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[COMMITTEE PEINT]

THE PENN CENTRAL FAILURE AND THE
ROLE OP FINANCIAL INSTITUTIONS
PART V

TRADING IN PENN CENTRAL STOCK: FINANCIAL
INSTITUTIONS AND PRIVILEGED INFORMATION

STAFF REPORT OF THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
92d Congress, First Session

MARCH 29, 1971

Printed for the use of the Committee on Banking and Currency
V.S. GOVERNMENT PRINTING OFFICE
57-901




WASHINGTON : 1971

COMMITTEE ON BAXKIXG AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM A. BARRETT, Pennsylvania
WILLIAM B. WIDNALL, New Jersey
LEONOR K. (MRS. JOHN B.) SULLIVAN,
FLORENCE P. DWYER, New Jersey
ALBERT W. JOHNSON, Pennsylvania
Missouri
HENRY S. REUSS, Wisconsin
J.WILLIAM STANTON,Ohio
THOMAS L. ASHLEY, Ohio
BENJAMIN B. BLACKBURN, Georgia
WILLIAM S. MOORHEAD, Pennsylvania
GARRY BROWN, Michigan
ROBERT Q. STEPHENS, JR., Georgia
LAWRENCE G. WILLIAMS, Pennsylvania
FERNAND J, ST GERMAIN, Rhode Island
CHALMERS P. WYLIE, Ohio
HENRY B. GONZALEZ, Texas
MARGARET M.HECKLER, Massachusetts
JOSEPH G.MINISH, New Jersey
PHILIP M. CRANE, Illinois
RICHARD T. HANNA, California
JOHN H. ROUSSELOT, California
TOM S. GETTYS, South Carolina
STEWART B. McKINNEY, Connecticut
FRANK ANNUNZIO, Illinois
NORMAN F. LENT, New York
THOMAS M. REES, California
BILL ARCHER, Texas
TOM BEVILL, Alabama
BILL FRENZEL, Minnesota
CHARLES H. GRIFFIN, Mississippi
JAMES M. HANLEY, New York
FRANK J. BRASCO, New York
BILL CHAPPELL, JR., Florida
EDWARD I. KOCH, New York
WILLIAM R. COTTER, Connecticut
PARREN J. MITCHELL, Maryland




PAUL NELSON, Clerk and Staff Director
CURTIS A. PRINS, Chief Investigator
BENET D. GELLMAN, Counsel

JOSEPH C. LEWIS, Professional Staff Member
GARY TABAE, Counsel

ORUAN S. FINE, Minority Staff Member
(IT)

LETTER OP TRANSMITTAL
To the Members of the House Committee on Banking and Currency:
On the morning of June 9, 1970, millions of Americans picked up
their newspapers and discovered that the Nation's largest railroad
and seventh largest corporation was in deep financial trouble. Even
then, the magnitude of Penn Central's troubles was not revealed and
there was no hint that the railroad was only days away from bankruptcy.
But a select few knew—and had known for some time—that the
railroad was in dire straits. They were in a position to know that
the giant corporation was very likely suffering from a terminal illness.
The exact make-up of this select group is still unknown, but it did
include the highest officials of the Nixon Administration, the directors, officers and key employees of Penn Central and the officers
and directors of some of the nation's major banking and financial
institutions.
The information at the disposal of the members of this select group
was not ordinary corporate data. It was the kind of data that would
eithor make or lose millions of dollars in the stock market before
the company collapsed on June 21.
This report analyzes the trading in Penn Central stock during
the critical period from April 1,1970 to the bankruptcy on June 21.
The analysis reveals highly unusual trading patterns by a number
of institutional investors. Particularly significant are the heavy sales
engaged in by Chase Manhattan National Bank, Morgan Guaranty
Trust Company, Continental Illinois National Bank and Trust
Company and the Alleghany group, which included the Investors
Mutual, Inc. and Investors Diversified Services. Together, these
four entities sold 1,751,225 shares of Penn Central stock between
April 1, 1970 and June 19, 1970. This was almost one-third of all
the Penn Central stock sold during the period.
The staff has compared the sales against various events affecting
the corporation. Some of these events were generally known and were
available equally to the investing public. But many others involved
secret inside events and negotiations which had vital bearing on the
most critical decisions concerning the futurefinancialwell-being of the
corporation. These events were not known to the general public,
but were available only to a highly select group of insiders.
Many of these critical events occurred from May 19 through May
27, 1970—a period in which the corporation was publicly silent about
itsfinancialcondition and its future plans. The report singles out three
major events—known only to the insiders—which occurred during this
period May 19 through May 27:
1. On or about May 19, Stuart Saunders, chairman of the board of
Penn Central, discussed the possibility of a Government guaranteed
loan with Secretary of the Treasury David Kennedy.




(in)

IV

2. On May 21, David Be van, chief financial officer of the Penn
Central, met with banking representatives. Discussion included PC's
postponement of the $100 million debenture offering and its intent
to seek a Government guaranteed loan.
3. On May 27, the board of directors of the railroad met at 11:00
a.m. Directors were informed of the decision to postpone the debenture offer.
Significantly, Chase Manhattan Bank unloaded 262,300 shares of
Penn Central stock from May 19 to May 27. The Alleghany Corporation and the two mutual funds it controls—Investors Mutual, Inc.
and Investors Diversified Services—apparently had dumped all of its
stock by the end of trading on May 27. The Alleghany group sold a
total of 489,000 shares of Penn Central stock in the May 19-May 27
period.
The sales by Chase Manhattan, the Allegheny Corporation Group,
and five other institutional investors studied by the staff accounted
for 53 percent of the sales recorded on the stock exchanges in the
May 19 to May 27 period. On two significant dates, May 19 and May
27, the sales by this handful of investors dominated the market in
Penn Central stock. On May 19, 77 percent of all the sales recorded
in Penn Central stock—over 142,000 shares—were made by the nine
institutions studied in this report. On May 27, the transactions conducted by these institutions apparently accounted for all of the sales
of Penn Central stock on that date—372,400 shares.
May 27 was a crucial date for Penn Central and the holders of its
stock. At^ 11:00 a.m. on that date, the directors received the highly
discouraging news that the corporation was unable to market $100
million in debentures critically needed for the continued operation of
the railroad. This was a private board of directors meeting and no
announcement was made to the public about the failure of the debenture offering until 26 hours later, at 1:20 p.m. on May 28.
In addition, there were other periods on which vital nonpublic
events occurred which had great impact on the stock of the Penn
Central company. Many of these events—like the May 19 to May 27
period—are surrounded by unusual trading patterns by the institutional investors cited in this report.
It becomes apparent that the trust departments of such banking
institutions as Chase Manhattan conducted their massive sales of Penn
Central stock on the basis of either great clairvoyance or inside
information.
It is also obvious that Chase Manhattan did not need to be clairvoyant to obtain crucial information about the railroad.
For example, Chase was a major creditor of Penn Central and at
the time of the bankruptcy, the bank held $50 million of the outstanding debt of the railroad and its various subsidiaries. In June of 1970,
Penn Central and its subsidiaries had $5 million on deposit at Chase
and the bank was a member of the bank steering committee that
represented the financial institutions which were attempting to participate in the proposed government-guaranteed loan. In addition, the
man most acquainted with the operations of the railroad—its president, Stuart Saunders—was a member of the board of directors of
Chase Manhattan throughout the period of time in question. It appears then, that Chase Manhattan "had friends at Penn Central".




V

Morgan Guaranty Trust Company, like Chase, maintained interlocking directorates with the railroad. And like Chase, Morgan Guaranty held about $35 million of Penn Central's debt and was a member
of the bank steering committee involved in the attempted government
loan guarantee. The railroad also maintained deposits in excess of
$6 million with Morgan.
Continental Illinois National Bank did not have interlocking directorates with the railroad, but it had other close ties. The bank had
more than $23 million of the outstanding debt of the railroad and was
a member of the bank steering committee which participated in
critical meetings with Penn Central directors and high officials of the
Treasury Department during the period June 10 to June 13. In the
midst of these secret meetings—involving banks, Administration
officials, and the hierarchy of Penn Central—Continental Illinois
suddenly decided on June 12 to get rid of 108,950 shares of the railroad's stock. The sales apparently were based on an in-house memorandum to the trust investment division, marked "Flash" and warning
"Recent events indicate that the likelihood of returning to a profitable
basis appears quite distant. . ." The report also cites stock sales by
the trust department of the Provident National Bank of Philadelphia,
a bank which served through the years as more or less an "in house"
financial institution for the railroad. David Bevan, the chief financial
officer of Penn Central until June 8, 1970, was a director of Provident.
John Seabrook, chairman of the board of International Utilities
Corporation, was a director of both Penn Central and Provident
National Bank. In addition, William Gerstnecker, a former Penn
Central official, was vice-chairman of the board of Provident until
his resignation in January, 1971.
Similar questions are raised concerning Allegheny Corporation, Investors Diversified Services, and Investors Mutual, Inc.—the so-called
Allegheny group. In recent years, Allegheny Corporation has maintained director interlocks with Penn Central and until March, 1970,
the chairman of the board and the president of Allegheny Corporation—Fred M. Kirby—was a member of the board of Penn Central.
In addition, Allegheny Corporation has interlocks with Manufacturers
Hanover Trust Company, which participated in the critical meetings
with Penn Central and Administration officials in an attempt to
arrange a government-guaranteed loan for the railroad. The bank
also holds a large portion of the outstanding debt of the railroad.
This report will be transmitted to the appropriate Federal and
State agencies. Special attention should be directed to the operations
of the trust department of the Chase Manhattan Bank, National
Association of New York. In view of the bank's director interlock with
Penn Central, and its other close relationships with the railroad, the
rapid disposal of 436,300 shares of Penn Central stock by the bank's
trust department should not be minimized, particularly where these
sales coincide so closely with events known only to a handful of
insiders.
In conclusion, the Congress, the Securities and Exchange Commission, and other agencies charged with protecting the public interest
should keep in mind that the 1,861,000 shares sold by these nine institutional investors were bought by someone. In many cases, if not most,
the sales undoubtedly were made by Chase Manhattan and the other




VI

institutional investors to unsophisticated and unsuspecting members
of the investing public. Much of this public today holds Penn Central
stock which is worth only a small fraction of its selling price in the
spring of 1970. The purchasers of this stock can rightfully feel that
they were victims of a massive shell-game carried on by financial
entities in a position to know the innermost financial secrets of the
Penn Central organization.
#
It appears that a number of private and public institutions failed the
public miserably. For example:
• The Securities and Exchange Commission—The general
investing public believes that the SEC is watching the
markets closely for unusual trading patterns and is constantly
collecting information which might have a bearing on the
value of a public corporation's stock. There is no evidence
that the SEC either collected or disseminated such information to the public which might have been in the market for
Penn Central stock dm ins the spring of 1970. SEC may well
argue that it lacks the authority to earn' out such a function,
and if this is the case, the agency should seek an immediate
change in its procedures and new legislation from the Congress. At a minimum, it seems essential that the people be
made more aware of what the SEC can and will do to protect
the public in such situations. With the increasing dominance
of the institutional investor, the public has an even greater
need for vigorous SEC scrutiny of the types of transactions
related in this report.
• The Interstate Commerce Commission—The ICC was
certainly in the best position to know the internal problems
of Penn Central and to be aware of its close relationships
with key institutional investors. If the ICC did not have
such information about the largest single corporation under
its regulation, the agency must be charged with gross incompetence. If it did have the information, but failed to act
and failed to inform the public, it was sadly remiss—if not
legally negligent—in carrying out its functions.
• The Nixon Administration—The highest officials of the
Administration gained early knowledge of Penn Central's
extreme financial difficulty and, in fact, Secretary of Transportation John Volpe participated in meetings with Penn
Central officials as carfy as late April. Interspersed with
meetings between the Administration and Penn Central
were meetings between the hierarchy of Penn Central and a
growing number of banks including some of the institutions
cited in this report. On one occasion, more than 100 officials
from several score commercial banks, representatives of
Penn Central, Federal Reserve officials, and Under Secretary
of the Treasury, Paul Volcker, gathered together to discuss
the financial future of the now rapidly-declining railroad.
These meetings created great opportunities for the transmission of the most vital inside information about the Penn
Central complex. Despite these meetings and discussions,
the members of the Administration made no attempt to
warn the investing public about the true nature of Penn
Central's condition. At the same time, it is obvious that



VII

institutional investors holding hundreds of thousands of
shares of Penn Central stock were given a complete rundown
of Penn Central's finances and future prospects in these
meetings.
• The Press—Most of the nonpublic events so critical to
Penn Central's future went on under the noses of the largest
concentration of financial and business writers in the world.
Until just before the bankruptcy, the press had given
little indication that Penn Central was in near-collapse or that
the Federal Government had been engaged in long negotiations with banks and Penn Central officials. Since many of
these meetings involved ke}' officials from Washington, the
top hierarchy of the Nation's banking establishment, and
officials of the Nation's largest railroad, it is regrettable
that the events went unnoticed by the press covering
these areas of government and business. It seems possible that
more vigorous and critical reporting on the financial pages
might have given the public some indication of the grave
nature of Penn Central's financial problems and prevented
the loss of millions of dollars by unsuspecting investors.
The views and conclusions found in this staff report clo not# necessarily express the views of the Committee or any of its individual
members.




WRIGHT PATJVIAN, Chairman.




CONTENTS
Pate

Letter of transmittal
Introduction
Trading in Penn Central Co. Common Stock
Daily Trading In Penn Central Stock
Events Affecting Trading in Penn Central Common Stock
Significant Public Events
Market Reaction to Significant Public Events
Significant Nonpublic Events
Analysis of Trading in Penn Central Common Stock
Analysis of Trading Questionnaires
Monthly Sales by Nine Institutions
Daily Sales by Nine Institutions
Relationship of Stock Sales by Nine Institutions to Public and Nonpublic
Events
Relationship of Stock Sales to Public Events
Relationship of Stock Sales to Nonpublic Events
Additional Analysis of Stock Sales by Nine Institutions
Chase Manhattan Bank
Morgan Guaranty Trust Co
Continental Illinois National Bank & Trust Co
Alleghany Corp., Investors Diversified Services & Investors Mutual,
Inc
Provident National Bank
Security Pacific National Bank
United States Trust Co.Conclusion
Other Institutions Selling Large Amounts of PC Common Stock
LIST OF TABLES
Table 1. Average Monthly Trading on Exchanges in PC Common Stock for
First Quarter of 1970.
Table 2. Trading in Penn Central Common Stock on Exchanges for
Period April 1, 1970, through June 19, 1970
Table 3. Daily Trading on Exchanges in Penn Central Common Stock for
Period April 1 through June 19, 1970
_
Table 4. Significant Public Events Affecting Trading in Penn Central
Common Stock
Table 5. Significant Nonpublic Events Affecting Trading in Penn Central
Common Stock
-Table 6. Sales of Penn Central Common Stock by Nine Institutions during
Period April 1,1970, through June 19, 1970
Table 7. Monthly Sales of PC Common Stock by Nine Institutions
Table 8. Monthly Sales of PC Common Stock by Nine Institutions As a
Percentage of Total Sales on the Exchanges
Table 9. Daily Sales of Penn Central Common Stock by Nine Institutions
During Period April 1, 1970 through June 19, 1970
Table 10. Daily Sales of PC Common Stock by Nine Institutions As a
Percentage of Total Sales on the Exchanges.
Table 11. Stock Sales by Nine Institutions As Related to Significant
Public Events
Table 12. Percentage Relationship of Stock Sales by Nine Institutions to
Significant Public Events
Table 13. Stock Sales by Nine Institutions During Period May 19 through
May 27, 1970
Table 14. Percentage Relationship of Stock Sales bv Nine Institutions
During Period May 19 through May 27, 1970
Table 15. Daily Closing Prices of Penn Central Common Stock on New
York Stock Exchange from April 1-June 22, 1970
__
(EC)
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THE P E N N CENTRAL FAILURE AND THE ROLE OP
FINANCIAL INSTITUTIONS
PART V
TRADING IN PENN CENTRAL STOCK: FINANCIAL INSTITUTIONS AND
PRIVILEGED INFORMATION

INTRODUCTION

The first four parts of the staff report of the House Banking and
Currency Committee, The Penn Central Failure and the Role of
Financial Institutions, concerned themselves primarily with financial
matters directly related to actions by the Penn Central management.
This part of the report relates to another important aspect of the Penn
Central collapse—trading in Penn Central common stock in the months
and days immediately preceding the filing for reorganization on June
21, 1970. In analyzing the trading in Penn Central common stock,
the Committee staff concentrated on what role domestic financial
institutions played with respect to the subject trading.
TRADING IN PENN CENTRAL COMPANY COMMON STOCK

Trading in common stock of the Penn Central Company (PC) is
done primarily on the New York Stock Exchange. PC common stock
is also traded on other major exchanges, except the American Stock
Exchange, as well as in the third market. In addition, some private
trading in PC common stock occurs. Generally, trading on the Exchanges accounts for about 95% of the total trading in PC common
stock.
There were approximately 24 million shares of Penn Central Company common stock outstanding in the months immediately preceding
the filing for reorganization. Total monthly trading in the stock for
the first three months of 1970 on the Exchanges averaged about 554,000
shares per month, as shown in Table 1 below.




(l>

TABLE

monthly trading on Exchangesl in PC common stock for 1st
quarter of 1970

1.—.

Total shares
traded on
exchanges

Month
January
February
March

Breakdown of trading
on exchanges

_

Total-Average monthly trading

_._
_

New York
Exchange

Other
exchanges

748, 239
443, 931
468, 926

597,100
374, 700
436, 300

151,139
69, 231
32, 626

1, 661, 096

1, 408, 100

252, 996

553, 699 .

i In addition, there were 144,096 shares traded in the third market during this 3-month period. However,
there are no monthly breakdowns of this figure. Also, it is possible that there was some private trading in
PC common stock during this 3-month period.

As shown in Table 2 below, beginning in April 1970 there was a
significant increase in the number of shares of Penn Central common
stock traded on the Exchanges—from 468,926 shares in March to
683,470 shares in April, an increase of about 46 percent. The increase
was even more dramatic for May—from 683,470 shares in April to
2,758,426 shares in May, an increase of almost 304 percent. The
accelerated rate of increase in sales of Penn Central common stock
continued through the first 19 days of June—June 19 was the last
trading date preceding the filing for reorganization on June 21, 1970.
TABLE 2.—Trading in Penn Central common stock on Exchanges1 for period
Apr. 1, 1970, through June 19,1970
Breakdown of trading
on exchanges
Time period
May
June 1 through June 19
Total
_

traded on
exchanges

New York
Exchange

Other
exchanges

683, 470
2, 758, 426
2,252,730

598, 400
2, 349, 100
2, 007, 200

85, 070
409, 326
245, 530

5,694,626

4, 954, 700

739, 926

i During the months of April, May, and June 1970, there were 308,602 shares of PC common, stock traded in
the third market. There are no monthly breakdowns of thisfigure.Also, it is possible that there was some
private trading in PC common stock during this period.

Daily Trading in Penn Central Stock
Based on data provided by the Securities and Exchange Commission
(SEC), it was possible to develop figures showing the daily trading
on the Exchanges in Penn Central common stock for the period April 1
through June 19, as presented in Table 3 below.
As can be seen from Table 3, trading activity on the Exchanges in
Penn Central common stock fluctuated greatly from day to day. The
apparent causes of these fluctuations is explained in subsequent sections of this report.




TABLE 3.—Daily trading on Exchanges in Penn Central common stock for period
Apr. 1-June 19,1970
Date

Shares traded

April:
1—
2._
3__
4._
56_.
7._
8_.
9._
1011_.
12..
13.14. _
15_.
16. _
17..
18..
19..
20..
21..
22..
23..
24..
2526..
27..
28..
29..
30..
Total traded, April. _
May:

32, 093
29, 646
22, 5C3

0)
<2> 937
„

20,
12,
18,
12,
12,

0)
(2)

12,
24,
13,
19,
18,

070
938
758
443

Date

Shares traded

May—Continued
13
14
15
1617
18
19
20
21
22
23

93, 649
138, 573
89, 720
0)
«
71, 541
183, 450
91, 891
154, 805
419, 990
0)

__

_.

24..

584
433
835
349
033

0)
(2
> „

(2)

25..
26
27
28._
29__
30
31

157,
115,
360,
250,
212,
0)
(2)

___
_

517
209
563
507
545

Total traded, May
2, 758, 426
578
890 June:
860
117,008
817
2
_._
__
151,921
978
3._
••"
'"
119,478'
4..
126, 771
5
113,410
57, 278
6—P)
60, 917
7
(2)
90, 982
8
48, 595
50, 470
683, 548
9_
_
253, 804
It.
__
258, 515
11
117, 413
28, 771
12..
399, 457
0)
13
0)
(2)
14
- .
P)
28, 871
15
151, 746
16
114, 957
36, 555
17
_.
113, 086
56, 732
18
__
88, 783
37, 719
19
77, 786
21, 887
18,
17,
49,
54,
32,

8

1.
2.
3.
4.
5.
6.
7.
8.
9.
0)
10.
(2)
11.
25, 578
12.
182, 353
Total shares traded during period—

Total traded, June

2, 252, 730

_ 5, 694, 626

* Saturday.
* Sunday.
EVENTS AFFECTING TRADING IN PENN CENTRAL COMMON STOCK

Prior to April 1, 1970, it was general knowledge within the financial
community that the Penn Central Transportation Company was
having financial difficulties, particularly after discontinuance of the
normal quarterly dividend for the last quarter of 1969. However, be-




4
tween April 1, 1970, and June 19, 1970, precise and vital information
regarding the seriousness of the Companj-'s deteriorating financial
condition was not equalty available to all segments of the investment
population. Those inside the Company and various members of the
financial community were obviously privileged to far more information than were the vast majorit}- of the stockholders in the Company.
Between April 1,1970, and June 19,1970, numerous events occurred
that could have had direct impact on trading in Penn Central common stock. Some of these events were of a public nature—public
announcements, press releases, etc. Other events were of a non-public
nature, with only a few institutions and individuals aware of their
occurrence.
These events, both public and nonpublic, had varying degrees of
eifect on trading in Penn Central common stock. Although the significance of any one event can never really be measured, it is possible,
as described below, to identify those events that were apparently the
most significant.
Significant Public Events
The events contained in Table 4 below represent the public events
that the SEC believes to be of significance with respect to their
effect on trading in Penn Central common stock.
TABLE 4.—Significant public events affecting trading in Penn Central common stock
Date
April 22

April 28

May 15

May 28

. June 2
June 10
June 19




Significant Public Events
The Penn Central Company (holding company)
reports a consolidated loss of over $17 million for
first quarter of 1970. The reported loss for the
Railroad (Penn Central Transportation Co.) for the
first quarter of 1970 is $62,709,000.
The Pennsylvania Company (the Railroad's whollyowned subsidiary) announces a proposed offering in
mid-May of $100 million of debentures due in 1995.
The Pennsylvania Co. will use the proceeds from
the debentures to purchase certain securities from
the Railroad.
Representatives of the underwriting group state that
the Pennsylvania Company's $100 million debenture
offering, scheduled for June 2, 1970, is expected to
have an interest rate of 10}$ percent.
Penn Central announces postponement of the Pennsylvania Company's $100 million debenture offering
and indicates that alternative methods of financing
are being considered. (Announcement came across
the Dow Jones business wire in New York- at 1:20
p.m.)
First National City Bank of New York heads a group
of 73 banks applying for a Government guarantee
of a $225 million loan for Penn Central.
Government support indicated for a guarantee of a
$200 million loan for Penn Central.
Government withdraws support for loan guarantee to
Penn Central. (Announcement occurred at approximately 5:00 p.m.)

5
Market Reaction to Significant Public Events
In order to determine the reaction time of the stock market to
significant public events-, the Committee staff consulted with Various
market experts, including members of the financial community and
Government officials.
The consensus of the experts is that the market usually reacts
immediately to any significant public event. For example, market
reaction to a morning announcement on a trading day generally
would be reflected in the afternoon trading in the stock of the affected
company. Market reaction to an announcement taking place after
the market closed would generally be reflected in the next day's
trading.
The reaction time of the market may vary slightly if the news is
more complex and thus requires time to analyze and digest. Even in
a case like this, however, market reaction would normally, be complete
within two or three days.
Significant Nonpublic Events
Between April 1, 1970, and June 19, 1970, many significant nonpublic events relating to the Penn Central occurred. Most of these
events consisted of meetings between Penn Central officials, representatives from various banks and financial institutions, U.S. Government officials and Congressional leaders. In general, these meetings
concerned Penn Central's deteriorating financial condition, its
attempts to obtain additional financing, and the attempt to get a
Government loan guarantee.
By their very nature, these meetings required detailed discussions
and the presentation of information regarding the financial condition
of the Penn Central. However, the exact discussions that occurred at
these meetings are unknown. In fact, many of these meetings were held
in complete secrecy. For example, it was not until June 10, 1970, that
the first newspaper articles appeared regarding the fact that meetings
had been held between Penn Central and U.S. Government officials,
even though such meetings had been taking place since early May.
Because of the secrecy surrounding many oi the meetings, it was not
possible to establish the exact date and nature of ever}- meeting that
took place. However, through discussions with various Penn Central
officials and representatives from the financial community, it was
possible to identify some of the more significant meetings that did
occur.
Presented below in Table 5 is a detailed listing of those significant
nonpublic events that the Committee staff was able to identify. In
several instances, because of the lack of specific dates, approximations
had to be used.
TABLE 5.—Significant Nonpublic Events Affecting Trading in Penn Central
Common Stock
Date:
Late April




Significant Non-Public Events
Meeting between Penn Central (PC) and Department
of Transportation (DOT) to discuss PC's financial
problems. (A previous meeting between PC and
DOT officials was held in early March.) Subsequent
to the meeting, DOT Secretary Volpe meets with
Treasury Secretary Kennedy to discuss PC.

6
TABLE 5.—Significant Nonpublic Events Affecting Trading in Penn Central
Common Stock—Continued
Date:
May 9 (Approximate)..

Significant Non-Public Events

Stuart Saunders, Chairman of the Board of PC, meets
with Treasury Secretary Kennedy regarding PC's
financial problems.
May 19 (Approximate). Saunders meets with Secretary Kennedy to discuss
possibility of Government loan guarantee.
May 21
—.....
Chief Financial Officer of Penn Central, David Bevan,
meets with representatives from Chemical Bank
New York Trust Company and First National City
Bank (FNCB). Meeting included discussion of (1)
PC's financial condition, (2) postponement of the
Pennsylvania Company's proposed $100 million
debenture offering, and (3) PC's intent to seek a
$225 million Government guaranteed loan.
May 26
...........
David Bevan and other PC officials meet with representatives from Chemical Bank, FNCB and counsel
for the 53 banks participating in the $300 million
Revolving Credit agreement with PC. Discussion
concerns preliminary plans for the Government
guaranteed loan and the need for PC officials to
meet with representatives from the 53 Revolving
Credit Banks.
May 27 (11 a.m.)
Meeting of Board of Directors of Penn Central Transportation Company. Chairman informs Directors that
(1) PC's proposed $100 million debenture offering
will be withdrawn, (2) first quarter deficit for Railroad exceeded projection by $30 million, (3) Railroad
would not market any more commercial paper, and
(4) Railroad needs $263 of additional cash to meet
its requirements to the end of the year.
May 28
David Bevan and other PC officials meet with officers
of the 53 Revolving Credit Banks. Discussion concerns financial condition of PC and the status of its
negotiations with Government officials for guaranteed loan.
May 29-June 4 . .
_ Meetings at FNCB between informal 5 member Bank
Steering Committee representing the banks that plan
to participate in the proposed Government guaranteed loan to PC, counsel for the banks and PC
officials. Committee consists of FNCB, Chemical
Bank, First National Bank of Chicago, Mellon
National Bank, and Manufacturers Hanover Trust.
June 6 and 7
Representatives from various banks meet with Federal
Reserve and U.S. Government officials.
June 10
Representatives from 64 banks that are creditors of
the PC meet with Federal Reserve officials. Banks
sign moratorium agreement in which they agree not
to call a loan to the PC within the next 10 days.
June 10
Meetings of the 10 member Bank Steering Committee
representing the banks participating in the proposed
Government guaranteed loan to the PC. Committee
includes FNCB, Chemical Bank, First National
Bank of Chicago, Mellon National Bank, Manufacturers Hanover, Continental Illinois National
Bank & Trust Co., Bankers Trust Co., Irving Trust
Co., Morgan Guaranty and Chase Manhattan.
June 11
Summary of terms for the proposed Government guaranteed loan signed by 10 member Bank Steering
Committee.
June 12. • .
First draft of proposed loan agreement completed.
June 15-18
Meetings between PC officials, 10 member Bank Steering Committee, U.S. Government officials and Federal Reserve representatives.




7
ANALYSIS OF TRADING IN PENN CENTRAL COMMON STOCK

As part of its Penn Central investigation, the SEC sent questionnaires to 250 brokers requesting information on trading in PC securities during the period April 1, 1970, to June 30, 1970. According to
SEC officials, the 250 brokers were selected primarily because they
represented the major dealers in PC securities/ and that these brokers
probably accounted for at least 75 percent of all trading in PC common
stock during the subject time period.
The Committee staff analyzed the data contained in the brokers7
responses relating to the sales of PC common stock. The purpose of the
staff's analysis was to ascertain which institutions or individuals were
responsible for the increased sales of PC common stock during the
period April 1, 1970, to June 19, 1970—the last trading date before
the Railroad filed for reorganization.
In order to confirm the validity of the figures developed by the
Committee staff in its analysis, similar data was requested from the
SEC. The figures supplied by the SEC as a result of its analysis of
the broker responses supported those developed by the Committee
staff. Because the sales data was obtained from brokers' responses to
the SEC trading questionnaires, the data is subject to the limitations
inherent in the source of the information, and there is no assurance
that the data will a^ree precisely with the records of the institutions
themselves. In addition, the possibility exists that an institution raay
have traded through a broker who was not among the 250 brokers
sent trading questionnaires by the SEC.
Analysis of Trading Questionnaires
The staff's analysis of the 250 trading'questionnaires resulted in
the identification of six domestic banking institutions that sold considerable shares of PC common stock—more than 30,000 shares
each—during the period April 1, 1970, to June 19, 1970. In addition,
the Committee staff identified three other domestic institutions, all
closely interlocked to each other, that sold almost 600,000 shares of
PC common stock during the subject time period.2
The institutions identified as heavy sellers of PC common stock and
the number of shares they sold during the period April 1, 1970,
through Juno, 19, 1970, are set forth in Table 6 below.
1
The brokers sent questionnaires include those trading on the New York Exchange, the other majo
Exchanges and in the third market.
3 As discussed in the concluding section of this part of the report, the staff identified additional institutions
that sold significant amounts of PC common stock during the subject time period.

57901—-71




n

8
l

TAULI: 6.—fiales of Penn.Central common stock by nine institutions during period
April 1,1970, through June 19,1970
Number of
shares sold
between
Apr. 1
and
June 19,
1970

Name of institution
Chase Manhattan Bank—
^
Morgan Guaranty Trust Co
_
Continental Illinois National Bank <fc Trust Co. _ _
Investors Mutual, Inc
Investors Diversified Services
_.
,
Alleghanv Corp
Provident National Bank
,
Securitv Pacific National Bank
United States Trust Co_
_
w
Total shares sold

436, 300
391,575
332, 550
251. 600
243,200
96, 000
43, 933
36, 217
30,300

___

1,861,675

» The sliares sol&mclude sales on the New York Exchange, other major Exchanges, and apparently some
sales by the nine institutions in the tliird market. However, these nine institutions may have sold stock
through brokers other than those included in the 250 brokers sent questionnaires by the SEC. In {addition,
the nine institutions jnay hare participated }n private sales of PC common stock.

Monthly Sales by Nine Institutions
On a monthly basis, the sales by the nine institutions are shown in
Table 7 below.
TABLE 7»—Monthly salesl of PC common stock by nine institutions
Breakdown of sales by month

Name of institution
Chase Manhattan Bank
Morgan Guaranty Tru&t Co
Continental Illinois National B. & T.
Co
Investors Mutual, Inc__
Investors Diversified Services
Alleghany Corp
__
Provident National Bank
Securitv Pacific National Bank
United'States Trust Co__
Total shares sold

PC shares
sold
between
Apr. 1 and
June 19,
1970

Sales
during
April

436, 300
391, 575

17, 400
22, 200

309, 200
57, 475

109, 700
311, 900

332, 550
251, 600
243, 200
96,000
43, 933
36, 217
30, 300

6,800
0
0
0
1,700
12, 900
13, 500

34, 300
251, 600
243, 200
96, 000
18, 600
15, 617
2,400

291, 450
0
0
0
23, 633
7,700
14, 400

74, 500 1, 028, 392

758, 783

1, 861, 675

Sales
during
Sales
period
during June 1 to
May June 19

• The shaies sold include sales on the New York Exchange, other major Exchanges, and appaientlv some
sales by the nine institutions in the third market. Howevei, these nine institutions may have sold stock
through brokers other than those included in the 250 brokers sent questionnaires by the SEC. In addition,
the nine institutions nia> have participated m private sales of PC common stock.




9
The monthly sales by the nine institutions were then compared to
the total trading on the Exchanges for the same period. When compared to the total trading on thc^ Exchanges, the sales by the nine
institutions accounted for a very significant proportion of the sales of
PC common stock for the period April 1, 1970, through June 19, 1970.
This is especially true regarding the sales for the month of May and
the first 19 days of June, as shown in Table 8 below.
TABLE 8.—Monthly sales of PC common stock by nine institutions as a percentage
of total sales on the Exchanges

Time period
April
_
May
June 1 to June 19
Total

Total sales
on exchanges l

Sales by 9
institutions2

Percentage
of total
exchange
sales made
by 9
institutions

683,470
2, 758, 426
2, 252, 730

74,500
1, 028,392
758, 783

11
37
34

5,694,626

1,861,675

33

t Does not include sales in third market or private sales.
2 Apparently includes some sales in third market. In addition, these institutions may have sold stock
through brokers other than the 250 sent questionnaires by the SEC, and the institutions may have participated in private sales.

As shown in Table 8 above, the percentage of stock sales for the
nine institutions increased dramatically from April to May—from 11
percent in April to 37 percent in May, For the first 19 days of June,
the nine institutions accounted for 34% of the total stock sales on the
Exchanges.
For the period April 1, 1970, through June 19, 1970, the stock sales
by the nine institutions accounted for 33 percent of the total sales on
the Exchanges. In short, one out of every three shares of PC common
stock sold on the Exchanges during the subject period was sold by
these nine institutions.
Daily Sales by Nine Institutions
On a daily basis, the sales by the nine institutions were as shown in
Table 9 below. As the data demonstrates, the sales by the nine institutions, both in total and on an individual basis, fluctuated greatly
from day to day. This was especially true for the daily sales in May
and June.




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700
400

12
The daily sales by the nine institutions were then compared to the
total daily trading on the Exchanges for the same period, as shown in
Table 10 below.
TABLE 10.—Daily sales of PC common stock by nine institutions as a percentage of total
sales on the Exchanges

Date

Total daily
sales on
exchanges *

Total sales
by 9
institutions 2

Percentage
of total
exchange
sales made
by 9
institutions

32, 093
29, 646
22, 503

0
3,100
800

0
10
4

20, 937
12, 070
18, 938
12,758
12, 443

6,800
6,100
0
2,800
0

32
51
0
22
0

12, 584
24, 433
13, 835
19, 349
18, 033

300
100
500
700
8,300

2
0
4
4
46

18, 578
17, 890
49, 860
54, 817
32, 978

400
1,700
0
13, 700
2,800

2
10
0
25
8

April:
3
4 (Saturday).
5 (Sunday).
6
7
8
9
10
11 (Saturday).
12 (Sunday).
13
14„_
__„
15
16—
-17.
18 (Saturday).
19 (Sunday).
20
21
22
23
24
25 (SaturdajO26 (Sunday).
27
28
29
30
May:

9 (Saturday).
10 (Sundav).
11
1.
12
13
14.__
15
16 (Saturday).
17 (Sunday)".
See footnotes at end of tabic, p. 13.




22
10
0
15

28, 771
2~(Saturday).
3 (Sunday).
4
5
6
7
8

5, 900
400
7,400
6,200

22

28, 871
36, 555
56, 732
37, 719
21, 887

0
100
23, 700
10, 600
8,600

0
0
42
28
39

25, 578
182, 353
93, 649
138, 573
89, 720

0
15, 800
1, 500
69, 300
7,217

0
9
2
50
8

57, 278
60, 917
90, 982
50, 548

J.4,

i\t\J

13
TABLE 10.—Daily .sales of PC common stock by nine institutions, as a percentage of
total sales on the Exchanges—Continued

Total daily
sales on
exchanges 1

Date
May—Continued
18
19
_
20
21
_
22
„
23 (Saturday).
24 (Sunday).
25_._
26
27
28
29_
_
30 (Saturday).
31 (Sunday).
June:
1
_
2
Zll
I
4
5
6 (Saturday).
7 (Sundav).
8_
9
_—
10
_
11
."'

-

71, 541
183,450
91, 891
154, 805
419, 990

200
142, 000

_
—

l

157, 517
115, 209
360, 563
250, 507
212, 545

0
77
20
19
32

18, 075
29, 700
135, 000

2

55, 800
37,100
372, 400
48,100
47, 000

2

35
32
103
19
22

117, 008
151,921
119, 478
126,771
113, 410

45, 940
36, 416
24, 400
49, 600
31, 952

39
24
20
39
28

48, 595
253,804
258,515
117,413

_-,

12lI.III._IIL-

13 (Saturday).
14 (Sunday).
15
\
10l"""
17
is::::
19_._
Total.

Total sales
by 9
institutions 2

Percentage
of total
exchange
sales made
by 9
institutions

4,900
98, 100
47, 825
13, 700
201,150

10
39
18
12
50

151,746
1 H 957
113,086
8* 783
77, 786
o, 694, 626

57, 100
39, 500
45, 900
38, 800
23, 500

38
34
36
44
30

1, 861, 675

33

399, 457
—
.—
-

» Does not include sales in third market;or private sales.
8
Apparently includes some sales in tiiird market. In addition, these institutions may have sold stock
through brokers other than the 250 sent questionnaires by the SEC, and the institutions may have participated in private sales.

As the data in Tabic 10 above shows, there were few days during
the period April 1 through May 18 on which the stock sales by the
nine institutions accounted for a significant percentage of the total
sales on the Exchanges. On many days during this period, the nine
institutions had no stock sales at all.
Starting on May 19, however, the situation changed dramatical^'.
On most days during the period May 19 through June 19, the stock
sales by the nine institutions accounted for over 30% of the total
sales on the Exchanges.




14
RELATIONSHIP OF STOCK SALES BY NINE INSTITUTIONS TO PUBLIC
AND NONPUBLIC EVENTS

As shown in Tables 9 and 10 above, the daily sales of PC common
stock by the nine institutions fluctuated markedly from day to day.
These fluctuations raised questions as to the basis for the sales by
the nine institutions.
Were all or some of the nine institutions selling their PC common
stock on a systematic basis because of the Railroad's deteriorating
financial condition? The vast fluctuations in the daily sales by the
institutions appears to eliminate this thesis.
Were the nine institutions reacting solely to specific public announcements regarding the Railroad? Was there any connection between the
nonpublic events and the stock sales fry the nine institutions?
In an attempt to answer the above questions, the dates of the stock
sales by the nine institutions were compared to the significant public
and nonpublic events that occurred during the period April 1, 1970,
through June 19, 1970. The results of these comparisons are discussed
below.
Relationship of Stock Sales to Public Events
As noted previously, the stock market generally reacts quickly to
any significant public event. In addition, market reaction to any
significant public event is usually complete within two or three days.
Accordingly, in comparing the stock sales of the nine institutions to the
significant public events, generally three days was allotted for reaction
time by the market—the day the event occurred, plus the two succeeding days.
The comparison of the sto^k sales by the nine institutions to the
significant public events is presented in 'table 11 below. The announcement on May 15,. 1970, relating to the interest rate on the proposed
debenture offering, has been excluded because the interest rate would
have had little effect on sales of PC common stock by large institutional investors.
The May 28, 1970, announcement came across the Dow Jones wire
at about 1:20 p.m. Because this was an extremely important announcement, the major market reaction would haVe been substantial^
completed by May 29, 1970—the last trading day of the week. Accordingly, the sales on Monday, June 1, 1970, were not included in the
comparison.
The announcement on June 19, 1970, has been excluded because it
occurred about 5:00 p.m., and therefore did not affect stock sales for
that date—June 19,1970, was the last trading day before the Railroad
filed for reorganization.




TABLE 11.—Stock sales by nine institutions as related to significant public events
Breakdown by Institution

Significant public events

Dates of
Total
affected
sales
stock
by 9
sales
institutions t

Chase
Manhattan
Bank

Continental
Morgan
Illinois
Guaranty
National
Trust Co.
B&TCo.

Investors
Mutual,
Inc.

Investors
Diversified
Services

Alleghany
Corp.

Provident
National
Bank

Security
Pacific
National
Bank

United
States
Trust Co.

April 22— Rail road and Holding Company announce losses.. Apr. 22
for first quarter of 1970.
Apr. 23
Apr. 24

0
13,700
2,800

0
6,800
300

0
0
0

0
300
0

0
0
0

0
0
0

0
0
0

0
1,600
0

0
0
0

0
5,000
2,500

April 28—Announcement of the Pennsylvania Company's..Apr. 28
proposed $100 million debenture offering.
Apr. 29
Apr. 30

5,900
400
7,400

0
0
2,700

1,500
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

4,400
400
4,700

0
0
0

May 28—PC announces postponement of Pennsylvania May 28
Company's proposed debenture offering.
May 29

48,100
47,000

35,300
0

0
44,900

10,000
0

0
0

0
0

0
0

1,200
2,100

1,600
0

0
0

June 2—73 banks apply for Government guarantee of $225 June 2
million loan for PC.
June 3
June 4

36,416
24,400
49,600

0
0
3,000

25,900
24,200
40,600

0
0
0

0
0
0

0
0
0

0
0
0

2,716
200
800

0
0
5,200

7,800
0
0

June 10—Government support indicated for guarantee of June 10
$200 million loan for PC.
June 11
June 12

47,825
13,700
201,150

0
0
90,700

44,100
8,400
0

500
0
108,950

0
0
0

0
0
0

0
0
0

1,725
500
1,500

0
2,300
0

1,500
2,500
0

i Apparenlly includes some sales in third market In addition, these institutions may have sold
stock through brokers other than the 250 sent questionnaires by the SEC, and the institutions may




have participated in private sales.

Oi

16
As can be seen from Table 11 above, the stock sales for most of the
institutions generally had very little relationship to the significant
public events. Several of the institutions had no stock sales on any of
the dates coinciding with the significant public events. For others, the
sales on the subject dates were relativel}7 insignificant. The one possible
exception to the above observations was the June 12,1970, stock sales
by Chase Manhattan and Continental Illinois.
The general lack of any relationship between sales of PC' common
stock by the nine institutions and the significant public events becomes
even more apparent from examining Table 12 below. Table 12 compares the stock sales by the nine institutions as a percentage of the
total sales on the Exchanges for those dates coinciding with the
significant public events.




TABLE 12.—Percentage relationship of stock sales by nine institutions to significant public events

Significant public event

April 22—Railroad & Holding Co. announce losses for 1st quarter of 1970
April 28—Announcement of the Pennsylvania Co.'s proposed $100 million debenture offering
May 28—PC announces postponement of the Pennsylvania Company's proposed debenture offering
June 2—73 banks apply for Government guarantee of $225 million loan for PC

Dates of
affected
stock
sales

Total sates l on
the exchanges

{Apr. 22
{
23
I
24
(Apr, 28
<
29
[
30
| y |g
[June 2
\
3
I
4
June 10
11
12

49,860
54,817
32,978
60,917
90,982
50,548
250,507
212,545
151,921
119,478
126,771
258,515
117,413
399,457

7,400
48,100
47,000
36,416
24,400
49,600
47,825
13,700
201,150

0
25
8
10
0
15
19
22
24
20
39
19
12
50

1,976,709

498,391

25

{
Totals
» Does not include sales in third market or private sales.
2 Apparently includes some sales in third market In addition, these institutions may have sold




Total sales 2 by
9 institutions

0
13,700
2,800
5,900

400

Percentage of total
exchange sales made
by 9 institutions

stock through brokers other than the 250 sent questionnaires by the SEC, and the institutions may
have participated in private sales.

18
Table 12 above demonstrates quite clearly the lack of any measurable relationship between the stock sales by the nine institutions and
the significant public events. For the period April 1, 1970, through
June 19, 1970, stock sales by the nine institutions averaged about 33
percent of the total sales on the Exchanges (see Table 8). However,
for the dates coinciding with the significant public events, the stock
sales by the nine institutions exceeded 25 percent of the total sales on
the Exchanges on only two days—June 4 and June 12. In both instances, the subject day was the second full day following the occurrence
of the public event.
For all the dates coinciding with the significant public events, the
stock sales by the nine institutions averaged about 25 percent of the
total Exchange sales. Elimination of the stock sales on June 4 and
June 12 reduces the average to about 17 percent—little more than half
of the overall 33 percent average for the period April 1, 1970, through
June 19, 1970 (see Table 8).
Relationship of Stock Sales to Nonpublic Events
Although the comparison of stock sales by the nine institutions to
the listing of the public events failed to demonstrate any significant
relationship as shown in Tables 11 and 12 above, a completely different
picture emerged when the stock sales were compared to certain of the
significant nonpublic events.
As shown in Table 5, there were a number of significant nonpublic
events during the period April 1, 1970, through June 19, 1970. For
many of these events, exact information as to what occurred is not
available. In addition, there may have been other significant nonpublic events not included in Table 5. Accordingly, there is no precise
method for comparing the stock sales by the nine institutions to the
significant nonpublic events.
The Committee staff discussed the nonpublic events (Table 5) with
various market experts to determine which events would have had
the greatest impact on sales of Penn Central common stock. The
experts expressed the opinion that those nonpublic events occurring
during the period May 19, 1970, through May 27, 1970, were the
most important, particularly those relating to the withdrawal of the
debenture offer and the need for the Railroad to seek a Government
guarantee in order to obtain additional financing from the banks.
During this period there were no major public events that could
have affected sales of PC common stock—renn Central's announcement of the withdrawal of the debenture offer did not take place until
May 28, 1970. As regards nonpublic events, several important events
occurred during this period, as noted below:
1. On or about May 19, Stuart Saunders, Chairman of the Board of
Penn Central, discussed the possibility of a Government guaranteed
loan with Secretary of the Treasury David Kennedy.
2. On May 21, David Bevan, chief financial officer of the Penn
Central, met with banking representatives. Discussion included PC's
postponement of the debenture offering and its intent to seek a
Government guaranteed loan.
3. On May 27, the Board of Directors of the Railroad met at 11:00
a.m. Directors were informed of the decision to postpone debenture
offer.
Table 13 below shows the stock sales by the nine institutions during
the period May 19, 1970, through May 27, 1970.



TABLE 13.—Stock sales by nine institutions during period May 19 through May B7t 1970
Breakdown by institution
Total
sales by 9
institutionsl

Dates of affected stock sales

May 19
May 20
May 21
May 22
May 23 (Saturday)
May 24 (Sunday)
May 25
May 26
May 27
Total

_

Continental
Morgan
Illinois
National
Guaranty
Trust Co. B. & T. Co.

Chase
Manhattan
Bank

142,000
18,075
29,700
135,000
—

0
9,000
2,000
134,300
_

55,800
37,100
372,400

53,200
32,100
31,700

790,075

262,300

-

11,575

Investors
Diversified
Services

0
0
0
0

67,500
0
13,400
0

60,100
0
13,400
0

500
0
9,500

7,600
3,775
200
0

Investors
Mutual,
Inc.

0
2,000
118,300

0
2,000
116,300

10,000

201,200

191,800

Alleghany
Corp.

Provident
National
Bank

Security
Pacific
National
Bank

United
States
Trust Co.

0
0
0
0
-

2,600
3,300
0
300

4,200
2,000
700
400

0
0
0
0

0
0
96,000

200
700
0

0
300
600

96,000

7,100

8,200

-

1,900
0
0
1,900

i Apparently includes some sales in third market. In addition, these institutions may have sold stock through brokers other than the 250 sent questionnaires by the SEC, and the institutions may have
participated in private safes.




20
As the data in Table 13 demonstrates, several of the nine institutions
had large sales of stock during the subject time period, particularly
Chase Manhattan Bank, Alleghany Corporation, Investors Mutual,
Inc., and Investors Diversified Services. In order to put these sales
in a better perspective, we compared them with the total sales on the
Exchanges for the subject time period, as shown in Table 14 below.
TABLE 14.—Percentage relationship of stock sales by nine institutions during
period May 19 through May 27, 1970

Dates of affected stock sales
May:
19
20—
_-_
21
_.
22
23 (Saturday).
24 (Sunday).
25
26
27
Total

_
_„.
_
__
_

_
_

Total sales
on the
exchanges *

Total sales
by 9
institutions 8

Percentage of
total exchange
sales made by
9 institutions

183, 450
91, 891
154, 805
419, 990

142, 000
18, 075
29, 700
135, 000

77
20
19
32

55, 800
37, 100
372, 400

35
32
2103

790, 075

53

157, 517
115, 209
i 360, 563
1,483, 425

2

1
2

Does not include sales in third market or private sales.
Apparently includes some sales in third market. In addition, these institutions may have sold stock
through brokers other than the 250 sent questionnaires by the SEC, and the institutions may have participated in private sales.

The data in Table 14 raises serious questions about the basis for the
stock sales by several of the nine institutions during the period May 19
through May 27, 1970, particularly the stock sales by Chase Manhattan, Alleghany Corporation, Investors Diversified Services, and
Investors Mutual, Inc. The sales of PC common stock by the nine
institutions during the period May 19, 1970, through May 27, 1970,
accounted for more than 53 percent of the total stock sales on the Exchanges. More than one out of every two shares sold by all investors
during the subject time period was sold by these nine institutions.
The vast proportion of the stock sales oy the nine institutions between May 19 and May 27 were made by Chase Manhattan, Alleghany
Corporation, Investors Diversified Services, and Investors Mutual,
Inc. For example, on May 25, Chase Manhattan accounted for over
95% of the total stock sales by the nine institutions, and almost 34%
of the total stock sales on the Exchanges. In short, more than one out
of every three shares sold on the Exchanges on May 25, 1970, was
sold by Chase Manhattan Bank. (This aspect of the stock sales by the
nine institutions is discussed in more detail in the following section of
this part of the report.)
In addition to the May 19-27 period, there were several periods in
June—prior to the filing for reorganization on June 21, 1970—when
sales of PC common stock could have been affected by the nonpublic
events. However, because of the numerous nonpublic events occurring
in June, particularly the many meetings between PC officials, members
of the financial community, and Government representatives, it was



21
not feasible to highlight any specific time periods. However, a comparison of the data developed in Tables 7,9, and 10 regarding the stock
sales in June with the significant nonpublic events occurring in June
(see Table 5), raises serious questions concerning the basis for some of
the stock sales by certain other of the nine institutions.
The information developed above raises the strong possibility that
some of the nine institutions were reacting to nonpublic events as the
basis for their sales of PC common stock. It is impossible to dismiss
the timing of the stock sales by certain of the nine mstitutions during
the subject time periods in May and June 1970 as mere coincidence.
ADDITIONAL ANALYSIS OF STOCK SALES BY NINE
INSTITUTIONS

As noted above, sales of PC common stock by some of the nine
institutions during May and June 1970 appear to have been based on
certain nonpublic events that occurred during this time period.
Further analysis of the stock sales by the institutions and evaluation
of the institutions' relationships to Penn Central strengthens the
above conclusion.
When the Committee staff first began its investigation of the Penn
Central collapse, various financial institutions were subpoenaed for
additional information regarding their transactions with the Penn
Central. The selection of the financial institutions was based on an
evaluation of preliminary data by the Committee staff showing certain
relationships between the financial institutions and Penn Central.
The analysis of the stock sales as discussed in this report took place
several months after the selection occurred of the financial institutions that were subpoenaed. As a result, only five of the nine institutions included in this analysis were among those from whom additional
information has been received—Chase Manhattan, Morgan Guaranty,
Continental Illinois, Provident National, and United States Trust.
Additional information was available from other sources regarding
three of the remaining four financial institutions—Alleghany Corporation, Investors Diversified Services, and Investors Mutual, Inc. Additional information regarding Penn Central stock transactions was not
readily available for only one of the nine financial institutions—Security
Pacific National Bank.
Chase Manhattan Bank
In addition to its transactions involving Penn Central common stock,
Chase Manhattan had other significant relationships with the Company.
Stuart Saunders, Chairman of the Board of Penn Central, was a
Director of Chase Manhattan. In addition, Chase Manhattan was a
major creditor of the Penn Central—as of July 1970, Chase held about
$50 million of the outstanding debt of the Railroad and various of its
subsidiaries. At June 1970, Penn Central and certain subsidiaries had
about $5 million on deposit in various accounts at Chase. Chase Manhattan was also a member of the 10-member Bank Steering Committee
that represented the banks participating in the proposed Government
guaranteed loan in May and June 1970 (see Table 5).
As shown in Table 7, Chase Manhattan sold 436,300 shares of PC
common stock during the period April 1, 1970, through June 19,
1970—17,400 shares in April, 309,200 shares in May, and 109,700
shares in the first 19 days of June. Of the total of 436,300 shares sold,



22
262,300 were sold during the period May 19 through May 27 (see
Table 13). The sales on these seven trading days accounted for over
60 percent of the total shares sold by Chase during the period April 1,
1970, through June 19, 1970.
Further analysis shows that Chase sold 251,300 of these shares
between May 22 and May 27—May 22 was the first trading day
following David Sevan's meeting with banking representatives (see
Table 5). The sales of PC common stock by Chase Manhattan on
these four trading days—May 22, 25,26 and 27—accounted for almost
58 percent of the total shares sold by Chase during the period April 1,
1970, through June 19, 1970.
As noted previously, Chase Manhattan's sales of PC common stock
on certain days accounted for almost the entire total sales by the nine
institutions, and also represented a significant proportion oi the total
sales on the Exchanges for the subject days. On May 22, 25, and 26,
Chase Manhattan's sales of PC common stock accounted for 99, 95
and 87 percent, respectively, of the total sales for the nine institutions
on those dates. Even more significant is the fact that Chase's sales of
PC common stock on these three same days accounted for 32, 34, and
28 percent, respectively, of the total sales of this security sold on the
Exchanges—an average of about one out of every three shares sold.
Information supplied the Committee by Chase Manhattan shows
that almost all the shares of PC common stock sold came from Chase's
discretionary trust accounts. There were almost no sales from Chase's
non-discretionary trust accounts.3 Between April and June 30, 1970,
Chase reduced its holdings of PC common stock in its discretionary
trust accounts by almost 570,000 shares—from 638,686 shares to
70,663. For its non-discretionary trust accounts, Chase's holdings of
PC common stock for the same period remained about the same—
275,997 shares in April as compared to 276,198 shares at June 30,1970.
Morgan Guaranty Trust Co.
John T. Dorrance, Chairman of the Board of the Campbell Soup
Company, and Thomas L. Perkins, Counsel with Perkins, Daniels
and McCormick, were directors both of Morgan Guaranty and Penn
Central. At July 1, 1970, Morgan Guaranty held about $35 million
of Penn Central's various debt obligations. As of June 1970, PC had
total deposits in excess of $6 million in various accounts at Morgan
Guaranty. In addition, Morgan was a member of the 10-member
Bank Steering Committee.
As shown in Table 9, Morgan Guaranty sold most of its shares during the period May 29 through June 10. On June 9, for example,
Morgan's sales of PC common stock accounted for over 98 percent of
the total sales of the nine institutions, and over 38 percent of the total
stock sales on the Exchanges for that day. For the entire period May 29
through June 10, Morgan Guaranty sold 335,700 shares, or almost 86
percent of its total sales during the period April 1, 1970, through June
19, 1970.
The material submitted by Morgan Guaranty does not explain the
basis for its heavy sales of PC common stock during the period May 29,
1970, through June 10, 1970. Neither does the material show whether
these sales were made from discretionary or non-discretionary trust
» Generally speaking, discretionary trust accounts represent those trust accounts over which the trustee
exercises complete control regarding investment decisions. For non-discretionary trust accounts, there are
usually certain restrictions on the trustee's investment authority, rangingfromthe necessity to consult with
others before investment decisions are made to the playing of no substantial role in the investment decisions.




23
accounts. The material does show, however, that most of the sales
during this period were ratified after the sales occurred rather than
being approved beforehand by the Bank's Committee on Trust
Matters. This was quite different from the Committee's prior practice
of approving the sales before they were made. No explanation was
contained in the Morgan submission regarding this change in procedure.
Continental Illinois National Bank and Trust Co.
At July 31, 1970, Continental held more than $23 million of the outstanding debt of the Railroad. As of this same date, the Railroad's
deposits at Continental totaled about $4 million. Continental was also a
member of the 10-member Bank Steering Committee and attended the
meetings that took place during the period June 10-13 (see Table 5).
Table 9 shows that the majority of Continental's sales occurred during the period June 12 through June 19. On June 12, Continental
sold 108,950 shares, over 32 percent of the total shares sold on the
Exchanges that day. Continental's sales of PC common stock on
June 15, 16 and 17 accounted for over 96 percent of the total sales
by the nine institutions for these three days, and for more than 35
percent of the total sales on the Exchanges for these three days. For
the entire period June 12 through June 19, Continental sold 290,950
shares, or almost 87 percent of its total sales of PC common stock
for the period April 1, 1970, through June 19, 1970.
The apparent basis for Continental's heavy sales of stock during
June is a memorandum dated June 12, 1970, from the Stock Selection
Committee to the Trust Investment Division. The document has the
word "FLASH" across the top and the subject matter is labeled
''RECOMMENDATION CHANGE". The document concludes with
the following sections:
Conclusion: The Stock Selection Committee recommends the sale of
the common stock in all accounts.
Commentary: Recent events indicate that the likelihood of returning
to a profitable basis appears quite distant at this point in time. Despite
the possibility of government aid in securing additional financing, the
basic operational problems of the railroad company will still remain and
it is doubtful that substantial losses can be avoided for the foreseeable
future.

The memorandum does not indicate the source data for the Bank's
analysis regarding the Railroad's problems.
Alleghany Corporation, Investors Diversified Services and Investors
Mutual, Inc.
Until March 1970, the Chairman of the Board and President of
Alleghany Corporation—Fred M. Kirby—was a member of the Board
of Penn Central. Alleghany Corporation controls Investors Diversified
Services (IDS) and Fred Kirby is Chairman of the Board of IDS.
Investors Mutual, Inc., pays an investment advisory and services fee
to IDS, which comprises the entire management and operating expense of Investors Mutual, Inc.
In recent years, Alleghany Corp. also had other director interlocks
with Penn Central and certain of its subsidiaries. In addition,
Alleghany Corp. is interlocked with Manufacturers Hanover Trust
Co., a member of the Informal 5-member Bank Steering Committee
and the 10-member Bank Steering Committee (sec Table 5).




24
As shown in Table 7, all of the sales of PC common stock by
Alleghany Corp., IDS, and Investors Mutual, Inc., during the period
April 1, 1970, through June 19, 1970, occurred in the month of May.
The stock sales during May 1970 by these three institutions totaled
590,800 shares: Alleghany Corporation—96,000; IDS—243,200; and
Investors Mutual, Inc.—251,600.
Table 9 shows that the majority of these sales occurred on May 27,
1970—the day before Penn Central publicly announced withdrawal
of the Pennsylvania Company's proposed debenture offering. On
May 27, the three institutions sold 330,600 shares—almost 92 percent
of the total shares sold on the Exchanges for that day—Alleghany
Corp.—96,000; IDS—116,300; and Investors Mutual, Inc.—118,300.
The sales on May 27 represented almost 56 percent of the three
institutions' total sales for the period April 1, 1970, through June 19,
1970.
On May 19, IDS and Investors Mutual sold a total of 127,600
shares, almost 70 percent of the total shares sold on the Exchanges
that day. The two institutions also had heavy sales of PC common
stock on May 14 and May 21.
The dates of the stock sales by these three institutions during May
1970 raise serious questions regarding the basis for these sales, particularly the sales on May 19, 21, and 27. On May 27, the Railroad's
Board held a meeting at 11:00 a.m., at which time the Directors were
informed that the debenture offer was being withdrawn. Penn Central
did not make this decision public, however, until the afternoon of the
next day, May 28, 1970 (see Table 5).
Another interesting factor is that the stock sales by the three
Alleghany-related companies on May 27, 1970, apparently completely
depleted the PC common stock holdings of the three institutions.
The institutions had no more sales of PC common stock during the
period May 28, 1970, through June 19, 1970. A listing of PC common
stockholders as of June 26, 1970, does not show any holdings for
Alleghany Corp., IDS or Investors Mutual, Inc.
Provident National Bank
David Bevan, Chief Financial Officer of the Penn Central until
June 8, 1970, was a director of Provident. John Seabrook, Chairman
of the Board of International Utilities Corp., was in the spring of
1970 and still is a director both of the Penn Central Company and
Provident National Bank. In addition, William Gerstnecker, a former
PC official, was Vice Chairman of the Board of Provident until his
resignation in January 1971. Provident held over $10 million of
various PC debt obligations at September 10, 1970. At Juno 30,1970,
PC had total deposits of about $4 million at Provident.
As shown in Tables 7 and 9, the majority of Provident's sales of
PC common stock occurred in May and June". The sales by Provident,
which took place on many different dates during the subject time
period, do not appear to follow any set pattern.
Documentation supplied by Provident shows that the decision to
dispose of its PC common stock holdings was made on May 28, 1970.
As the data in Table 9 shows, however, Provident had already disposed of 17,000 shares prior to May 28, all but 1,700 of which were
sold during the period May 1 through May 27, 1970. These 17,000
shares represented almost 39 percent of Provident's total sales during
the period April 1, 1970, through June 19, 1970.



25
Security Pacific National Bank
As noted previously, Security Pacific was the only one of the six
commercial banks included in this study whose records were not
subpoenaed, because research of available information at the time the
Committee approved the issuance of subpoenas failed to disclose any
significant relationships between Penn Central and Security Pacific.
Table 7 shows that Security Pacific's sales of PC common stock
were mostly in April and May. The specific dates of these sales, as
shown in Table 9, do not indicate any apparently noticeable relationships between Security Pacific's sales and the significant nonpublic
events. Security Pacific was not a member of the Bank Steering Committees, nor did it apparently hold any substantial amounts of PC
debt.
United States Trust Company
U.S. Trust Company was the sixth domestic banking institution to
sell more than 30,000 shaies during the period April 1, 1970, through
June 19, 1970. As in the case with Security Pacific, however, there
does not appear to be any relationship between the stock sales and
the significant nonpublic events that occurred during this time period.
Evaluation of the U.S. Trust Co. submission to the Committee
failed to disclose any director relationships between Penn Central and
U.S. Trust Co. Penn Central and its subsidiaries had no deposits in
U.S. Trust nor did U.S. Trust hold any debt of the subject companies
during the period January 1, 1963, through August 28, 1970. In addition, U.S. Trust Co. was not a membar of the Bank Steering
Committees.
The U.S. Trust Co. submission shows a net increase of about 2,500
shares in its trust department's holdings of PC common stock between
dates in April 1970 and June 1970—from 128,404 shares as of April 2
to 131,170 shares as of June 23. The submission by U.S. Trust did
not indicate which holdings were in discretionary accounts and which
were in non-discretionary accounts.
CONCLUSION

As discussed in detail above, there is a strong possibility that some
of the nine institutions included in the analysis were selling shares of
PC common stock on the basis of certain nonpublic events. This is
articularly true with respect to the stock sales by Chase Manhattan
lank, Alleghany Corp., Investors Diversified Services and Investors
Mutual, Inc. The dates of the stock sales by these four institutions
coincide so closelv with the occurrence of certain highly significant
nonpublic events "that the possibility of "pure coincidence" appears
extremely remote.
In addition, there appear to be serious questions regarding certain
stock sales by Continental Illinois National Bank and Trust Co.,
Morgan Guaranty Trust Co., and possibly Provident National Bank.
The exact bases for some of the stock sales by these three institutions
is not discernible from the available information. However, the
probability that some of these sales by the three institutions were
related to certain nonpublic events cannot be dismissed.
The trading in stock of a company on the basis of nonpublic events
involves very serious legal and ethical questions that must be resolved.

g




26
Accordingly, it is recommended that those Federal agencies and
congressional committees charged with overseeing the securities laws
investigate the propriety of all sales of PC common stock by the
subject institutions.
OTHER INSTITUTIONS SELLING LARGE AMOUNTS OP PC COMMON STOCK

Analysis of the broker responses to the SEC trading questionnaires
disclosed the identity of other institutions that sold large amounts of
PC common stock during the period April 1, 1970, through June 19,
1970, as shown below. The institutions and their stock sales are being
presented in the hope that the Federal agencies and congressional
committees charged with overseeing the securities laws will investigate to determine the propriety of the subject sales by these
institutions.
1. Commonwealth International Leverage Fund, Ltd. (Canada)—Sold
80,000 shares on June 10,1970.
2. Second Alliance Trust Co,, Ltd.—Sold 18,000 shares on May 22,
1970.
3. Hamilton Funds, Inc., Series HDA—Sold 18,000 shares on June 9,
1970 and 18,000 shares on June 12,1970.
4. Elfun Trusts 4—Sold 60,800 shares on May 22,1970.
5. Deltec Banking Corp., Nassau, Bahamas—Sold 22,600 shares on
May 13, 1970.
6. Deltec Securities Corp.—Sold 17,800 shares on May 14, 1970 and
sold 9,800 shares on May 20,1970.
7. Butcher and Sherrerd—Between April 1, 1970, and June 19, 1970,
this firm sold approximately 150,000 shares for its own account and
for the accounts of individuals directly involved with the firm.
«A senior Vice President of First National City Bank, Conrad F. Ahrens, is a Trustee of Elfun Trusts.
FNCB was one of the key banks involved in the negotiations for a Government guaranteed loan for the Penn
Central (see Table 6).




27
TABLE 15.—Daily Closing Prices of Penn Central Common Stock on New York
Stock Exchange from April 1-June 22, 1970
Date

Closing
price

Date

Closing
price

May—Continued
April:
13
15%
1
23%
14—
15%
2
22%
15
15%
3
22%
16 (Saturday)
_—
4(Saturday)
17 (Sunday)
5 (Sunday)
__
18
15%
6
23%
19
14
7
23%
20
_
13%
8
22%
21
13%
9
—
22%
22
_ . - 11%
10_
— 22%
23 (Saturday)
—
_
11 (Saturday)
24 (Sunday)
12 (Sunday)
2512
13
22%
26
_.
12%
14
22%
27.
„
13%
15
- 21%
28
— 13%
16
._
21%
29
12%
17
21%
30 (Saturday)
18 (Saturday)
31 (Sunday)
19 (Sunday)
20
1!
21% June:
21
21%
1
13%
22
_
— 20
2—
~ ~ 13%
23
19
3
14
24
19
4
13%
25 (Saturday)
5
—
12%
26 (Sunday)
6 (Saturday)
27__—
__
17%
7 (Sunday)
-28— 17%
8
- 13%
29
18%
9_
14
30
18
10
12%
May:
11
12%
12
_._
— 11%
2~(S~atVrday)
13 (Saturday)
3 (Sunday).._
_
—
14 (Sunday)
4.
18
15
10%
5
17%
16
11
6
18
17
._
11%
7
18%
18
11%
8
18%
19
11%
9 (Saturday)
_-20 (Saturday)
10 (Sunday)
21 (Sunday)-111~
—17%
22
6%
12
_
15%
Source: ISL Daily Stock Price Index, New York Stock Exchange, April, May, June 1970.




O


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102