. Armstrong- Assistant secretary, the Union Trust Co ; other affiliations, Dreher Piano Co , Standard Land Co , Pemiscott Land & Cooperage Co ,
and Clardo Holding Co
John G Armstrong. Vice president, the Union Trust Co ; other affiliations,
J H E Products Co, Willoughby
W M Baldwin: President and chairman of trust committee, the Union
Trust Co ; vice president and director, Union Cleveland Corporation, United
States Coal Co., and the Stillman Co ; president and director, Canfield Realty
Co, Canfield Apartments Co , Chester Realty Co , and Packard Holdmg Co.;
member of executive committee and director, Chesapeake & Ohio Railway Co,
Pere Marquette Railway C o , and Virginia Transportation Corporation; chairman of executive committee, Cleveland Clearing Souse; director, National Refining Co, Kelley Island Lime & Transport Co, and Monarch Fire Insurance
Co ; other affiliations, J B Savage Co , Union Lennox Co , Harbor View Co.,
J. S Coal Co , Corngan-McKinney Steel Co , DiUonvale & Smithfield Railroad,
Union Club, and Mayfield Country Club.
Ernest S Barkwill Director, the Union Trust Co ; treasurer, the Common
Brick Manufacturer's Association of America; secretary, the Cleveland Builders
Supply Co ; other affiliations, Cleveland Material Co., Cleveland Builders Realty
Co , and Canfield Tank Line Co
George Bartol Director, the Union Trust Co ; vice president and director, the
Otis Steel Co ; other affiliations, Cleveland Lime & Transport Co , Beelick Knob
Coal Co , and Cleveland Furnace Co
W P Belden Director, the Union Trust Co and the Trumbull-Cliffs Furnace
Co ; partner, Andrews & Belden; general counsel, the Cleveland-Cliffs Iron Co.
and Lake Superior & Ishpeming Railroad Co ; other affiliations, Belden, Young
Veach, Piqua Handle & Manufacturing Co , Cleveland Industrial Exposition Co.,
and Low Volatile Coal Co
George P. Comey Director, the Union Trust Co and the National Refining
Co.; other affiliations, Comey & Johnson and Falls Rubber Co
Aims C Coney Vice president, general manager, and director, the Union
Cleveland Corporation; vice president, the Union Trust Co ; director, Automatic
175541—34—*T 18
17
8226
STOCK EXCHANGE PEAOTIOES
Voting Machine Corporation, Union Trust Securities Corporation, Southeastern
Coal Co ; other affiliations, Southern Coal Co, Monoc Coal Co., Dodge Manufacturing Corporation, and Automatic Registering Machine Co , inc
Henry W. Corning Director, the Union Trust Co ; other affiliations, Cran-wood Lumber Co , Investment Land Co , Standard Land Co , Lake Shore Realty
Co , and Distillata Co.
George A Coulton (deceased) Vice chairman of board and director, the Union
Trust Co ; director, Electric Controller & Manufacturing Co, Ferry Cap & Set
Screw Co , Midland Steel Products Co , and Wheeling & Lake Erie Railroad Co ;
other affiliations, Cleveland Window Glass & Door Co , Union Cleveland Corporation, Chagrin Falls Banking Co , Prospect and 22d Realty Co , Peerless Motor
Car Co , Telling-Belle Vernon Co , and Van Dorn Iron Works
Robert S. Crawford' Executive vice president and secretary, the Union Trust
Co ; other affiliations, Schaaf Hillcrest Co.
Willard J Crawford Jr Director, the Union Trust Co and Equity Savings &
Loan Co ; vice president and director, Herrick Co ; president and director, Crawford Realty Co , Crawford Land Co., and Cleveland Realization Co.; other affiliations, Cuyahoga Valley Realty Co, Cleveland Realty Improvement Co, Crawford Woodhill Realtor Co , Driving Park Realty Co , West Sixth Street Realty Co ,
Broad Rock Co , Courtney Leasehold Co, Western Reserve Club Co, Rayon
Terminals Co , Cleveland Storage Co., Pepper Pike Club Co., Cuyahoga Co.
E. E Creswell* Vice president, the Union Trust Co.; other affiliation, Rutzen
Power Co.
Henry G. Dalton: Director, the Union Trust Co., Bethelehem Steel Corporation, Central Alloy Steel Corporation, Guardian Trust Co, Guaranty Trust
Co of New York, Ohio Bell Telephone Co , Steel Co of Canada, Ltd , Youngstown Steel Door Co , Athens Iron Mining Co, Ashtabula & Buffalo Dock Co ,
Erie Dock Co , and rortage Coal & Dock Co rpartner, Pickands, Mather & Co ;
president and director, Interlake Steamship Co , Balkan Mining Co , Bennett
Mining Co, Boston Mine Co, Detour Dock Co , Hemlock River Mining Co ,
Hoyt Mining Co , James Mining Co , Mather Iron Co , Odanah Iron Co , Palmer
Mining Co, Perry Furnace Co , James Pickands & Co , Plymouth Mining Co ,
Rugby Iron Co, Sagamore Ore Mining Co , Syracuse Mining Co , Vermillion
Mining Co, and Verona Mining Co ; president, Perry Iron Co ; senior vice
president and member executive committee, Youngstown Sheet & Tube Co ;
vice president and director, Biwabik Mimng Co , Corsica Iron Co , Crete Mining
Co , Hobart Iron Co , Sunday Lake Iron Co , and Youngstown Mines Corporation, chairman of board and director, Interlake Iron Co ; vice president, Orwell
Iron Co , Penn Iron Mining Co , Michigan, Penn Iron Mining Co, Wisconsin,
Penn Store Co, and Mahoning Ore & Steel Co.: other affiliations, Bankers'
Trust Co of New York, New Orleans, Texas & Mexico Railway Co , Mexican
Railway Co , Missouri Pacific Railway, and Athens Mining Co
Charles E. Farnsworth Vice president, the Union Trust Co ; other affiliations,
Conrad-Baisch-Kroehle Co , G C. Kuhlman Car Co , and Ellwell-Parker Electric
Co.
Louis H Fisher Vice president, the Union Trust Co ; other affiliations, Park
Hill Land & Allotment Co.
Frank B. Fretter. Director, the Union Trust Co , and Canadian Oil Cos , Ltd ,
president and director, the National Refining Co.; president, Canadian Oil Co ,
Ltd ; other affiliations, Nor Oil Co., Atlas Oil Co., and Plomo Specialties Manufacturing Co.
William H Freytag: Assistant vice president, the Union Trust Co ; other affiliations, Jaffa Co.
William H Gerhauser: Director, the Union Trust Co , Construction Materials
Corporation, Union Savings & Loan Co.; president and director, American Ship
Building Co.
Frank H. Gmn. Director, the Umon Trust Co , the Tellmg-Belle Vernon Co ,
the National Refining Co, the Glenn L Martin Co., the Richman Bros C o ,
Industrial Rayon Corporation, Electric Controller & Manufacturing Co , the
Midland Steel Products Co., the Otis Steel Co., the Chesapeake & Ohio Railway Co, Thompson Products Co , Inc , and Pere Marquette Railway Co.;
partner» Tolles, Hogsett & Ginn; president and director, the Ohio & Pennsylvania
Coal Co.; vice president and director, the Guarantee Title & Trust Co ; secretary,
S.M A. Corporation; other affiliations, Moxahela Corporation of Delaware,
Milk Products Co., Laboratory Products Co , Murray Ohio Manufacturing C o ,
Metropolitan Utilities, Inc, Covington & Cincinnati Elevated Railroad Co,
C & 0. Railway Co. of Indiana, Tillotson & Woolcott Co , Cleveland Southwestern Railway & Light Co , Chesapeake & Hocking Railway Co , and Euclid Co.
STOCK EXCHANGE PRACTICES
8227
Girdler, Tom L Director, the Union Trust Co ; other affiliations, Republic
Steel Corporation, Goodyear Tire & Rubber Corporation, Goodyear Tire &
Rubber Co, Trumbull Cliffs Furnace, Union National Bank of Pittsburgh, and
Chase National Bank of New York
Charles B Gleason Vice president, the Union Trust Co ; other affiliations,
Willoughby Terminals Co, Owens China Co, University Club Co, Distillata
Co , and C T Investment Co
George C Gordon Director, the Union Trust Co ; president and director, the
Park Drop Forge Co ; other affiliations, Ohio Crankshaft Co, and First Investment & Realty Co
George W Grandm Director, the Union Trust Co : other affiliations, Missouri
Lumber & Mining Co , Euclid Streator Co , Tavern Co , and F H. Hill Co
Eugene R Grasselli: Director, member of executive committee, member of
finance committee, the Union Trust Co ; director, the Grasselli Chemical C o ,
and Cleveland & Pittsburgh Railroad Co. (Penn system)
Thomas S Grasselli Director, the Union Trust Co , the Wheeling & Lake Erie
Railway Co , and E I du Pont de Nemours & Co ; president and director, the
Grasselli Chemical Co ; other affiliations, Cleveland & Youngstown Railroad Co.,
Kirtland Country Club, and Grasselli Powder Co.
George F Gund Director, the Union Trust Co , the Kaffee Hag Corporation,
Realty & Leasehold Co , Kellogg Co , Gund Realty Co , Sheriff Street Market &
Storage Co ; other affiliations, Gund Co, Realty & Rental Co, and Cleveland
Realization Co
John A Hadden Director, the Union Trust Co ; other affiliations, Andrews,
Hadden & Burton, attorneys, Mentor Marsh Co., Haven Point Club Co, and
Mentor Harbor Co
Howard M Hanna Director, the Union Trust Co, National Biscuit Co.,
Howe Sound Co, Hanna Coal Co, Hanna Iron Ore Co, and the Producers
Steamship Co ; chairman and director, the M A Hanna Co and Susquehanna
Collieries Co ; president and director, Hanna Ore Mining Co ; other affiliations,
Martmg Ore Co , Jefferson Coal Co , Lower Lake Dock Co , Wheeling & Lake
Erie Coal Mining Co , M A Hanna Coal & Dock Co , Mead Iron Co , MassiUon
Coal Mining Co , Ohio & Western Pennsylvama Dock Co , Tod-Stambaugh Co ,
Valley Furnace Co, National Biscuit Co , Republic Iron & Steel Co, Calumet
Transportation Co, Consumers' Ore Co, Eastern Coal Dock Co, Hanna Furnace Co, La Rue Mining Co, Susquehanna Ore Co, Wakefield Iron Co, and
Richmond Iron Co.
William A Harshaw Director, the Union Trust Co. and the Laurel Realty
Co ; president and director, the Harshaw Chemical Co ; Other affiliation, Stibium
Products Co
Francis H Haserot Director, the Union Trust Co , Cherry Home Co , Highland Cherry Farm, Gypsum Canning Co., and Cherry Growers Factory, Inc.;
president and director the Haserot Co
Warren S Hayden (deceased) Director, the Union Trust Co , Cleveland, Cincinnati, Chicago & St Louis Railway Co, Globe Machine & Stamping Co,
Michigan Central Railroad Co., and New York Central Railroad Co ; partner,
Hayden, Miller & Co ; vice president and director. Malvern Land Co ; also
director. Strong, Carlisle & Hammond Co , West Shore Railroad Co , White
Motor Co , New York & Harlem Railroad Co , and Zanesville & Western Railway; president and director, Cleveland Union Terminals Co.; other affiliations,
New Western Railroad, Miami Paper Co, Nelson Rodgers, Inc., and Iroquois
Securities Co
Parmely Webb Herrick* Director, the Union Trust Co , National Surety Co,
Harnman National Bank, New York Joint Stock Land Bank, Guarantee Title
& Trust Co , and The Sun Investing Co ; president and director, Cuyahoga Co.
and Thomas Young Nurseries, Inc (Delaware); vice president and director,
Burkam-Hernck Publishing Co, Dayton, Ohio; trustee, Society for Savmgs,
Cleveland; other affiliations, Mitchell, Hernck & Co, Crawford Realty Co.,
Crawford Land Co , Burkham-Hernck Publishing Co., Cuyahoga Valley feealty
Co , Ohio-Pennsylvania Joint Stock Land Bank, Cleveland Land & Improvement Co, Cleveland Hardware Co, the Securities Co., Miami Securities Co.,
and Anable Avenue Factory Corporation of New York.
George H Hodgson Director, the Union Trust Co ; president and director,
Cleveland Worsted Mills Co ; vice president and director, Sheriff Street Market
& Storage Co
Grover H Hull Vice president, the Union Trust Co ; other affiliations, Cleveland & Baston Co, Union-Lennox Co, Akers-Folkman Co, Perkins Hough
Realty Co , Gerecee Realty Co , and Sterling Realty Corporation, Inc.
8228
STOCK EXCHANGE PRACTICES
John A Jackson Advisory board, the Union Trust Co ; other affiliations,
Canfield Apartments Co , Chester Realty Co , Canfield Realty Co , Clinton Co ,
Canfield Tank Line Co , and Canfield Oil Co
Emil Joseph Director, the Union Trust Co ; attorney, 705 Union Trust
Building; other affiliations, Tippecanoe Club Co
Adrian D Joyce Director the Union Trust Co , president and director, the
Glidden Co ; president Wood Chemical Products Co, and Owen Automatic
Spring Machinery Co , other affiliations, Surkee Famous Foods Co , Chemical &
Pigment Co , Ripahn Co , Metals Refining Co , Forest City Paint & Varnish Co ,
Wisconsin Food Products Co., and Joyce Realty Co
Ralph T King Director the Union Trust Co , vice president and director,
the Realty Investment Co
John A Klmg Director the Union Trust Co , Kelley Island Lime & Transport Co, Guardian Trust Co, Century Cement Corporation, Baker, R & L
Co, Lithonia Granite Co, Northern Granite & Stone Co, Klmg Realty Co ,
American Gypsum Co , Darlington Brick & Mining Co , and John A Klmg Co ;
president and director the Cleveland Builders Supply & Brick Co ; other
affiliations, Roll Manufacturing Co, Cleveland Builders' Realty Co, BakerRaulang Co , and Kelley Island Lime & Transport Co
Joseph R Kraus Vice chairman of board, chairman of finance committee, and
director of the Umon Trust Co ; vice president and director, the Pittsburgh &
West Virginia Railway Co ; director, the Fremont Foundry Co, the Valley
Mould & Iron Co, the United States Fidelity & Guaranty Co, and UnionCleveland Corporation, other affiliations, Fisher Ohio Body Co , Donelshe Electric Co, General Tire & Rubber Co, Thompson Products, Inc, Rapid Transit
Land Co, Cedar Heights Land Co, Northern Ohio Reconstruction Co, and
Prudential Land & Home Building Co
Elroy J Kulas Member of executive committee and director, the Umon
Trust Co ; president and director, the Midland Steel Products Co, and the
Otis Steel Co , director, the Perfection Heater & Manufacturing Co, the
Pittsburgh & West Virginia Railway Co , and the Union-Cleveland Corporation;
other affiliations, Beehck Knob Coal Co , Valley Railway Co , Parish & Bmgham
Co , Cleveland Lime & Transport Co , Cleveland Furnace Co , Cleveland Worsted
Mills Co , and National Bond & Share Co
E. A. Langenbach Director, The Umon Trust Co and First Trust & Savings
Bank, Canton, chairman of board and director, Hercules Motors Corporation,
Canton, R V. Mitchell & Co, McCasky Register Co, and Ohio Alloys Corporation; president and director, Allied Coal Co and United Electric Co
Ernest P Lenihan Director, the Union Trust Co and Pittsburgh & West
Virginia Railway; president and director, Lenihan & Co ; other affiliations,
Johnson & Higgms and Wilcox, Peck & Hughes, Inc
Bascom Little Director, the Union Trust Co ; president, the Crowell & Little
Construction Co ; vice president and director, the Cleveland Land & Securities
Co and Bolton Square Improvement Co ; other affiliations, Cobb Realty &
Investment Co, Reilly & Monanty, Inc, Cleveland Land & Securities Co ,
Lakewood Land & Securities Co, Kerr Realty Co, Pilgrim Realty Co, and
Tavern Co.
Philip R Mather Director, the Union Trust Co ; other affiliations, Mather
Realty Co and Pickands, Mather Co
William G Mather Director, the Union Trust Co , Kelley Island Lime &
Transport Co, and Cleveland & Mahonmg Valley Railroad; president and
director, the Cleveland-Cliffs Iron Co , the Lake Superior & Ishpemmg Railroad
Co , Gwinn (Mich) State Savings Bank, First National Bank of Alger County,
Munismg, Mich , and Corngan, McKinney Steel Co ; vice president and director,
Low Volatile Coal Co ; chairman and director, the Otis Steel Co ; member of
executive committee and director, Republic Steel Corporation; other affiliations,
Progress Steamship Co, Cleveland Cliffs Steamship Co, Negaunee Mine Co,
Athens Iron Mining Co , Andaste Steamship Co , Presque Isle Transportation
Co , Mesaba Cliffs Iron Mining Co , phffs Corporation, Cleveland & Mahonmg
Valley Railway Co , Medusa PortlanU Cement Co, Cleveland Industrial Exposition Co , and White Motor Co
Homer D Messick Vice president, Union Trust Co.; vice president and director, the Equity Savings & Loan Co ; secretary-treasury and director, Kalamazoo,
Allegan & Grand Rapids Railroad; director, the Dreher Piano Co. and Acme
Foundry Corporation; other affiliations, Ada Holding Co , Euclid-E 100th Co ,
Spencer Estates Co , and Stone Shoe Co.
STOCK EXCHANGE PKACTICES
8229
Otto Miller Director, the Union Trust Co , the Chesapeake & Ohio Railway
Co., the Pere Marquette Railway Co, the White Motor Co, the Globe Machine & Stamping Co , the Otis Steel Co , the Arthur G McKee Co , the Glidden
Co , and the Cleveland Railway Co , partner, Hayden, Miller & Co ; president
and director, the Malvern Land Co ; other affiliations, Iroquois Securities, Inc ,
White Co, Euchd-Streator Co, C U Q Railway Co , Covmgton & Cincinnati
Elevated Railroad & Transfer & Bridge Co , Hocking Land & Development Co.,
Troop A Armory Co , White Motor Securities Corporation, White Motor Realty
Co , Nelson Rodgers, Inc , Hocking Valley Railroad Co , Sparks-Withmgton Co.,
and Cleveland & S W. Railway & Light Co.
Thomas Wm Miller: Chairman of board and director, the Faultless Rubber
Co ; director, the Union Trust Co., the First National Bank, Ashland, and the
F. E. Myers & Bro Co
R V Mitchell Director, the Union Trust Co ; other affiliations, Mitchell
Hernck & Co , Harris Automatic Press Co, City National Mortgage Loan Co,
Reliance Manufacturing Co , James Leffel & Co , Oblen-Bishop Co , Thompson
Products, Inc , Henry Furnace & Foundry Co , Dill Manufacturing Co , Harris,
Seybold-Potter Co , Ohio-Pennsylvania Joint Stock Land Bank, Troy Sunshade
Co, Kaynee Co, Houghton Elevator & Machine Co , James Leffel Co, Byers
Machine Co , Continental Shares, Inc
Herman Moss Director, the Union Trust Co , the Cleveland Worsted Mills
Co , and the Citizens League; general agent, the Equitable Life Assurance
Society of the United Btates
Charles A Nicola Advisory board, the Union Trust Co ; other affiliations,
Nicola, Stone & Meyers Co, Northern Ohio Lumber & Timber Co, Lakewood
Lumber Co , Freehold Co , Saginaw Bay Transportation Co , and Myers-Parsons
Lumber Co
Lawrence H Norton Director, the Union Trust Co, Oglebay, Norton &
Co, and Cuyahoga Factory Development Co ; vice president and director,
Bristol Mining Co and Commonwealth Iron Co ; treasurer and director, the
David Z Norton Co ; trustee, Society for Savings
Robert C Norton Director, the Union Trust Co , Lakeside & Marblehead
Railroad Co , Baker-Raulang Co , the Independence Steamship Co , the Cleveland Storage Co , The American Ship Building Co , the Great Lakes Towing
Co ; president and director, Troop A Armory Co and the David Z Norton Co ;
treasurer and director, Oglebay, Norton & Co , Columbia Steamship Co , Castile
Mining Co , Brule Mining Co , The St James Mining Co , the Ferro Engineering
Co, Commonwealth Iron Co, Bristol Mining Co, and Bristol Holding Co ;
treasurer, Montreal Mining Co , the Nelson Mining Co , and the Fortune Lake
Mining Co ; other affiliations, Troop A Armory Co , Ferro Engraving Co , and
Cleveland Storage Co
Joseph R Nutt Chairman and director, the Union Trust Co ; vice president
and director, New York, Chicago, & St Louis Railroad Co , director, the Faultless Rubber Co , the F E Meyeis & Bros Co , the Quaker Oats Co , The
White Motor Co , the Cleveland & Pittsburgh Railroad Co , the Goodyear Tire
& Rubber Co , and the Alleghany Corporation; other affiliations, Union Cleveland Corporation, International Holdings, Wyoming Pocahontas Coal & Coke
Co, F E Myers & Bros Co, Corngan-McKmney Steel Co , Euchd-Streator
Co , Cleveland Electrical Terminal, Cleveland & Youngstown Railroad Co ,
White Motor Securities Corporation, White Motor Realty Co, and Northern
Ohio Power & Light Co.
Wilbert J O'Neill Vice president, the Union Trust Co ; secretary-treasurer
and director, the Damar Realty Co ; secretary and director, the Supenor-Doan
Realty Co ; president and director, the Ozohzer Co ; vice president and director,
the International Holding Co ; treasurer and director, the Caston Land Co and
the Miami Valley Brewing Co ; director, the Chase Bag Co , Whitman & Barnes,
Inc , the Whitman-Barnes Manufacturing Co , and the Superior Thirty Fourth
Co , other affiliations, Sterling Realty Corporation, Inc , and Canton Land Co
Carl N Osborne Director, the Union Trust Co , the M A Hanna Co , and
National Steel Corporation; secretary and treasurer, the M A Hanna Co ;
other affiliations, Tod-Stambaugh Co , Jefferson Coal Co , Lower Lake Dock Co ,
Valley Furnace Co, Stambaugh Iron Co , Ohio & Western Pennsylvania Dock
Co , Mead Iron Co , La Belle Steamship Co , Martmg Ore Co , East Steamship Co ,
Virginia Steamship Co , Wheeling & Lake Erie Coal Mining Co, and Chagrin
Valley Hunt Club Co
Charles A. Otis Advisory board, the Union Trust Co ; partner, Otis & Co ;
president and director, the Otis Safe Deposit Co ; vice president and director,
8230
STOCK EXCHANGE PEACTIOES
Kanawha & Hocking Coal & Coke Co ; director, Bulldey Building Co and William
Edwards Co.; other affiliations, Otisito Mines Co., Waite Hill Farms Co and
Cuyahoga Co
Kenyon V. Painter. Director, the Union Trust Co.; other affiliation, Cleveland
& Pittsburgh Railroad
James L Paton. Vice president, the Union Trust Co ; other affiliation,
Wheeler Realty Co
Charles P Pimonka Vice president, the Union Trust Co ; other affiliations,
Cleveland Home Investment Co., Arrowhead Beach Sales Co, Willobee No 3
Land Co , and Russell Realty Co
Henry J Ranft Treasurer, the Union Trust Co ; other affiliation, Union
Cleveland Corporation
N G Richman Director, the Union Trust Co ; chairman of board, the
Richman Bros Co
Thomas P Robbms Member of executive committee and director, the Union
Trust Co ; first vice president and treasurer, the Cleveland Hardware Co ;
director, the Cleveland Hardware Co ; president, the Kirtland Mutual Co
L. J Roeder Assistant treasurer, the Union Trust Co ; other affiliation,
Union Trust Securities Co
WALTER H
SEYMOUR,
Senior Examiner,
Mr SAPERSTEIN. Mr. Meehan, I have here a report entitled "The
Union Trust Company—Corrigan-McKinney Steel Co.", and ask
you if that was prepared by the members of the investigating staff
of the committee under your immediate supervision.
Mr. MEEHAN It
was.
Mr. SAPERSTEIN. Mr. Chairman, I now wish to offer that report in
evidence, together with exhibits which are at the present time at the
Government Printing Office for the purpose of facilitating printing.
The CHAIRMAN. The report and exhibits will be received in evidence
and appropriately identified by the committee reporter.
(The report entitled "The Union Trust Company—CorriganMcKinney Steel Co.", and exhibits referred to therein which are
now at the Government Printing Office, were received in evidence,
marked "Committee Exhibit No. 16, May 4, 1934", and are as
follows:)
CORRIGAN-MCKINNEY STEEL CO
This report relates to the interest of the Union Trust Co. in transactions which transpired in the eventual purchase of the CorriganMcKinney Steel Co by the Cleveland Cliffs Iron Co.
The Corrigan Steel Co. was the original corporate name, having
been formed in 1880. In 1917 the name was changed to the McKinney
Steel Co , and then in 1926 it was again changed, this time to the
Corrigan-McKinney Steel Co. In May 1925, J K Nutt was instrumental in the formation of a corporation known as the " McKinney
Steel Holding Corporation", which purchased control of the McKinney Steel Co. For the purchase by the McKinney Steel Holding Co.
of a certain block of McKinney Steel Co. stock Mr. Nutt received
a commission of $130,000, which, although turned over to the bank
by Mr. Nutt 7 months after he had received it, has been a transaction
causing very much dispute and discussion. The McKinney Steel
Holding Co in 1925 issued $7,250,000 par value of preferred stock,
the entire issue of which was purchased by the Union Trust Co.
Subsequently, in 1930, the Union Trust Co , in participation with
several other banks, arranged a loan of $25,000,000 to the Cleveland
STOCK EXCHANGE PEACTICES
8231
Cliffs Iron Co in order that the Iron Co. might purchase the McKinney Steel Co. stock. No payments have ever been made on these
Cleveland Cliffs Iron Co. loans.
An interesting news item appeared in the Cleveland Press of March
22,1930, in which was given a brief history of the Corrigan-McKinney
Steel Co. and which stated in part:
The story of the Corngan-McKmney Steel Co. is one of the most spectacular
and dramatic fights in the history of Cleveland
Old Capt James C Corngan founded the firm after a battle with John D
Rockefeller here, in which John D. whipped the young upstart who had borrowed
from him the money to get control of Lake Superior ore properties
After this whipping Captain Corngan and Stevenson Burke founded the little
independent steel firm here in the early eighties * * * And Old Jim wrote
a will that put his property m the hands of Price McKmney, his bookkeeper, to
hold intrust * * *
* * * Meanwhile the name of the Corngan Steel Co had been changed to
the Corrigan-McKmney Steel Co, and finally to the McKmney Steel Co, the
former bookkeeper voting the Corngan stock he held in trust to write the name
of the founder out of the firm name and his own name in
* * * Then in 1925 Young Jim came back to Cleveland. He had in his
pocket 40 percent of the stock He also had 13 percent, got from E S Burke.
He dropped into a directors' meeting, and the announcement that came out of
thai session fell like a bomb in Cleveland circles
The name of the firm had been changed to the Corngan-McKmney Steel Co.,
and the former bookkeeper had been ousted as president * * *
(U-15-la)
In the spring of 1919, Mr. J. R. Nutt was elected to the board of the
then McKinney Steel Co at the request of Mr James W Corrigan.
At that time, according to Mr Nutt, the ownership of the company
was as follows:
Percent
Mr. James W. Corrigan
Mr. Price McKinney
Mr E S Burke, Jr
Mrs Ross (Burke's sister)
Mrs. Stevenson Burke
Total
_
_
—
_
—
40
30
13%
8%
7%
100
In the latter part of April 1925, Mr. E. S. Burke, Jr , called at the
office of Mr Nutt and stated that he desired to sell his 13%-percent
interest in the McKinney Steel Co , and asked Mr. Nutt to find a
purchaser for the stock.
(U-15-2)
On May 1, 1925, Mr. Burke addressed a letter agreement to Mr.
Nutt personally as follows:
I own 13% percent of the authorized and issued capital stock of the McKinney
Steel Co , which I give you exclusive authority to sell for $7,000,000
If sold I will pay you a commission from the proceeds of sale of 2 percent of
sale price
This authority is to you personally and good until June 15, 1925, 12 o'clock
noon.
It is understood that you may yourself purchase or be interested in the purchase
of the stock, and shall, in that event, be entitled to the commission stated.
(U-15-3, 4)
Mr. Nutt held conferences with Mr. Corrigan a,nd with Mr. Burke
for several days. It was planned to form a holding company which
would issue preferred stock to Mr Burke in payment for his holdings
8232
STOCK EXCHANGE PBACTICES
of McKinney Steel Co On May 6, 1925, Mr Burke addressed a
letter, on the stationery of the Union Trust Co , to Mr Nutt personally
in which Mr Burke outlined the plan and then stated:
(TJ-15-3)
This letter will serve as your authority exclusively to represent me in this
transaction and is given to you personally
Finally it was agreed that the holding company would be formed
under the name McKinney Steel Holding Co. with an authorized
common stock of 10,000 shares which were issued to Mr. James
Corrigan in exchange for his 40-percent interest in McKinney Steel
Co, and an authorized preferred stock of $7,250,000 par value consisting of 72,500 shares which were issued to Mr E S Burke, Jr. in
exchange for his 13% percent holdings of McKinney Steel Co. stock.
(U-15-7)
The stock of the McKinney Steel Co. which was represented by
Corrigan's 40 percent and Burke's 13% percent was then turned over
to the Union Trust Co. to hold as trustee—
(U-16-5)
* * * for safekeeping and to assure conformity with the preferred stock
provisions prohibiting the sale, pledge, or otherwise imposing a hen on said
stock, * * *
(U-15-6, 8)
Mr E. S Burke then entered into an agreement with the Union
Trust Co to sell to the bank the entire issue of McKinney Steel Holding Co. preferred stock at 89 655 percent or $6,500,000 It was from
this $6,500,000 received from the Union Trusi Co that Burke paid
his 2 percent commission or $130,000 to Nutt and, evidently, it was
from the participation of the Union Trust Co instead of Nutt in the
transaction that the other directors felt the commission belonged to
the bank and not to Nutt personally
Mr Burke addressed a letter, dated May 13, 1925, to Mr. Nutt
stating that upon receipt by him of the $6,500,000 from the Union
Trust Co in cash, " I will pay you a commission equal to 2 percent
of the sale price or $130,000 "
(U-15-10, 13, 12,11)
The Union Trust Co "banking department" purchased this entire
McKinney Steel Holding Co. $7,250,000 par value preferred stock
from E. S. Burke at 89 655 percent, or $6,500,000, paying Burke with
official check No A83087 of the Union Trust Co. The "banking department" then sold the entire issue to the "bond department" at
93 percent or a profit to the "banking department" of $242,500.
The "bond department" then formed several groups each of which
sold the stock as follows* Purchase group bought issue at 93; sold to
special purchase group at 95K, which sold to banking group at 96K;
which sold to selling group at 99K; which disposed of the stock to
the public at 100.
STOCK EXCHANGE PEACTICES
8233
(U-15-15)
The Union Trust Co. obtaining the following profits:
Banking department
Bond department
_. $242, 500. 00
238, 355. 83
480, 855 83
130, 000. 00
Plus the 2-percent commission
610, 855. 83
(U-15-14, TJ-6-51)
Mr. Nutt received the $130,000 commission from Mr. Burke on
May 16, 1925, and it was not until 7 months later (Dec. 24, 1925)
that the check was turned over to the bank for its own account
We have heard rumors expressed around the bank that Mr. Nutt
considered this $130,000 as a personal transaction and that it did not
belong to the bank, an opinion that was not shared by the other senior
officers and directors. According to these rumors Mr. Nutt refused
to turn the $130,000 over to the bank but on the other hand was afraid
to take it himself, with the result that he held the check for 7 months
before he turned it over to the bank. Mr. Nutt claims this is all
untrue and that he always considered that he was acting as president
of the Union Trust Co. in this transaction and that he did not
"hold" the check at all but turned it over to the bank immediately.
Further, Mr. Nutt states that it was a personal check of Mr. Burke's
that he had and turned over to the bank. Actually Mr. Burke purchased Union Trust Co. official check no. A83106 in the amount of
$130,000 payable to the order of J. K. Nutt and gave that check and
not his own to Mr. Nutt.
Shortly after the closing of the Union Trust Co. there was evidently
some newspaper comment about this transaction and Mr. Nutt wrote
to the Conservator of the bank on April 19,1933, stating:
(U-15-17)
* * * I welcome your most searching investigation You will find that
every transaction between myself personally, and as chairman of the Union, with
the above was in accordance with the
best type of banking practice, open and above
board and clean in every respect, avnd that not one dollar of profit ever went directly
or indirectly to any officer of the Union Trust Co
Mr. Nutt has prepared several memoranda and has written letters
to the liquidator of the Union Trust Co. about this $130,000 transaction.
In one of these memoranda Mr. Nutt states:
(U-15-16)
Mr. Burke gave me his personal check for my 2 percent or $130,000 and congratulated me, supposmg I had earned this for my personal account, and m order
that there should be no false impression I stated to Mr. Burke at the time that
I was not earning one dollar personal profit; that the $130,000 was an earning
for the bank
And then, in a letter dated April 20, 1933, to Mr. Cox, then bank
conservator, Mr. Nutt stated:
(U-15-la)
When Mr Burke gave me his check for $130,000 he congratulated me on
making this mce commission. I stated to him that this was not coming to me
Digitized personally
for FRASERbut would go to the Union Trust Co. as earnings.
8234
STOCK EXCHANGE PBACTICES
This was corroborated by Mr Baldwin in a letter to Mr Cox on
April 21. However, Mr Baldwin attempts to explain the 7 months'
delay by stating that—
(U-15-18)
At the time the check was received, credit was deferred because we had under
consideration the creation of a pension plan for the benefit of officers and
employees * * *
The open attitude expressed in the foregoing letters might be
disarming if it were not for the facts presented in this report To
a man such as J. K. Nutt, accustomed to making important decisions
frequently and quickly, it does not appear reasonable or creditable
that it would take 7 months for him to decide whether he should
keep the commission or turn it over to the bank. It does appear,
however, that J. R. Nutt would like to create the impression of a
magnanimous gesture, whereas the elapsed time would indicate the
contrary and after much indecision.
Early in 1928 James W Corrigan died, leaving in trust his estate
for the benefit of his widow, Laura Mae Corrigan The joint trustees
were the Union Trust Co and John H. Watson, Jr., president of the
Corrigan-McKinney Steel Co. It was thought shortly after Corrigan's
death that the stock of his company was for sale, and many inquiries
were received from various reputable houses regarding its purchase.
There was considerable correspondence on this subject, but representative of them all was a letter from Dillon, Read & Co. to J. R.
Nutt, dated February 6, 1928, stating in part:
(U-15-19)
We are very much interested in the possibilities of purchasing all or control of
the McKinney Steel Co. and I would appreciate your advice as to whether there
is anything that we can do at the present time to develop the situation. We
would be glad to work on this busiess with you and your associates if the opportunity presents.
Mr Nutt answered this letter 2 days later, stating that the company
was not for sale and that—
(U-15-20)
We elected Mr John H. Watson, Jr , as president of the company to succeed
Mr. Corrigan, and we have announced that the property was not for sale, nor
did we care to consider any scheme for consolidating it with other companies.
Our plan is to go right ahead and operate the company. It is in splendid physical
condition. Our costs are low, and if there is any business, we believe we will
get our share of it and can handle it at a profit.
However, early in 1930 Cleveland Cliffs Iron Co. began negotiations toward the purchase of the McKinney Steel Holding Co Mr.
Nutt outlined this whole transaction to Mr. Cox in his letter of
April 20, 1933, as follows:
(U-15-lb)
I think it was in March 1930, as president of the Union Trust Co , representing
the Corrigan estate, I began negotiations with Mr. W. G. Mather for the sale of
the Corrigan interest in the Steel Co., represented by 10,000 shares of the McKinney Steel Holding Co common stock, which, as previously stated, controlled
53% percent of the Corrigan, McKinney Steel Co. I also represented the &%
percent owned by Mrs. Ross, or a total of 62% percent These negotiations finally
resulted m a sale to the Cleveland Cliffs Iron Co.—the price agreed
upon was to
be on the basis of $37,500,000 for the 62% percent Mrs Ross1 share amounted
to $5,250,000 and the Corrigan estate $32,250,000. The Corrigan interest, how
ever, was represented by common stock of the McKinney Steel Holding Co. and
STOCK EXCHANGE PRACTICES
8235
the Steel stock was pledged as security for the preferred stock, so that from the
$32,250,000 there was deducted $7,250,000 preferred at the call price of 105, or
$7,612,500, leaving a net of $24,637,500—this amount being paid for all of the
common stock of the McKinney Steel Holding Co My recollection is that after
Mr Corngan's death the common stock of the McKinney Steel Holding Co was
increased from 10,000 to 10,100 shares—this 100 shares being paid to Messis
M B and H H Johnson, with Mrs Corngan's consent, in settlement of fees
for a number of years of legal service—so that the net proceeds above mentioned
were divided with all of these common stock shareholders In the sale of Mrs
Ross' 8% percent for $5,250,000 it might have been perfectly legitimate and
proper to have charged her a commission or fee, but no charge of any kind was
made to Mrs Ross
(U-15-21a, 23, 24a, 25)
On March 19, 1930, Mrs Laura Mae Corrigan, widow of the
deceased Corrigan and principal participant in the transaction, in
accord with proper legal license, consented to the sale of all of the
common stock of the McKinney Steel Holding Co. This appeared
in a letter to the Union Trust Co and John H Watson, Jr., trustees
under the last will and testament of James W. Corrigan, deceased.
In this letter, the sale price was stipulated as $29,887,500, cash to
be distributed $24,152,500 pro rata to the holders of the common
stock of the McKinney Steel Holding Co., $5,060,000 to Parthenia
Burke Koss, and $675,000 as follows
Donald B Gillies
Henry T Harrison
James S McKesson
Edward G Resch
John H Watson, Jr
$50, 000
50, 000
50, 000
25, 000
500, 000
The distribution of $675,000 to the above was for services rendered
in the management of the Steel Co. and the estate, each of the stockholders bearing their pro rata share of #ie endowment.
(U-15~22a, 26, 27)
On March 21, 1930, the Cleveland Cliffs Iron Co. agreed to purchase the 10,100 shares of the McKinney Steel Holding Co. and the
218% shares of the Corrigan-McKinney Steel Co., held by Parthenia
Burke Ross, and pay the Union Trust Co. $29,887,500. This they
did and the Union Trust Co then distributed this sum as $5,059,995.62 to Parthema Burke Ross, $675,000 endowment to officers,
and the balance to the Corrigan estate.
In the financing of this purchase the Union Trust Co. participated
in the amount of $3,387,500 in a collateral-loan note, the aggregate
principal amount of which was $14,387,500 The participants in this
loan, as evidenced by the collateral loan card, were:
(U-15-28c; 28d)
Union Trust Co, Cleveland
Guardian Trust Co , Cleveland
Central United National Bank, Cleveland
Cleveland Trust Co , Cleveland
Bankers Trust Co , New York
Continental Illinois Bank & Trust Co , Chicago
First National Bank, Chicago
William G Mather
Total
-
$3,387,500
1,500,000
500, 000
300, 000
4, 000, 000
3, 500, 000
1, 000, 000
200,000
14, 387, 500
8236
STOCK EXCHANGE PBAOTIOES
At the time of the Union Trust Co 's participation in this loan it
was considered by them to be well secured. This was not the opinion
of J P Morgan & Co 2 years later, however, when the Union Trust
Co. expressed a desire to sell this participation, on agreement to repurchase, to J P. Morgan & Co. In a letter of January 6, 1932, to
Mr. T. W. Lamont, J. R. Nutt stated in part:
(U-15-29)
You will note under the Participated Secured Loans that the Union Trust Co.
has an interest of $3,387,500 I would like to sell this participation to you under
our repurchase agreement or with our endorsement, whichever you prefer My
thought is that if the Reconstruction Finance Corporation is authorized in Congress, and I believe it will be, as soon as it is in operation I can place this participation with that Corporation and relieve you of it I think this is only a
matter of a very few weeks
In a reply dated January 13, 1932, Mr. T. W. Lamont, after presenting an analysis of the security for the loan, states:
(U-15-30a, b)
I am most regretful that the firm cannot see its way clear to take over this item,
even under the repurchase agreement It falls too much in the category of deadslow stuff You know how anxious we are to help in any way that is possible.
We took over your British credit unhesitatingly We made an arrangement in
the Higbee matter that was of relief to the Cleveland banks We have noted
without objection the transfer of deposits from New York to Cleveland in an
undue proportion, but in a way that would be of aid to the Cleveland banks, but
this particular item, my dear Joe, is beyond us
(U-15-31, 32, 33)
The reply must have been discouraging, even though J. R.Nutt
agreed with T. W. Lamont's analysis of the security for the loan, as
evidenced in a letter to Lamont from Nutt, dated January 14, 1932,
stating*
(U-15-34)
Thank you very much for your letter of the 13th. The man on your staff I
think has analyzed the Cleveland Cuffs matter correctly I am, of course, sorry
that you could not use the item in the way I suggested, but I understand the
matter perfectly Be assured I deeply appreciate the careful consideration that
you have given it.
(U-15-35i)
The discouraging aspect must have been due to the anticipation
of an additional loan of $3,500,000 to the Cleveland Cliffs Iron Co.,
which occurred on March 29, 1932, and which brought the total
loans to approximately $7,000,000. No principal payment having
been made against these loans to April 25, 1933, must have restricted
the bank's liquidity considerably.
(U-15-36; 37)
The Union Trust Co 's beneficent attitude toward the Cleveland
Cliffs Iron Co. changed when on June 23,1932, a renewal of the loans
was required, a 1-percent penalty in the form of a commission was
applied against a total amount of $6,887,500, or an amount of $68,875.
This is repeated on September 23, 1932, in the same amount, making
a total commission charge of $137,750 for the two renewals.
STOCK EXCHANGE PEACTICES
8237
(U-15-37)
The commissions were received in the form of loans and so entered
upon a loan card The June 23, 1932, commission was carried on the
books at full value, while the September 23, 1932, commission was
carried at zero The reason for not carrying the latter note at face
value was that by doing so the Cleveland Cliffs Iron Co. would have
loans in excess of its borrowing limit, namely 20 percent of the capital
and surplus, that limit being $7,000,000.
(U-15-38a)
It subsequently developed, as a result of a suit in court, that the
commissions were considered usurious and the bank liquidator has
been ordered to refund to the Cleveland Cliffs Iron Co. approximately
$145,000, representing excessive interest charges on loans to that company.
An interesting and pertment point was brought out in the testimony during the cross-examination in the suit to recover the interest
for the Cleveland Cliffs Iron Co , when W. J. O'Neill, a vice president of the Union Trust Co , was questioned by A Kollin, an attorney, wherein it was established definitely that the bank knew the
commissions were usurious from the beginning. The testimony was
in part as follows:
(U-15-39d)
Mr KOLLIN But you had your doubts—not only a doubt, but you thought
it was a usurious rate?
Mr O'NEILL I did not have any doubt at all I was certain it was usurious
(U-15-40)
Regardless of the knowledge of usury, the bank, nevertheless,
pledged these commission notes on a loan from the Reconstruction
Finance Corporation. The Reconstruction Finance Corporation,
however, was informed of the usury after the loan was procured, in
a letter dated August 8, 1933, to F S Collander, acting manager,
Reconstruction Finance Corporation, from Oscar L. Cox.
(U-15-41, 42, 43, 44)
If only as a matter of record, it is interesting to note that after
the bank closed, some of the stockholders gave considerable attention to J. R. Nutt's participation in the sale of the steel company
stock when, on April 19, 1933, a firm of attorneys, Snyder, Thomsen,
Ford, Seagrave & Roudebush, of Cleveland, t)hio, requested that
Oscar L. Cox, conservator of the Union Trust Co , bring suit against
Joseph R. Nutt on behalf of Zella S. Olmstead and other owners of
a large number of shares in the Union Trust Co., basing the suit on
the understanding that J R Nutt received a sum of nearly $1,000,000
for his part in the sale of the stocks of the Corrigan, McKinney Steel
Co. and the McKinney Steel Holding Co.
(U-15-45)
The fact remains that the attorneys were not in possession of a
perfect understanding of the situation Several exhibits are offered
substantiating this, which were brought out when Mr. Cox investi
8238
STOCK EXCHANGE PRACTICES
gated the facts. These exhibits also present the opinions of several
people regarding the Corrigan, McKinney transactions.
Concluding, it can be stated that the Corrigan, McKinney transaction was a profitable one for the Union Trust Co. This, no doubt,
was the foundation for the leniency in the credit extension to that company which later developed into the frozen liquidity which prevented
the depositors from a realization of approximately $7,000,000.
That J. R. Nutt did not relinquish his commission of $130,000 as
a "grand gesture" but only upon pressure or for fear of "losing face."
That even under the protection of a repurchase agreement "Dear
Lamont" could not see his way clear to help "Dear Joe" on the
Cleveland Cliffs Iron participation loan, it was that poorly secured.
And last, but not least, appeared the descension of the Union
Trust Co. into usury, in an attempt to recover on their mistaken
judgment.
WALTER H. SEYMOUR,
Senior Examiner.
(TJ-13-1, p. l)
Mr. SAPERSTEIN. Mr. Meehan, I hand you a report which I understand was prepared by members of the investigating staff of the
committee under your immediate supervision entitled "PainterBradley-Nutt Van Sweringen Syndicate". Will you please state
whether that was prepared bj members of the investigating staff
under your immediate supervision?
Mr. MEEHAN. It
was.
Mr. SAPERSTEIN. Mr. Chairman, I offer the report in evidence,
together with exhibits referred to therein and which exhibits are now
at the Government Printing Office.
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately identified by the committee reporter.
(The report entitled "Painter-Bradley-Nutt Van Sweringen Syndicate", and exhibits referred to therein, which exhibits are now at the
Government Printing Office, were received in evidence, marked
"Committee Exhibit No. 17, May 4, 1934," and are as follows:)
COMMITTEE EXHIBIT N O . 17, MAY 4,
1934
PAINTER-BRADLEY-NTJTT-VAN SWERINGEN SYNDICATE
An illustration of the long and close relationship which existed
between K. V. Painter, director and largest stockholder of the Union
Trust Co., and J. R. Nutt, chairman of tiie board, is corporate trust
no. 2975. There is nothing unusual or unethical about this trust.
We are simply reporting it to further illustrate this close relationship
which did exist, and had existed for a long time, between these certam
individuals who controlled the Union Trust Co.
On August 5, 1915, an agreement was entered into between O. P.
Van Sweringen, J. R. Nutt, K. V. Pamter, and C. L Bradley, to
purchase and develop certain residential property in Cleveland
Heights and on July 15, 1919, another similar agreement was entered
into between the following: O. P. Van Sweringen, Van Sweringen Co.,
and Citizens Savings & Trust Co. (now the Union Trust Co.).
STOCK EXCHANGE PEACTICES
8239
The Van Sweringens and their associates were desirous of developing and marketing the properties covered by the two agreements
mentioned above, and on April 14, 1920, the beneficiaries of the two
agreements conveyed their interests to a new syndicate, or trust,
consisting of the following: K. V. Painter, C. L. Bradley, F. E.
Myers & Bros., Citizens Savings & Trust Co., trustee, Van Sweringen
Co.
(U-3-4, 5)
This agreement of April 14, 1920, provided that the Van Sweringen
Co. would take the property over under an option at an aggregate
price of $1,000,000, with interest from January 1, 1920, at 6 percent
for the benefit of the beneficiaries. The Union Trust Co., as successor by consolidation to the Citizens Savings & Trust Co., was
appointed trustee. Certificates of equitable ownership in the allotment property were issued to the respective beneficiaries and the
distribution was directed by O. P. Van Sweringen and C. L. Bradley
as supervisors. Exhibit U-3-8 is a statement showing in detail how
much each of the beneficiaries received from the corporate trust for
the years 1924 to 1932, inclusive, summarized as follows:
(U-3-6, 8, 1, 2, 3)
Name
Van Sweringen Co
C L Bradley
Alva Bradley
Estates department, the Union Trust Co
J R Nutt
K V Painter
Estate of F E Myers (J C Myers, administrator).
P A Myers
Total
848,000
WALTER H. SEYMOUR,
Senior Examiner.
Mr SAPERSTEIN Mr Meehan, I show you a report entitled "The
Union Trust Company—The United Milk Products Corporation "
Will you please state whether that report was prepared by the members of the investigating staff of this committee under your immediate
supervision?
Mr
MEEHAN. It
was
Mr SAPERSTEIN. Mr Chairman, I wish to offer the report in
evidence, together with the exhibits referred to therein and which
exhibits are now at the Government Printing Office for the purpose
of f acihtating printing.
The CHAIRMAN. The report and exhibits will be received and
appropriately identified by the committee reporter.
(A report entitled "The Union Trust Company—The United
Milk Products Corporation," and exhibits referred to therein, which
exhibits are now at the Government Printing Office, were received
in evidence, marked "Committee Exhibit No. 18, May 4, 1934," and
are as follows:)
8240
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT N O . 18, MAY 4,
1934
(U-13-1, p 1)
T H E UNITED M I L K PRODUCTS CORPORATION
The United Milk Products Corporation was incorporated in the
State of Delaware in December 1925. Its organization represented
a consolidation of 11 companies operating between 40 and 50 plants
located in New York, Ohio, Indiana, Illinois, Michigan, Wisconsin,
and California. These plants were engaged in the production, condensation, and canning of milk, the principal and largest plant being
the Western Reserve Condensed Milk Co of Cleveland, Ohio.
The corporation had an authorized capital consisting of: 250,000
shares $100 par value preferred and 250,000 shares no par value
common.
All the common stock has been issued and there was originally
issued 134,044 shares of the preferred, making the original capitalzation—
(U-13-1, p 1)
7 percent cumulative preferred stock
No par value common stock shares)
$13, 404, 400
250,000
(U-13-4)
Mr J R. Nutt and his wife were stockholders of the Western
Reserve Condensed Milk Co , one of the companies acquired at the
organization of the United Milk Products Corporation. Shortly
after the formation of the United Milk Products Corporation, J. R.
Nutt was given the opportunity of purchasing 25,000 shares of its
preferred stock at par of $100 per share with 1 share of common stock
being given as a bonus with each share of preferred purchased Mr.
Nutt took up some of the stock himself and interested certain of his
friends in this deal and sold some of the stock to them at the cost
price to him. He then interested several of the employees of the
bank in the stock; sold some to outside customers of the bank, and
sold the remainder to the individual trust estates of the bank.
In order to bring about these purchases the Union Trust Co. loaned
money to certain of the individuals and to the trust estates, taking
as security for the loans the stock of the United Milk Products Corporation. Most of the loans were made in the amount of from 89 to
100 percent of the par value of the stock and practically all of the
loans were made on the approval of Nutt
Subsequently Mr Nutt, and probably most of his close friends,
disposed of the greater part of his holdings. However, no warning
was given to the small investor and he was caught "holding the bag."
The market on the stock dropped very badly. The Union Trust Co.
still has several loans unpaid with the principal collateral being the
stock of United Milk Products.
(U-13-1 and 2)
The charge has been made time and again that J. R Nutt and his
associates organized this company for no other reason than their own
personal profit. No statements of the company were published, in
STOCK EXCHANGE PRACTICES
8241
spite of continued requests, until some 2 or 3 years after it was formed
and the stock had been sold. When it did issue statements the information given was grossly misleading. The liquidator of the Union
Trust Co detailed a Walter G. Mitchell to make a study of the matter
and report on it. Mr. Mitchell completed his examination and submitted two reports, one dated September 27, 1933, and the other on
November 17, 1933 We have obtained copies of the narrative sections of both of these reports
Mr Mitchell summarizes his findings in his supplemental report as
follows*
(U-13-2, p. 1)
Placing the worst construction on all circumstances which have been indicated
by this investigation, it may be assumed that the entire deal was a scheme to
organize and float the United Milk Products Corporation for the personal benefit
and profit of J R Nutt and/or other persons connected with the bank
The first indication in the bank's files of the existence of such a company consists of a telegram in the credit department, dated November 2,1925, in answer to an inquiry from J. H Skinner, vice president,
Bank of Italy, San Francisco, the contents of the telegram being the
following:
(U-13-3)
Unable to get trace of company mentioned your night letter
address or names of principals
Can you furnish
This telegram was followed by; a confirmatory letter to Mr Skinner
signed by W. F Copeland, assistant vice president of the bank in
which he stated:
(U-13-5)
This concern is unknown to all of those with whom we talked including the
leading milk companies, dairy supply houses, and brokers in the evaporated milk
business
In the short interval of onty 1 month and 2 days Mr J R Nutt
was sufficiently familiar with this corporation to prepare what amounts
to a "sales letter" for the stock to be distributed, and to have an
intimate knowledge of its financial conditidn to the degree that he
wrote Mr Kraus, then vice president of the bank, the following on
December 4,1925:
(U-13-6)
I have never seen a deal quite like it in my Me Most new corporations of this,
kind want a lot of new money, but this company does not need nor want any,
and they have had applications for eight and a half times the amount of stock they
can prudently let out In fact any stock sold is that amount additional of new
cash in the treasury which is not needed
Mr Kraus in a letter to C. S Castle, president of the Standard
Trust & Savings Bank of Chicago, used Mr Nutt's letter almost
verbatim to inform Mr Castle that the available supply of the stock
was very limited and
(U-13-7)
If you are allotted any of this stock, it will be on account of personal friendship
of some one of the crowd.
^
Whether or not Mr. Nutt's statement concerning the applications
for eight and a half times the amount of stock available is true or
not is unknown.
175541—34—PT 18
18
8242
STOCK EXCHANGE PRACTICES
There was no actual underwriting, nor were there any circulars or
advertisements issued in the distribution of the stock.
(U-13-24a)
On December 31, 1925, Mr. Nutt subscribed to the 25,000 shares
of preferred stock. The cash records of the United Milk Products
show that Nutt paid for these 25,000 shares on January 2, 1926.
Incidentally, Mr. Nutt's $2,500,000 subscription was the first cash
receipt by the corporation according to its records. On January 18,
1926, the certificates for 25,000 shares of the preferred and 25,000
shares of common were delivered to C. W. Carlson, vice president of
the Union Trust Co. All of the close friends and business associates
of Nutt were included in the list of persons receiving the stock. However, in the name of Nutt there appears to be only the following:
(U-13-9)
R. H Nutt
Mrs. Helen F. Nutt
500 shares of each
50 shares of each
Approximately 8,000 shares were in the name of Carlson, however,
and, as will be shown later, he acted as nominee for a group.
Mr. Mitchell points out in his report that—
(U-13-1, p. 2)
It appears that a large part of the opening capital of the United Milk Products
Corporation was furnished by the Union Trust Co through the estates trust and
collateral loan departments
(U-13-1, p 2)
As of December 31, 1932, pursuant to a reorganization agreement, the United
Milk Products Corporation was dissolved and the United Milk Products Co.
organized as a successor This resulted in an exchange of stock as follows
(U-13-1, p 2)
United Milk Products Corporation
1 share (preferred)
1 share (common
Exchanged for United Milk Products Co (new
stock)
8/10 share (preferred) and $3 cash.
1/6 share common).
(U-13-1, p. 2)
The preferred stock held as collateral to Union Trust loans has all been exchanged
for stock in the new corporation with the exception of 100 shares held as security
toaloantoW.J.O'Neill.
(U-13-1, p 4)
Mr. Mitchell then lists the total amount of loans which were based
on the stock of United Milk during the first 6 months of 1926. These
loans total $2,163,206.74. Mr. Mitchell then states that:
(U-13-1, p. 4)
In the period from January 2 to June 30,1926, covered by schedule I, numerous
loans appear in which an apparent excessive amount was loaned Certain borrowers deposited a small amount of other collateral, but the following tabulation is
submitted covering loans on which 80 to 100 percent of par value was allowed,
solely upon United Milk preferred stock as collateral (in each case "par value"
refers to the preferred stock, with an equivalent number of common shares which
were given as a bonus);
8243
STOCK EXCHANGE PBACTICES
(tl-13-1, pp. 4, 5)
Borrower
Approved b y -
Matilda B Dowhng
<5 N Osborne
ItalphH Sharpe
JohnB Killits
•E N Wagley
Leslie O Carr, Jr
Robert A WeppnerandJ E Weil..
E R Fancher
X H Stofer
O B Anderson
SamW Emerson
Maude H Bruce
Leon S Miller
O L Bartshe
O L Avers i
Grace D and Chas K Alter
Matilda B Dowhng
M H Hurst
A M KellyR T Taylor
•C T Nixton
W L Fox
fl M Jones
R S O__
O L B_O W 0.
J R N-.
O W O.
J R N.do—
.—do—
O W O.
.-—do—
.—.do—
.do—.
J R N-.
O W O..
J R N-.
O W 0..
W M B..
O W 0-.
do—.
-do.
..do_do-do-
Amount of Percentage of
loan
par value
$855 00
20,000 00
4,500 00
9,000 00
4,500 00
4,000 00
9,000 00
9,000 00
4,400 00
4,500 00
200,000 00
8,500 00
90,000 00
25,000 00
125,000 00
25,000 00
850 55
5,000 00
5,000 00
5,000 00
5,000 00
5,000 00
5,000 00
85H
100
90
90
90
80
90
90
88
90
80
85
85
100
+92
100
85
100
100
100
100
100
100
(U-13-1, p. 5)
i Attention is invited to the loan to C L Ayers, above noted, in the sum of $215,000, made March 8,1926,
approved by J R Nutt, secured by 1,350 shares preferred and 1,000 shares common stock of United Milk
On this loan the bank suffered a large loss, having charged off $102,000 to reserve for losses, as follows Nov 5,
30, $25,000, Dec 30,1930, $10,000, Dec 30,1931, $67,000, total $102,000
(U-13-1, p. 6)
In addition to the loans above noted at over 80 percent of par value,
there were also $590,000 of loans secured by United Milk Products
&t 100 percent of its par value. These loans carried the endorsement
of Mr. C L Bartshe, president of the corporation. Mr. Crawford
and Mr. Nutt were the bank officials who approved these loans.
From the above it can readily be seen that while individuals were
the nominal purchasers of this stock, the acquisition was made
possible by the Union Trust Co ; and by the pursuance of a lenient
•credit pohcy, the depositors' money being risked
The Trust Co. officials were very "bullish" concerning the future
of the corporation, but in their replies to requests for factual information the statement is frequently made:
(U-13-12)
No statements of the company are available, but some of our officers have seen
the company's statement, which we understand shows an excellent financial
condition, the company having large cash balances, with no debt.
(U-13-14)
Mr. Nutt prepared a memorandum dated May 6, 1926, from which
it appears most of the answers to inquiries were written. This memorandum has a notation on the bottom addressed to Mr. Tonks, vice
president, as follows. "The above to be used by your department
with discretion."
The first financial statements available to the public were those as
of December 31, 1928, some 3 years after the formation of the corporation. During this period, investors and those extending credit
8244
STOCK EXCHANGE PEACTICES
to the corporation were forced to accept information furnished by the
bank's officials. Below are some excerpts of letters which are representative of the information disseminated by the Umon Trust Co.
(U-13-10)
As yet the company has issued no financial statements, although we are told
that one is to be issued some tune soon. We understand the company is in a
good financial position, with around $6,000,000 of cash and practically no debts
(U-13-11)
Letter dated April 9, 1926, Mr. Tonks to Mr. W. K. Adams
The company is in strong cash position, and we hold the management of the
company in very high regard, and feel that the people associated with it represent
the best experience in the milk business in this country.
(U-13-13)
Letter dated January 27,1928, Mr. J. P. Harris to D. B. A Richardson.
Your inquiry in regard to United Milk Products Corporation has been handed
to me in view of my knowledge of that situation, I am very sorry to report,
however, that I cannot send you a financial statement of this company, although
the company's operations are known to us rather intimately As yet, the company has not seen fit to issue any statements of any sort, but it is not at all impossible that in the not distant future they will decide that the tune has arrived
when the complete statement may be given out to all stockholders In general,
however, I may say that the company is very highly regarded by us here, that we
have the highest respect for the quality of the management, which to our minds
is one of the best m the industry in America, and that we know the company
to be doing very well As you probably know, they do not owe a dollar to any
one, and are in the habit of discounting all bills They are in a very strong cash
position, while their current position generally is exceptional
An effort by the liquidator to determine under what circumstances
the borrowers from the collateral-loan department were induced
to purchase the stock, brought to light the following*
(U-13-1, p 17)
In connection with the latter point, an interview was had with Mr Charles L.
Bethel, formerly assistant treasurer, in charge of the Detroit-Cook office, and
now employed in the mam office Mr Bethel, together with his wife, Ida M ,
appears as a borrower in the collateral-loan department, his loan still being open
as of July 15, 1933, with 56 shares of United Milk Products preferred and 3%
shares common (formerly 70 and 20 shares, respectively, of the old company) as
part collateral Asked as to the circumstances under which he was induced to
purchase this stock, Mr Bethel stated that he was on the list of those invited to
subscribe for the original issue of stock, receiving 20 shares of the preferred with
a bonus of 20 common This was financed by Mr Bethel's payment of $500,
and a bank loan of $1,500, dated February 1, 1926
(U-13-1, p. 17)
About a year later, Mr Bethel states he had sold his residence and having some
cash available from the proceeds, Mr Nutt advised Tiis wife, Ida M. Bethel, to
purchase an additional 50 shares United Milk preferred, stating at the time that
he would personally guarantee that she would never suffer a loss through this
purchase Acting upon this advice, Mrs Bethel purchased the stock recommended Needless to say, Mr Nutt's guaranty was never made good.
STOCK EXCHANGE PEACTICES
8245
Other pertinent information concerning the collateral loans is
obtained from the liquidator's confidential report, as follows*
(U-13-1, p. 11)
In an attempt to secure additional information not revealed in the bank's
records, a discreet interview was had with Mr Brown, resident partner of Hornblower & Weeks, who was known to have had some knowledge of the affairs of
the company, this information having come to light at the time the J. P Harris
account was analyzed Mr Brown stated that shortly after the organization of
the United Milk Products Corporation, he noted that the stock was drifting m as
collateral to Hornblower & Week's accounts He was highly opposed to this as
collateral and ordered it cleared from all accounts as rapidly as possible
His objection to this security was based upon the following.
(U-13-1, p. 11)
1. In his opinion the company was grossly overcapitalized and the set-up
would not have been accepted or approved by his firm
2 No figures as to earnings were obtainable from the company's officers
3. Future earnings were very speculative
The Union Trust Co , through its estates trust department was also
quite active in the distribution of these shares, for in the period from
the corporation's organization to the end of 1932, a total of 18,902
shares of preferred stock were placed in individual trust estates as
follows:
Shares
January 1926
February 1926
March 1926.
April 1926
May 1926
June 1926
July 1926
August 1926
September 1926October 1 9 2 6 _ .
3, 990
2, 640
140
654
431
422
446
175
Shares
November 1926
December 1926
Year 1927
Year 1928
Year 1929
Year 1930
Year 1931
Year 1932
Total
430
50
2, 948
2, 340
3, 062
250
619
305
_. 18, 902
And as Mitchell has pointed out in his report:
(U-13-1, p 7)
At May 5, 1933, the following preferred stock, representing shares in the
reorganized company, was still in the estates trust department Shares 10,094;
carrying value, $782,487 11; market value May 5, 1933, $181,692
Of this total, 1,760 shares belonged to the Nutt family trusts, leaving a balance
of 8,334 shares in the names of holders outside that family
Bank officials interested: Of the officers and directors of the bank
who appear as principals in the1 transactions under review are the
following: J. E. Nutt, president; C. W. Carls*
Carlson, assistant vice president;* Otto Miller, director l
Mr Nutt originally subscribed to 25,000 units consisting of 1 share
preferred and 1 common at $100 per unit, and records of the corporation show a receipt of $2,500,000 in cash. These shares were then
sold by Mr Nutt to officers and employees of the bank, "insiders",
business associates, and the estates trust department of the bank.
Apparently, Mr. Nutt derived no profit from these transactions.
(U-13-15a, 16b, 16c)
From Mr Nutt's personal ledger we found that the total investment made by Mr Nutt personally was $204,000 in United Milk
Digitized fori Union
FRASER
Trust connection.
8246
STOCK EXCHANGE PEACTICES
Products stock, which he disposed of at various times during the 2
years following its acquisition, at an indicated profit of $23,679 6(L
All of this profit was earned early in 1928 through the sale of 520
shares of common stock, the preferred having previously been sold
out at the cost price. Although the above is the only profit Mr.
Nutt's books show, we learn from his 1928 income tax return that he
reported a total profit from the sale of United Milk stock in that
year of $85,613 80.
(U-13-1, p 14)
Mr C W. Carlson, vice president of the bank, had in his name at
one time in 1926, 12,972 shares of preferred and 10,190 shares of
common of United Milk stock Mr Carlson, upon receipt of the
dividends on the preferred stock, usually purchased official checks
from the bank and disbursed these dividends to the actual owners of
the stock Apparently, he was acting only as a nominee for others,
amongst whom Mr Nutt appears to be the owner of some shares.
From the distribution of dividends, it appears that Mr Carlson had
in his name 3,020 shares from which Mr Nutt derived the income, sa
it follows that he (Nutt) was the actual owner
Market price of stbck.—The market prices of the stock of United
Milk Products Corporation showed wide fluctuations, particularly
in the common, as evidenced by the following tabulation obtained
from Standard Corporation records(U-13-21)
Common
Preferred
Year
High
1927
1928
1929
Common
Preferred
Year
94
91
80
Low
86
76
50
High
80
423/4
21
Low
36
14
2M
High
1930
1931
1932
65
37
12
Low
High
44
15
10
6
2%
Low
1
Figures for 1926, the first year of the company's existence, are not
available from public sources. However, from the liquidator's confidential file we obtained the following:
(U-13-1, p. 16)
Sales were made m January 1926 at prices ranging from 110 to 115
Other information pertaining to the market values of this stock
from the liquidator's file is presented herewith:
(U-13-1, p 16)
With reference to market prices for United Mill stock, another set of circumstances is noted, which may possibly be of interest in connection with the holdings of the bank's officers One H E Collm, connected with the brokerage firm
of Collm, Norton & Co of Toledo, Ohio, was a trustee for the stockholders of
the National Dairy Co , with a plant at Morenci, Mich, one of the properties
acquired by United Milk at organization The consideration therefor was 10,000
shares each of preferred and common stock of the United Milk Co, which was
duly issued to Colhn and his cotrustees, of which 7,000 shares of each class of
stock were at once transferred to Campbell, Starring & Co., a New York brokerage firm, and 3,000 each to R L Corby
8247
STOCK EXCHANGE PRACTICES
In addition to the stock above issued, Collm was given an option to purchase
an additional 20,000 shares of common stock at prices ranging from $45 to $90
per share. This he exercised to the extent of 9,000 shares, paying therefor
$485,000 m cash
(U-13-1, p 16)
An immediate market was created for United Milk common stock, resulting
in a price range from 110 to 115 during the month of January 1926 at the same
time the preferred was being offered at 91 The officers of the company disclaim
any responsibility for the high price for the common, stating that they were not
interested in the market and did not profit thereby They do state, however,
that they believe Collm was responsible for creating this market in order to dispose of his common holdings at a profit This is based partly upon the fact that
letters have come to their attention dated about the time of organization, circulating various rumors calculated to enhance the value of the common stock,
and also the fact that Collm at that time was attempting to sell units of 1 share
preferred and 1 common at $150, in the face of the company's subscription price
of $100 for the same unit.
Financial position oj company.—We shall quote Mr. Mitchell's
comments regarding the financial history of the company, in full:
(U-13-1, p. 9B)
Financial position of company —As previously stated, the company furnished
no statements and did not make public any record of its earnings prior to those
for the year 1928 During this year the files of the credit department seem t a
indicate that stockholders were becoming uneasy as to the affairs of the company
probably due in large part to the low market price of the stock, resulting in numerous letters of inquiry to the bank. Replies thereto, usually by Mr J P. Harris,
stated that the bank was using pressure to secure the issuances of public statements Whatever the cause, a statement, certified by Messrs Arthur Young &
Co., was issued for the year ending December 31, 1928.
(U-13-1, p 9B)
The credit files contain an analysis of the company's operations for the years.
1926, 1927, and 1928 The source of the figures for the first 2 years is not indicated and they may not be reliable, but are set forth below, together with the
certified figures for the following years
(U-13-1, p. 9B)
Year
1926-- _
1927
1928
1929
1930.. i,
1931—J
1932
Total
i Loss
Net operating
Net operating
or charge
income or loss Dividends paid credit
to surplus
$1,285,543
653,626
604,492
526,554
U34,733
1107,336
57,328
55
04
84
98
15
68
45
2,885,476 03
00
25
00
75
50
$360,339 55
2 65,118 21
32,837 84
5,459 23
2 644,903 65
2 107,336 68
57,328 45
3,246,869 50
2 361,393 47
$925,204
718,744
571,655
521,095
510,170
2 Charge
In addition to the above operating income, the company created a "profit"
through the repurchase of its preferred stock at a discount, and obtained certain
other nonoperatmg income set forth below
Profit on repurchase of preferred stock.
1927
$439,336 00
1928
148, 444 12
1929
63, 278 00
1930
173, 128 58
1931
—
—r—
24, 835 00
1932
$849, 021 70
8248
STOCK EXCHANGE PEACTICES
(U-13-1, p. 10)
Profit on sale of plants, sale of Liberty bonds, setting
up cash surrender value of life-insurance policies
and other nonoperating income
1927
$84, 743. 96
1928
8, 029 18
1929
1930
33,122 07
1931
1932
Total
145, 895. 21
994, 916 91
An analysis of surplus for the above period indicates the following
"Profit" on repurchase of—
Company's preferred stock
$849, 021. 70
Other nonoperating income
145, 895 21
994, 916 91
(U-13-1, p. 10)
Less (excess of dividends paid over operating income)
361, 393 47
Surplus, Dec 31, 1932
633,523 44
It thus appears that a large part of the dividends paid were derived from the
discount on stock repurchased—in reality a return of capital
With reference to the company's balance sheet, a certain item deserves consideration m relation to the transactions with the bank. To illustrate this point,
the balance sheet at December 31, 1932, is set forth in brief form below
Assets
Current
"Milk supply"
Deferred
Permanent, less reserves
Brands and trade marks
Total assets
(U-13-1, p 11)
$1, 996, 993. 20
4, 364, 662. 08
79, 275. 70
1, 929, 996. 88
10. 00
8, 370, 937. 86
Liabilities
Current
259, 446. 05
Capital stock (preferred) outstanding
6, 940, 500. 00
Capital surplus, represented by 209,394 shares no-par common stock outstanding
537, 468 37
Earned surplus
633, 523 44
Total liabilities
8,370, 937. 86
It will be noted that among the above assets of the corporation is an
item of "milk supply" in the amount of over $4,000,000. We are
convinced that anyone, accountant or not, studying the balance sheet
of the company would be led to believe that this paiticular item, carried
<on the statement of a corporation engaged in the canned milk business,
was one of inventory Actually this item is nothing but—goodwill.
However, no mdication of this fact is disclosed Mitchell made an
analysis of this account from the books of the United Milk Products
Corporation and in his report states:
STOCK EXCHANGE PEACTICES
8249
(U-13-1, p 18, 19)
* * * the account represents only the difference between the consideration
paid for the various companies acquired at organization and the appraised
value of their respective physical assets The greater portion of the account ia
concerned with the Western Reserve properties due primarily to the exchange
of shares on a 2% for 1 basis A brief summary of the account follows*
Set up in connection with valuation of assets of—
(U-13-1, p 19)
Western Reserve Condensed Milk Co , Jan 1, 1926
National Dairy Co , Feb 26, 1926
All plants, Dec 31, 1926
$2, 098, 436. 01
300, 000. 00
1, 716, 401. 07
4,114, 837. 0&
Less (value of milk supply applicable to Standish plant sold
during 1927)
175 00
4,114, 662. 08
Milk supply account set up on books of subsidiary, United
Milk Products Corporation of California, representing
difference between value of physical properties and cash
paid Libby, McNeil & Libby for Loleta plant
250, 000 00
Milk supply account per consolidated balance sheet, Dec.
31, 1932
4, 364, 662 08
In connection with the above valuations, Mr P L Haymes, of the company,
advises that as a general rule, appraisals of physical assets were placed at as low
a figure as possible in order to reduce the burdens of local taxes upon their
numerous plants This would naturally result in a correspondingly higher
figure for intangibles.
(U-13-18, 17a, 19)
J. B. Nutt loan —On June 2, 1926, Mr. Nutt borrowed $500,000
from the United Milk Products Corporation. He had also borrowed
on April 15, 1926, the sum of $25,000 from the same source We do
not know what use was made of the $25,000 but we do know that
Nutt used the $500,000 he borrowed on June 2 to purchase Southern
Baking Co., 5,000 shares 8 percent preferred stock; 1,250 shares
no-par common stock.
(U-13~20a)
On the same day Mr. Nutt sold one fifth of this purchase, or 1,000
shares preferred and 250 shares common to C. L. Bartshe, president
of United Milk Products Corporation, at cost, or $100,000 During
the year 1927 Mr. Nutt disposed of the remainder of this stock at
a loss of $8,636.20.
Corporation management.—Concerning the character of the management, which the Union Trust Co officials thought was of the highest
type ; no concrete evidence is at hand which would permit a definite
opinion.
However, the filing of suits charging fraud on the part of the
management of United Milk Products Corporation creates, at least,
a doubt in one's mind of the integrity and character of its officials.
Certain of the officers, principally C. L. Bartshe, chairman, and
P. L Haymes, vice president, have been sued at 7various times by
stockholders because of their acts. A stockholders protective com-1
mittee was formed and made an investigation of the corporations'
affairs, after which the committee wrote
8250
STOCK EXCHANGE PEACTICES
(U-13-22, 23)
As a result of the investigation of the accountants thus made available, it is
disclosed that the corporation received no money or property for all of its 250,000
shares of common stock, although at the time when the stock was issued the
shares were setting and were purchased by many stockholders in the open market
in New York at prices in excess of $100 per share. It appears quite clear that
certain persons then in control of the corporation profited improperly at the
expense of the corporation and its stockholders.
A suit was discharged in court because the statute of limitations
prevented any redress.
The following is an excerpt from the Cleveland News of September
22, 1932:
An injunction suit seeking to block the officers and directors of the United Milk
Products Corporation from carrying out a proposed reorganization plan was filed
in common pleas court late today by F W. Lovell, of 2945 Eaton Road, Shaker
Heights Lovell, who says he owns 100 shares of preferred stock, charged that
the proposed reorganization would be detrimental to the preferred stockholders
and beneficial to the owners of common stock He declared the officers and
directors own 51,890 shares of common stock and 1,425 preferred
The disposition of this suit is described in an item in the Cleveland
Plain Dealer of February 24, 1934, which in part is as follows:
Five directors and officers of the United Milk Products Corporation yesterday
were held to have committed fraud against preferred stockholders of the company
in having proposed and obtained a reorganization with a view to enriching the
value of the company's common stock
Federal Judge Samuel H West handed down an opinion holding that each
petitioning holder of the company's preferred stock was entitled to $49.66 in
damages for each share held.
The judgment involved 925 shares, or about $46,000 plus interest from January
1, 1933. It was awarded against G E Bartshe, president; C P Lindhal, secretary; W L Fox, treasurer; Philip L Haymes, former director and vice president;
and James L Harris, director and vicepresident, all of whom were found to have
participated in the fraud, and Sam W Emerson, director, and W. A. Bartshe,
vice president, who, the court held, were responsible because of their breach of
trust as directors.
Any management that is required to spend the amount of time and
money necessary to defend itself against the charges above described,
cannot be above suspicion, and it would seem that a properly conducted business would not be compelled to defend its actions to the
extent that this company has experienced.
The company went through reorganization in 1932, which probably
was due partially to the economic crisis, but basically the result of
the heavy burden of preferred dividends placed on its earning power.
WALTER H. SEYMOUR,
Senior Examiner.
Mr. SAPERSTEIN. Mr. Meehan, the next report on my list, No. 19,
Loans from the E.F.C. Will you tell the committee about that?
Mr. MEEHAN. The report in regard to loans from the Reconstruction Finance Corporation was sent to the Government Printing Office
to facilitate printing. There being only one copy of that report we
were unable to bring one here this morning. I ask, however, that that
report be considered as offered in evidence at this time, the same as
was done in regard to the report entitled "Union Trust's Directorate
in Other Concerns."
STOCK EXCHANGE PRACTICES
8251
Mr. SAPERSTEIN. Mr. Chairman, I should like to offer the report
Teferred to by Mr. Meehan, together with the exhibits which are also
in the possession of the Government Printing Office in order to facilitate punting.
The CHAIRMAN. The report and exhibits will be considered as in
evidence, and will be appropriately identified by the committee
reporter.
{The report entitled "Reconstruction Finance Corporation Loans",
together with the exhibits mentioned in said report, which exhibits
are now at the Government Printing Office, were received in evidence
and marked "Committee Exhibit No. 19, May 4, 1934", and are as
follows:)
COMMITTEE EXHIBIT N O . 19, MAY 4,
1934
RECONSTRUCTION FINANCE CORPORATION LOANS
(U-19-la)
Shortly after the formation of the Reconstruction Finance Corporation, and at a time when the Union Trust Co had borrowed extensively from the Federal Reserve Bank, New York City banks, and
National Credit Association No. 1, an application was filed on March
10, 1932, with the loan agency of Reconstruction Finance at Cleveland, Ohio, by the Union Trust Co. after being duly authorized by
the board of directors on March 8, 1932, for a loan not to exceed in
the aggregate $12,000,000 to mature in 6 months, or on September
10, 1932
The extent of the borrowings of the Union Trust Co. can be appreciated if one refers to the comparative statement of condition as
of February 29, 1932, which reflects total borrowings of $31,587,000.
The files of the Union Trust Co are not complete concerning the
loans obtained from the Reconstruction Finance Corporation, so that
complete information pertaining to the collateral offered for the loan
is not available
(U-19-2a, 3)
The application of March 10, 1932, in amount of $12,000,000 was
amended and redated April 15, 1932, and the amount increased to
$14,000,000. The latter application was approved on April 27, 1932,
and cash received amounting to $13,947,106 on April 29, 1932
For some reason not disclosed by the files, the application of April
15, 1932, offered as collateral for the loan of $14,000,000, $27,843,928 53 of real-estate mortgages No information is available as to
the location or type of property loaned upon, nor the status of the
individual loans The application of March 8, 1932, offered as
collateral, bonds and other securities, secured and unsecured notes
and real-estate mortgages, the latter being the smallest item in amount
of the group This collateral totaled in value $19,233,188.01 Just
why the collateral was changed from investments a,nd short-term
loans to real-estate mortgages is not readily determined, unless it
was that the better type of collateral could always be borrowed upon,
whereas the loans with real-estate mortgages as collateral would have
to be obtained from the Reconstruction Finance Corporation.
8252
STOCK EXCHANGE PEACTICES
(U-19-2a)
The purpose of the loan as stated in the application was "to pay
'other bills payable' which have been outstanding, for some time "
Examination of the loans payable ledger discloses that the followingpayments were made on April 29, 1932, the day the cash actually
was received from the Keconstruction Fmance Corporation:
Irving Trust Co
National City Bank
Bankers Trust Co
Chase National Bank
First National Bank
Federal Reserve Bank
$4,156,
3, 786,
650,
700,
800,
4, 000,
275
000
000
000
000
000
14, 092, 275
so that the proceeds of the loan were used to liquidate obligations
to other financial mstitutions
As of June 20, 1933, the balance owed the Reconstruction Fmance
Corporation on this loan amounted to $11,253,195 81 The files
indicate that this loan originally matured on October 15, 1932, and
was renewed to mature April 15, 1933 No further extension is
found m the files; however, some arrangement was undoubtedly
made for future payment.
(U-19-4a, 5)
In addition to the above loan, an application dated June 30, 1932,
in amount $1,500,000, was also filed The files of the Union Trust
Co show that this application was approved, and $1,475,297 21 in
cash was advanced on August 2, 1932
The purpose of this loan was also for "paying loans payable",
which at the date of the application amounted to $24,115,560 88,
including the loan of approximately $14,000,000 from the Reconstruction Finance Corporation, previously described.
The security for this loan is real-estate mortgages in amount $3,002,140.09 No detail was available to determine whether these mortgages
were on business or residential properties, nor the condition of the
loans
The original maturity date was December 30, 1932, which was
extended to June 30, 1933 No further extension is found in the
files
(U-19-7-a)
The balance unpaid on this loan as of June 2, 1933, amounted to
$1,397,477 62
(U-19-6)
An application was also filed on July 16, 1932, for a loan of
$2,000,000 from the Reconstruction Finance Corporation. This was
approved and cash received, in amount $1,967,461 76, on August 12,
1932
The purpose of this loan also was "paying bills payable."
Collateral for this loan was $4,002,574 30 in real-estate mortgages,
but no detail is available to ascertain what type of property was
involved nor the intrinsic value of the loans
The original maturity date of this loan was January 16, 1933, which
was renewed so as to mature July 17, 1933. No further extension is
8253
STOCK EXCHANGE PRACTICES
noted This, however, was undoubtedly obtained as the unpaid balance on June 2, 1933, was $1,831,565.43
The following is a recapitulation of the loans obtained from the
Reconstruction Finance Corporation during the year 1932 directly by
the Union Trust Co :
Loan no
Date
W-114
W-504
W-548
Amount cash
received
Value of
collateral
June 1933
unpaid
Apr 15,1932 $13,947,10fi 00 $27,843,928 53 $11,253,195 81
3,002,140 09
1,397,477 62
June 30,1932
1,475,297 21
4,002,574 30
1,831,565 43
1,967,461 76
July 16,1932
17,391,864 97
Total
34,848,642 92
14,482,238 86
(U-19-12, 13, 14, 15, 16)
Mr. Kraus, vice chairman of the board of directors of the Union
Trust Co., was apparently quite influential in matters pertaining to
the Reconstruction Finance Corporation. His assistance was asked
in an effort to obtain loans for "patrons" of the Union Trust Co.
Information concerning the effectiveness and results of his efforts
is not available.
WESTERN RESERVE MORTGAGE CO.
In February of 1933 the Cleveland banks comprising the Cleveland
Clearing House Association caused the formation of a corporation
known as "the Western Reserve Mortgage Co." This corporation
y a s incorporated in Ohio for the "purpose of handling and dealing
in and with mortgages, mortgage notes, and all forms of securities",
however, the true purpose of its formation appears to be to aid the
Cleveland banks in obtaining loans indirectly from the Reconstruction Finance Corporation without the general public being informed.
The Western Reserve Mortgage Co. issued a total of 32,336 shares
of stock, par value $100 per share, or a total capital of $3,233,600,
of which the Union Cleveland Corporation purchased 18,541 shares,
or an investment of $1,854,100 To consummate this purchase the
Union Cleveland Corporation borrowed from the Union Trust Co.
$1,854,100, secured by the capital stock of the Western Reserve
Mortgage Co. The proceeds of this subscription, to the extent of
$1,844,642.47, was invested by the Western Reserve Mortgage Co.
m mortgages purchased from "the Union Trust Co. Following this,
the Western Reserve Mortgage Co. purchased from the Union Trust
$46,330,410.76 of real-estate loans In payment of these loans the
Western Reserve Mortgage Co gave its notes to the Union Trust
Co. for the same amount, which notes were secured by a pledge of
the mortgages so purchased.
The mortgage company then borrowed from the Reconstruction
Finance Corporation $21,162,626 and pledged mortgages so prchased
as collateral for the loan, the Union Trust Co waiving its lien on said
mortgages in favor of the Reconstruction Finance Corporation. The
proceeds of this loan were then applied by the Western Reserve Mortgage Co. as a reduction of the respective notes given to the Union
Trust Co.
8254
STOCK EXCHANGE PEAOTIOES
From the above it can be seen that the real-estate loans with mort^ages as collateral had been replaced with an asset which was col{ateraled with the same security, but subject now to the prior lien of
the Reconstruction Finance Corporation. The proceeds of the loan
were used to liquidate bills payable to the Federal Reserve bank and
other banks
These transactions were made just 3 days prior to the restricted
withdrawal status of the bank, which was in force beginning the morning of February 27, 1933 No substantial withdrawal of cash is
noticed during the period in which the loans were made, nor immediately following the receipt of the cash While this transaction improved the financial condition of the bank, in that it reduced the bills
payable liability, no benefits are apparent which appear favorable to
the depositor
LOANS OBTAINED BY THE UNION TRUST CO. FROM NATIONAL CREDIT
ASSOCIATION NO 1
The National Credit Association No. 1 was organized by the clearinghouse banks of Cleveland on November 2, 1931.
This association was one of a group orgamzed by member banks
of the fourth Federal Reserve district for the purpose of borrowing
from the National Credit Corporation, a Delaware corporation, which
was a governmental-financed institution and the forerunner of the
Reconstruction Finance Corporation
(U-19-8)
The Union Trust Co. subscribed for $3,500,000 of gold notes of the
National Credit Corporation on December 17,1931, of which $1,050,000 was paid in cash during January 1932. This was refunded to
the extent of 95 percent, or $997,500, leaving an investment of
$52,500 on the books of the Union Trust Co.
(U-19-8)
On January 18, 1932, the bank borrowed from this association
$3,000,000 with collateral of certificate of participation in loan to the
Cleveland Cliffs Iron Co. in amount $3,387,500.
(U-19-10)
This association reported that all loans were paid in full as of
December 13, 1932
The Union Trust Co 's loan was paid September 20, 1932
WALTER H. SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner.
J. J. SINNOTT.
Mr. SAPERSTEIN. Mr. Meehan, I show you a report entitled "The*
Union Cleveland Corporation", and ask you whether or not that
report was prepared by the investigators on the staff of the committee under your immediate supervision.
STOCK EXCHANGE PEAOTIOES
Mr. MEEHAN. It
8255
was.
Mr. SAPERSTEIN. Mr. Chairman, I now wish to offer the report in
evidence, together with the exhibits referred to therein, which exhibits
were sent to the Government Printing Office in order to facilitate
printing.
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately identified by the committee reporter.
(The report entitled "The Union Cleveland Corporation", together
with the exhibits referred to therein, were received in evidence,
marked "Committee Exhibit No. 20, May 4, 1934", and are as
follows:)
COMMITTEE EXHIBIT N O . 20, MAY 4,
1934
THE UNION-CLEVELAND CORPORATION
The Union-Cleveland Corporation, although not a bank subsidiary, was a component part of the Union Trust Co's operations It
was created primarily "for the organization and operation of a
securities and investment company", and to relieve the Union Trust
Co of some of its investments which it (the Union Trust Co ) could
not legally hold
It was incorporated in the State of Ohio on July 20, 1929, and
began operations with $2,285,000 in cash contributed by the stockholders of the Union Trust Co Its capital structure consisted of
228,500 shares of common stock without par value allocated as
follows: $2,000,000 capital stock, $285,000 paid-in surplus
(U-lfr-1)
Its first transaction occurred on August 20, 1929, and consisted of
the purchase from the securities and mvestment department of the
Union Trust Co of a group of securities aggregating $407,202 51, the
list being composed principally of real-estate mortgage bonds, railroad and industrial corporation bonds, and foreign government bonds,
with coupon yields of \){ percent to 7 percent
The functions of this corporation were:
(a) Participating in the underwriting and distribution of security
issues.
(b) Purchases and sales of securities for the convenience of bank
customers.
(c) Also commitments were made for securities to be held by the
corporation for investment and income
The first mentioned above was its chief function, and involved the
merchandising of first mortgage bonds to a large degree, and preferred
and common stocks to a somewhat slighter degree.
The corporation's record of net earnings from its inception to October 31, 1933, is as follows:
(U-16-2, 3, 4, 5)
Loss (4 months ended Dec 31,1929)
Profit (year ended Dec 31, 1930)
Loss (year ended Dec. 31, 1931)
Loss (year ended Dec. 31, 1932) _.._
Loss (year ended Oct 31, 1933)
$87,477.70
__ 311,687.80
25, 390 25
168, 784 99
72, 241. 37
8256
STOCK EXCHANGE PRACTICES
(U-16-12)
The principal source of mcome during the years 1929, 1930, and
1931 was in the underwriting and wholesale distribution of securities;
however, losses were sustained from inventory depreciation resulting
from write-downs from book value to market value, and sales of securities at prices less than cost or ledger value. These losses have created
<a deficit of $1,960,999 14 at October 31, 1933, which have completely
wiped out "paid in surplus account" and impaired the capital of the
corporation to the extent that the stockholders' equity in the corporation is, at October 31, 1933, only $35,793 90, with the likelihood that
further write-offs will be necessary.
(U-16-6)
During the years of its existence the Union-Cleveland Corporation
depended entirely upon the Union Trust Co for its financing. This
was in the form of both unsecured and collateral loans which were
payable on demand and were at the rates of 5 and 6 percent per annum,
with the exception of one (no. 12985) made on May 1, 1930, in the
amount of $650,000, which was at 3 percent per annum, and was made
to facilitate purchases of the capital stock of the Chagrin Falls Banking Co
The loans outstanding at October 31 in the years 1929, 1930, 1931,
and 1932 were as follows (these dates have been chosen because they
more clearly reflect the extent of the borrowing than the last day
of the year, as in 1929, and 1930, loans were liquidated for tax evasion
purposes (See special report)
(TJ-16-7, 8, 7-9, 10-11)
I
Collateral
Oct
Oct
Oct
Oct
31,1929.
31,1930
31,1931.
31,1932
$2,050,000 00
None
2,575,760 00
2,395,023 48
Unsecured
None
$3,500,000 00
840,000 00
893,426 64
On October 31, 1933, the corporation's financial statements reflect
the debts to the Union Tiust Co as notes payable:
(U-16-12)
Secured
Unsecured
$3, 580, 767. 11
984, 361 36
Total
4, 565, 128. 47
From the above figures it can readily be seen that the depositors'
funds of the Union Trust Co were used to finance the security
affiliate's operations, and the loans now owed contributed to the
situation now existing.
(U-16-13)
Also, the superintendent of banks in his report of January 20, 1933,
questions the value of the collateral securing the notes, and is doubtful
if the securities posted as collateral would ever be sold at prices equivalent to the extent upon which they have been borrowed. Some of the
STOCK EXCHANGE PEACTICES
8257
securities posted as collateral are in defult and the issuing corporations in receivership. Notable among those in this position are the
Construction Materials Co. and the Sensibar Transportation Corporation Also among securities owned and posted as collateral is the
capital of the Chagrin Falls Banking Co., now in the process of liquidation, which is without value and has attached to it a double liability
contingency
These loans were apparently granted almost automatically upon
application, and with little or no consideration give as to the ability
to repay or to the sufficiency of the collateral.
The amount borrowed from and owed to the Union Trust Co.
frequently exceeded the capital and surplus of the security affiliate
by more than 100 percent This arrangement can be severely condemned, especially if one considers that the funds of the depositors
were being loaned almost promiscuously to finance transactions of a
specualtive nature, wherein the benefits derived would inure to the
stockholders of the corporation, who were identical to those of the
bank, and with little or no risks assumed by those destined to profit
from the transactions. Certainly the corporation, were it not for its
affiliation with the bank, could not have obtamed financing with such
ease as it enjoyed.
ACQUISITION OP CHAGEIN FALLS BANKING CO
(U-16-23)
On September 26, 1929, the Union-Cleveland Corporation began
acquiring the capital stock of the Chagrm Falls Banking Co at $650
per share, plus accrued dividends Smce the files and records concerning this deal are practically sans any evidence which would tend
to indicate the purpose of the acquisition, the greater portion of this
report is assumption
This much is certain: The Union-Cleveland Corporation was
merely an instrument through which the Union Trust Co could acquire control of the Chagrm Falls Bank without violation of the
State law which prohibited a State bank from owning a similar
institution
(U-16-23, 24)
Though we were unable to locate any form of agreement concerning the price of $650 per share, it is fairly certain that such an agreement was made, as the Union-Cleveland Corporation not only paid
that price m September of 1929 but continued to do so until as late
as November 1931 some 2 years after the market " crash " Certainly that price would have never been maintained unless the corporation was obligated to fulfill a contract at that price
Among the larger stockholders of the Chagrm Falls Banking Co.,
prior to the purchase by the Union-Cleveland Corporation, were the
Mary J Frazer
Austin H Church
M F Brewster
John W Stoneman
175541—34—PT :
Shares
170 S P Harris
70 A C Brewster
60 John A Church
60
Shares
— 60
50
50
8258
STOCK EXCHANGE PEACTICES
These individuals were apparently all local persons of the community in which the bank was located, and appear to have no connection of any importance with the Union-Cleveland Corporation or
the Union Trust Co. However, the Chagrin Bank did use the Union
Trust Co as its principal depository, and during the years subsequent
to its purchase borrowed frequently from the Union Trust Co.
(U-16-23, 24)
The funds necessary for the acquisition of Chagrin Falls Banking
Co. were, as stated above, obtained by the Union-Cleveland Corporation from the Union Trust Co., and the fact that this $650,000 loan
was made at the rate of 3 percent per annum tends to prove that the
acquisition was at the suggestion of the Union Trust Co. At the
time of the purchase the Chagrin Falls Banking Co. was paying a
dividend at the rate of $18 per share per year. This amounted to a
return of 2 77 percent on the $650 per share investment of the UnionCleveland Corporation, and probably accounts for the interest rate
of the loan from the Union Trust Co (3 percent).
From conversation with Mr O C Morton, a former Union Trust
Co. employee, and at present a member of the liquidator's staff, we
were led to believe that the purpose of the acquisition was the first
step of the creation of a State-wide banking chain, and at the time of
purchase agitation was prevalent to change the State laws so as to
permit State-wide branch banking.
(U-16-25)
It is, however, interesting to note that in 1931, Mr. B. L. Jenks, a
Van Sweringen associate was indebted to the Chagrin Falls Banking
Co. to the extent of $269,914.83, which appears to be a large loan for
an institution of $100,000 capital. No information is available to
judge just how good this loan was or if it is existent today and contributed to the failure of the Chagrin Falls institution to obtain a
license to reopen after the national banking holiday. Whether or
not this is the only loan which Mr. B L. Jenks had at this bank is
also unknown.
(U-16-26)
The price of $650 per share seems to be exceedingly generous even
for the prosperous days of 1929. The indicated book value as ascertained from the only financial statements available was $365 92 per
share as of September 23,1929. The indicated earnings per share were
in 1928 and 1929 $60.09 and $69.50 respectively. The last figure is
an estimate based on the first 6 months' earnings.
(U-16-26)
The deposits of the institution totaled $3,335,222.18 at the original
date of purchase, of this amount $1,200,000 are shown as "public
funds " which should be secured 100 percent by Government or surety
bonds However, the balance sheet as of September 23, 1929,
showed only $978,289.31 as total investments, which included corporation and foreign bonds in the amount of $492,704 24.
STOCK EXCHANGE PEACTICES
8259
(Minutes of meeting of executive committee, p 1138; Union Trust Co ,
U-16-27)
In December of 1932 the Union-Cleveland Corporation borrowed
$100,000 from the Union Trust and contributed it as additional
capital to the Chagrin Falls institution This was necessary as a
result of the write-downs on the book value of certain properties of
the banking company which the superintendent of banks had ordered.
To prevent this depletion of surplus being reflected on the books and
statements of the Chagrin Falls institution, this contribution was
made with the instruction that it should be shown on the books and
statements as surplus
(U-16-29, 30, 31)
Soon after the capital stock had been acquired by the Union-Cleveland Corporation, it sold five shares each at $650 per share to seven
gentlemen, chosen to be directors. These individuals borrowed
$3,250 each from the Chagrin Falls Banking Co to pay for their
directors' qualifying shares. For some reason not disclosed by the
files, but probably due to criticism from the bank examiner, these
notes were sold to the Union-Cleveland Corporation on September
20, 1932, and are now carried as accounts receivable on that corporation's books and statements. In conversation with Union-Cleveland
Corporation's employees, information was obtained to the effect that
suits have been filed to force pajrment of the notes It is quite
obvious that these directors never intended to pay for these shares,
but were merely acting as agents for the bank in aiding it to comply
with the law pertaining to stockholders and directors Mr Allard
Smith, when billed for interest on his note on May 3, 1933, wrote
across the face of the invoice* "This is for Chagrin Falls Bank stock
and I do not owe any interest." What he was endeavoring to convey,
evidently, was that he had no personal interest in that bank, consequently, was not going to pay any interest on a loan which he directly
had little or nothing to gain from by its creation Other evidence
that the directors were only figureheads is present in the option that
each director gave to the Union-Cleveland Corporation offering to
sell to the corporation at $650 per share at any time up to and including 30 days after his resignation as director
The Chagrm Falls institution is now m the hands of the conservator, and information concerning its progress is not available In conclusion, this acquisition appears to have been handled verbally so
that it is impossible to report specifically as to its merits or demerits
as an investment financed by the Union Trust Co 's depositors.
OTHER ACTIVITIES OF UNION-CLEVELAND CORPORATION
(U-16-18, 19)
The directors and officers of the Union-Cleveland Corporation were
either former officers or directors of the Union Trust Co., as a result
of which the policies of the corporation were dictated and prearranged
by the bank officials, and the officials of the Union-Cleveland Corporation acted in more or less of a perfunctory capacity. At least in one
instance the minutes of the directors' meeting were drafted in advance
and ratified without discussion or comment
8260
STOCK EXCHANGE PRACTICES
Principal issues involving
sums in which the corporation was
the house of issue or took a su tantial position in the flotation, are
as follows:
(U-16-14,15, 16,17)
Date of issue
Name of issue
Mar 15,1933 Construction materials, 2 year 6 percent
Feb 1,1930 Dow Chemical Co , 10-year 6 percent notes
Mar 30,1931 Sensibar Transportation Co 6-percent bonds
Jan
1,1930 Newton Steel Corporation, 2-year 6-percent notes
Total issue
$1,500,000
3,500,000
1,650,000
3,000,000
UnionCleveland
Corporation participation
$625,000
1,400,000
660,000
1,200,000
The corporation also participated in the flotation of numerous
other issues which were sponsored or originated by New York or
Chicago houses wherein its profits were relatively nominal. Among
the houses with which it joined in marketing securities were: J. P.
Morgan & Co., Kuhn-Loeb & Co, Halsey Stuart & Co., Harris,
Forbes & Co , Guaranty Co. of New York.
The Union-Cleveland Corporation also purchased in the open
market common stocks of some of the national and well-regarded
industrial corporations. Among the issues so traded were* American
Telephone & Telegraph, General Electric, United States Steel, New
York Central, Electric Auto Lite.
A commitment of $500,000 was made in 1930 for this type of securities Mr Hayden, a director of both the bank and security affiliate,
criticized the practice of trading on the board and stated
(U-16-20-C)
* * * while it was inevitable that the corporation at times suffer inventory
losses in the course of merchandising and underwriting, he thought that the
shareholders of the Trust Co , who of course were identical with the shareholders
of the corporation, would be unhappily affected if it appeared that the corporation
as a matter of customary policy were buying and selling on the board merely as
a client of brokers It would be his inclination to advise against tradmg of this
sort as a part of the regular business of the corporation He would not say that
such operations should never be engaged in. In fact, in the immediate case, as
an example, he would find it difficult to oppose buymg some of the sound shares
for which orders had been placed. Nevertheless he thought that all must recognize the seriousness of the risk; that if there were a rule generally forbiddmg
trading on the board as a recognized policy, and exceptions to that rule were
allowed, it would not be too much to say that the rule would almost certainly be
drowned by the exceptions.
(U-16-20)
Mr. Baldwin, a director and officer of both companies, while opposed
to trading on the board as a customary policy, was of the opinion
that after considering the present investment and material loss, it
would be advantageous to make this commitment in the hope of
obtaining a profit from the market appreciation in this list of securities. The thought, as expressed by Mr Baldwin, was that at this
time, there was prevailing a low price level for sound stocks, and this
trading would offer a solution to financial situations confronting the
directors
STOCK EXCHANGE PEACTICES
8261
(U-16-20-C)
To which Mr. Hayden remarked:
* * * to smack a little of the quality of the classic prayer of the sinner:
" 0 , Lord, let me sm ;just this once more "
The funds necessary to finance this speculative venture were, of
course, obtained from the Union Trust Co., and the losses sustained
merely increased the total liability of the corporation to the bank,
while it became a frozen loan with insufficient collateral from the
standpoint of the depositor. It would seem that this practice, while
not continued (possibly due to the continued decline of the market)
can be severely criticized for its use of the bank's funds for general
market transactions which more properly are the functions of a
professional trader
The Union-Cleveland corporation, while still in existence, is now
in the process of liquidation, and is primarily engaged in the disposal
of its security portfolio, the proceeds to be paid on the loans at the
Union Trust Co. It appears to be a matter of conjecture whether or
not the corporation will ever be able to completely liquidate its loans
at the Trust Co. Some improvement in their financial condition has
been noticed, resulting from an enhancement of the value of their
investment inventory.
(U-16-21, 22)
On December 31, 1933, the book value of the securities inventory
amounted to $4,603,185 63, and the notes payable due the Union
Trust Co. as of that same date were $4,552,844.31. The UnionCleveland Corporation security inventory as of December 31, 1933,
includes a column captioned, "Market value/' which adds to a total
of $3,896,169.71. This figure ($3,896,169.71), however, includes
$727,286 48 representing the cost of the stock of the Chagrin Falls
Banking Co. which is of virtually no value, and also $1,854,100 of
Western Reserve Mortgage Co. stock of which the value is entirely
dependent on the mortgages now up as collateral for loans from the
Reconstruction Finance Corporation. In addition to these items,
$98,061.25 of Construction Materials Corporation's 6 percent notes
due March 15, 1933, are carried at cost in the "Market value"
column. This latter company is in default as to principal and interest
as to this issue. Eliminating the above-mentioned items from consideration and the "Market value " figure, there remains $1,216,721.98
market value of securities as of December 31, 1933, which if sold at
the prices prevailing that day could be used to liquidate the loans for
which they are collateral
WALTER H. SEYMOUR,
Senion Examiner.
This report based upon preliminary report and complete investigation by committee examiner J. J. Sinnott.
Mr. SAPERSTEIN. Mr. Meehan, I show you a report entitled
"Union Cleveland Corporation—Market Activities in Trust Company
Stock", and ask you if that is a report prepared by the investigating
staff of the committee under your immediate supervision,
Mr. MEEHAN. It is.
8262
STOCK EXCHANGE PBACTICES
Mr. SAPERSTEIN. Mr. Chairman, I wish to offer the report in
evidence, together with the exhibits referred to therein and which
exhibits have been sent to the Government Printing Office in order to
facilitate printing.
The CHAIRMAN. The report and exhibits will be received in evidence and appropriately identified by the committee reporter.
(The report entitled "Union Cleveland Corporation—Market
Activities in Trust Company Stock", together with the exhibits
referred to therein, were received in evidence and marked "Committee
Exhibit No. 21, May 4, 1934," and are as follows:)
COMMITTEE EXHIBIT N O . 21, MAY 4,
1934
MARKET ACTIVITIES IN TRUST COMPANY STOCK
The Union-Cleveland Corporation, security affiliate of the Union
Trust Co , did not actively trade through any pool participation in
the stock of the bank From the time of its formation in August
1929 to December 1932 the Union-Cleveland Corporation purchased
and sold Union Trust Co. stock as follows*
1,416 shares purchased direct and sold to employees
1,363 shares purchased in the market and sold to employees
9,320 shares purchased and 3,590 shares sold in the market, leaving a
balance of 5,730 shares still owned.
(U-18-la, lb)
When the Union-Cleveland Corporation was formed in August
1929 it purchased direct from the Union Trust Co., 1,416 shares of
the Trust Co.'s stock at a par of $100 per share Between August
1929 and August 1931 this full block of 1,416 shares was sold to the
employees of the Union Trust Co. at the cost price of $100 per share.
(U-18-2, 4)
During 1931 the stock of the Union Trust Co. had dropped to
approximately $60 a share and the Union-Cleveland Corporation
purchased in the open market from May 20, 1931, to July 1, 1933,
1,363 shares which were sold to the employees of the Union Trust Co.
on the installment plan at $60 per share. In his letter to the emloyees, offering the stock, Mr. Allard Smith, executive vice presient, stated:
S
It is our wish that you continue to hold the stock as an investment and not
purchase with the idea of selling it again in the immediate future.
Practically all of the stock was taken up by the employees, as on
October 31, 1933, the balance sheet of the Union-Cleveland Corporation reflects only $475 06 as accounts receivable employees stocks
subscription
As stated above, in addition to the stock purchased and sold to
employees, the Union-Cleveland Corporation purchased from August
1929 (with no purchases being reflected m 1931) through 1932, 9,320
shares and sold 3,590 shares. These purchases range in price from
$107 in August 1929 down to $75.50 in October 1930, and $27.26 a
share in June 1932. It is not known whether or not these purchases
were made in any effort to maintain the market of the stock, but it is
STOCK EXCHANGE PBACTIOES
8263
felt they were not, as there were only 9,320 shares traded in out of a
total outstanding of 914,000 shares of Union Trust Co. stock.
WALTER H
SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner J J. Sinnott
Mr SAPERSTEIN Mr Meehan, the last report which we have to
offer today is one entitled "Union Cleveland Corporation—Tax
Evasion " Will you please state whether or not that report was prepared by members of the mvestigating staff of the committee under
your immediate supervision?
Mr
MEEHAN It
was
Mr SAPERSTEIN Mr Chairman, I now offer the report in evidence,
together with the exhibits referred to therein, which exhibits have been
sent to the Government Printing Office in orderfcofacilitate printing.
The CHAIRMAN The report and exhibits will be received m evidence
and appropriately identified by the committee reporter
(The report entitled "Union Cleveland Corporation—Tax Evasion", together with the exhibits referred to therein, was received in
evidence, marked " Committee Exhibit No 22, May 4, 1934 " and
are as follows*)
COMMITTEE EXHIBIT N O . 22, MAY 4,
1934
TAX EVASION
(U-14-1)
The Union-Cleveland Corporation was subiect to a personal property tax in the years 1930 and 1931. This tax was imposed under
sections 5369, 5404, 5404-1, 5405, 5406, 5387-1, of the general code
of Ohio. This tax was in effect only in these 2 years, 1930 and 1931,
a different form of taxation being substituted for the year 1932 Taxable under these sections were various classes of assets, such as Cash,
accounts receivable, merchandise inventories, and investments (bonds
and corporate stocks) The provision of the law provided that accounts payable could be used to reduce accounts receivable, but in
no other way could liabilities be used to reduce assets.
The Union-Cleveland Corporation, in accordance with the law, filed
its return for the year 1930 on February 27,1930, and for the yearl931,
on February 19,1931. A tax of $27.69 was paid on the return for the
year 1930, but no tax was paid on the return for the year 1931 In
the year 1931 the tax law was revised, and there apparently was little
effort made to collect taxes due for that year in small amounts The
Union-Cleveland tax, if it had been paid upon the basis of its return,
would have been approximately $21 06.
(U-14-2a-3a)
The Union-Cleveland Corporation was organized to take over the
security business of the Union Trust Co. The nature of its business
8264
STOCK EXCHANGE PEACTICES
required a substantial investment in securities. The return for the
year 1930 shows it owned securities in the amount of $2,198,769.80,
and that these securities were listed as preferred and common stocks
of corporations domesticated in the State of Ohio, $1,978,784.14, and
United States Government bonds and Treasury notes totaled $19,985.66. Similarly, in 1931, it owned $3,147,284.91, distributed as
preferred and common stocks of Ohio corporations—$2,989,869, and
Liberty bonds—$157,415 91 Under the provisions of the code of the
State of Ohio, referred to above, securities domesticated in the State
of Ohio, and United States securities were exempt from this personal
property tax. The corporation on the face of its return was, therefore,
practically exempt from tax on its personal property.
(U-14r-16a, 16h; U-14-5, 6, 9, 10)
The above picture does not represent the true situation. In order
for the Union-Cleveland Corporation to place itself in the position
wherein it paid no tax or a very nominal tax, it was necessary to
arrange with the Union Trust Co to purchase from it on the last day
of the years involved, all of its taxable securities. This transaction
was brought about by the Union-Cleveland Corporation's billing the
Union Trust Co. on December 30, 1929, a varied assortment of stocks
and bonds of corporations domesticated without the State of Ohio, m
the amount of $1,762,118.82 and $236,762 93 These totals, decreased
by a sale on the same date, made the total purchases by the Union
Trust Co. of taxable securities in the amount of $1,997,972.37.
(U-l^-7, 8)
This transaction relieved the Union-Cleveland Corporation of all its
taxable securities, and placed them in possession of the Union Trust
Co. The Union Trust Co. was not involved in any tax situation similar to the Union-Cleveland Corporation, hence this transaction
had no effect from the tax standpoint upon them. The delivery of a
check to the Union-Cleveland Corporation in payment of these securities would presumably place them in a position where they would have
cash on their balance sheet instead of securities This is not the case,
however, because of the fact that the Union-Cleveland Corporation
was a large borrower of the Union Trust Co , and immediately upon
receipt of this check paid to the Union Trust Co. the amount of $1,600,000 on December 30, 1929, and $150,000 on December 31, 1929. It
will be seen that the above transaction reduced the asset of securities
and decreased loans payable as a liability The transaction in no
way affected profit and loss or net worth.
The Union Trust Co. reflected the transaction by increasing its
investments and decreasing its loans leceivable in the amounts stated
above. The transaction also carried no element of profit and loss to
the Union Trust Co. and in no way affected its net worth.
The Union-Cleveland Corporation on December 31, 1929, was,
therefore, in a position to file a balance sheet as part of its personalproperty tax return, showing that it owned no taxable securities and
was only taxable for the small amount of cash on hand at that time.
STOCK EXCHANGE PBACTICES
8265
(U-14-11)
The transaction having served its purpose, insofar as the tax
situation was concerned, the Union Trust Co on January 2,1930 sold
back to the Union-Cleveland Corporation the same securities that it
bought on December 29 and December 31, 1929 A check of $1,997,972 37 was given to the Union Trust Co in payment On this same
date the Union Trust Co loaned the Union-Cleveland Corporation
$1,900,000 After this transaction the Union Trust Co and the
Union-Cleveland Corporation were in exactly the same position they
were prior to December 29, 1929 If this transaction had never been
carried out the Union-Cleveland Corporation would have been taxable
in addition to the cash shown to have been on hand December 31,
1929, on an amount of $1,997,972 37, which at the tax rate of $2 71 %
a $100 would have amounted to $54,244 94. This transaction was
purely a measure to evade taxation
(U-14r-13a, 13f, U-14-12, 14)
A similar transaction occurred at the end of 1930 On December
31, 1930, the Union-Cleveland Corporation billed the Union Trust
Co. securities consisting of bonds and stocks of corporations, in the
amount of $2,782,130 90, and was taken up on the books of the Union
Tiust Co at the same figure The check of the Union-Cleveland Corporation was deposited by the Union Trust Co on December 31,1930,
in the amount of $2,782,130 90 The Union-Cleveland Corporation
on receipt of this cash paid the Union Trust Co as a reduction on its
loan account the amount of $2,720,600
Again this transaction relieved the Union-Cleveland Corporation
of its taxable securities and disposed of the cash received in payment
therefor, by a reduction in its loan, and placed its balance sheet in such
a position that the only taxable items appearing thereon were a small
amount of cash on hand at that time
(U-14-15)
January 2, 1931, the entire transaction was reversed; the UnionCleveland Corporation purchased from the Umon Trust Co the same
securities and paid therefor an amount of $2,782,246 86. On this
same date the Union-Cleveland Corporation borrowed from the Union
Trust Co. in the amount of $2,740,000. Both the Union-Cleveland
Corporation and the Union Trust Co , after this transaction, were
placed in exactly the same position as they were prior to December 31,
1930.
If this transaction had not been consummated, the Union-Cleveland
Corporation would have been liable for taxes on an additional amount
of $2,782,130 90, which at the rate of tax in effect at that time would
have amounted to $76,786 82 in taxes This transaction was purely
a method to evade taxation
In addition to the tax features mentioned above, other features
present themselves in connection with this transaction which places
the Union Trust Co. in a position of buying not only illegal securities
but also of purchasing these securities from the Union-Cleveland Corporation at a value in excess of the current market value at the time
of the purchase.
8266
STOCK EXCHANGE PBACTICES
The " Section 710-111-Investments", which is a part of the laws
of the State of Ohio relating to banks and trust companies, does not
permit a bank to purchase stocks of corporations. The section of the
laws stated above does not specifically state that stocks cannot be
purchased, but it does state the class of securities that the bank can
purchase.
It will be noted from the invoices furnished the bank by the UnionCleveland Corporation that there are substantial amounts of stocks
of corporations appearing on this list.
To show that the bank paid the Union-Cleveland Corporation more
than the market value of the securities on the date of purchase, the
following tabulation is submitted*
Shares
American Cyanamid
Baltimore & Ohio R E . .
Chesapeake & Ohio E B.
Electric Storage BatteryLehman Corporation
Manhattan Deaiborn
New York Central R R.
Penroad Corpoiation
Purchase
price per
price
share from Market
per share
Union-Cleve- Dec
30,1929*
land Corporation i
1,815
500
1,000
1,000
500
2,000
1,000
6,000
$30
125
214
81
104
51
186
16
/High
00 \Low
25 /High
\Low
175 /High
Low
045 Low
00 High
Low
00 High
Low
851 High
Low
50
1 These prices included in Union-Cleveland Corporation's invoice dated Dec 30,1929 versus the Union
Trust Co , amount $1,095,241 32
2 These prices obtained from Commercial and Financial Chronicle, vol 130, pt 1 Those marked with
an asterisk are the weekly range for the week Dec 28,1929, to Jan 3, 1930 Those unmarked are prices as
of that day, Dec 30,1929
While the Union Trust Co apparently received no benefits from
this transaction and acted its part only to save taxes for the UnionCleveland Corporation, it did indirectly receive a benefit in the nature
of securing a better class of asset at December 31 of each year in question, than the asset which it would have had, provided the transaction
never had occurred. Otherwise, its advances to an affiliated company
in the nature of loans was changed to an asset of investments of highgrade securities.
This would come under the classification of "window dressing."
Whether it was intended as such by the Union Trust Co. has not
been established, but there is no question but what it materially
assisted in building up a more presentable balance sheet at the end of
the years 1929 and 1930
WALTER H
SEYMOUR,
Senior Examiner.
This report based upon preliminary report and complete investigation by Committee Examiner Frank H. Ensign.
STOCK EXCHANGE PBACTICES
8267
Mr. SAPERSTEIN. Mr. Chairman, I believe that is all that we have
to offer this morning.
The CHAIRMAN. And I believe that concludes the Cleveland investigation . Are there any questions?
Senator ADAMS. I have no questions.
The CHAIRMAN. IS there anything further this morning, Mr.
Saperstem?
Mr. SAPERSTEIN. Nothing further, Mr. Chairman That concludes the presentation of data with regard to the Cleveland bank
situation.
The CHAIRMAN. Very well. That is all, Mr. Meehan. The subcommittee will stand adjourned subject to the call of the chairman
(Thereupon, at 10:50 a.m., Friday, May 4,1934, the subcommittee
adjourned subject to the call of the chairman.)
@FedFRASER