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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGRESS
SECOND SESSION
ON
S. Res. 84 and S. Res. 239
RESOLUTIONS TO TH OROU GH LY IN VESTIG ATE PRACTICES
OF STOCK EXCH AN GES W ITH RESPECT TO THE
BU Y IN G AND SELLING AND THE BORRO W ING
AN D LEN D IN G OF LISTED SECURITIES
THE VALUES OF SUCH SECURITIES
AND THE EFFECTS OF SUCH
PRACTICES
PART 4
(KREUGER AND TOLL)
JAN U ARY 11 AN D 12, 1933
Printed for the use of the Committee on Banking and Currency
U N IT E D S T A T E S
G O V E R N M E N T P R IN T IN G O F F IC E
W A S H IN G T O N : 1933
C O M M IT T E E ON B AN K IN G AN D C U R R E N C Y
PETER NORBECK,
S M IT H W . B R O O K H A R T , Iowa.
P H IL L IP S L E E G O L D S B O R O U G H , M arylar
J O H N G . T O W N S E N D , Jr ., Delaware.
F R E D E R I C C . W A L C O T T , Connecticut.
J O H N J. B L A IN E , Wisconsin.
R O B E R T D . C A R E Y , W yom ing.
J A M E S E . W A T S O N , Indiana.
J A M E S C O U ZE N S, Michigan.
F R E D E R I C K S T E IW E R , Oregon.
uth Dakota, Chairman
D U N C A N U . F L E T C H E R , Florida.
C A R T E R G L A SS, Virginia.
R O B E R T F . W A G N E R , N ew Y ork.
A L B E N W . B A R K L E Y , K entucky.
R O B E R T J. B U L K L E Y , Ohio.
T H O M A S P. G O R E , Oklahoma.
E D W A R D P . C O S T IG A N , Colorado.
C O R D E L L H U L L , Tennessee.
R O B E R T R . R E Y N O L D S , N orth Carolina.
J ulian W, B lount , Clerk
S u b c o m m itte e
on
S e n a te
R e s o lu tio n s
84
and
239
P E T E R N O R B E C K , South Dakota, Chairman
J O H N G . T O W N S E N D , J r ., Delaware.
J O H N J. B L A IN E , W isconsin.
J A M E S C O U ZE N S , M ichigan.
II
D U N C A N U . F L E T C H E R , Florida.
C A R T E R GL A SS, Virginia.
E D W A R D P. C O S T IG A N , Colorado.
CONTENTS
Statement of—
Altschul, Frank, banker, New York City___________________________ __1328
Beming, A. D., public accountant_________________________________ _1249
Durant, Donald, member firm of Lee, Higginson & Co., New York
City____________________________________________________________ __1146
Lindley, Allen L., vice president New York Stock Exchange________ __1387
May, George 0., of Price Waterhouse & Co., New York City________ __1259
Redmond, Roland L., attorney, New York C ity_____ ______________ _1234
Siler, Gilmer, partner of Eastman, Dillon & Co., New York City______1367
Winkler, Dr. Max, College of the City of New Y ork__________________1305
hi
STOCK EXCHANGE PBACTICES
WEDNESDAY, JANUARY 11, 1933
,
U n it e d S t a t e s S e n a t e ,
C o m m itte e o n B a n k in g a n d C u r r e n c y ,
Washington D. C.
The subcommittee met, pursuant to call of the chairman, at 10
o’clock a. m., in the hearing room of the committee, Senate Office
Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Townsend, Blaine, Fletcher,
and Costigan, and John Marrinan, economic adviser to the committee.
Present also: Senators Walcott, Watson, Carey, Goldsborough,
Gore, and Reynolds.
The C hairm an. The committee will come to order. This hearing
has been called on the subject of the Kreuger & Toll bond issue,
which issue was headed in whole or in part in this country, and is said
to have been for $50,000,000. I have been informed that it was a
bond issue based upon a certain bunch of collateral. When those
were deposited with the trustee it was done under a written agree
ment providing that there might be substitutions. The usual
phrase was not used, substituting securities of like value, but
substitutions were permitted on a basis of par value. I think the
evidence will show plainly that good securities were taken out and
oor securities substituted, with the result that the value of this
ond issue has gone down to almost nothing. The issue I am told
was approved by the Lee-Higginson banking house, by their attorneys,
by attorneys for the New York Stock Exchange, and by the listing
committee of the New York Stock Exchange.
If there is anything further to be said on this matter before the
committee begins examination of witnesses, Mr. Marrinan can com
plete the statement. He has been investigating the case.
Mr. M a r r in a n . Mr. Chairman, I believe you have painted the
picture in its essentials. In so far as my examination may proceed
I should like the members of the committee to understand that
although this Krueger & Toll picture is a very broad one, our investi
gation has been confined to an examination of the situation surround
ing this so-called 5 per cent secured sinking-fund gold debenture
issue.
Senator W a l c o t t . Please put in the record the dates of issue and
maturity.
Mr. M a r r in a n . I expect to develop all those facts, Senator Walcott.
Senator W a l c o t t . A il right.
Mr. M a r r in a n . In so far as I have proceeded with the investiga
tion, I have examined the situation all along the line to ascertain if
at any place there were safeguards set up for the investor. I think
E
1145
1146
STOCK EXCHANGE PRACTICES
it fair to say that that will be the general tenor of my examination,
in so far as the committee may wish to proceed.
I shall try to ascertain whether the sponsoring bankers performed
their functions intelligently in this matter. Have reasonable steps
been taken to keep the mvesting public informed regarding the
status of Kreuger & Toll’s affairs? Has the New York Stock Ex
change exercised diligence in performing its function as the instru
mentality between, on the one nand, the company and its sponsoring
bankers, and, on the other hand, the public? Has the press, which we
find participated generally in this gigantic deception, had an oppor
tunity to protect itself against misinformation? Have the lawyers
involved acted not only with professional integrity but have they
given due regard to questions of their moral responsibility to the
public?
We all know that Kreuger was a great swindler. We are beginning
to realize that at the same time he was a great gambler. We aye
finding evidence of his gambling which it would appear ought to have
been manifest long ago to some of the institutions involved had they
been reasonably diligent.
Gentlemen of the committee, there are some contingent matters
of importance. We may discover in this general situation, which I
will try to present to you through the testimony of qualified witnesses,
opportunities for reform in the regulations and practices of the
New York Stock Exchange.
The question may conceivably arise, granting that the New York
Stock Exchange desires such reforms, has it the power to effect the
reforms that should be instituted?
Now, we have summoned as our first witness Mr. Donald Durant)
who probably knows more about this Kreuger & Toll situation than
any other American. I will ask Mr. Durant to come forward, please.
The C h airm an . Mr. Durant, you may take a seat right opposite
the committee reporter. And now you will stand, hold up your right
hand and be sworn.
You do solemnly swear that you will tell the truth, the whole truth,
and nothing but the truth, regarding the matters now under investi
gation by this committee, so help you God?
Mr. D u r a n t . I do.
TESTIMONY OF DONALD DURANT, CORNWALL-ON-THE-HUDSON,
N. 7 .; MEMBER OF FIRM OF LEE, HIGGINSON & CO., NEW YORK
CITY
(The witness was duly sworn by the chairman, as shown above.)
The C h airm an. Mr. Durant, you will first give your name, address,
and occupation.
Mr. D u r a n t . Donald Durant, Comwall-on-the-Hudson, N. Y .;
member of the firm of Lee, Higginson & Co., 37 Broad Street, New
York City.
Mr. M a r r in a n . Mr. Durant, you have been a director of the
Kreuger & Toll Co., isn’t that true?
Mr. D u r a n t . That is correct.
Mr. M a r r in a n . Are you still a director of that company?
Mr. D u r a n t . Well, I have never resigned. Yes; I am still a
director.
STOCK EXCHANGE PRACTICES
M r. M
a r r in a n .
1147
H ow long have you been a director in that com
p ly ?
Mr. D u r a n t . Since about the middle of 1929, I believe.
Mr. M a r r in a n . Y o u are also a director of International Match
and of the Swedish American Investment Co., are you not?
Mr. D u r a n t . I was a director of the Swedish American Investment
Co. but am no longer. That company changed its functions.
Mr. M a r r in a n . Y o u are also a director, or at least a partner in
the firm of Lee, Higginson & Co., are you not?
Mr. D u r a n t . That is correct, that I am a partner.
Mr. M a r r in a n . That is one of the older and you might say veteran
New England investment banking houses, is it not?
Mr. D u r a n t . Well, it was formed about 1848.
M r . M a r r in a n . Before it undertook its expansion in recent years
it was essentially a Boston institution, is that correct?
Mr. D u r a n t . Well, it was started as a Boston institution. I do
not know just what you mean by “ recent years.” The New York
office, for instance, has been going for, I think, almost 30 years; for
27 or 28 years, at least.
Mr. M a r r in a n . When would you say it was that the New York
office became, or did it so become, more important to the institution
than the Boston office?
Mr. D u r a n t . Well, that would be a matter of opinion, as to the
question of what importance it is. I am not sure that it was ever
more important.
Mr. M a r r in a n . It is relatively of small importance, except as a
part of the company, I take it. Now, Mr. Durant, how long have
you been associated with Lee, Higginson & Co.?
Mr. D u r a n t . About 24 years.
M r . M a r r in a n . H o w long have you been a partner in the business?
Mr. D u r a n t . My recollection is that it would be about 10 years,
9 or 10 years.
Mr. M a r r i n a n . Will you tell the committee, if you please, aside
from such banking experience and acquaintance as you have gained
in the business, what was the nature or the technical character of
your preparation for the banking business?
Mr. D u r a n t . Mv preparation for the banking business?
Mr. M a r r in a n . Yes.
Mr. D u r a n t . Well, I came out of college and got a position as
office boy in Lee, Higginson & Co., and with them is the only position
I ever had. I worked at the most of the branches of the business.
Mr. M a r r in a n . Very well. I think you have already answered
what I had in mind on that point quite fully.
Senator F l e t c h e r . Who are the other partners in the firm of Lee,
Higginson & Co.?
Mr. D u r a n t . There are 16 partners in all, Senator. Mr. George
C. Lee, of Boston-----Senator F l e t c h e r . Suppose you just furnish for the record a list
of them, and it may be incorporated later on.
Mr. D u r a n t . I shall be glad to do that.
Mr. M a r r in a n . Mr. Durant, at the time you became a director
of the Kreuger & Toll Co. were you acquainted with the mechanism
and the legal conditions under which the security business is con
ducted generally abroad?
11 4 8
STOCK EXCHANGE PRACTICES
M r . D u r a n t . W e ll, that is a pretty sweeping question. I really
do n ot know just w hat that question means, Mr. M arrinan, although
I should like to try to answer it.
Mr. M a r r in a n . I will request that the committee reporter repeat
the question to Mr. Durant.
(The reporter read the question.)
Mr. D u r a n t . I had had something to do indirectly with various
issues for foreign companies, but had never had any experience with
the operation of an office abroad.
Mr. M a r r in a n . Were you able at the time when you became a
director of the Kreuger & Toll Co. to make at least a shrewd guess as
to the intrinsic value of the various issues of foreign securities offered
in the public markets?
Mr. D u r a n t . Well, I thought I knew something about judging
the merits of the issues.
*
Mr. M a r r in a n . Were you fairly well acquamted with political
conditions abroad and able to interpret such conditions in terms of the
ability of a going concern to operate?
Mr. D u r a n t . Well, I have never pretended to be an expert on
political conditions.
M r . M a r r in a n . A n d y e t political conditions are rather im portant
in their relation to foreign issues, are they not?
Mr. D u r a n t . Perhaps important in the getting of foreign issues,
of foreign Government bonds, but the bond speaks for itself as an
obligation.
M r . M a r r in a n . But the guarantor is really the Government,
and political conditions in turn have considerable influence over the
situation; is not that the fact?
Mr. D u r a n t . Y o u mean as to whether a Government bond might
default, or not, or something of that sort?
M r . M a r r in a n . Yes,* sir. Will you explain the general arrange
ments for the flotation of the issue of $50,000,000 of Kreuger & Toll
so-called 5 per cent secured gold debentures?
Mr. D u r a n t . I will try to do so. The company started negotia
tions for these $50,000,000 of bonds in the early part of 1929. Only
approximately half of the issue was to be sold m this country. Theannual report for the yew ending 1928 in due course was to come
out in the spring of 1929 according to the custom of the company, sothat we did not have at that time the final figures for 1928, although
of course we had the published annual reports of the Kreuger & Toll
Co. ever since its inception in 1911. Ana, incidentally, I have those
here if the committee would like to have those made a part of the
record.
Mr. M a r r in a n . Pardon me, if I may interrupt you for a moment.
Mr. D u r a n t . Certainly.
Mr. M a r r in a n . Perhaps I did not make my question clear enough.
What I had in mind was the mechanics, the set-up for the flotation
of the issue, and not a complete historical record of the transaction.
I expect to develop that latter fact perhaps a bit more clearly to the
members of the committee through my examination. I want to show,
if you please, what was the arrangement between the Kreuger & Toll
Co. and Lee, Higginson & Co. with respect to the flotation of those
bonds, and how you went ahead to do the job, what the underwriting
fees were, and what houses participated.
STOCK EXCHANGE PBACTICES
1149
Mr. D u r a n t . The purely mechanical part of it?
M r . M a r r in a n . Yes, the mechanics of the operation.
Mr. D u r a n t . Well, briefly, the mechanics were that we bought
the
issue at 98 less
per cent, I mean gross. Twenty-six million five
hundred thousand dollars of the issue were bought for sale in this
country. The rest of it was bought by a syndicate, and the leader
of it was the largest private banking institution in Sweden, Skandinaviska Kreditaktiebolaget.
M r. M a r r in a n . Am I correct in understanding that that means
Scandinavian Credit Share Co.?
Mr. D u r a n t . I believe that is right, Mr. Marrinan, but I am not
a Swedish translator.
Mr. M a r r in a n . If the committee will permit me to use that trans
lation I should like permission to refer to it in English, if that state
ment is correct, because I can not wiggle my tongue around that
combination of words.
The C h airm an. All right, Mr. Marrinan, proceed along that line.
Mr. M a r r in a n . Mr. Durant, what houses participated with Lee,
Higginson & Co. in the flotation of this issue?
Mr. D u r a n t . "Well, there were with us the National City Co., the
Guaranty Co., Messrs. Brown Bros., Clark Dodge & Co., Dillon
Read & Co., and Union Trust Co. of Pittsburgh. I believe that is
the list of names that appeared. But 1 have that information and
can furnish you the exact list in the order in which they appeared.
If you want me to do that I will be glad to do so.
The C h airm an. Y o u will be given an opportunity to read over
your testimony and make it correct if that is not a correct list.
Mr. D u r a n t . I thank you.
M r. M a r r in a n . I will say for the benefit of the committee that I
think I have a correct list, which I will ask the committee to have
incorporated in the record in a minute. But I will submit it for your
identification, M r . Durant, before doing so.
Mr. D u r a n t . All right.
Mr. M a r r in a n . It has been widely held that this security was a
bond. Is that the fact?
Mr. D u r a n t . I believe so.
M r. M a r r in a n . From your knowledge of investment terminology
what would you say was the difference, if there is any, between a
secured debenture and a bond?
Mr. D u r a n t . I think they are both bonds. A bond to my mind
is a promise to pay.
Mr. M a r r in a n . Am I correctly advised that there were three stock
exchange firms engaged in this flotation?
Mr. D u r a n t . I think that is correct.
Mr. M a r r in a n . And those firms were Lee, Higginson & Co.,
Brown Bros. & Co., and Clark Dodge & Co.?
Mr. D u r a n t . Yes, sir.
Mr. M a r r in a n . At this point, gentlemen of the committee, I
should like to insert in the record, with your permission, a list of the
directors of the participating houses. There are some rather dis
tinguished gentlemen in the Hst. There should have been consider
able financial genius in the assemblage of gentlemen who as directors
of the various houses of issue had some responsibility for their par
ticipation in this issue. I note, among others, Mr. Charles E. Mitchell,
1150
STOOK BXOHANQB FBAOTIOES
of the National City Co., and Mr. Percy Rockefeller, and others per
haps of scarcely less distinction in financial circles. I will ask the
committee reporter to identify this exhibit by giving it a number, and,
if it is the wish of the committee, you may postpone decision as to
what you wish included in the record.
Mr. Durant, suppose you look at these papers, and 1 will suggest
that you might make them your own exhibits.
Mr. D u r a n t . What are they?
Mr. M a r r in a n . Those papers contain lists of directors taken from
Poor’s Register of Directors for 1929.
Mr. D u r a n t . If it is the same to you I will leave it until I can
check them up, or you can put them in if you desire at this time.
Mr. M a r r in a n . Mr. Chairman, then I will submit those as an
exhibit for the record.
Senator F l e t c h e r . T o u offer these lists, Mr. Marrinan, and Mr.
Durant may make any corrections or additions if he finds it necessary.
M r . M a r r in a n . That is taken from the list published in Poor’s
Register of Directors as of 1929, and therefore I assume is correct.
The C h a irm a n . If there is no objection, that data will be incor
porated in the record of the hearing.
(The data furnished by Mr. Marrinan is here made a part of the
record, as follows:)
A
KBEUOEB 6 TOLL (HOUSE 0 7 ISSUE)
&
Lee Higginson Co., Guaranty Co. of New York, Brown Bros.
Co., Clark
Dodge & Co., National City Co., Dillon, Read & Co., Union Trust Co. of Pitts
burgh.
LEE HIGGINSON * CO.
George C. Lee (member of the exchange), N. Penrose Hallowell, Francis L.
Higginson, Frederic W. Allen, Charles H. Schweppe, Sir W . Guy Granet, Jerome
D. Greene, Robert Grant, jr., Barrett Wendell, jr., James Nowell, Charles E.
Cotting, Donald Durant, George Muraane, Edward H. Osgood, William McCor
mick Blair, Edward N. Jesup, Ralph Lowell.
CLARK, DODGE * CO.
Partners, 1029: Messrs. Donald G. Geddes, George Blagden (special), Arthur
O. Choate, George Crawford Clark, Louis C. Clark, jr., Joseph P. Bradshaw,
Edward T. H. Talmage, jr. (member of the exchange), Carl Egner, Benjamin D.
Mosser, H. Nelson Walker, David McAlpin.
BBOWN BB0THEB8 * CO.
Partners, 1929: Messrs. James Brown, James Crosby Brown, Thatcher Magoun
Brown (member of exchange), Moreau Delano, Louis Curtis, John Henry Ham
mond, Ray Morris, Louis Curtus, jr., Charles Denston Dickey, Ellery Sedgwick
James, Robert Abercrombie Lovett, Ralph T. Crane.
(The above lists were taken from the New York Stock Exchange Directory as
of September, 1929.)
GUAHANTY CO. OF NEW YOBK
[Moody's Banks and Finance, 1929, p. 515]
C. H. Sabin, W. C. Potter. J. R. Swan, M. P. Callaway, W. P. Conway, H. F.
Greene, R. F. Loree, J. L. O Neill, F. H. Sisson, E. W. Stetson, Burnett Walker,
W. H. Booth.
NATIONAL CITY CO.. (NEW TOBE, N. T .)
[Moody's Banks and Finance, 1929, p. 821]
Directors: E. P. Swenson (chairman), C. E. Mitchell, P. A. Rockefeller, J. P.
Grace, Beekman Winthrop, James A. Stillman, N. F. Brady, G. S. Rentschler,
Garrard S. Winston.
STOCK EXCHANGE PRACTICES
1151
THE UNION TRUST CO. OF PITTSBURGH
[Moody’s banks and finance, 1829, p. 606]
Directors: J. Frederic Byers, George W. Crawford, Arthur V. Davis, Henry C.
Fownes, Childs Frick, A. L. Humphrey, Roy A. Hunt, Benjamin F. Jones, 3d,
James H. Lockhart, J. Marshall Lockhart, Richard B. Mellon, Richard K.
Mellon, William L. Mellon. Henry C. McEldowney, Lewis A. Park, Howard
Phipps, David A. Reed, William C. Robinson, William B. Schiller, George E.
Shaw, Arthur W. Thompson, Frank M. Wallace, Homer D. Williams.
DILLON, READ ft CO.
Officers, 1929: Messrs. Clarence Dillon, Roland L. Taylor (Philadelphia) (mem
ber Philadelphia Stock Exchange), William A. Phillips, W. M. L. Fiske, Edward
J. Bermingnam (Chicago), Dean Mathey, Ralph H. Bollard, Westmore Wilcox,
jr., Robert O. Hayward, Henry G. Riter, 3a, William Slater Chariiley (Los
Angeles). Robert E. Christie, jr., Joseph H. Seaman, William A. Read, jr., J. V.
Forrestal, Albert M. Barnes, Duncan H. Read, Ferdinand Eberstadt, Clifton
MacPherson Miller.
Mr.
M a r r in a n .
Mr. Durant, how much money did Lee, Higginson
& Co. make in floating this issue? And in answering 1 do not want
to split fractions in the matter, but want you to give tne round figure.
Mr. D u r a n t .
All right, sir. In the issue of $26,500,000 floated
here; Lee, Higginson & Co. made approximately $130,000 for under
writing profit gross, and approximately $220,000 I would say as
compensation for sales made, making roughly our total of about
$365,000 gross, out of which, of course, the expenses of the organiza
tion had to be taken.
Mr. M a r r in a n . Were there any additional amounts which as a
matter of accounting might be credited to this issue, — say addi
tions which might be properly traceable as a benefit to your firm in
consequence of the flotation of this issue.
Mr. D u r a n t . I do not recall any at the moment.
Mr. M a r r in a n . Did you have any proceeds of the issue in your
custody as bankers from which you might have derived an income
during any part of the life of the flotation or while the flotation was
proceeding?
Mr. D u r a n t . That might be quite possible. I will say that I
did not look that point up and therefore I do not know.
Mr. M a r r in a n . Would you charge in jou r system of accounting
such benefit or money as a part of this picture?
Mr. D u r a n t . Oh, no. It would be entirely a banking transaction,
in the banking department, and it would be paid interest on it. It
would be impossible for me to say whether it was a profit or a loss.
Senator F l e t c h e r . Mr. Durant, you used the word “ under
writing.” Did Lee, Higginson & Co. underwrite this $26,500,000?
Mr. D u r a n t . We bought i t ; yes, sir.
Senator F l e t c h e r . What was that?
Mr. D u r a n t . We bought it and carried the risk.
Senator F l e t c h e r . Y ou bought it?
Mr. D u r a n t . Yes; with associates.
Senator F l e t c h e r . When you sold them did you sell them without
recourse or did you guarantee the bonds?
Mr. D u r a n t . When the final syndicate was made up, to the dealers
throughout the country, then the risk was assumed by the dealers.
The C h airm an. And the reason for that was that you sold them
the bonds and did not guarantee the payment of the bonds?
1152
STOCK EXCHANGE PRACTICES
Mr. D u r a n t . Oh, no. We did not guarantee the bonds. We were
just guaranteeing the sale of the bonds. We were underwriting the
issue in that sense.
Senator F l e t c h e r . Y o u did not become obligated in any way to
pay the bonds?
Mr. D u r a n t . N o , sir.
Senator F l e t c h e r . Or any of them?
Mr. D u r a n t . N o , sir.
M r . M a r r in a n . Did Lee, Higginson & Co. directly act as brokers
as well as the issuing house in any transactions involved in this issue?
Mr. D u r a n t . I do not understand just what that question means.
M r . M a r r in a n . W e ll, were you involved in any transactions in
which you got brokerage commissions in addition to the underwriting
fees and commissions?
Mr. D u r a n t . We got underwriting fees for selling the issue pri
marily. Now, after that undoubtedly if anyone had given us a com
mission to buy or sell those bonds there would be a commission on
the transaction. Is that what you mean?
M r . M a r r in a n . Yes.
Mr. D u r a n t . It would be just like the case of any other bond.
M r . M a r r in a n . Then you do a very considerable brokerage busi
ness in addition to having such income as you m ight derive from the
flotation of the issue?
Mr. D u r a n t . I think that is a fair statement; yes.
Mr. M a r r in a n . I have at this point an exhibit which I should
like to have inserted in the record, which was furnished to me by
Lee, Higginson & Co. And I might say, gentlemen of the committee,
that Lee, Higginson & Co. have been very courteous in furnishing
anything I asked for, and if I lack anything here in the way of exhibits
or of facts or figures, it is not the responsibility of Lee, Higginson &
Co., but rather my own lack of genius in asking for the documents.
I have here a schedule of issues of the Kreuger & Toll Co. and Inter
national Match Corporation securities offered in the United States,
which was prepayed for me in the office of Lee, Higginson & Co., of
New York, which I should like to have inserted in the record at this
point. It is not a long document.
The C h a irm a n . That may be done.
(The paper referred to is here made a part of the record, as follows:)
S c h e d u le
o r I s s u e s o f K r e u g e r & T o ll C o . a n d I n t e r n a t io n a l M a t c h
C o r p o r a t io n S e c u r it ie s M a d e in t h e U n it e d S t a t e s
(N ote .— There were no public offerings, in the United States,
of any securities
of Swedish Match Co.)
KREUGER & TOLL CO.
(1)
September, 1928: A total of 45,000,000 kroner par value participating
debentures offered as follows: Approximately 17,917,800 kroner par value in
exchange for preferred stock of Swedish American Investment Corporation;
8,500,000 kroner par value for subscription by old holders of participating de
bentures and shares of Kreuger & Toll Co.; approximately 18,582,200 par value
for public subscription. The subscription price on the last two blocks was 525
per cent of par, or a total of 142,181,550 kroner (approximately $38,000,000, at
par of exchange). Of the block of approximately 18,582,200 kroner par value
10,000,000 kroner was offered in the United States in the form of American cer
tificates at a total price of $14,070,000.
1153
STOCK EXCHANGE PRACTICES
Lee, Higginson & Co., Brown Bros. & Co., and Clark Dodge & Co. made the
offering of participating debentures (in the form of American certificates) for the
Swedish American Investment Corporation participating stock. Lee, Higginson
& Co., Guaranty Co. of New York, the National City Co., Brown Bros. & Co.,
Dillon Read & Co., Clark Dodge Co.? and the Union Trust Co. of Pittsburgh
offered the 10,000,000 kroner participating debentures (in the form of American
certificates) for public subscription in the United States.
(2) March, 1929: 16,250,000 kroner par value participating debentures offered
for subscription by old holders of participating debentures and shares at 600 per
cent of par: A total price of 97,500,000 kroner (approximately $26,000,000, at
par of exchange). Our records show that approximately 7,600,000 kroner par
value of debentures were subscribed for in the United States, equivalent, at the
subscription price, to approximately $12,300,000. This offering was underwritten
by a syndicate headed by Lee, Higginson & Co., New York, Higginson & Co.,
London and Skandinaviska Kreditaktiebolaget, Stockholm.
(3) $50,000,000 par value 5 per cent secured debentures offered for public
subscription at 98, or $49,000,000. The entire offering was underwritten by an
international syndicate and approximately $27,000,000 par value (equivalent, at
the issue price of 98, to $26,460,000) of the issue was offered in the United States
by a syndicate composed of. Lee, Higginson & Co., Guaranty Co. of New York,
the National City Co., Brown Bros. & Co., Dillon Read & Co., Clark Dodge &
Co. and the Union Trust Co. of Pittsburgh.
(4) October, 1929: 37,916,660 kroner par value participating debentures and
10,833,400 kroner par value shares offered for subscription by old holders of par
ticipating debentures and shares, at prices of 429 per cent or par for the new de
bentures and 405 per cent for the shares. At the same time 166,600 kroner par
value shares were privately sold at a price of 600 per cent. At these prices, these
issues totaled 207,537.341 kroner (approximately $55,600,000, at par of exchange).
Our records show that subscription in the United States totaled, at the sub
scription price, approximately $17,700,000. Both offerings were underwritten
by an international syndicate, the members of the American group including
Lee, Higginson & Co., Guaranty Co. of New York, the National City Co., Brown
Bros. & Co., Dillon Read & Co., Clark Dodge & Co., and the Union Trust
Co. of Pittsburgh.
(5) The American syndicate named in the preceding paragraph purchased an
additional 20,000,000 kroner par vahie participating debentures at $28,000,000.
&
SWEDISH AMERICAN INVESTMENT CORPORATION
The preferred stock of this corporation, in exchange for which American
certificates representing Kreuger & Toll participating debentures were offered
in September, 1928, was originally offered as follows:
(6) December, 1925: $15,000,000 par value offered for public subscription at
99 per cent of par, or $14,850,000. Our records show that approximately
$12,400,000 par value of the issue was offered for subscription in the United
States (at 99 per cent, equivalent to $12,276,000).
(7) March, 1927: $3,000,000 par value offered for public subscription at 108
per cent of par, or $3,240,000. Our records show that approximately $2,500,000
par value of the issue was offered for subscription in the United States (at 108
per cent, equivalent to $2,700,000).
Both of these offerings of Swedish American Investment Corporation preferred
stock were made by a syndicate consisting of Lee, Higginson & Co., Brown
Bros. & Co., and Clark Dodge & Co.
r e c a p it u l a t io n
Total
Paragraph:
(1)...............................................................................................................................
(2).................................................................................................................
(3).................................................................................................................
4 ...............................................................................................................................
(5).................................................................................................................
m ...............................................................................................................................
$38,000,000
26,000,000
49.000.000
55.600.000
28.000.000
14.860.000
3,240,000
Total____________________________________________________ 214,000,000
United States
$14,070,000
12.300.000
26.460.000
17.700.000
28,000,000
12.276.000
2,700,000
113,506,000
11 54
STOCK EXCHANGE PRACTICES
IN TER N AT IO N AL MATCH CORPORATION
(1) October, 1923: $15,000,000 par value 6% per cent, debentures offered for
public subscription at 94%, or $14,175,000. Our records show that approximately
$870,000 par value of this issue was offered abroad, equivalent, at the issue price
of 94%, to approximately $822,000.
The offering syndicate consisted of Lee, Higginson & Co., Guaranty Co. of
New York, the National City Co., Brown Bros. & Co., and Dillon Read & Co.
(2) December, 1924: 450,000 shares of participating preference stock offered
in exchange for above 6% per cent debentures then outstanding.
(3) July, 1925: 450,000 shares participating preference stock offered for sub
scription by old holders at $45 per share, a total price of $20,250,000. Our syn
dicate records show that foreign subscription totaled approximately 55,320
shares, equivalent, at the issue price of $45, to approximately $2,489,000.
(4) November, 1926: 450,000 shares participating preference stock offered for
subscription by old holders at $50 per share, a total price of $22,500,000. Our
syndicate records show that foreign subscription totaled approximately 65,790
shares, equivalent, at the issue price of $50, to $3,290,000.
The foregoing three offerings of participating preference stock were under
written by a syndicate consisting of Lee, Higginson & Co., Guaranty Co. of New
York, the National City Co., Clark Dodge & Co., Brown Bros. & Co., Dillon
Read & Co., and the Union Trust Co. of Pittsburgh.
(5) November, 1927: $50,000,000 par value 5 per cent debentures offered for
public subscription at 98%, or $49,250,000. Our records show that approxi
mately $2,911,000 par value of this issue was offered abroad, equivalent, at the
issue price of 98%, to approximately $2,867,000.
The offering syndicate consisted of Lee, Higginson & Co., Guaranty Co. of
New York, the National City Co., Brown Bros. & Co., Dillon Read & Co.,
Clark Dodge & Co., and the Union Trust Co. of Pittsburgh.
(6) January, 1931: $50,000,000 par value 5 per cent debentures offered for
public subscription at 96, or $48,000,000. Our records show that approximately
$2,480,000 par value of this issue was offered abroad, equivalent, at the issue
price of 96, to approximately $2,381,000.
The offering syndicate consisted of Lee, Higginson & Co.,,Guaranty Co. of
New York, the National City Co., Brown Bros. & Co., Dillon Read & Co.,
Clark Dodge & Co., and the Union Trust Co. of Pittsburgh, and Bankers Co. of
New York.
R E C A P IT U L A T IO N
Total
Paragraph:
(1)
(3)...............................................................................................................................
(4)...............................................................................................................................
(5).................................................................... .........................................................
(6)..............................................................................................................................
..............................................................................................................................
United States
$14,175,000
20.250.000
22.500.000
49.250.000
480,000,000
$12,353,000
17.701.000
19.210.000
46.383.000
45.619.000
154,175,000
142,326,000
Mr. M a r r in a n . Mr. Durant, what would you say was the correct
total par value of the issues of Kreuger & Toll securities floated in
the United States by Lee, Higginson & Co.?
Mr. D u r a n t . Well, that is a little hard to give offhand. D o you
mean just the part handled by Lee, Higginson & Co., or the syndi
cates which we headed?
M r. M a r r in a n . The syndicates which you headed.
Senator C o stig a n . When were those bond sales made, in what year?
Mr. D u r a n t . Of Kreuger & Toll in 1928 was the first sale, if my
memory is correct, with some American certificates representing
participating debentures. The exact par value of that, Mr. Marrinan,
I forget. D o you mean, do I have it here?
Mr. M a r r in a n . I believe that figure is in the exhibit.
Mr. D u r a n t . I think it probably is.
STOCK EXCHANGE PRACTICES
1155
Senator C o s t i g a n . Y o u are not including in that statement any
reference to International Match sales?
Mr. D u r a n t . N o, sir.
Mr. M a r r i n a n . Mr. Durant, are you able to estimate the Ameri
can losses at the current position of the market, status quo, between
the American and the Swedish interests?
Senator W a t s o n . Right there let me ask: For how long a period
of time were you selling those bonds?
Mr. D u r a n t . D o you mean this particular issue, Senator?
Senator W a t s o n . Yes.
Mr. D u r a n t . My recollection is that the syndicate lasted for 90
days, which is the usual length of time for a syndicate.
Senator W a t s o n . Did you take them over originally as Lee,
Higginson & Co., or did others join with you in the original under
taking?
Mr. D u r a n t . Lee, Higginson & Co., Skandinaviska Kreditaktiebolaget, and Higginson & Co. of London. Then it was divided, with
the Skandinaviska Kreditaktiebolaget, they headed the Swedish, or I
should say the European syndicate. And we headed the syndicate
which I have just described.
Senator W a t s o n . When did these other firms or establishments in
this country enter into the undertaking?
Mr. D u r a n t . In March of 1929.
Senator C o s t i g a n . What were the figures shown there?
Mr. J o s e p h M. P r o s k a u e r . Here is a duplicate of that statement,
Senator, if it will be of any benefit to you.
Senator C o s t i g a n . I thank you.
Senator G o r e . Y o u have stated all o f the members o f the American
syndicate?
Mr. D u r a n t . No; as I thought the question was, as put to me, I
stated the so-called managers of the American syndicates, the names
of those who appeared on the prospectus.
Senator G o r e . Will you attach to that a list of those that par
ticipated?
Mr. D u r a n t . I will be very glad to do so. It is numbered 385,
I believe.
Mr. P r o s k a u e r . I might say-----Mr. M a r r i n a n . Will you now please answer the question, Mr.
Durant, which was-----Senator G o r e (interposing). In how many States and cities?
Mr. P r o s k a u e r (interposing). I could say-----The C h a i r m a n (interposing). Now, I think we better start having
order here. We are not going to let a visitor who has come into the
room, and who has not been called upon, take part in the hearing.
If there is anything of importance you can address the Chair, and if
it is important, you will be treated courteously. But the committee
reporter is trying to get the name of the gentleman who broke in, and
it is impossible to conduct our proceedings properly if outsiders are
butting in.
Senator G o r e . Mr. Chairman, I am responsible for that, I suppose.
Mr. P r o s k a u e r . I am glad that Senator Gore made that state
ment. He asked a question, which I assumed was asked on behalf of
the committee. It was answered as a question put, as I thought to
me, as he was looking this way, by a member of the committee. I
1156
STOCK EXCHANGE PRACTICES
assumed that Senator Gore is sitting as a member of the committee
and therefore is entitled to ask questions. And I took it that he
asked the question directly of me.
The C h a i r m a n . It was very polite of Senator Gore to take all of
the responsibility in this case, but the gentleman sitting back there
started it as a matter of fact. Now let us get along.
Mr. M a r r i n a n . Mr. Durant, I believe I asked: “ Are you able to
estimate the American losses” ?
Mr. D u r a n t . No. I could not estimate that because I do not
figure it is possible to determine them to-day.
Mr. M a r r i n a n . You'would not even venture a guess?
Mr. D u r a n t . It would hardly be worth while, I take it.
Mr. M a r r i n a n . I have heard various estimates, from between
$300,000,000 on upwards.
Mr. D u r a n t . I do not see how anyone can guess as to that with
any degree of accuracy, not until after the whole complicated situ
ation is worked out, and there are reorganizations, which are very
important, and it is decided what assets can be recovered in the situ
ation.
Senator F l e t c h e r . What are those securities worth to-day?
Mr. D u r a n t . Those bonds?
Senator F l e t c h e r . Yes.
Mr. D u r a n t . That is very hard to say, what they are worth. D o
you mean market value?
Senator F l e t c h e r . Yes; or any value.
Mr. D u r a n t . The market value I think is only around 14, although
I have not looked it up recently. But those bonds are secured by a
deposit of other bonds, Government bonds, which up to a year ago
I think, or a little over a year ago, were all paying their interest.
Now some of them are not. Some are paying their interest but there
is involved a transfer problem. The Hungarian interest is being paid
in Hungary in a blocked account to the Government, and as the
Senators no doubt know, it is impossible now to get money out of
Hungary. The Government will not transfer funds so that interest
is not available. But if you mean the payment of interest on those
bonds, it is being paid in Hungary, and the bonds are not in default.
D o you mean income from the collateral that is actually being trans
mitted to this country? My recollection is about one-third necessary
for the interest, but the most of it is accumulating in the countries,
and when the transfer problem is solved I have no doubt the amounts
will then come out.
Senator W a l c o t t . Is the interest payable in gold?
Mr. D u r a n t . I believe in all cases; yes.
Senator W a l c o t t . And the American issues in dollars?
Mr. D u r a n t . Yes, sir.
Senator F l e t c h e r . So that if I had one of those bonds, which I
have not, unfortunately, or perhaps fortunately, I might say, I could
possibly get 14 cents for it to-day?
Mr. D u r a n t . Oh, yes; you could to-day, for I believe that is the
market.
Senator W a l c o t t . Did you mean 14 cents?
Mr. D u r a n t . Oh, no. That would be 14 per cent, or on a $1,000
bond it would be $140.
STOCK EXCHANGE PRACTICES
1157
Mr. M a r r i n a n . It has been stated that under the competitive
processes of American investment bankers some bankers largely
perform the function of merchandisers of securities. How far is it
fair to accept that view?
Mr. D u r a n t . Well, it is a question of definition. Almost any
banker who buys securities has to merchandise them, either wholesale
or retail, because American bankers do not buy entire blocks of issues
for their own portfolios. So in the conduct of the business as I know
it they are essentially merchants. I wouldn’t know just how to
separate or explain that situation any more than that.
Mr. M a r r i n a n . In merchandising, of course, they have to follow
the practices of marketing rather than the practices of banking, isn’t
that true?
Mr. D u r a n t . I would not think it was inconsistent in the merchant,
who is very careful of and has a pride in the product he is selling, so
that he did not interfere with any proper banking principles in making
the issue.
Mr. M a r r i n a n . Are you familiar with the provisions of the
debenture agreement in connection with the flotation of this issue of
5 per cent secured debentures?
Mr. D u r a n t . I am reasonably familiar, although perhaps not in
every detail.
Mr. M a r r i n a n . Who drafted the agreement, please?
Mr. D u r a n t . When we wanted that agreement drafted we had
the benefit of the following counsel-----M r . M a r r i n a n (interposing). That was to be my next question.
Who drafted the agreement in its inception, counsel or the company,
or who started it?
Mr. D u r a n t . Well, I would have to speak from recollection,
subject to correction. I should say it was probably started by
counsel, with Lee, Higginson & Co., rather than the company.
We were setting up the indenture. Who it was just made the first
conversations I do not recall, Mr. Marrinan, but that indenture-----Mr. M a r r i n a n (interposing). Mr. Durant, we will have later
witnesses who I think will be able to clear that point up. By whom
was the legal opinion given?
Senator G o r e . Will you put a copy of the agreement in the record,
Mr. Marrinan?
Senator C o s t i g a n . Of the indenture do you mean, Senator Gore?
Senator G o r e . Yes.
Senator C o s t i g a n . I think I can answer, Senator Gore, that it
will be put in.
The C h a i r m a n . What was that?
Senator C o s t i g a n . Senator Gore wants to know if a copy of the
agreement will be put in the record. ^
Mr. M a r r i n a n . The chairman wishes me to clear up the record
to the extent of making the statement that the indenture referred
to in that question is the so-called debenture agreement between the
Kreuger & Toll Co., the fiscal agents Lee, Higginson & Co., and the
trustee, Lee, Higginson Trust Co. of Boston, under the provisions
of which this whole transaction proceeded.
^Now, Senator Gore, in answer to your question, it was my inten
tion to insert in the record as an exmbit, subject to the pleasure of
the committee, of course, a copy of this debenture agreement at the
119852—33— p t 4------2
1158
STOCK EXCHANGE PRACTICES
time when a member of the counsel who participated in this trans
action is called to the stand.
Senator G o r e . That will be all right with me.
Mr. D u r a n t . Might I finish answering that question?
Mr. M a r r i n a n . Yes.
Mr. D u r a n t . It was prepared by counsel. There were two firms
in this country, Messrs. Carter, Ledyard & Millburn, and Ropes,
Gray, Boyden & Perkins, of Boston. And we were particularly for
tunate, we thought, in being able to get a former partner of Ropes,
Gray, in the person of Mr. Leon Fraser, whom you will all remember,
I think, as counsel to the Reparations Commission, and then in
Europe. He was often in Paris, and the final work on this debenture
agreement was done by the lawyers there with Mr. Leon Fraser
representing us; and at the request of counsel we had had eminent
legal advice from Sweden in the person of Mr. Loefgren, who came
to Paris to advise or counsel on points of Swedish law.
Mr. M a r r i n a n . In connection with the various discussions and
conferences on the drafting of the debenture agreement do you recall
any consideration given to questions of how adequately investors
were to be safeguarded under its provisions?
Mr. D u r a n t . I think that was the gist of the most of the con
ferences, or I should say so. Certainly it was in everybody’s mind.
Mr. M a r r i n a n . Are you familiar with the so-called substitution
provisions wherein the Kreuger & Toll Co. were permitted to ex
change or withdraw or substitute the pledged collateral?
Mr. D u r a n t . Yes, sir.
Mr. M a r r i n a n . If it is the wish of the committee I should like
to insert in the record at this point a statement prepared and turned
over to me by Lee, Higginson & Co. entitled, “ Chronology of Pur
chase of Substituted Collateral.” The face of the memorandum
bears a note in pen and ink at the top “ Draft, subject to recheck.”
I should like to have the question raised by that note cleared up
through any changes or amendments that may be necessary, if they
are necessary, before this finally appears in the record.
The C h a i r m a n . Y o u are now offering that for the record?
Mr. M a r r i n a n . Yes.
The C h a i r m a n . If there is no objection, it will be made a part of
the record.
(The paper referred to is here made a part of the record, as follows:)
CHRONOLOGY OF PURCHASE OF SUBSTITUTED COLLATERAL
Subsequent to the public sale of the secured debentures in March, 1929, the
major issues deposited under the debenture agreement were:
Kingdom of Serbs, Croats and Slovenes 6J4’s, 1958_______________
Hungarian land reform mortgage 5%’s, series B, 1979____________
Kingdom of Rumania Monopolies Institute 7%’s, 1971-............... ..
Kreuger & Toll Co. purchased the Yugoslavian bonds as follows:
$15, 000, 000
12, 000, 000
2, 938, 425
Mar. 23, 1929________________ ____________________ _____ _ . ........... $7, 000, 000
July 23, 1929___________________ _____ ___________________________
7, 000, 000
8, 000, 000
Mar. 23, 1930_____ ______________________________ _______ _______
The $7,000,000 installment purchased March 23, 1929, was included in the
collateral originally deposited under the debenture agreement. The remaining
installments were deposited on various dates subsequent to their purchase.
The Hungarian land reform mortgage bonds, series B, were purchased by
Kreuger & Toll Co. on January 15, 1930, and deposited under the debenture
agreement on January 23, 1930.
1159
STOCK EXCHANGE PRACTICES
The Kingdom of Rumania Monopolies Institute bonds were issued publicly
in Europe in March, 1931, and presumably those owned by the Kreuger & Toll
Co. were purchased subsequent to that date. They were deposited on August
24, 1931.
PLAN FOLLOW ED IN MAKING SUBSTITUTIONS
As it was contemplated in the debenture agreement that substitution of eligible
securities might at any time be made at the option of the Kreuger & Toll Co.
provided the required ratios were maintained, the modus operandi of making
such substitutions may be described.
The majority of the securities deposited were lodged with the Skandinaviska
Kreditaktiebolaget, the duly authorized depositary under the debenture agree
ment. This institution is one of the leading banks of Stockholm, and these
securities were kept in its custody for greater convenience in the collection of
amortization and interest payments and in the making of such substitutions.
The first substitution of securities was made on August 10, 1929, when the
Skandinaviska Kreditaktiebolaget advised Lee, Higginson Trust Co. that a par
value of approximately $250,000 of securities had been released to Kreuger &
Toll Co. against the deposit of $500,000 of Yugoslavian 6%’s. This transaction
being in accord with the terms of the agreement, Lee, Higginson Trust Co. wrote
the depositary on August 26, 1929, that these changes had been duly noted.
Such was the usual practice in the making of all similar substitutions. Fre
quent minor changes in the exact amount of securities on deposit were occasioned
by amortization payments, and these were duly confirmed by correspondence
between Skandinaviska Kreditaktiebolaget and Lee, Higginson Trust Co. The
total amount on deposit at various times was also periodically reported by the
depositary and careful check made by the trust company to see to it that the
records agreed.
The first large substitution was on January 21, 1930. On that date Lee, Hig
ginson Trust Co. received a cable from Skandinaviska Kreditaktiebolaget as
follows:
“ Kreuger & Toll desire withdraw from collateral for secured debentures
60.000.000 French francs, Republic of France, 3 per cent Rentes; Francs French
144.000.000, Republic of France 4 per cent, 1917; 140,000,000 Republic of France
4 per cent, 1918, against deposit of $12,000,000 Hungarian Land Reform Insti
tute, series B, 5% per cent, 1979; and $1,000,000 Kingdom of Serbs, Croats, and
Slovenes 6% per cent, 1958. Cable approval urgently.”
To which Lee, Higginson Trust Co. responded by cable in the following terms:
“ Refer your cable to-day we confirm substitution collateral assuming sub
stitution conforms to governing provisions contained in indenture dated March
1, 1929.”
This cable correspondence was later confirmed by letter from the Skandi
naviska Kreditaktiebolaget dated Stockholm, January 24, 1930, to Lee, Hig
ginson Trust Co., as follows:
“ Further to our letter of yesterday regarding withdrawal and deposit by
Kreuger & Toll Co. of securities in accordance with the debenture agreement
dated March 1, 1929, we hereby, for good order’s sake, give a specification of the
par value and actual interest income, computed in dollars in conformity with the
provisions of said debenture agreement, of the collateral held by you and us after
having given effect to the transactions described in our above-mentioned letter.
As for the securities held by your good selves, we have based our figures on the
statements and plans of amortization received from the Kreuger & Toll C o.:
Par value
Yugoslavia 6J4 per cent............................................................................................
Latvia 6 per cent__________________ ______________________ ______________ _
Poland 7 per cent______________________________
____________________
RumAnia Mnnnp 7 per
___ .
Hungarian I,and Rofnnrling A
pur font
Hungarian Land Refunding B
per cen t.—........ .........................................Prussian Mortgage Bank 8 per rawit
Greece 8}4 per cent, £968,655 at 4.8665...... .................... .....................................
Rumania 4 per cent, £380,691 at 4.8665_________________________ _________
Belgian National R y . Co. 6 per cent, preferred.............................................. .
Ecuador 8 per cent__________________ ____ ____________________- ...................
Ecuador Mortgage Bank 7 per cent................................................... - ................
Total______________________________________________________
Interest
income
$8,500,000.00
6,000,000.00
4.800.000.00
1.972.000.00
11,952,454.88
12,000,000.00
2.858.400.00
4,713,472.86
1.852.628.00
2.224.640.00
1,944,370.02
988,172.72
$531,250.00
360.000.00
336.000.00
138.040.00
657.384.00
660.000.00
205.804.00
400.645.00
74.105.00
133.478.00
155.650.00
69.172.00
59,806,138. 48
3,721,428.00
1160
STOCK EXCHANGE PRACTICES
“ As, after $375,000, 5 per cent KreutoU secured debentures having been re
deemed on September 1, 1929, through operation of the sinking fund, the total
amount of secured debentures now outstanding is $49,625,000, the ratio of prin
cipal and the ratio of income are now 120.52 per cent and 150 per cent, respec
tively.
“ We shall be pleased to have your confirmation that you are in agreement
with the above figures, * * * ”
The next substitution of importance was initiated by cablegram from Skandinaviska Kreditaktiebolaget to Lee, Higginson Trust Co., dated Stockholm,
September 12, 1930, as follows:
“ Our last letter regarding collateral Kreutoll secured debentures dated August 1.
Kreutoll now desire withdraw 80,000,0t)0 Belgian francs Belgian National Rail
way preference shares and 12,000,000 marks Prussian Mortgage Bank bonds
against depositing in substitution $5,000,000 Yugoslavia 6% per cent bonds. We
find proposed transaction in accordance with indenture dated March 1, 1929, and
not imparing stipulated ratios. Kindly confirm our opinion by cable.”
To which, on the same day, Lee, Higginson Trust Co. cabled as follows:
“ Refer your cable to-day. We confirm substitutions by Kreutoll $5,000,000
Yugoslavia 6J4 per cent bonds for 80,000,000 Belgian francs Belgian National
Railway preference shares 12,000,000 marks Prussian Mortgage Bank bonds with
understanding proposed transaction conforms to indenture dated March 1, 1929,
and does not impair stipulated ratios.”
On the same day confirming the cablegram by letter, in which the cable message
is repeated and the trust company says:
“ According to our records, you now hold the following collateral securing the
Kreuger & Toll $50,000,000 debenture issue:
Kingdom of Serbs, Croats, and Slovenes (Yugoslavia) 6*4 per
cent, 1958_________________________________________________ $13, 500, 000. 00
Republic of Latvia 6 per cent bonds, 1964____________________
6, 000, 000. 00
Republic of Poland 7 per cent bonds, 1945____________________
4, 650, 000. 00
Kingdom of Rumania Monopolies Institute 7 per cent, 1959__
1. 935, 700. 00
Hungarian land reform mortgage:
5y2 per cent, 1979 (A )____________________________________
11, 902, 841. 18
5y2 per cent 1979 (B )_____________________________________ 12, 000, 000. 00
Republic of Ecuador external loan of 1927 8 per cent, due 1953
1, 929, 044. 00
Mortgage Bank of Ecuador 7 per cent gold bonds, 1949 1______
963, 261. 81
52, 880, 846. 99
Kingdom of Rumania 4 per cent, 1968________________________
Republic of Greece 8% per cent, 1954_________________________
£380, 691 0 0
956, 243 0 9
“ Kindly advise us in case this list is not correct.”
This list was in due course properly confirmed.
On October 14, 1930, Skandinaviska Kreditaktiebolaget cabled Lee, Higginson
Trust Co. as follows:
“ Upon request Kreutoll we release to-day out of collateral held under Kreutoll
debenture agreement March 1, 1929, £956,243 Greece 8% per cent bonds against
delivery $5,000,000 principal amount Yugoslavia 6}i per cent bonds due 1958.
Kindly confirm receipt by cable.”
To which cable, on October 15, 1930, Lee, Higginson Trust Co. replied, like
wise by cablegram, as follows:
“ Refer your cable yesterday. We confirm substitution by Kreutoll $5,000,000
Yugoslavia 6}i per cent bonds due 1958 for £956,243 Greece 8% per cent bonds
with understanding proposed transaction conforms to trust indenture and does
not impair stipulated ratios.”
The foregoing transaction, as in the case of all others, was duly confirmed by
mutual exchange of letters.
On January 8, 1931, the status of the collateral held was set forth in a letter
from the Skandinaviska Kreditaktiebolaget to Lee, Higginson Trust Co. as follows:
“ Further to our letter of the 31st ultimo, regarding the collateral which we
held in our capacity of depositary under the Kreuger & Toll Co. debenture agree
ment dated March 1, 1929, we beg to give you below, for good order’s sake, a
specification of the par value and actual interest income, computed in dollars in
conformity the provision of said debenture agreement, of the collateral held by
i Held b y Lee, Higginson Trust Co.
1161
STOCK EXCHANGE PRACTICES
you and us. As for the securities held by your good selves we have based our
figures on the statements and plans of amortization received from the Kreuger &
Toll Co. and on your letter of September 12 last re Ecuador 8 per cent.
Par value
Interest
income
$22,000,000.00
6,000,000.00
4, 500,000.00
11,902,841.18
Hungarian Land Reform B 5)^ per c e n t . . . ____
_ ____________ __ 12, 000,000.00
1,852,628. 00
. - _______ _
Ecuador 8 per c e n t __________ ____________ __________
1,929,044.00
963, 261.81
$1,375,000.00
360.000.00
315.000.00
654, 656.00
660.000.00
74.105.00
154, 323.00
67.428.00
61,147,774.99
3,660, 512.00
“ As, after $394,000 5 per cent Kreuger & Toll Co. secured debentures having
been redeemed on September 1, 1930, through operation of the sinking fund, the
total amount of secured debentures as of December 31, 1930, is $48,840,000, the
ratio of principal and the ratio of income are now 125.20 per cent respectively
149.90 per cent.
“ We shall be pleased to have your confirmation that you are in agreement
with our figures, and remain.”
Further indicative as to the method by which these transactions were carried
on, was a cable from Skandinaviska Kreditaktiebolaget to Lee, Higginson Trust
Co. dated March 26, 1931, as follows:
“ Upon request Kreutoll we release out of collateral held under Kreutoll
debenture agreement March 1, 1929, 956,243 pounds Greece 8% per cent bonds
due 1958 against $2,950,000 Poland 7 per cent bonds due 1945 which exchange,
thanks to surplus collateral now held according to our records, still leaves value of
collateral above contractual minimum ratio. Kindly confirm by cable.”
This message was acknowledged by cable to Skandinaviska Kreditaktiebolaget
by Lee, Higginson Trust Co., under date of March 27, 1931, as follows:
“ We acknowledge receipt of your cable twenty-sixth relative change in col
lateral under Kreutoll debenture agreement dated March 1, 1929, of which we
have taken due note.”
On May 21, 1931, Lee, Higginson Trust Co. forwarded a letter to Skandinaviska
Kreditaktiebolaget, outlining a proposed code to facilitate and to save expense in
connection with cabling advices as to substituted collateral. In that letter was
the following paragraph:
“ In case securities which have not previously been held as collateral are
deposited under the agreement, we assume that prior to releasing other eligible
securities you will see that the new collateral meets the general requirements of
the indenture as outlined in Section I of Article III of the debenture agreement
dated March 1, 1929. We are writing to Kreuger & Toll requesting them to
kindly send us, whenever new collateral is deposited, their certificate to the effect
that the new securities are eligible securities and other details, as outlined in
Section VI of Article III of the debenture agreement, together with a copy of the
opinion of Kreuger & Toll's counsel relative to the respective issues.”
On the same day, Lee, Higginson & Co. advised Messrs. Kreuger & Toll by
letter substantially to the same effect as indicated in the foregoing paragraph.
CONFIRM ATION BY LEGAL COUNSEL
The opinion of competent legal counsel as to the legality and authenticity of
the various issues deposited as collateral has been duly supplied by the following:
Issue of Hungarian land reform mortgage bonds, 5% per cent, 1979, in total
principal amount of $36,000,000, authenticated by opinions of Doctor Mezei and
Doctor Urbach; opinion dated Budapest, Hungary, May 7, 1929.
Issue of Republic of Latvia, $6,000,000, 6 per cent external cumulative sinkingfund gold loan bonds, authenticated by W. Kuehn, in an opinion dated Riga,
June 6, 1930; accompanied by certificate of legality and authenticity executed
by Martins Nuksa, minister of the Republic of Latvia in Stockholm.
Issue of $22,000,000, Kingdom of Serbs, Croats, and Slovenes, 6}i per cent
secured external gold-bond monopolies loan, 1958, authenticated by A. Pavlovitch; opinion dated Stockholm, July 22, 1929.
1162
STOCK EXCHANGE PRACTICES
,
Issue of Kingdom of Rumania consolidation 4 per cent sterling bonds, 4 per
cent, due 1968.
Issue of Kingdom of Rumania monopolies institute 7% per cent bonds, due
1971, authenticated by opinion of M. Pantazi; opinion dated Bucharest, March
19, 1931.
Issues of the Republic of Ecuador 8 per cent external gold-loan bonds, due
1953, and the Mortgage Bank of Ecuador 7 per cent gold bonds, due 1949, were
authenticated by Alfonso Moscoso; opinion dated Quito, April 27, 1931.
The issues of Yugoslavia (Kingdom of Serbs, Croats, and Slovenes), Latvia,
and the Hungarian land reform mortgage loan were further authenticated by
Ivar Engellau (barrister at law, Stockholm) and Erland Geijer (former member
of court of appeal in Stockholm); opinion dated April 15, 1931.
CERTIFICATE OF THE COMPANY
Confirming all of these transactions, Kreuger & Toll Co. addressed to Lee,
Higginson Trust Co. on April 15, 1931, a certificate, duly authenticated by Mr.
Harold Carlson, vice consul of the United States at Stockholm, in which it was
set forth:
“ The undersigned Aktiebolaget Kreuger & Toll hereby certifies that the securi
ties described herein and which are deposited with Lee, Higginson Trust Co., as
trustee, respectively with Skandinaviska Kreditaktiebolaget, Stockholm, as de
positary, under the above-mentioned debenture agreement:
“ 1. Are of the character and description specified in section 1 of Article III
of said debenture agreement,
“ 2. Are legally and validly issued,
“ 3. Are not in default as to either principal or interest,
“ 4. Yield an annual income, at the rate of interest currently being paid thereon,
after the deduction of all taxes, assessments, and governmental charges payable
therefrom in dollars (Kingdom of Rumania consolidation 4 per cent sterling
bonds due 1968 computed at a rate of exchange of 4.85), equivalent to not less
than 120 per cent of the agregate interest payable annually on all secured deben
tures now outstanding under said debenture agreement.”
Originals of all of the foregoing are lodged in the office of Lee, Higginson Trust
Co.
The situation was brought up to date in a letter from Skandinaviska Kreditak
tiebolaget to Lee, Higginson Trust Co., dated January 7, 1932, as follows:
“ With reference to our previous correspondence, we beg to give you below, for
order’s sake, a list of the collateral which we held as of December 31, 1931, in our
capacity of depositary under the Kreuger & Toll Co. debenture agreement dated
March 1, 1929.
I. In our vaults: $22,000,000 Kingdom of Yugoslavia 6% per cent bonds, 1958;
$6,000,000 Republic of Latvia 6 per cent bonds, 1964; $11,848,753.65 Hungarian
land reform mortgage 5j4 per cent bonds, series A ; $12,000,000 Hungarian land
reform mortgage 5J4 per cent bonds, series B ; $2,925,600 Kingdom of Rumania
Monopolies Institute, 7j4 per cent, 1971.
II. Abroad in our name: 380,691 pounds. Kingdom of Rumania 4 per cent
bonds, 1968 (with Messrs. Higginson & Co., London).
“ At the same time we beg to give you a specification of the par value and
actual interest income, computed in dollars in conformity with the provision of
said debenture agreement, of the collateral held by you and us as of December
31, 1931. As for the securities held by your good selves we have based our
figures on the statements and plans of amortization received from the Kreuger &
T oll C o.:
Interest incom e
$22,000,000 (par value) Yugoslavia 6% per cent___________________ $1, 375, 000
$6,000,000 (par value) Latvia 6 per cent__________________________
360, 000
$11,848,753.65 (par value) Hungarian land reform series A. 5*4 per
cent____________________________________________________________
651, 681
$12,000,000 (par value) Hungarian land reform, series B 5% per cent.
660, 000
$2,925,000 (par value) Rumania Monopolies Institute 7)4 per cent__
219, 420
$1,294,350 (par value) Rumania 4 per cent (380,691 pounds at 3.40) _
51, 774
$1,896,529.17 (par value) Ecuador 8 per cent_____________________
151, 722
65, 550
$936,576.61 (par value) Ecuador Mortgage Bank 7 per cent_______
T otal____________________________________________ __________
(The par value of the above collateral is $58,901,809.43.)
3, 535,157
STOCK EXCHANGE PRACTICES
1163
Mr. M a r r i n a n . Was there any requirement, Mr. Durant, as to
the value of the pledged security?
Mr. D u r a n t . Not in the sense of market value, but in the sense of
its security. It was not done by saying the collateral shall always be
of a certain market value, because it was supposed that the issues that
would be there would be whole issues bought in connection with the
match business, Government bonds, which would not therefore be
listed and not have a market value. But the main provision in it,
which I think was a very good one, was instead of market value not
only should the collateral’s par value be 120 per cent of the principal,
but the income on whatever collateral was in there must be at least
120 per cent of the interest due on the Kreuger & Toll bonds, which
meant that the collateral itself was furnishing enough money to supply
the sinking fund, and so it was reducing that debt right along without
any other funds from the company being necessary to retire that debt.
It was a self-liquidating debt over a period of time.
M r . M a r r i n a n . In the light of what we know now of this situation
by reason of the audit, a report of which was published yesterday,
prepared by Price, Waterhouse & Co., that income which you have
referred to several times probably was coming out of the capital struc
ture rather than out of the earnings, isn’t that true?
Mr. D u r a n t . N o, sir. The income I am referring to now is income
from pledged collateral, which had nothing to do with anything else.
It was lodged with Lee, Higginson Trust Co.
The C h a i r m a n . But the income ceased.
Mr. D u r a n t . No, sir; not from anything that happened to Kreuger
& Toll Co. That interest came from certain countries, Hungary for
instance, and there the transfer problem is involved, connected with
the world economic situation.
The C h a i r m a n . The market value of your bond issue went down
from—what was the par value of the stock, 100?
Mr. D u r a n t . Yes, sir.
The C h a i r m a n . And i t sold a t 9 8 ?
Mr. D u r a n t . Yes, sir.
The C h a i r m a n . And it has hit a very low mark of what?
Mr. D u r a n t . I do not recall, sir.
The C h a i r m a n . Did somebody say 12 cents?
M r . M a r r i n a n . T w e l v e a n d o n e -h a lf p e r c e n t .
Mr. D u r a n t . $120, do you mean? I do not know the low price.
The C h a i r m a n . What is the present price?
Mr. D u r a n t . My recollection is that it is 14, which is about $140
per $1,000 bond.
The C h a i r m a n . Y o u mean $ 1 4 whereas i t was $ 1 0 0 before?
Mr. D u r a n t . Yes, sir.
The C h a i r m a n . And you do not remember how low it went?
Mr. D u r a n t . No, sir.
Senator C o s t i g a n . Are you referring to the Hungarian land reform
mortgage bonds?
Mr. D u r a n t . Yes, sir; in that remark.
Mr. M a r r i n a n . In order that the situation may be clear, and you
may correct or confirm my understanding, these bonds were issued
in denominations of $1,000.
Mr. D u r a n t . $1,000 and $500. But the $500 bonds were rarely
used. So $1,000 is the way we usually speak of them.
1164
STOCK EXCHANGE PRACTICES
M r . M a r r i n a n . I s i t tr u e t h a t th e r e w a s a v e r y lib e r a l c o n s t r u c
t io n o f e lig ib ilit y a t fir s t in c o n n e c t io n w it h th e s u b s t i t u t io n o f
c o lla t e r a l?
Mr. D u r a n t . Well, it was limited primarily to Government obli
gations, or certain guaranteed Government obligations or munici
pals. But I do not know whether you would say it was liberal or
not. I think, to our minds, it was liberal in that particular class,
but the class itself was not one particularly liberal when taken in
conjunction with the match business and monopolies.
Mr. M a r r i n a n . We have heard, and, of course, we get a lot of
rumors down here, that the eligibility provisions were so liberal that
it would have been possible to substitute legally defaulted issues.
That if a bandit chief in the Yangste Valley, who could control and
guarantee formally an issue, so long as his domain had a minimum
population of 300,000 people, under the terms of this indenture such
issue would be eligible. Is there anything in such a report?
Mr. D u r a n t . I do not see how there could be anything in it,
because there is another provision in the indenture which provides
that the interest must be paid and the bond m good standing at the
time it was put in.
The C h a i r m a n . So if a bandit chief had paid one or two payments
of interest, his bond would be eligible for substitution?
Mr. D u r a n t . That is a theoretical case, Mr. Chairman. I should
like to go through other features of the debenture. No such bonds
went in.
Senator C o s t i g a n . Nothing was said about market value or fair
value?
Mr. D u r a n t . No, sir.
Senator C o s t i g a n . About par value?
Mr. D u r a n t . Yes, sir. It was thought that with these other pro
visions, the securities would remain, that it was set up with a sinking
fund, and that sinking fund was always paying off the Kreuger &
Toll debts. So we did not need to have market value as such. It
was a self-liquidating operation.
Senator C o s t i g a n . Have such substitutions of other securities
been customary in the practice of Lee, Higginson & Co.?
Mr. D u r a n t . A s to that I could not answer. Perhaps each one is
different. I am not an expert enough to speak in that way.
Senator C o s t i g a n . Have you ever known one similar to this?
Mr. D u r a n t . We have never had a situation where we were
dealing with a number of foreign governments before.
Senator C o s t i g a n . Y ou have not known of a similar substitution?
Mr. D u r a n t . No; I have not known of it. I have not looked up
that point, of course, and there might be some somewhere, but if so
I do not know of it.
Senator F l e t c h e r . Were those collateral securities all Govern
ment issues?
Mr. D u r a n t . I think so. There is a list of the collateral here.
Mr. M a r r i n a n . There will be a list of the collateral submitted to
the committee for inclusion in the record, a little later.
The C h a i r m a n . All right. Proceed with the examination.
Mr. M a r r i n a n . What was the most valuable asset in your opinion
in the originally pledged collateral?
STOCK EXCHANGE PRACTICES
1165
Mr. D u r a n t . Well, I never thought of it in terms of any particu
lar issue, as to any particular collateral. To me the system under
which this bond issue was set up was a very valuable one, a group
of good Government bonds, and-----Mr. M a r r i n a n (interposing). I know, but there are relative values,
and you are familar with that what was pledged. What particular
item in the pledged securities would you say had the greatest in
trinsic or market value? I mean practical value and do not mean
par value.
Mr. D u r a n t . I suppose the one that has the most readily sale
able market value was the French.
M r . M a r r i n a n . The French bonds?
Mr. D u r a n t . Yes.
Mr. M a r r i n a n . Is it true that those French bonds were paying
3 and 4 per cent?
Mr. D u r a n t . That is my recollection, that that was the coupon
on them.
M r . M a r r i n a n . Would you say that that bond issue could be
supported if it had all been on French bonds at that rate?
Mr. D u r a n t . Certainly, because—do you mean because the inter
est was only 3 or 4 per cent?
Mr. M a r r i n a n . Just answer the question. I mean as to all
classes and also as to income requirements.
Mr. D u r a n t . Well, to meet the income requirements of the inden
ture, which provided for income of collateral at 120 per cent, the
par value of those bonds would have had to be increased. The ruling
clause in that case would have been the interest clause. Is that
answer clear?
M r . M a r r i n a n . Yes; I t h in k so.
Mr. D u r a n t . S o that you would have had to have more par
valuation than if those bonds had been at the rate of 6 or 7 or 8 per
cent.
M r . M a r r i n a n . Then you mean you would have had to change
the par value provision of the agreement?
Mr. D u r a n t . No, sir; not the provision of the agreement, but
instead of—for instance, here was a $50,000,000 issue with an inter
est provision of 120 per cent. That would mean that a 6 per cent
bond paying its interest was adequate collateral at par. But if it
was a 3 per cent bond you would have to put in twice as many bonds,
without changing the provisions, just deposit more par value. That
is the way I understood it.
Senator F l e t c h e r . The French did not make default, did they?
Mr. D u r a n t . No, sir.
Senator F l e t c h e r . Were their bonds subsequently withdrawn?
Mr. D u r a n t . Yes, sir.
Mr. M a r r i n a n . Was it not apparent, Mr. Durant, from the profit
standpoint that an early substitution of the French bonds was
inevitable?
Mr. D u r a n t . I do not think so.
Mr. M a r r i n a n . Well, you either had to get more French bonds or
you would have had to replace them with issues that had a greater
return, isn’t that true?
Mr. D u r a n t . I do not think so, because when they were originally
in I think all the provisions of the indenture were fulfilled, interest
1166
STOCK EXCHANGE PRACTICES
as well as principal. That is my recollection. And could have
stayed there I think from that point of view.
Mr. M a r r i n a n . There has been an impression that those French
bonds were put in there for purposes of window dressing the issue.
Is there anything in that impression?
Mr. D u r a n t . I do not think so.
Senator W a t s o n . H o w many French bonds were there, Mr.
Durant?
Mr. D u r a n t . About $13,000,000 market value.
The C h a i r m a n . They were all withdrawn before they were paid,
were they?
Mr. D u r a n t . Oh, yes. I think they are long-time bonds, if I
remember correctly.
Senator G o r e . What was substituted for them when they were
withdrawn?
Mr. D u r a n t . My recollection is some more of the Hungarian
bonds. I would like to check that. No new names of new bor
rowers have been added to that picture since the start, with the excep
tion of a small amount of German bonds. I think I am correct about
that.
The C h a i r m a n . Was the Hungarian issue that large?
Mr. D u r a n t . Yes, sir.
The C h a i r m a n . Is it not a matter of fact that several kinds of
bonds were substituted for that issue, and some of them are worthless
to-day?
Mr. D u r a n t . Senator Norbeck, I said that I was subject to cor
rection on just what was substituted, because I have not got it exactly
in mind. M y memory was that much of those bonds I do not think
are worthless to-day.
Mr. M a r r i n a n . We shall have offered to the committee for inser
tion in the record a complete story of each and every substitution by
date, both withdrawal and deposit.
Mr. D u r a n t . I will be glad to.
Mr. M a r r i n a n . Which was prepared in yaur office and submitted
formally to the committee.
Mr. D u r a n t . Yes, sir. I thought you had that.
Senator C o s t i g a n . Mr. Durant, what were the least marketable
of the securities originally deposited as collateral, if you recall?
Mr. D u r a n t . I could not recall. We never made any study of the
marketability of those.
Senator C o s t i g a n . It has been stated that the Latvian and
Ecuadorian bonds might be so described.
Mr. D u r a n t . Well, perhaps, but strange to say, the Latvian are
still paying their interest, so far as I know. Have not been defaulted.
One of the ones that have been still outstanding through all these
years.
Senator C o s t i g a n . Are they still among the collateral?
Mr. D u r a n t . They are still among the collateral. Still paying
interest, the last time.
The C h a i r m a n . Have they got a market value? Are they listed?
Mr. D u r a n t . They are not listed. It is the whole issue, sir. I
think that is the only external debt of Latvia. I am not sure.
Mr. M a r r i n a n . Mr. Durant, am I correct in the understanding
that the Lee, Higginson Trust Co. of Boston was the trustee of this
issue?
STOCK EXCHANGE PRACTICES
1167
Mr.
D u r a n t . T h a t is m y r e c o lle c t io n .
M r . M a r r i n a n . And that the Scandinavian
Credit Share Co.—if
that is a correct translation—of Stockholm, was the depository?
Mr. D u r a n t . The depository, I believe, under the trustee.
Mr. M a r r i n a n . I s it fair to state that the arrangements provided
in the debenture agreement have been at least partially responsible
for the condition existing to-day wherein the liabilities of this issue
are in America and its assets held in Sweden—or perhaps we can
apply that statement more largely or generally to the Kreuger & Toll
picture?
Mr. D u r a n t . I do not understand the question, Mr. Marrinan.
Could you split it up a little?
Mr. M a r r i n a n . Perhaps I did not make myself clear. Who, in
fact, had control of the pledged collateral?
Mr. D u r a n t . The trustee. You mean physical control?
M r . M a r r i n a n . Physical control.
Mr. D u r a n t . Physical control was lodged with the trustee, who
appointed its depositary, I believe. I think that is perhaps legal.
But the trustee and the depositary had physical control of the col
lateral while it was in behind the bonds. And it is all there.
Mr. M a r r i n a n . Most of that collateral was kept all the time in
Stockholm, is that not true?
Mr. D u r a n t . I do not know what proportion is there or in Boston.
M r . M a r r i n a n . I t h in k th e r e c o r d w h ic h w e w ill in s e r t w ill s h o w
th a t.
Mr. D u r a n t . The records will show it; yes.
M r . M a r r i n a n . Well, in the present situation
•
where are most of
Are they in the United States
those bonds now, the pledged bonds?
or are they in Sweden?
Mr. D u r a n t . I do not think they have been moved over here, but
they have all been found to be just where they were supposed to be,
for the benefit of the bondholders,
M r . M a r r i n a n . Well, I think that you will find t o a very con
siderable extent in Sweden.
Mr. D u r a n t . Possibly so.
Mr. M a r r i n a n . Being in Sweden and counted into this general
picture now in liquidation, is it fair to say that they comprise a part
of the assets in Sweden? That is what I am driving at. We have
got plenty of liabilities over here, and there appears to be a very
considerable percentage of the assets in Sweden. I do not want a
precise legalistic answer on that point. I just want a man to man
answer.
Mr. D u r a n t . Well, I do not know what the legalistic phase of it
is, but I think most of those securities are with the depositary, which
is in Stockholm, subject to these bonds. I think they can be brought
over any time you want.
Senator F l e t c h e r . Why should they not be with the trustee?
Mr. D u r a n t . Sir, they are with the depositary, and they are being
held by the Swedish bank for the account of the trustee and not to
be confused with other Kreuger & Toll assets in Sweden, because
they are earmarked for this trustee.
Senator W a l c o t t . That is, the collateral that is supposed to be
behind these bonds and supposed to be in the possession of the
trustee in America behind the American bonds is lodged in a, let us
1168
STOCK EXCHANGE PRACTICES
say, safe deposit vault, hired by the trustee in Boston, in Sweden;
is that correct?
Mr. D u r a n t . Well, that is essentially correct.
Senator W a l c o t t . Yes.
Mr. D u r a n t . N o w , whether it is just a safe deposit vault hired
by the trustee or the Scandinavian bank, that is a fact I do not
know.
Senator W a l c o t t . But segregated?
Mr. D u r a n t . Segregated.
Senator W a l c o t t . And so marked as collateral to the American
issue?
Mr. D u r a n t . Yes.
Senator W a l c o t t . N o w , then, have your auditors, whoever is look
ing into this whole question, or the auditors for the bondholders,
checked that to find out whether that is actually a fact?
Mr. D u r a n t . Yes. Not only did auditors check it on behalf of
the Lee, Higginson Trust Co. immediately after the death of Mr.
Kreuger, but I understand that the bondholders’ committee has
made an independent check and found it, and so stated, that every
thing was in order.
Senator C o s t i g a n . Mr. Durant, have any legal steps been taken
to attach the collateral for the benefit of foreign creditors?
Mr. D u r a n t . I do not think so.
Senator C o s t i g a n . May I ask who suggested the substitution pro
vision in the indenture? Was it Kreuger or was it some member
of the law firm?
Mr. D u r a n t . Why, I would say that it was Kreuger, who felt
that that was necessary in this business. Sometimes these bonds had
to be taken out, as he once bought a French issue and had to sell it
back to France in two years at a big profit.
Senator C o s t i g a n . Do you recall any question being raised as to
the propriety of inserting so liberal a substitution agreement?
Mr. 'D u r a n t . N o , sir. The company at that time had additional
assets of $150,000,000 above the bonds, and was showing very big
earnings. And that did not come up.
Senator C o s t i g a n . S o far as you remember no question was raised
either by legal counsel or by Lee, Higginson & Co.?
Mr. D u r a n t . Well, we felt that it was a sufficient protection.
Government bonds with this interest rate, that would liquidate the
debt, plus the guarantee of Kreuger & Toll that was in addition.
Senator C o s t i g a n . No discussion of the novelty of the situation
occurred within your recollection?
Mr. D u r a n t . M y recollection would be that the novelty was per
haps discussed with a feeling that it was a rather good change over
some other issues, where market value had to be made good. But a
self-liquidating loan which was not dependent on the earnings of the
company itself necessarily was a change to the good.
Senator C o s t i g a n . Notwithstanding the fact that the substitution
clause in effect permitted the withdrawal of $60,000,000 of market
value of securities and the possible substitution therefor of a rela
tively minor quantity of securities in value?
Mr. D u r a n t . Well, it was not set up on the point of value at all.
It was type of security. And only the same type could be put in
that was taken out, so far as type goes.
STOCK EXCHANGE PRACTICES
1169
Senator C o s tig a n . In effect, however, the clause did permit the
substitution of securities of inferior value. That was the result of
the operation of the clause, was it not?
Mr. D u r a n t . Well, the result of that clause was that some secu
rities were substituted for the French, but they have not defaulted.
There is a transfer problem on it.
Senator C o s tig a n . D o you or do you not regard the substituted
securities as of inferior value to those for which they were substi
tuted?
Mr. D u r a n t . Yes, sir; I regard them as inferior in market value
to the French, yes, sir; of course.
Senator C o s tig a n . T o what Extent? How do you estimate the
difference in value?
Mr. D u r a n t . Well, one has got a transfer problem at the moment
and the investor is not getting his interest. I would not be able to
put it in dollars, Senator.
Senator C o stig a n . Y o u could make no estimate of the difference
in value of the substituted securities?
Mr. D u r a n t . No ; because these substituted securities were not
listed. There is no comparable security on the market.
Senator F l e t c h e r . Was it entirely optional with Kreuger & Toll
to make the substitution, or did the trustee have anything to say
about this?
Mr. D u r a n t . The trustee had this to say, that Kreuger & Toll
could make the substitution as long as they were within the terms of
the debenture agreement, and it was up to the trustee to live up to
the agreement, which we feel has been lived up to.
Senator F l e t c h e r . And that was that the substituted security
should have a par value equal to those withdrawn?
Mr. D u r a n t . Par value and income. There are several provisions
in the debenture agreement, Senator Fletcher, that all have to be met.
Senator W a t s o n . When was that substitution made, Mr. Durant?
Mr. D u r a n t . Senator, I do not recall. We have given Mr.
Marrinan a complete list of all the substitutions with dates.
Senator W a t s o n . Were Hungarian bonds regarded as good at
that time?
Mr. D u r a n t . They were regarded as good at that time, and they
were already in the original list. It was an additional amount of
Hungarians. No new names of borrowers were ever substituted, as I
can remember, except a small amount of Germans.
Senator W a t s o n . Well, were all Hungarian bonds substituted for
the French bonds?
Mr. D u r a n t . I do not know. The list will establish it.
Senator C o s tig a n . It is reported that the Hungarian bonds which
were substituted were either in default or affected by the moratorium.
Mr. D u r a n t . At the time of the substitution?
Senator C o s tig a n . At the time of the substitution.
Mr. D u r a n t . That is not correct, sir.
Mr. M a r r in a n . Mr. Durant, was substitution of pledged collateral
reported to the trustee, Lee, Higginson & Co.? Promptly, I mean?
With reasonable promptness?
Mr. D u r a n t . T o Lee, Higginson Trust Co.?
Mr. M a r r in a n . I should have said that if I did not. The trustee,
the Lee Higginson Trust Co., of Boston. Were all subscriptions of
collateral promptly reported to them?
1170
STOCK EXCHANGE PRACTICES
Mr. D t j r a n t . Do you mean by the Swedish depositary?
Mr. M a r r i n a n . Yes.
Mr. D u r a n t . Well, I would assume so, but I do not know of my
own knowledge. I have no relation with the Lee, Higginson Trust Co.
The C h a i r m a n . H o w long after the bond issue was offered to the
public did the substitution start?
Mr. D u r a n t . Senator Norbeck, I would have to refresh my rec
ollection from the statement we have already handed in to the
committee.
The C h a i r m a n . I s it a fact that there is any truth to these rumors
that some of them actually took place before they were offered to the
public? While the set-up was being prepared?
Mr. D u r a n t . None of them took place while they were being
offered to the public, because the debenture agreement, as I recall it,
was not even written then. They were sold when, as, and if issued.
The C h a i r m a n . In other words, the public did not know what they
were buying then?
Mr. D u r a n t . The public knew what they were buying then, but
I mean there could be no substitution. The original amount was
there.
The C h a i r m a n . So this substitution then was something that was
written in after the public had bought the bonds?
Mr. D u r a n t . N o, sir. I thought you were talking about physical
substitution.
The C h a i r m a n . Yes. I am asking when it took place. You said
that the indenture was not written at the time the bonds were offered
to the public, is that right? Did I understand you correctly?
Mr. D u r a n t . Well, I would have to refresh my recollection. I
think the bonds were offered and agreement to make a debenture
agreement on certain lines. It is all in the record sir. I could look
it right up.
The C h a i r m a n . Go ahead.
M r . M a r r i n a n . W a s th e p u b li c g iv e n a n y in f o r m a t io n a b o u t th e s e
s u b s t it u t io n s b y t h e tr u s te e , o r in a n y o t h e r m a n n e r ?
Mr. D u r a n t . I don’t know what the trustee did. I know it was
always available.
M r. M
a r r in a n .
Did Lee, Higginson & Co. have knowledge of the
substitution?
M r . D u r a n t . It w a s a lw a y s a v a ila b le .
M r . M a r r i n a n . Well, d id y o u have it , s ir ?
Mr. D u r a n t . I don’t know whether the trustee sent it to us or not.
Mr. M a r r i n a n . Don’t you think that as sponsoring bankers that
it was your duty to keep measurably abreast of the events?
Mr. D u r a n t . Mr. Marrinan, I do not know. I would like to look
at it—I mean I can not answer the question at the moment whether
they did.
M r . M a r r i n a n . Well, everybody in New York has been talking
about this particular proposition. It seems to me that you should be
reasonably well informed on that point.
Mr. D u r a n t . A s to whether the trustee notified us?
The C h a i r m a n . Can you answer it to-morrow or the day following?
Mr. D u r a n t . I c a n fin d o u t n o w , I t h in k .
The C h a i r m a n . Well, you will have an opportunity.
Mr. D u r a n t . I will be prepared.
STOCK EXCHANGE PRACTICES
1171
The C h a i r m a n . We will give you an opportunity to come back and
answer that.
Mr. M a r r i n a n . A s a director in Kreuger & Toll, Mr. Durant, and
also a director in Lee, Higginson & Co., can you state whether or not
this information of substitutions was made available to the New York
Stock Exchange?
Mr. D u r a n t . I do not know.
Mr. M a r r i n a n . Your firm is a member of the New York Stock
Exchange?
Mr. D u r a n t . Yes.
Mr. M a r r i n a n . I am advised that the first information regarding
the details of substituted collateral reached the New York Stock
Exchange on its own initiative by cable from Kreuger & Toll under
date of March 21, 1932, some nine days after Kreuger’s suicide. Can
you confirm by your own knowledge—I have other witnesses to whom
the same inquiry may be directed—can you confirm by your own
knowledge as to whether that understanding is correct?
Mr. D u r a n t . I know that there was a question of some informa
tion going to the stock exchange at that time, but I do not know of
my own knowledge whether that is the first advice they had of any
substitutions. It was the obligation of the company to furnish them
changes.
Mr. M a r r i n a n . Do you think, Mr. Durant, that in this substitu
tion phase of the matter that adequate safeguards were set up in behalf
of the public?
Mr. D u r a n t . In the indenture?
Mr. M a r r i n a n . In this whole situation— the indenture and the
operations under the terms of the indenture.
Mr. D u r a n t . Oh, I think so. Those bonds would be perfectly
good to-day if it were not for the international transfer problem.
Mr. M a r r i n a n . The Hungarian bonds would be good, you say, if
it were not for a transfer problem?
Mr. D u r a n t . I so understand it, because I am advised that the
income on those bonds, the interest, is being paid to a blocked account
in Hungary—that is the advice that has been given to me—for the
benefit of the holders of the bonds when transfer is allowed by the
Government.
Mr. M a r r i n a n . Well, to get back to that question, Mr. Durant,
do you think that where the public was kept generally in ignorance
and the New York Stock Exchange was kept generally in ignorance
of the exact status of this substituted collateral, that in that situa
tion the American investor had an adequate safeguard?
Mr. D u r a n t . I think I can answer your question by saying that
the company certainly should have made good on its obligation to
post the stock exchange promptly—Kreuger & Toll Co.
Mr. M a r r i n a n . We are going into that a little later. You do not
think that the trustee had any obligation?
Mr. D u r a n t . N o , sir.
Mr. M a r r i n a n . You do not think that you, as sponsoring bankers
and members of the New York Stock Exchange, had any obligation?
Mr. D u r a n t . No, because we thought the company was going to
do it. The company had agreed in the listing application to furnish
that information.
Mr. M a r r i n a n . You assumed no responsibility then for that at all?
Mr. D u r a n t . For posting the exchange; no, sir.
1172
STOCK EXCHANGE PRACTICES
Senator F l e t c h e r . Y o u , as a director of the company, might have
seen to that, might you not?
Mr. D u r a n t . Well, Senator Fletcher, I did not realize that the
company had failed to give that information to the stock exchange
over those years, and when I heard there was some information that
they had not given when I was in Sweden I told them to tell them at
once what it was.
Mr. M a r r i n a n . Mr. Durant, I have before me here a statement
prepared in the office of Lee, Higginson & Co., under date of May 26,
1932, in which there is a very complete report on the details of the
originally pledged collateral and all changes, including deposits and
withdrawals. I can find at no place in this record a complete agree
ment between the total ol pledged collateral at par value in dollars
and the corresponding total as it appears in tiie application of Kreuger
& Toll Co. for listing on the New York Stock Exchange, which was
signed by you as a director of Kreuger & Toll Co. The disparity in
the figures I call attention to, not because the difference appears to
be material, but to emphasize the apparent laxity with which this
transaction started in its relations with the New York Stock Exchange.
I am informed that the exchange, for example, had no knowledge
of any substitutions until after Kreuger’s death. Substitutions,
according to your records submitted to me, were more than $280,000
at par in dollars prior to the time that the application for listing was
approved, and during the period between the filing of the application
on August 6, 1929, and its approval on August 14, 1929, there was a
deposit of Serbian bonds amounting to $500,000, and withdrawals of
other various issues in small amounts, in the aggregate $256,599. I
am informed that some of these transactions, if not all of them, may
be explained by withdrawals for sinking fund purposes—not as against
the Kreuger & Toll issue itself, but the individually pledged collateral
issues. It is a rather confusing situation. The amounts involved do
not appear so material, but there appears to be no definite check and
no comparability between your figures and the figures of the New
York Stock Exchange, and there is a general atmosphere of laxity.
Have you examined that situation and can you give us any informa
tion as to how I can, or how—perhaps we will put it impersonally—
how those figures may be reconciled?
Mr. D u r a n t . Mr. Marrinan, it seems to me that if the stock ex
change was never notified by Kreuger & Toll Co. of any changes, the
figures by the trustee would always disagree.
Mr. M a r r i n a n . Well, I am talking about a table representing the
alleged pledged collateral, when you applied for listing. I have
the complete record, with every deposit and withdrawal, from the
time that you report the original withdrawal on July 1, 1929, some
months before, by the way, you applied for listing, on through August
10, when you withdrew an aggregate of something like $250,000
and deposited some Serbian bonds of $500,000 value, all par value,
and on down some 36 changes. Nowhere in that statement can I
find identity or incidence between the total of pledged collateral on
deposit as reported by you in this statement, and the total of pledged
collateral on deposit as reported by you to the New York Stock
Exchange as signatory of the application to list. Now the differences,
as I stated, are not material, but you have accountants. There
appears to be a laxity in there. Have you ever tried to reconcile
STOCK EXCHANGE PRACTICES
1173
the statement of pledged collateral in your application at the exchange
with your own books?
Mr. D t j r a n t . Mr. Marrinan, those would not be our own books.
Those would be the books of the Lee, Higginson Trust Co., which
was a separate trust company in Boston, the trustee.
Mr. M a r r i n a n . Yes; but did you not always have access to them
or knowledge of that situation?
Mr. D u r a n t . N o , sir; not any more than any others. They were
in there separate. They were the trustee.
Senator F l e t c h e r . May I ask, how did you make up your list on
behalf of the substitutions?
Mr. D u r a n t . It was done by the company, I believe. I did not
have anything to do with it.
Senator F l e t c h e r . The company?
Mr. D u r a n t . That was done by the trustee.
Senator F l e t c h e r . That was done by the trustee, and you did
not handle that?
Mr. D u r a n t . No; I h a d no interest in the trustee. I was no
officer of the trustee.
Senator F l e t c h e r . N o ; but it is a member of the Stock Exchange,
and a director of Kreuger & Toll, and is underwriting agents for the
sale of securities. Did you know about these lists being put in from
time to time?
Mr. D u r a n t . No, sir.
Mr. M a r r i n a n . Mr. Chairman, with your permission, and that
of the committee, I would like to introduce as an exhibit at this time
a communication signed by Jerome D. Greene, at that time a partner
of Lee, Higginson & Co., addressed to Frank J. Meehan, of George
K. Watson & Co., at that time employed by this committee, in which
answers are given to a series of questions presumably propounded
to Lee, Higginson & Co. on this matter under the direction of William
A. Gray, at that time counsel to the committee. I request that this
be made a part of the record.
And in that connection will you clear this point, in order that there
may be no weakness in the authenticity of this document. Was Mr.
Greene at that time in fact a partner of Lee, Higginson & Co.?
Mr. D u r a n t . He w a s .
M r . M a r r in a n . I s h e n o w ?
Mr. D u r a n t . He is.
M r . M a r r i n a n . He is not in the United States?
Mr. D u r a n t . That is correct.
The C h a i r m a n . If there is no objection it will be
received as an
exhibit, and also printed in the record. The Reporter will mark it.
(The data supplied by Mr. Jerome D. Greene, of Lee, Higginson
& Co., above referred to, was marked “ Exhibit A,” and is here printed
in the record in full, as follows:)
E x h ib it
A
Co.,
New York, May 31, 1982.
L e e , H ig g in s o n &
J. M e e h a n ,
Care of George K. Watson & Co., New York City.
M r. F r a n k
D e a r Mr. M e e h a n : I send you herewith our answers to your several ques
tions of May 26 with regard to data supplementing the various documents which
you examined the other day.
Very truly yours,
J e r o m e D. G r e e n e .
119852— 33— p t 4--------------- 8
1174
STOCK EXCHANGE PRACTICES
1. Time and date of Mr. Kreuger’s death becoming known in Paris.
2. List of substitutions made, with dates of deposit of new securities, in rela
tion to release of originally deposited securities, giving dollar equivalents of
foreign currency securities.
3. Brief summary of items in balance sheets now known to have been falsified.
4. Brief details concerning falsification of reported earnings.
5. Record of Lee, Higginson & Co., or any of its partners’ security holdings in
Kreuger & Toll Co. and its affiliates on a date prior to Kreuger’s death, on the
day following his death, and on May 25, 1932.
6. Record of any sales of such securities from day prior to Kreuger’s death up
to present, giving dates, number or value of securities sold, and prices realized.
7. Description of bonds and shares not identified which appear in Kreuger &
Toll Co. and its affiliates’ statements as of 1928, 1929, and 1930.
8. Description of syndicate participations and accounts receivable items
which appear in the above statements,
M ay
26, 1932.
Q
u e s t io n
1
The facts as to our information in regard to Mr. Kreuger’s death are as follows:
. On Saturday morning, March 12, 1932, we received a brief cablegram stating
that Mr. Kreuger had died very suddenly, that the news was not public, and
that nothing should be said until it was announced in Paris. The cablegram
was addressed to the partners of our firm and was not opened by a partner until
after 10 o’ clock. We felt that the information was confidential and therefore
did not communicate it even to our own organization. We, naturally, did not
use it for our own advantage and did not sell any of our own holdings of Kreuger
securities. We received confirmation later on Saturday of the fact that the
French authorities had determined that no announcement should be made that
day.
The cable which we received did not indicate that Mr. Kreuger had committed
suicide. The first information we had of that fact were the items in the New
York newspapers on Saturday afternoon. It was not until late on Saturday
evening that we had definite information from Paris that Mr. Kreuger had
committed suicide.
Q uestion 2
Kreuger & Toll 5 per cent secured debentures—Details of mthdrawals and substi
tutions of securities deposited
Original
on
Deposited W ithdrawn Balance
deposit
K ingdom of Serbs, Croats and Slovenes 6H per cent, 1958.................. $7,000,
R epublic of Latvia 8 per cent, 1964............................................................ 6,000,
R epublic of Poland 7 per cent, 1945.-.......................................................
5,100,
Mortgage Bank of Ecuador 7 per cent, 1949............... ............................
1, 000,
Kingdom of Rumania M onopolies Institute 7 per cent, 1959..............
2, 000,
Hungarian land reform mortgage, series A 5J4 per cent, 1979.............. 12, 000,
R epublic of France Perpetual Rente 3 per cent (Fes. 60,000,000).......
2,340,
5,616,
Republic of France Perpetual Rente 4 per cent, 1917 (Fes. 144,000,000)
Republic of France Perpetual Rente 4 per cent, 1918 (Fes. 140,000,000)
5,460,
Belgian National R ys. preferred stock (B . Fes. 80,000,000).................. 2,224,
Prussian Mortgage Bank 8 per cent, 1959 (R m . 12,000,000).................
2,856,
Kingdom of Rumania 4 per cent, 1968 (£380,691)................................... 1,850,
R epublic of Greece 8J4 per cent, 1954 (£979,902.84)...............................
4, 762,
R epublic of Ecuador 8 per cent, 1953......................................................... 1,973,
July 1, 1929: Republic of Ecuador 8 per cent, 1953.................................
A ug. 1: Mortgage Bank of Ecuador 7 per cent, 1949..............................
A ug. 10:
Kingdom of Serbs, Croats, and Slovenes 63-4 per cent, 1958..........
500,000
R epublic of Poland 7 per cent, 1945...................................................
Kingdom of Rumanian Monopolies Institute 7 per cent, 1959____
Hungarian Land Reform Mortgage, series A , 5J4 per cent, 1979.—
R epublic of Greece, 8H Per cent, 1954 (£11,347/8/6)..........................
Sept. 19: Republic of Poland 7 per cent, 1945..........................................
N ov. 7: Mortgage Bank of Ecuador 7 per cent, 1949.............................
Jan. 2, 1930: Republic of Ecuador 8 per cent, 1953.................................
Jan. 15: Hungarian Land Reform Mortgage, series A , 5W per cent,
1979...............................................................................................................
$14,169
11,827
$60,182,399
60,168,230
60,156,403
150.000
28,000
23,450
55,149
150.000
12,241
14, 736
60.399.804
60.249.804
60,237,563
60,222,827
24,095
60,198,732
1175
STOCK EXCHANGE PRACTICES
Kreuger & Toll 5 per cent secured debentures—Details of withdrawals and substi
tutions of securities deposited—Continued
Original
Deposited Withdraw]
Jan. 23:
Kingdom of Serbs, Croats, and Slovenes 6*4 per cent, 1 9 5 8 -....
Hungarian Land Reform Mortgage, series B ,
per cent, 1979
Republic of France Perpetual Rente 3 per cent (Fes. 60,000,000).
Republic of France Perpetual Rente 4 per cent, 1917 (Fes.
144,000,000)........................................................................................
Republic of France Perpetual Rente 4 per cent, 1918 (Fes.
140,000,000).......................... .............................................................
Feb. 1: Kingdom of Rumanian Monopolies Institute 7 per cent, 1959
Mar. 27: Republic of Poland 7 per cent, 1945______ _______________
July 1: Republic of Ecuador 8 per cent, 1953.......................... ..............
July 15: Hungarian land reform mortgage series A 5% per cent, 1979.
Aug. 1:
Mortage Bank of Ecuador 7 per cent, 1949_____________________
Kingdom of Rumania M onlpolies Institute 7 per cent, 1959........
Republic of Greece 8}4 per cent, 1954 (£12,311/19/1) ___________
Sept. 15:
Kingdom of Serbs, Croats and Slovenes 6\i per cent, 1958...........
Belgian National Railways Co. participating preferred stock, 6
Prussian Mortage Bank 8 per cent, 1959 (R m . 12,000,000)_______
Sept. 29: R epublic of Poland 7 per cent, 1945_______________________
Oct. 16:
Kingdom of Serbs, Croats, and Slovenes 6M per cent, 1958_____
Republic of Greece 814 per cent, 1954 (£956,243/-/9)____________
Dec. 30:
Kingdom of Serbs, Croats, and Slovenes 614 per cent, 1958_____
Kingdom of Rumania Monopolies Institute 7 per cent, 1959___
Jan. 2. 1931: Rermhlie of Ecuador 8 ner cent. 1953 ____________
Jan. 16: HnnErarian land reform morteaee series A 5V6 Der cent. 1979 '
Feb. 2: Mortgage Bank of Ecuador 7 per cent, 1949......................
Mar. 20:
Balance on
deposit
$1,000,000
12,000,000
$2,340,000
5.616.000
5.460.000
22,000
150,000
15,326
49,614
$59,782, 732
59, 760, 732
59, 610, 732
59,595,406
59, 545, 792
12,670
14,300
59,836
59,458,986
5,000,000
2,224,640
2,856,000 "’ 59,'378,'346
150,000
59,258,346
5,000,000
4,647,341
59,611,005
1,935,700
15,939
50,978
13,113
61,175,305
61,150,366
61,108, 388
61,095, 275
4,350,000
61, 392,616
4,647,341
Mar.______
27: R________________
epublic of Poland 7 per cent, 1945 150,000
59,695, 275
59,545,275
3,500,000
.
4,647,341
Mar. 26:
2,950,000
M a y 20:
4,582,419
2,950,000
16,576
3,109
13,572
July 15: Hungarian land reform mortgage series A 5 ^ per cent, 1979.
Aug. 24:
Kingdom of Rumania Monopolies Institute 7J4 per cent, 1971
(Fes. 75,000,000)....................................... ........... - ...........................
Republic of Greece 8J^ per cent, 1954 (£942,884/11/4)............ .........
Oct. 21: Kingdom of Rumania Monopolies Institute 7)4 per cent,
1971 (Fes. 100,000)........................................................................... .........
61,177,634
61,161,118
61,158, 009
61,144,437
3,000,000
” 4,'582,"419’ "*59,'562,'018
4,000
17,239
59, 558,018
59, 540,779
14,047
59, 540, 779
14,047
59,541,472
6,000
59, 541,472
Feb. 2:
14,047
March 12:
14,740
April 1:
Cash (Fes. 150,000)
.................................................... .....................
Kingdom of Rumanian Monopolies Institute
per cent, 1971
(Fes. 150,000)
............................................................ ....................
6,000
Changes in amount secured debentures outstanding:
50,000,000
Sinking-fund retirements— *
Sept. 1,1929........................................................ .................. .........
Mar. 1, 1930 ............................... ......................................... ..........
Sept. 1,1930 .......................................... .........................................
Mar. 1,1931............................................................................. .........
Sept. 1,1931.....................................................................................
Mar. 1, 1932 ...................... ................................... ........................
375.000
391.000
394.000
404.000
414,500
425.000
2,403,500
47,596,500
Conversion of foreign currencies to dollars, used above, have been made at rate of £ = $ 4 .8 6 ; French
franc=$0.04; Belgian franc=$0.138; reiehmark=$0.238; krona=$0.268.
1176
STOCK EXCHANGE PRACTICES
Questions 3
and
4
CABLED SUMMARY OF STATEM ENT ISSU ED B Y SW EDISH IN VESTIG ATIN G COMM ITTEE,
A PRIL 5, 1932
The investigation committee called in by the board of A. B. Kreuger & Toll,
after having conferred with the board, makes the following statement:
As it is evident that it will take considerable time yet to obtain a clear state
ment of the position of Kreuger & Toll, the investigation committee has requested
Messrs. Price, Waterhouse & Co. to make a preliminary report on its examination
of the last published accounts of the company as of December 31, 1930. The
accountants have made such a report, the contents of which are summarized as
follows:
“ Although our investigations are still but in the preliminary stage we have
nevertheless reached a point where we are able to state that, in our opinion
beyond doubt, that the balance sheet of Aktiebolaget Kreuger & Toll as at Decem
ber 31, 1930, as well as the consolidated balance sheet accompanying it (in which
were embodied also the account of its wholly owned subsidiary company, N. V.
Financieele Maatschappij Kreutoll) appearing in the directors’ report to the
shareholders dated April 1, 1931, while being an agreement with the balance
appearing on the books of these companies, nevertheless grossly misrepresented
their true financial position.
“ Under the personal direction of the late Mr. Kreuger, entries were made on
the books which, on the one hand, eliminated substantial balances shown to be
owing to the parent company by him and by subsidiaries or affiliated companies
and, on the other, either entirely eliminated liabilities to other subsidiary com
panies or established book assets account purporting to represent assets of
substantial sums. In some instances there is reason to believe the book assets
so set up were either—
“ 1. Greatly in excess of the items they purported to represent,
“ 2. Entirely fictitious, or
“ 3. Duplication of assets belonging to and appearing on the books of associated
companies.
“ Moreover, even though some substance should lie behind these book asset
accounts (which at present there is reason to doubt), there are instances where
their descriptions and classifications in the balance sheets were entirely misleading.
“ It is of course impossible to state now just what the real position actually
was, but such evidence as is available is indicative that it was grossly overstated
and this is our present opinion.
“ From a cursory examination we have made of the books and accounts of the
Continental Investment Co. (a wholly owned subsidiary of the International
Match Corporation) and from a comparison of the details of the current accounts
between this company and the two Kreutoll companies above referred to, we
have ascertained that a similar situation exists in regard to the accounts of this
company also.
“ The manipulations of the accounts above indicated appear to have extended
also to the profit and loss account of the two companies concerned. Indeed,
there are also indications that the profits reported for the year 1930 were grossly
overstated by means of fictitious entries.”
The investigation committee and the board of the company are trying to
find some way, in the first place to liquidate the company in such a manner that
the interests of the creditors will be looked after to the greatest possible extent,
and also to continue in some form the business of the industrial undertakings
belonging to the Kreuger concern.
T orsten N othin .
E. B rowald .
M artin F ehr .
B. G. Prytz .
H ugo Stenbeck .
J.
W
allenberg
.
1177
STOCK EXCHANGE PRACTICES
Q uestions 5, 6
Record of security holdings in Kreuger & Toll Co. and affiliated companies at
August SI, 1981, March 14, 1932, and May 25, 19S2, of Lee, Higginson & Co.
Aug. 31,
1931
Mar. 14,
1932
Increase or
decrease,
Mar. 14,
1932, over
Aug. 31,
1931
M a y 25,
1932
Kreuger & Toll Co.:
Firm ................................ .........American certificates..
Partners______________________________ ______d o -----
119,440
149,572
139,307
160,973
139,307
160,973
19,867
11,401
Total__________ ________ __________________d o------
269,012
300,280
300, 280
1 3 31,268
Participating debentures—
F i r m ...______ ________________________kronor..
P a rtn ers...____ _________________ _______d o___
633,340
70,220
0
0
0
0
3 633,340
3 70, 220
T o t a l.________ _______________________ do___
70% 560
0
0
i 3 703,560
B shares—
Firm ____________ _____________________ shares..
Partners_______________ ________________ do___
5,900
1,770
5, 220
0
5,220
0
3 680
31, 770
T o ta l...........................................................d o___
7,670
5,220
5,220
2 3 2,450
International M atch Corporation:
Participating preference S to c k F irm ............ ................ ................................ shares. .
Partners___________________ _____ ______ do—
0
5,200
0
4,600
0
4,600
0
3 600
T otal............... ............... ............. .............. d o------
5,200
4,600
4,600
3 600
Swedish M atch Co.:
B s to c k Firm ____ ________________ ____ _______shares. .
Partners___ _________ ____________ ______d o ___
0
2,000
0
2,000
0
2,000
0
0
T otal............................................. ............. d o___
2,000
2,000
2,000
1 20 kronor equals 1 American certificate. These kronor debentures were exchanged for 35,178 American
certificates on Oct. 24,1931.
* W ith the proceeds of the sale of these 1,770 B shares there were purchased 7,860 American certificates
in February, 1932.
8 Decrease.
N ote .—N one of these securities were sold between the day prior to M r. Kreuger’s death and the present
time.
Q uestion 7
1928
The consolidated balance sheet of AB Kreuger & Toll and its principal sub
sidiary holding companies, N. V. F. M. Kreuger & Toll and Swedish American
Investment Corporation, as of December 31, 1928, shows “ Other industrial
stocks” of $10,280,704, “ Real estate interests in other European countries”
of $13,591,943, “ Bank stocks” of $15,231,962, “ Foreign Government bonds”
of $21,071,744 and “ Other stocks and bonds” of $4,784,103. According to
information furnished to us, the composition of these items is as follows:
Other industrial stocks:
38.000 shares Stora Kopparbergs Bergslags A B _______________ $1, 680, 360
8.000_shares AB Svenska Kullagerfabriken___________________
482, 400
5,266 shares Fiskeby Fabriks AB _____________________________
148, 185
523 shares Grangesberg C o___________________________________
42, 049
8,713 shares Kopparbergs & Hofors Sagverks A B _____________
262, 697
3,228 shares AB Separator, series A __________________________
155, 719
1,872 shares AB Separator, series B __________________________
90, 305
2,145 shares Mexikanska Telefon AB Ericsson________________
137, 966
5,710 shares Finska AB Kreuger & T oll______________________
688, 626
I,750 shares Svenska Flaktfabriken___________________________
281, 400
II,390 shares Finanzgesellschaft fur die Industrie, series A ____
2, 197, 814
58.000 shares Finanzgesellschaft fur die Industrie, series B ____
4, 113, 182
Total
10, 280, 704
11 7 8
STOCK EXCHANGE PRACTICES
Real estate interests in other European countries:
AG Fuer Hausbesitz (Berlin)___________________ _____________ $12, 928, 643
French Real Estate C o_______________________________________
663, 300
Total___________________________________________________13,591,943
SdiQk stocks *
70.000 shares Skandinaviska Kredit AB ......................... ................
6.000-shares Stockholms Intecknings Garanti A B -------------------78,098 shares Preussische Hypotheken Actienbank___________
79,550 shares Banque de Suede et de Paris_______________ ____
1,989 shares Hollandsche Koopmansbank_____________________
50.000 shares American Bank of Poland______________________
3,231 shares Algemeine Finanzgesellschaft____________________
2,128 shares Skandinaviska Kredit A B ________________________
689 shares Stockholms Intecknings Garanti A B _ _ ____________
49.000 shares Svenska Handelsbanken________________________
27,026 shares Ostergotlands Enskilda Bank__......... 1___________
2,100 shares Sundsvall Enskilda Bank____ _____ ______________
839 shares Venersborg Enskilda Bank______________ __________
8.000.shares Smalands Enskilda Bank.......................... — ............
3, 752, 000
964, 800
2, 462, 332
2, 306, 500
795, 840
1, 000, 000
419, 355
188, 200
180, 036
1, 469, 964
1, 412, 379
118, 188
33, 728
128, 640
Total__________________________________________________ 15,231,962
Foreign Government bonds:
371,721,841 francs French rentes, 3 per cent, 4 per cent, 5 per
cent_______________________________________________________ 11, 712, 581
$10,000,000 French 5 per cent bonds, 1928___________________
9, 359, 163
Total__________ ___________________________________________
Other stocks and bonds:
160,955 shares Belgian National Railways____________________
27,023 shares Hammarsforsens Kraft AB ................................. ......
Sundry______________________________________________________
Total_______________________________________________ ______
21,071,744
2, 684, 065
724, 216
1, 375, 822
4,784,103
1929
The consolidated balance sheet of AB Kreuger & Toll and its principal sub
sidiary holding companies, N. V. F. M. Kreuger & Toll and Swedish American
Investment Corporation, as of December 31, 1929, shows “ Other industrial
stocks” of $59,377,299, “ Real estate stocks in other European countries” of
$13,527,300, “ Bank stocks” of $15,628,562, and “ Foreign government and other
bonds eligible as collateral for secured debentures” of $85,274,937. According
to information furnished to us, the composition of these items is as follows:
Other industrial stocks:
38.000 shares Stora Kopparbergs Bergslags___________________ $1, 680, 360
8.000_shares AB Svenska KuUagerfabriken____________________
482, 400
8,713 shares Kopparberg-H of ore Sagverks A B _________________
262, 697
5,100 shares AB Separator____ _____ _________________________
246, 024
5,710 shares Finska AB Kreuger & T oll_______________________
688, 626
1,750 shares AB Svenska Flaktfabriken________ i _____________
281, 400
69,390 shares Finanzgesellschaft fur die Industrie_____________ 6, 310, 996
19,475 shares Societe Generale des Allumettes________________
3, 131, 580
Sundry_______________________________________________________
286, 152
Short-time investments_______________________________________ 46, 007, 065
Total______________________________________________________
59,377,299
Real estate stocks in other European countries:
A. G. fur Hausbesitz_________________________________________ 12, 864, 000
French Real Estate C o_______________________________________
663, 300
Total_______ ______ ________________________________________
13,527,300
STOCK EXCHANGE PRACTICES
1179
Bank stocks *
70.000 shares Skandinaviska Kredit A B _____ ________________ $3, 752, 000
2,128 shares Skar^dinaviska Kredit A B ___ ____________________
188, 200
6.000_shares Stockholms Intecknings Garanti A B _____________
964, 800
689 shares Stockholms Intecknings Garanti A B _______________
180, 036
29.000 shares AB Svenska Handelsbanken____________________
1, 408, 651
1, 412, 379
27,026 shares Ostergotlands Enskilda Bank___________________
Sundry bank shares__________________________________________
280, 556
3,769 shares Allgemeine Finanzgesellschaft___________________
497, 231
1, 000, 000
50.000 shares American Bank of Poland______________________
2, 306, 500
79,550 shares Banque de Suede et de Paris___________________
50.000 shares American Bank of Poland (new)________________
843, 170
1,989 shares Hollandsche Koopmansbank_____________________
795, 840
6,000,000 Reichsmarks, Deutsche Union Bank________________
1, 999, 200
Total________________________________________________ _____ 15,628,562
Foreign government and other bonds:
Belgas 16,095,500 Belgian National Railways_____________________
2, 552, 079
131, 422
$150,000 Jugoslavian, 1962, series A, 8 per cent___________________
$175,000 Jugoslavian, 1962, series B, 7 per cent___________________
130, 675
$100,000 Jugoslavian, 1957, 7 per cent________________ _____ ______
77, 161
$8,500,000 Jugoslavian, 6% per cent_______________________________
7, 616, 493
60.000.000 francs Rentes Fr. Perpet., 3 per cent___________________
1, 985, 656
144.000.000 francs Rentes Fr. 1917, 4 per cent____________________
5, 591, 268
140.000.000 francs Rentes Fr. 1918, 4 per cent____________________
5, 413, 036
$24,500,000 French State, 1928, 5 per cent________________________ 23, 745, 537
$975,931 Mortgage Bank of Ecuador, 7 per cent__________________
816, 192
$1,959,106 Republic of Ecuador, 8 per cent_______________________
1, 950, 525
$6,000,000 Latvia, 6 per cent_____________________________________
5, 495, 822
$4,800,000 Polish State, 7 per cent________________________________
4, 778, 976
968,554/19/10£ Greek Republic, 8% per cent______________________
4, 707, 352
380,691/l/0£ Rumanian, 4 per cent_______________________________
814, 100
4, 950, 223
$4,972,000 Rumanian, 7 per cent_________________________________
$11,976,550 Hungarian, 5% per cent___________ 1-------------------------- 10, 970, 165
Sundry Mortgage Bank bonds____________________________________
3, 512, 004
36, 252
Sundry Items__________ __________________________________________
Total__________________________________________________ _
85,274,937
1930
The consolidated balance sheet o f AB Kreuger & Toll and its principal sub
sidiary, N. V. F. M. Kreuger & Toll, as of December 31, 1930, shows “ Other
industrial shares” of $25,804,214, “ Real-estate interests outside Sweden” of
$22,136,610, “ Other bank shares” of $16,512,815, and “ Foreign Government and
other bonds eligible as collateral for secured debentures ” of $112,527,836. Accord
ing to information furnished to us the composition of these items is as follows:
Other industrial shares:
627,268 shares L. M. Ericsson Telephone Co_________________$10, 909, 033
34,806 shares Grangesberg C o _______________________________
2, 276, 034
24,900 shares Mexikanska Telefon AB Ericsson______________
1, 367, 266
144,000 shares Svenska Kullagerfabriken____________________
6, 946, 560
76,960 shares Stora Kopparbergs Bergslags A B ______________
2, 949, 415
5,710 shares Finska AB Kreuger & Toll_____________________
688, 626
4,800 shares Kreuger & Toll Construction Co________________
385, 920
1,750 shares AB Svenska Flaktfabriken_____________________
281, 400
Total_____________________________________________________
25, 804, 214
Real-estate interests outside Sweden:
120 shares AG fur Hausbesitz_______________________________
Shares in and advances to S. A. Birka (Paris)_______________
Shares in and advances to G. m. b. H. Origo (Poland)_______
12, 864, 000
8, 512, 350
760, 260
Total_______ _____ ________________________________________
22, 136, 610
1180
STOCK EXCHANGE PRACTICES
0tli6r b&iik sh&rQS *
198,359 shares Banque de Suede et de Paris_________________
49.000 shares Svenska Handelsbanken_______________________
6.000_shares Hollandsche Koopmansbank___________ _____ ___
100.000 shares American Bank of Poland____________________
10.000_shares French & Foreign Investors___________________
2.000_shares Soc. Fin. pour Valeurs Scandinaves, Sweden____
3,769 shares Allegemeine Finanzgesellschaft__________________
4,531 shares AB Bergenstrom________________________________
325 shares AB Bernhardt______________________________ _____
100 shares Norrland Insurance C o___________________________
2.000 shares Banque Contant___________________________ ____
T otal.
______ _______________ ____________________________
Foreign Government bonds:
$105,000 Yugoslavian, 1962, 8 per cent______________________
$171,000 Yugoslavian, 1962, 7 per cent.___________ __________
$97,000 Yugoslavian, 1957, 7 per cent_______________________
$22,000,000 Yugoslavian, 1958, 6% per cent_________________
French 4 per cent Rentes, 1918______________________________
$963,262 Mortgage Bank of Ecuador, 7 per cent, 1949_______
$1,929,044 Republic of Ecuador, 8 per cent, 1953____________
$6,000,000 Latvian, 6 per cent, 1964_________________________
$4,500,000 Polish, 7 per cent, 1945__________________________
956,243/9£ Greek, %% per cent, 1954_________________________
380,691/1£ Rumania, 4 per cent, 1968_______________________
$23,902,841 Hungarian Mortgage Bank, 5*4 per cent, 1979___
56,000,000 kronen German, 5% per cent, 1965________________
$3,000,000 German, 6 per cent, 1980_________________________
£9,000,000 Italian, 6 per cent, 1935_________________________
13,269,450 reichsmarks Sundry German mortgage bank bonds
(chiefly 8 per cent interest)_____________________ ______ ___
Total__________________ __________________________________
Q u e s t io n
$6, 616, 971
2, 915, 304
2, 865, 925
1, 842, 500
750, 735
536, 000
488, 893
242, 862
172, 200
40, 200
39, 225
16,512,815
95, 644
131, 799
74, 763
15, 420, 988
237, 934
809, 933
1, 930, 934
4, 805, 669
4, 504, 410
4, 646, 232
744, 511
19, 622, 741
10, 655, 680
2, 309, 168
43, 518, 003
3, 019, 426
112,527,836
8
SYNDICATE PARTICIPATION S
In the December 31, 1928, consolidated balance sheet of AB Kreuger & Toll
and its principal subsidiary holding companies, N. V. F. M. Kreuger & Toll and
Swedish American Investment Corporation, there was included $8,166,515
“ Syndicate participations” in the figure of $20,703,585 “ accounts receivable.”
In the December 31, 1929, and December 31, 1930, balance sheets the amount
of “ Syndicate participations” was reported at $21,802,784 and $50,878,027,
respectively. According to information furnished to us, the composition of the
“ Syndicate participations” item for 1928 and 1929 is as follows:
December 31, 1928:
Account Svensson (Swedish pulp and lumber)__________________ $3, 344, 485
Katanga Syndicate.__________________________________ ______ - 1,854,715
Arbed Syndicate__ __________________________________________
1,453,517
Bank Syndicate (French bank shares)________________________
1, 090, 999
Sundry______________________________________________________
422, 799
Total______________________________________________________
8, 166, 515
December 31, 1929:
Katanga Syndicate___________________________________________ _3, 501, 548
Arbed Syndicate_____________________________________________ _3, 141, 213
Bank Syndicate (French bank shares)________________________ _1, 897, 009
L. M. Ericsson Telefon AB ___________________________________ _8, 166, 954
Sundry_________________________ _______________________ _____ _5, 096, 060
Total__________________________________ _____ ______________
21,802,784
With regard to the item of “ Syndicate participations” appearing in the De
cember 31, 1930, consolidated balance sheet, the following is quoted from a
memorandum furnished by Mr. Kreuger, in November, 1931:
1181
STOCK EXCHANGE PRACTICES
"T h is item represents investments made jointly with other interests, of a more
or less temporary nature, or for a particular purpose which requires their being
considered in a different class than the other investments of the company.”
A list of the syndicate participations is given below.
Syndicate 'participations as at December 31, 1930
Kroner
28,269 shares in Ostergotlands Enskilda B ank........ ........... ...................... .......
359,260 shares in L. M . Ericsson Telephone C o ______ ____________________
10,000 shares in Deutsche Ijn ion ban k A /G , including interests in the
Deutsche Bodenkredit A . G __________________________________________
French Keal Estate S y n d ica te ................................ ............................ ...........
Investments in connection with Z business1__________ _____ ___________
Different interests in the German match industry...................... .......... ..........
Hungarian General M atch Manufacturing C o____________________________
M ajority holding in Garanta Corporation____ ______ ____________________
11,390 shares in Finanzgesellschaft fur die Industrie, Ser. A ................. ..........
58,000 shares in Finanzgesellschaft fur die Industrie, Ser. B ________ ______
Sundry items........ .....................................................................................................
United States
currency
5,222,586.90
10,671,951.90
$1,399,653.28
2.860.083.40
35,590,000.00
29, 780,000.00
36.976.500.00
15.366.790.00
15, 686,000.00
13, 636,507. 68
8, 200,800.00
15,347,692.67
3,434,523.20
9.538.120.00
7.981.040.00
9.900.000.00
4.114.000.00
4.200.000.00
3, 654,584.14
2.197.814.40
4,113,181.72
919,551.06
189,913,352.35
50,878,027.00
1 Designation for Diam ond M atch Co.
Ostergotlands Enskilda Bank.— The shares in this bank have been bought for
account of another Swedish bank which intends to amalgamate with Ostergot
lands Enskilda Bank as soon as conditions admit. Aktiebolaget Kreuger & Toll
is assured against any loss on this transaction and will have a fair profit on it.
L. M. Ericsson Telephone Co.— These shares were held with the intention of
introducing them on the French market and an agreement had been made with
a syndicate, headed by Credit Lyonnais, for this purpose. The authorization
by the French Government to introduce them was, however, delayed so long that
Aktiebolaget Kreuger & Toll decided to dispose of the shares in another way.
Deutsche Unionbank A. G.— This holding represents all the shares in this bank
and also a very important interest in Deutsche Bodenkredit A. G. For reasons
of taxation and also on account of public opinion it has been considered preferable
that Deutsche Unionbank instead of Aktiebolaget Kreuger & Toll should be
owners of the shares in Deutsche Bodenkredit A. G. The bank has not given
any mortgage loans on buildings owned by Aktiebolaget Kreuger & Toll.
French Real Estate Syndicate.— This represents participation in a syndicate
owning real estate interests. One of the most important of these consists of
shareholding in the largest real estate company in France. It owns 166 differ
ent properties in Paris and will have a very great earning power when the present
rent laws elapse. During the year 1931 additional shares in this company have
been acquired so that Aktiebolaget Kreuger & Toll now has the control of the
company. It is the intention that the French real estate company should take
over the other real estate interests owned by Aktiebolaget Kreuger & Toll in Paris.
Investments in connection with Z business.1— This business is of an extremely
confidential nature. The intention is to transfer it to Swedish Match Co. or
International Match Corporation when conditions permit.
Different interests in the German match industry.— These interests have been
taken over by Aktiebolaget Kreuger & Toll on account of the German match law
of 1923 prohibiting the Swedish Match Co. from owning more than 65 per cent of
the German match factories. At the present time the holding serves to give
Aktiebolaget Kreuger & Toll an interest in the match industry to compensate
for the company having taken over part of the German loan.
Hungarian General Match Manufacturing Co.— This company owns all match
factories in Hungary and has the concession for the Hungarian match monopoly.
Garanta Corporation.— This company has certain concessions in the Polish
match industry.
Finanzgesellschaft fur die Industrie.— This company was created in 1925 by
the Swedish Match Co., Bryant & May, England, Union Allumettiere, Belgium,
and Nitedals Match Co., Norway, which were at the time the four leading match
enterprises in Europe. The aim of the company was to finance match interests
in different countries, which interests were of such a nature that they could not
1 Designation for Diam ond M atch Co.
1182
STOCK EXCHANGE PRACTICES
be owned openly by any one of the four above-mentioned companies. The
function of this company is to supervise agreements which exist between all
match factories in Europe and to make such transfers of profits from one com
pany to another which are a consequence of existing agreements. For reasons
of secrecy as well as for reasons of taxation the shares can not be owned by
Swedish Match Co.
ACCOUNTS RECEIVABLE
The December 31, 1930, consolidated balance sheet of AB Kreuger & Toll and
its principal subsidiary, N. V. F. M. Kreuger & Toll, shows “ Accounts receiv
able” of $45,378,390. According to information furnished to us, the composi
tion of this item is as follows:
Krona
14, 992, 535. 26
Hufvudstaden Real Estate_______________________________ ____
Swedish Pulp Co_____________ ______ _____________ _____ _____
853,921.15
434, 041. 18
Svenska Tandsticks Aktiebolaget_____________________________
AB Sefor_____________________________________________________
7, 687, 470. 35
R. Bothen-----------------------------------------------------------------------------204, 414. 52
Hentsch & Co., Geneva______________________________________
1, 673,670. 03
Sirius Share suspense a/c_____________________________________
4, 280, 470. 03
Societe Generale des Allumettes______________________________
2, 857, 719. 04
Italian suspense account______________________________________ 116, 703,112. 50
Hungarian suspense account__________ _______ _______________
3, 149, 059. 75
1. —
Spanish suspense account_______________ ___________________, _
A/c for interest due___________________________________________
2, 047, 208. 50
Sundry debtors_______________________________________________ 14, 438, 727. 25
169,322, 350. 56
Equivalent to $45,378,390.
We do not have detailed information concerning the “ Accounts receivable”
tems in 1928 and 1929.
Senator C o s t i g a n . During all the transactions to which reference
has been made you were, I believe, a director of Kreuger & Toll, also
of Lee, Higginson & Co.?
Mr. D u r a n t . That is not quite correct. I was a member of the
firm of Lee, Higginson & Co., but I did not become a director of
Kreuger & Toll until after this issue which we have just been discussing
was bought.
Senator C o s t i g a n . D o you recall the date when you became such
a director?
Mr. D u r a n t . I think I was elected by the stockholders at their
meeting in 1929, which was probably in April or May, some such time
as that, or June.
Senator C o s t i g a n . And have continued to be a director ever since?
Mr. D u r a n t . That is right.
Senator C o s t i g a n . Have you ever attended a meeting of the board
of directors of Kreuger & Toll?
Mr. D u r a n t . Not until after Mr. Kreuger’s death, I went to
Sweden.
The C h a i r m a n . And you became a member of the board at what
date?
Mr. D u r a n t . The exact date, Senator, I do not recall. In the
spring of 1929.
The C h a i r m a n . And Kreuger’s death was when?
Mr. D u r a n t . Kreuger’s death was 1932; March.
The C h a i r m a n . In other words, you were a director for three years
but did not attend the directors’ meetings?
Mr. D u r a n t . That is correct. The directors’ meetings were held
in Sweden.
Senator C o s t i g a n . He committed suicide in Paris?
STOCK EXCHANGE PRACTICES
1183
Mr. D u r a n t . Yes.
Senator C o s t i g a n . Were you in Paris and in the same hotel at the
time?
Mr. D u r a n t . No, sir; not in the same hotel. I was in Paris. He
was in his own apartment.
Mr. M a r r i n a n . Mr. Chairman, I would like to have inserted in
the record at this point as an exhibit a report prepared for the com
mittee by Lee, Higginson & Co. and delivered to me, under date of
January 5, 1933, setting forth the present status of this collateral
pledged.
The C h a i r m a n . If there is no objection it may be printed in the
record.
(Report prepared for the Senate Banking and Currency Committee
by Lee, Higginson & Co. setting forth present status of collateral
pledged, was marked “ Exhibit B,” and is here printed in the record
in full, as follows:)
Collateral on de-posit for Kreuger & Toll Co. 5 per cent secured debentures
Amount
On deposit, M ar. 12,1932:
Republic of Ecuador, 8 per cent, 1953Mortgage Bank of Ecuador, 7 per cent, 1949Republic of Latvia, 6 per cent, 1964...............
Annual in
terest yield
on issues
on which
service be
ing met as
of Mar. 12,
1932
$1,879,290
$150,343
922,530
64,577
,
6 000,000
360,000
(>)
Hungarian Mortage Bank, 5H per cent, 1979..
Kingdom of Jugoslavia,
per cent, 1958.......
23,848,754
Rumanian Government, 4 per cent, 1968
(£380,691).
Rumanian Government, 7 Yi per cent, 1971
(Fes.. 74,900,000).
German International, 5H per cent, 1965
(K r. 55,000).
J 1,852,628
2 55,733
a 2,928,630
* 219,647
»14,047
2 810
Total...................- .........—...................................
59,445,878
2,226,110
Changes since Mar. 12,1932:
W ithdrawn—
Mortgage Bank of E cuador..
Rumanian 7H (Fes. 295,000).
,
22 000,000
14,539
311,800
1, 375,000
Remarks
July 1, 1932, payment not
made.
A ll payments to date; next
Feb. 1, 1933.
All payments to date; next
July 15, 1933.
Dec. 1, 1932, payment not
made.
All payments to date(?);
next Apr. 1, 1933.
A ll payments to date; next
Apr. 1, 1933.
All payments to date; next
June 1, 1933.
(3)
26,339
Total...........................................................
A dded: Cash account, interest and amortiza
tion payments received.
T o ta l................................ ..........................
Secured debentures outstanding...............
Annual interest requirement thereon.
59,419,539
1,091,040
60,510,579
'700,000
47, 596, 500
2,379,825
1 Jan. 15, 1933, payment not made on account of moratorium; annual rate due, $1,311,640.
2 Approximate dollar equivalent.
3 Approximate present annual interest yield after allowing for defaults subsequent to Mar. 12, 1932.
Senator C o s t i g a n . Before we proceed, may I ask Mr. Durant why
you became a member of the board of directors of Kreuger & Toll if
you were not expected to attend the directors’ meetings?
Mr. D u r a n t . Because I thought it would increase our contact with
the business, and that it has been my expereince that a good deal
118 4
STOCK EXCHANGE PRACTICES
can be accomplished by a director outside of meetings. That the fact
that one is a director even gives one closer contact.
Mr. M a r r i n a n . As a basis for a further examination of MrJ
Durant, I now wish to examine certain ramifications of this situation
into the newspaper field.
The publicity and advertising given to the Kreuger & Toll issue of
secured debentures through the press and in advertisements in the
financial sections of many newspapers obviously played an important
role in the investment of a large sum of American money in the issue
of secured debentures. It seemed desirable to examine this situation
with a view to ascertaining what safeguards in behalf of the investor
were set up in the field of publicity and advertising.
For that purpose, the New York Times was selected because of
reputation. The Times has developed a system of examining secu
rity issues which it does not appear is excelled by any other newspaper
in the United States.
If the New York Times were unable to afford safeguards, it is im
probable that other newspapers are in a position to so do.
Investigation disclosed that when a banking house or other financial
advertiser floated its first issue, the Times makes a very exhaustive
investigation of its financial and moral responsibility. The only ex
ception to this rule is when application for advertising space comes
from a reputable bank or from a house holding membership on the
New York Stock Exchange. The regular system of bank examination
and the good repute of the New York Stock Exchange in financial
circles persuades the Times to waive such examinations in these two
instances.
Otherwise, applicants for advertising space are sent a questionnaire,
or a series of questionnaires, differing in some degree by reason of the
nature of the business, but generally asking for the following infor
mation :
The place of business.
The names of all officers and their addresses.
The prior business connection of all such officers, which information
is checked against information furnished by such, commercial agencies
as Bishop’s, Proudfoot’s or the Research Service. With banking and
brokerage concerns, inquiries are made as to their membership in
exchanges, their use of stock exchange or other news tickers, their
leased wires, and what business organizations they hold member
ship in.
They are further asked for two banking connections and their credit
examined.
Inquiry is made as to whether any of their officers are personally
acquainted with bank officials. The banks are asked how they came
to secure the accounts.
They are further requested to furnish one bank reference and four
business references.
They are required to file a financial statement signed by an officer
of the company, witnessed and sealed.
This information, together with such collateral information as may
be available in the reference files of the Times is examined by the
financial advertising staff and then passed on with comment to a
committee on acceptance comprised of six members, five of whom
are department heads of the New York Times, and the sixth is chair
man of the committee.
STOCK EXCHANGE PRACTICES
1185
If acceptance of the advertising is declined by the committee, the
applicant company may ask for the privilege of a hearing by a re
sponsible officer of the concern, to make personal appearance before
the committee and furnish additional information. When this tran
spires, a review of the situation is made which, if still negative, results
in the final rejection of advertising offered by the applicant concern.
The facilities of the local and national better business bureaus are
used, those of the stock exchange, the Attorney General's office, and
the various State securities departments to supplement the informa
tion furnished in questionnaires.
This general procedure applies to all new companies and new issues
which are not directly sponsored by a reputable banking house or a
member of the New York Stock Exchange.
The Kreuger & Toll issue floated by Lee, Higginson & Co., mem
bers of the New York Stock Exchange, and also a banking institution
of good repute, was not subjected to the examination above outlined.
I wish to submit for the record at this time copies of questionnaires,
the usual questionnaires used by the New York Times for this purpose.
The C h a i r m a n . Do you want them printed in the record?
M r . M a r r i n a n . Yes.
The C h a i r m a n . If there is no objection, they may be printed in
the record.
(The New York Times questionnaires above referred to are here
printed in the record in full, as follows:)
T h e N e w Y o r k T im e s ,
Times Square, New York.
(Financial advertising department)
Confidential information regarding firm or corporation issuing securities,
advertising of which is offered for publication on the financial pages of The New
York Times.
D a t e ______________________
1. Name of company_________________________________________________________
2. Location and description of properties______________________________________
3. Nature of advertising to be done__________________________
4. Business__________________________________________________
5. How long established_____________________________________
6. Authorized capital: Common_______________
Preferred
7. Amount outstanding: Common_______________ Preferred
8. Par value________________________________________________
9. Amount of cash paid in___________________________________
10. For what purpose was balance of outstanding capital issued
11.
12.
13.
14.
15.
16.
17.
18.
19.
Is company on a producing and marketing basis____________ _____________
Has company paid dividends______________________________________________
How long_________________________________________________________________
Date of last dividend: Preferred___________________
Common____________
Common____________
Dividend rate last three years: Preferred__________
Net earnings per year for last three years___________________________________
Are securities of company listed on any exchange and where_______________
Is the company rated by Dun or Bradstreet______________________________
Officers and directors and their addresses with present and prior business
connections:
20. References, including one bank:
21. Attach financial statement signed by an official of the company.
11 86
STOCK EXCHANGE PRACTICES
22. Attach proofs of advertisements placed by you with other publications.
Give names of publications.
S igned_________________________________
T he N ew Y ork T imes ,
Times Square, New York.
(Financial advertising department)
Confidential information regarding individual, firm, or corporation dealing
in securities whose advertising is offered for publication on the financial pages
of The New York Times.
D a t e ______________________
1. Firm or individual________________________________________________________ _
2. Address____________________________________________________________________
3. Exact nature of business____________________________________________________
4. How long established.______________________________________________________
5. Officers, special partners, and others financially or otherwise interested and
business connections prior to present affiliation. (N am e)_______ ______ ____
(Prior connections)____________________________
(D ates)________________
6. Bank connections__________________________________________________________
7. Exchange membership______________________________________________________
8. Association memberships_______________________________ ______________ _____
9. Have you a stock exchange ticker?__________
9a. Curb ticker?_________ __
9b. Have applications been made?_____________ ___________ _____________
9c. Private wires, to whom?_ ______ _____________________________________
10. Rating by Dun, Bradstreet, or other agency_______________________________
11. Business references (and their addresses), preferably financial houses of
established standing.
(a)
--------------------------------------------------------------------------------------- .
(b)
----------- -------- ---------------------------------------------------(c)
(d)
(e)
---------- -----------------------------------------, ........... .............................. - .....................
12. If financial statement is available, kindly attach.
13. Attach proofs of advertisements placed by you with other publications.
Give names of publications.
Signed_________________________________
THE N EW YO RK TIMES
Information is required of advertisers offering or seeking partnership or
investment in a firm; or offering or seeking business connections, distributor
ships, agencies, etc.
(This information is held confidential)
Advertiser’ name______________________________________________________________
Business address___________________ _______________________________________ . . .
Nature of business__________________________________________________________ _
Business telephone_________________________________ _______________________
ONE B AN K AND TW O BUSIN ESS REFEREN CES
1
________________
Telephone__________ - ________________
Address________________________________________________________ ______ . . .
2
'_________________________ Telephone____________ ______________
Address_________________________________________________________ ________
3
________________ ___________ Telephone____ ___________. . . ________
Address__________________________________________________ ,------------ ______
Commercial ra tin g s?______________________________________________ ___________
STOCK EXCHANGE PRACTICES
1187
Give the following information if an investment in business is sought:
Is company organized or incorporated________
How long established_________
Names of partners if a firm; or officers if a corporation with previous business
connections_____________________________________________________ ____________ _
CONFIDENTIAL QUESTIONNAIRE FOR INVESTM ENT TRUSTS
T h e N e w Y o r k T im e s ,
Date________________
1. Full name of the trust_________________________________________ _____
2. Name of depositor corporation, officers, and prior business connections
3. Organized under what laws of what State:
(a) Trust________________________________________________________________
(b) Depositor corporation______________________________ _____ ____________
4. Is business conducted under a deed of trust, as a common law trust, or as an
association?________________________________________________________
5. Trustee__________________________________________________________________
6. (a) Date of trust agreement______________________________________________
(b) Date of trust termination_______________________________ _____ _______
(c) If provision is made for extension of trust, give full details_____________
(d) Name of attorneys who approved trust agreement
7. Furnish list of securities now in portfolio.
(Give full details)
8. Does indenture prohibit purchase of securities from officers, directors,
stockholders, or others interested___________________________________
9. State what proportion of the unit is represented by each share of trust_____
10. (a) Coupon or registered form____________________________________
(b) Accumulative or distributive_________________________________
11. How much capital represents—
(a) Securities____________________________________________________
(b) Organization expenses________________________________________
(c) Organizers bonus_____________________________________________
12. Does the depositing corporation give its stock as a bonus on sales?
13. State in detail facts pertaining reserve fund:
(a) Amount per unit_____________________________________________
(b) Created out of earnings, or what other so u r ce ?_______________
(c) If invested, in w h a t ? _______ ________________________________
(d) If held in cash, is interest paid?_______________What rate?____
(e) Who shares in reserve fund?__________________________________
(f) For what purpose can money be withdrawn from reserve fund?
14. (a) What is done with stock dividends, split-ups, rights, etc.?
(b) If sold, within what period?__________________________________________
(c) State whether trustee or depositor corporation sells stock dividends,
stock splits, etc____________________________________________________
15. (a) Is this a fixed trust or is there power or elimination and/or substitution?
(b) Give details as to elimination or substitution__________________ _______
(c) Name of persons who decide substituted collateral and history of their
prior experience____________________________________________________
(d) Are proceeds added to distributive fund or reinvested?________________
(e) If reinvested, in what?____________ _____ ___________________________ _
16. (a) Who pays trustees fees?______________________________________________
(b) When?_____ __________________________________________________________
(c) Can trustee place a lien on securities and other property for non-payment
of trustees fees?____________________________________________________
(d) Are trustees fees deducted from income?______ Explain______________
17. How much set aside for incorporations and managers?.
1188
STOCK EXCHANGE PRACTICES
18. (a) What is the “ load” or “ mark-up” ?____ ______________ _________ :____
(b) Is this computed on the offering price on underlying securities or on the
cost of securities in the portfolio?___________________________________
(c) Original price in $ ______________________________ ______________________
(d) What percentage of the value of the underlying trust property is this
loading charge?_____________________________________________________
19. State in detail method of conversion into cash_____________________________
(a) Charges if any________________________________________________________
(b) What maintenance charges are there?-_________________________________
(c) What relation, in terms of percentage, has this charge to the value of the
underlying trust property?__________________________________________
20. (a) State in detail disposition of trust assets upon termination of trust______
(b)
21. (a)
(b)
(c)
Are expenses deducted before final distribution?_______________________
How are stocks for the trust purchased?_______________________________
State methods of price computation___________________________________
In quoting the market price of this, do you use bid or asked price of the
underlying securities?_______________________________________________
22. (a) What has been earned on investments to date?________________________
(b) How has the amount been earned?____________________________________
23. (a) Give past record of disbursements_____________________________________
(b)
23. (c)
(d)
24. (a)
(b)
(c)
(d)
What portion of the amount earned has been paid to investors?________
Fees incurred if any___________________________________________________
Can management sell short?----------------------------------------------------------------Number of shares outstanding_________________________________________
Number of individual shareholders________ ____________________________
Do you sell shares on installment or partial payment plan?_____________
Have holders of trust certificates any voting privileges, if so, what?____
25. Price range since formation, by years______________________________________
26. Method employed for sales distribution of securities issued by the investment
trust and names and addresses of principal distributors_________________
27. (a) Do you publish regular quarterly statements of condition?____ If not,
when_______________________________________________________________
(b) Is independent and competent auditor employed to make these state
ments?_________________________________________________ ________ _
Who is your auditor?_______________________________________________
(c) Do you put out preliminary reports of condition?______________________
28. (a) Attach if possible copy of proposed advertisement.
(b) Attach proofs of advertisements from other publications.
(c) Attach if possible copy of trust indenture, or any other data pertaining
to the trust.
29. Attach latest financial statement.
Do you permit statements in your advertising, or by your salesmen, tending to
show results which would have been obtained if an investment had been made in
the securities comprising the portfolio at any time prior to its creation?
Signed-------------------------------------------------(Officer of Depositor Corporation)
T he N ew Y ork T imes,
Times Square, New York.
(Financial advertising department)
Confidential information requested regarding real estate bond offering, adver
tising of which is submitted for publication on the financial pages of the New
York Times.
Date_______________________
1. Name of borrowing corporation___________________________________________
2. Officers and directors______________________________________________________
3. Location of property and type of building_________________________________
4. Is this a construction loan?________________________________ ±______________
5. Title or designation of issue_______________________________________________
6. Name of independent trustee_________________________________________ ____
7. Date o f issue__________________________________________________ ___________
8. Amount of loan_____________________________________________________ _____
9. Date or dates of maturity. ______________________________________ __________
STOCK EXCHANGE PRACTICES
1189
10.
11.
12.
13.
14.
15.
16.
17.
Rate and interest dates___________________________________________________
Priced to yield_________________________________________________________ __
What other liens______________________ ___________________________________
Amounts of appraisals, land and improvements____________________________
By whom and dates_______________________________________________________
Gross rentals, actual or estimated_________________ _______________________
If estimated, by whom and what allowance of vacancies___________________
Gross expenses, management, taxes, etc. (before interest charges on these
bonds)____________________________________________ _____________________
18.
19.
20.
21.
Amortization or sinking fund______________________________________________
By whom?________________________________
Bonds guaranteed?__________
What is the total amount of finance fees on this loan?_____________________
Describe or enclose adv'ertising contemplated______________________________
Signed__ ______________________________
Mr. M a r r i n a n . It appears that the New York Times while exercis
ing every diligence to ascertain the financial and moral responsibility
of new applicants for advertising space—which I may say is a state
ment which may be broadly applied to the press—has been up to this
time, willing to accept the sponsorship of reputable banks and of the
New York Stock Exchange without question. Moreover, it does not
appear possible for the Times or any other newspaper to set up
machinery equal in effect to that already in existence in the banking
field and in the organization of the stock exchange. We, therefore,
have here a situation in which, more broadly speaking, the press is at
present dependent, and does in fact, rely upon the sponsorship or other
indorsement of banking institutions and members of the New York
Stock Exchange in advertising and giving publicity to securities
issues.
Mr. Durant, can you tell the committee how the advertising copy
for the Kreuger & Toll secured debenture issue was prepared?
Mr. D u r a n t . N o, sir; I can not of my own knowledge.
Senator G o l d s b o r o u g h . May I ask a question, Mr. Chairman?
The C h a i r m a n . Yes.
Senator G o l d s b o r o u g h . Mr. Durant, is it within your knowledge
to state that the New York Times is the only newspaper in the coun
try that makes careful examination of all applications for financial
advertisements ?
Mr. D u r a n t . It is not possible for me to so state.
The C h a i r m a n . Is it customary for the papers to accept advertise
ments provided they have been listed on the exchange?
Mr. D u r a n t . Senator Norbeck, I do not know of my own knowl
edge about that. I have never handled the advertising directly.
Senator F l e t c h e r . Mr. Durant, did you know Mr. Kreuger well,
personally?
Mr. D u r a n t . Yes, sir; I have known him for a number of years.
Almost 10 years.
Senator F l e t c h e r . For a number of years?
Mr. D u r a n t . Yes.
Senator F l e t c h e r . Were your relations close to him generally?
Mr. D u r a n t . In a business way. He came to this country two
or three times—a couple of times a year.
Senator F l e t c h e r . Did you know of his realizing he was in financial
difficulty just before he committed suicide?
Mr. D u r a n t . N o, sir. I knew he was ill at one time shortly
before he went away, but I did not realize he was in financial difficulty
or that he thought he was.
119852—33— pt 4------ 4
1190
STOCK EXCHANGE PRACTICES
Senator F l e t c h e r . Well, in Paris did you have any conferences
with him showing difficulties of this kind?
Mr. D u r a n t . No, sir. He failed to attend the first conference.
He killed himself before he attended.
Senator C o s t i g a n . Did you return with him to Europe on his last
trip to Paris?
Mr. D u r a n t . Yes. I was o n the same steamer.
Senator C o s t i g a n . D o you know why he returned?
Mr. D u r a n t . Well, I think he was through with the business on
this side that brought him. And he stayed rather longer than before.
Senator C o s t i g a n . Had a demand been made on him for the return
of several million dollars by the I. T. & T. and was he seeking to raise
that fund?
Mr. D u r a n t . I think he was seeking means to return that; yes, sir.
Senator C o s t i g a n . Had you been acquainted with the fact that he
was in need of a substantial sum of money to meet that demand at
the time of his return to Paris?
^Mr. D u r a n t . Just before he returned I was informed that he had
signed an agreement to give that money back within a period of time,
or make some other arrangements. And I believe he went over to
confer with his bankers as to how best to do that.
Senator C o s t i g a n . That fact raised no doubts in your mind or in
the minds of your financial associates as to his financial responsibility?
Mr. D u r a n t . No doubt at all. It was a cash item rather than an
earning item.
Senator C o s t i g a n . Returning for a moment to the subject of your
directorship. Is it the view of leaders of finance at this time in the
United States, or is it your view, that the director of a corporation is
under no obligations to direct its business?
Mr. D u r a n t . I certainly can not speak for anyone else except
myself. And it is my feeling that it comes down to a question of the
use of the word “ direct.” I do not think it is the duty of a director
to actually run the business. I think he should have responsibilities
and watch the management, and if he has any doubts about the
management the director should take proper steps. But the actual
running of the business can not very well be done by directors in the
American sense.
Senator C o s t i g a n . I s it your opinion that the director is under no
obligations to attend directors’ meetings and participate with other
directors in the discussion of its affairs?
Mr. D u r a n t . I think he should do it whenever possible.
Senator F l e t c h e r . How many American directors were there of
Kreuger & Toll?
Mr. D u r a n t . Only one.
Senator C o s t i g a n . You were the only one?
Mr. D u r a n t . Yes, sir.
Senator C o s t i g a n . Were you at all sensitive over the fact that
your name was being held out to the public as a director of Kreuger
& Toll without attendance at directors’ meetings by you?
Mr. D u r a n t . Senator, I did not know that it was being held out
to the public in any such sense.
Senator C o s t i g a n . Was your name not known generally to be that
of a director?
STOCK EXCHANGE PRACTICES
1191
Mr. D u r a n t . It was known, but I do not know that it meant
anything except that I was a director.
Senator C o s t i g a n . In other words, you do not think the investing
public ought to draw any inference from the fact that the names of
distinguished financiers are associated with concerns in which they
seek to make investments, or as directors of those concerns?
Mr. D u r a n t . Well, the fact that I was a director did not show
the public that I was much closer to it than I already was, as a
member of Lee, Higginson & Co.
Senator C o s t i g a n . Did that duality of representation embarrass
you in any respect?
Mr. D u r a n t . N o, sir.
Senator C o s t i g a n . In considering, for example, the question of
the substitution clause in the indenture?
Mr. D u r a n t . I d o n o t fe e l t h a t i t d id .
Senator C o s t i g a n . That is all.
M r . M a r r i n a n . M r . Durant, what is the purpose of including in
such an advertisement as I have here from the New York Times on
this secured debenture issue the note that legal matters are being
oared for by the distinguished firms in Boston and New York which
you have already mentioned? Why did you do that? We are
talking about advertising copy now. Are you advertising the issue
and are you using the firm to do it, or are you advertising the lawyers,
or what is the situation?
Mr. D u r a n t . Simply informing the investor of the name of the
firm that is going to handle the legal details.
Mr. M a r r i n a n . Mr. Chairman, I would like to insert in the
record at this point copy of an advertisement of this issue published
in the New York Times as of Thursday, March 7, 1929.
Senator F l e t c h e r . What is it?
M r . M a r r i n a n . This is an advertisement, Senator Fletcher, by
Lee, Higginson & Co. and all the participating subhouses of issue.
The C h a i r m a n . If there is no objection it will be printed in the
record.
(Advertisement of $50,000,000 Kreuger & Toll Co. 5 per cent
secured sinking fund gold debentures appearing in the New York
Times, Thursday, March 7, 1929, is here printed in the record in
full, as follows:)
[New York Times, Thursday, March 7,1929]
New issue— $50,000,000 Kreuger & Toll Co. (Aktiebolaget Kreuger & Toll),
Stockholm, Sweden, 5 per cent secured sinking fund gold debentures bearing
warrants for purchase of American certificates representing participating deben
tures of the company. Dated March 1, 1929. Due March 1, 1959. Interest
payable March 1 and September 1. Principal and interest payable, free of any
present or future Swedish taxes as to debentures held by other than a resident
o f Sweden, in United States gold coin, at offices of Lee, Higginson & Co., in
New York, Boston, and Chicago, or at option of holder in sterling, at fixed rate
o f £205 per $1,000, at offices of Higginson & Co., London. Coupon debentures
of $1,000 and $500 denominations, interchangeable. Callable, in whole or in
part, at any time on 30 days’ notice at 105 and accrued interest. Sinking fund
sufficient to retire entire issue by maturity. Lee, Higginson Trust Co., Boston,
trustee. Skandinaviska Kreditaktiebolaget, Stockholm, depository.
Each secured debenture will carry a nondetaehable warrant for the purchase,
upon presentation of the secured debenture with warrant attached and payment
o f $45 per American certificate, at any time on or prior to December 31, 1930,
or the redemption date of the secured debenture, whichever is earlier, of 16 or
8 American certificates (according as the secured debenture is of the denominfc
1192
STOCK EXCHANGE PRACTICES
tion of $1,000 or $500) representing participating debentures of Krueger & Toll
Co., American certificates representing participating debentures are listed on the
New York Stock Exchange.
Of this issue, substantial blocks are being simultaneously offeredjin other
countries by the following banks and financial institutions:
England: Higginson & Co., N. M. Rothschild & Sons.
Sweden: Skandinaviska Kreditaktiebolaget.
Holland: Hope & Co., Teixeira de Mattos Brothers, Deutsche Bank, Hollandsche Koopmansbank.
Switzerland: Swiss Bank Corporation, Credit Suisse, Union Financi&re de
Geneve, Banque F6d6rale S. A., Banque Commerciale de B&le, Leu & Co.’s
Bank (Ltd.), Union de Banques Suisses, Banque Populaire Suisse, Soci6t6
Financiere pour Yaleurs Scandinaves en Suisse, C. J. Brupbacher & Cie., Pictet
& Cie.
Capitalization of Kreuger & Toll Co. to be outstanding upon completion of
present financing including issuance of Kr. 16,250,000 participating debentures
now being offered to holders of participating debentures and ordinary shares.
5 per cent secured sinking fund gold debentures, due Mar. 1, 1959
(additional debentures issuable under provisions of debenture
agreement)____________________________________________________$50, 000, 000
Participating debentures authorized Kr. 130,000,000. Outstanding
Kr. 81,250,000 par value, equivalent to. Reserve for exercise of
the above-described warrants, Kr. 16,000,000__________________ 21, 775, 000
Ordinary shares, authorized and outstanding, Kr. 65,000,000 par
value, equivalent to ----------------------------------------------------------------17, 420, 000From the letter of Kreuger & Toll Co., signed by Ivar Kreuger, Esq., the
following is summarized:
Kreuger & Toll Co., organized in 1911 under Swedish laws, is an organizing,
managing, and financing company with assets including interests in some of the
world’s largest and most important enterprises. It is the largest stockholder
in Swedish Match Co. (with its subsidiaries the largest match manufacturing
and distributing organization in the world) and has at various times cooperated
financially with that company and its principal subsidiary, International Match
Corporation.
Purpose of issue: In obtaining government concessions for the right to manu
facture and sell matches in various countries, large amounts of securities are
frequently acquired by Swedish Match Co. and International Match Corporation
in return for advances made to governments from which concessions are obtained.
These operations have in recent years become increasingly important and as the
business of those companies is essentially industrial in character it has been
deemed advisable in general to transfer to Kreuger & Toll Co. the handling o f
such securities.
Proceeds of this issue and of Kr. 16,250,000 participating debentures being;
simultaneously offered to existing holders of participating debentures and ordi
nary shares, will be applied toward acquisition from Swedish Match Co. and/or
International Match Corporation of approximately $78,000,000 par value securi
ties now owned by those companies or to be presently acquired by them under
pending negotiations.
Security: The secured debentures will be the direct obligation of Kreuger &
Toll Co., and will be secured by pledge, under a debenture agreement, of securi
ties of the following character:
(а) Bonds or notes issued or guaranteed by any sovereign state or any political
subdivision thereof including any municipality, having authority to issue or
guarantee bonds or notes and having a population in excess of 300,000.
(б) Bonds or notes issued or guaranteed by mortgage banking institutions or
societies (in which the company may but need not have an interest) and secured
by mortgages on agricultural or city property or entitled by special law to priority
on such property.
(c)
Shares in railway or other companies on which dividends at a minimum rateare guaranteed by any sovereign state.
Securities to be pledged initially will have a total par value (as defined in the
debenture agreement) equivalent to not less than 120 per cent of the $50,000,000
par value secured debentures now to be issued, and an annual income (at rates
of interest and guaranteed dividends currently payable thereon) equivalent to
not less than 120 per cent of the $2,500,000 annual requirement for interest o »
the secured debentures.
1193
STOCK EXCHANGE PRACTICES
In view of the nature of the business of the company, the debenture agreement
will contain broad provisions in regard to withdrawal and substitution of pledged
securities. Provision will also be made for issuance, on certain conditions, of
additional secured debentures ranking equally with this issue.
Assets: Total net assets of Kreuger & Toll Co. and its wholly-owned subsidi
aries (Swedish American Investment Corporation and N. V. Financieele Maatschappij Kreuger & Toll) based on the December 31, 1928 consolidated balance
sheet, adjusted to give effect to present financing, amount to more than $212,000,000, or over four times this issue of $50,000,000 secured debentures.
In addition to the securities to be acquired through the present financing, such
assets include substantial stock interests in Swedish Match Co., in Grangesberg
Co. (largest producer of iron ore in Europe), and in real estate companies and
banks in various European countries.
Earnings: Consolidated net earnings of Kreuger & Toll Co. and its whollyowned _subsidiaries (Swedish American Investment Corporation and N. V.
Financieele Maatschappij Kreuger & Toll) for the 3 years ended December 31,
1928, before interest on debentures and after adjustment for intercompany items
and dividends on Swedish American Investment Corporation participating pre
ferred stock now retired, are as follows:
Year ended December 31:
192 6
192 7
192 8
$7,981,325
12,409,606
21,025,988
Such net earnings for the above three years average over three and three-quarter
times the $3,588,750 annual requirement for interest on the $50,000,000 secured
debentures and interest, at the fixed minimum rate of 5 per cent, on the Kr.
81,250,000 participating debentures to be outstanding upon completion of this
financing. For the year 1928 such net earnings were over five and three-quarter
times this requirement.
The above earnings include no income from securities and participations to be
acquired out of proceeds of the present financing or full annual income from
proceeds of participating debentures issued in September, 1928. Additional
income from these sources can conservatively be estimatecf at not less than
$7,000,000 per annum.
Net earnings for 1928, as above, together with the $7,000,000 estimated mini
mum additional income, after deducting the annual requirement for interest on
the $50,000,000 secured debentures, amounts to $25,525,988, or 65 per cent of
the total Kr. 146,250,000 ($39,195,000) par value participating debentures and
ordinary shares to be outstanding upon completion of this financing, and is equiv
alent to $3.48 per American certificate. No allowance has been made in these
calculations for American certificates (representing participating debentures)
which may be issued against exercise of warrants.
_ Based on present quotations, the Kr. 65,000,000 ($17,420,000) par value par
ticipating debentures and the Kr. 65,000,000 ($17,420,000) par value ordinary
shares now outstanding have a total market value of over $270,000,000.
The company has agreed to make application to list these secured debentures
on the New York Stock Exchange. Price 98 and accrued interest, yielding over
5y&per cent.
Secured debentures offered when, as and if issued and received by us and sub
ject to approval of counsel. Legal matters in connection with this issue will be
passed upon by Messrs. Ropes, Gray, Boyden & Perkins, of Boston, Messrs.
Carter, Ledyard & Milburn, of New York, and Iver Engellau, Esq., of Stockholm.
It is expected that delivery will be made in the first instance in the form of Lee,
Higginson & Co. interim receipts with non-detachable subscription warrants
attached and that such interim receipts will be ready on or about March 21, 1929.
L e e , H i g g i n s o n & Co.
G u a r a n t y C o m p a n y of N e w Y o r k .
B r o w n B r o t h e r s & Co.
C l a r k , D o d g e & Co.
T h e N a t i o n a l C i t y Co.
D i l l o n , R e a d & Co.
T h e U n i o n T r u s t Co. o p P i t t s b u r g h .
All conversions of foreign currencies to dollars used herein have been made at
par of exchange. The above statements, while not guaranteed, are based upon
information and advice which we believe accurate and reliable.
1194
STOCK EXCHANGE PRACTICES
M r . M a r r i n a n . M r . Durant, will you please identify for purposes
of the record that document as a copy of your prospectus on the
Kreuger & Toll secured debenture issue, and also, I believe, on the
participating debentures which are involved in this matter by reason
of the nondetachable warrants secured to the bonds. Are those both
copies of the prospectuses?
Mr. D u r a n t . I b e lie v e so .
Mr. M a r r i n a n . Mr. Chairman, I would like to submit for the
record copies of those two prospectuses and ask that they may be
made a part of the record.
The C h a i r m a n . There being no objection they will be printed in
the record.
(The two prospectuses referred to, one being for $50,000,000
Kreuger & Toll Co. 5 per cent secured sinking fund gold debentures,
and the other being American Certificates representing Kreuger &
Toll Co. participating debentures are here printed in the record in
full, as follows:)
N E W ISSU E
$50,000,000
K r e u g e r & T o l l C o .,
(Aktiebolaget Kreuger & Toll),
Stockholm, Sweden.
Five per cent secured sinking fund gold debentures, bearing warrants for pur
chase of American certificates representing participating debentures of the
company.
Dated March 1, 1929; due March 1, 1959; interest payable March 1 and
September 1. Principal and interest payable, free of any present or future
Swedish taxes as to debentures held by other than a resident of Sweden, in
United States gold coin; at offices of Lee, Higginson & Co., in New York, Boston,
and Chicago, or at option of holder in sterling, at fixed rate of £205 per $1,000,
at offices of Higginson & Co., London. Coupon debentures of $1,000 and $500
denominations, interchangeable. Callable, in whole or in part, at any time on
30 days’ notice at 105 and accrued interest.
Sinking fund sufficient to retire entire issue by maturity. Lee, Higginson
Trust Co., Boston, trustee; Skandinaviska Kreditaktiebolaget, Stockholm,
depositary.
Each secured debenture will carry a nondetachable warrant for the purchase,
at any time on or prior to December 31, 1930, or the redemption date of the
secured debenture, whichever is earlier, of 16 or 8 American certificates (accord
ing as the secured debenture is of the denomination of $1,000 or $500) repre
senting participating debentures of Kreuger & Toll Co., upon presentation of
the secured debenture with warrant attached and payment of $45 per American
certificate.
Capitalization of Kreuger & Toll Co. to be outstanding upon completion of
present financing (issuance of $50,000,000 secured debentures and issuance of
Kr. 16,250,000 additional participating debentures).
Five per cent secured sinking fund gold debentures, due March 1, 1959 (addi
tional debentures issuable under provisions of debenture agreement), $50,000,000;
participating debentures, authorized Kr. 130,000,000, outstanding Kr. 81,250,000
par value, equivalent to $21,775,000; reserved for exercise of warrants, Kr.
16,000,000; ordinary shares, authorized and outstanding, Kr. 65,000,000 par
value, equivalent to, $17,420,000.
From the accompanying letter of Kreuger & Toll Co., signed by Ivar Kreuger,
Esq., the following is summarized:
Kreuger & Toll Co., organized in 1911 under Swedish laws, is an organizing,
managing and financing company with assets including interests in some of the
world’s largest and most important enterprises. It is the largest stockholder in
Swedish Match Co. (with its subsidiaries the largest match manufacturing and
distributing organization in the world) and has at various times cooperated
financially with that company and its principal subsidiary, International Match
Corporation.
STOCK EXCHANGE PRACTICES
1195
Purpose of issue: In obtaining government concessions for the right to manu
facture and sell matches in various countries, large amounts of securities are fre
quently acquired by Swedish Match Co. and International Match Corporation
in return for advances made to the governments from which concessions are
obtained. These operations have in recent years become increasingly important
and as the business of those companies is essentially industrial in character it has
been deemed advisable in general to transfer to Kreuger & Toll Co. the handling
of such securities.
Proceeds of this issue and of Kr. 16,250,000 participating debentures being
simultaneously offered to existing holders of participating debentures and ordi
nary shares, will be applied toward acquisition from Swedish Match Co. and/or
International Match Corporation of approximately $78,000,000 par value
securities now owned by those companies or to be presently acquired by them
under pending negotiations.
Security: The secured debentures will be the direct obligation of Kreuger &
Toll Co. and will be secured by pledge, under a debenture agreement, of securities
of the following character:
(а) Bonds or notes issued or guaranteed by any sovereign state or any political
subdivision thereof including any municipality having authority to issue or guar
antee bonds or notes and having a population in excess of 300,000.
(б) Bonds or notes issued or guaranteed by mortgage banking institutions or
societies (in which the company may but need not have an interest) and secured
by mortgages on agricultural or city property or entitled by special law to priority
on such property.
(c)
Shares in railway or other companies on which dividends at a minimum rate
are guaranteed by any sovereign state.
Securities pledged will have a total par value equivalent to not less than 120
per cent of the $50,000,000 par value secured debentures now to be issued, and
an annual income (at rates of interest and guaranteed dividends currently pay
able thereon) equivalent to not less than 120 per cent of the $2,500,000 annual
requirement for interest on the secured debentures.
For a list of securities so to be pledged and provisions of the debenture agree
ment regarding issuance of additional secured debentures (in unlimited amount)
and withdrawal and substitution of pledged securities, reference is made to the
accompanying letter.
Assets: Total net assets of Kreuger & Toll Co. and its wholly owned subsidi
aries (Swedish American Investment Corporation and N. V. Financieele Maatschappij Kreuger & Toll), based on the December 31, 1928 consolidated balance
sheet, adjusted to give effect to present financing, amount to more than $212,000,000, or over four times this issue of $50,000,000 secured debentures.
In addition to the securities to be acquired through the present financing, such
assets include substantial stock interests in Swedish Match Co., in Grangesberg
Co. (largest producer of iron ore in Europe) and in real estate companies ana
banks in various European countries.
Earnings: Consolidated net earnings of Kreuger & Toll Co. and its wholly
owned subsidiaries, before-interest on debentures and after adjustment for inter
company items and dividends on Swedish American Investment Corporation par
ticipating preferred stock now retired, for the three years ended December 31,
1928, average over three and three-fourths times the $3,588,750 annual require
ment for interest on the $50,000,000 secured debentures and interest, at the fixed
minimum rate of 5 per cent, on the Kr. 81,250,000 participating debentures to be
outstanding upon completion of this financing. For the year 1928 such net
earnings were over five and three-fourths times this requirement.
American certificates (representing participating debentures) now outstanding
are listed on the New York Stock Exchange and the company has agreed to make
application to list these secured debentures; price 98 and accrued interest, yielding
over 5% per cent.
Secured debentures offered when, as and if issued and received by us and sub
ject to approval of counsel. Legal matters in connection with this issue will be
passed upon by Messrs. Ropes, Gray, Boyden & Perkins, of Boston; Messrs.
Carter, Ledyard & Milburn, of New York; and Ivar Engellau, esq., of Stockholm.
It is expected that delivery will be made in the first instance in the form of Lee,
Higginson & Co. interim receipts with nondetachable subscription warrants
1196
STOCK EXCHANGE PBACTICES
attached and that such interim receipts will be ready for delivery on or about
March 21, 1929.
L e e , H ig g i n s o n & Co.
G u a r a n t y C o . of N e w Y o r k .
B r o w n B r o t h e r s & Co.
C l a r k , D o d g e & Co.
T h e N a t i o n a l C i t y Co.
D i l l o n , R e a d & Co.
T h e U n io n T r u st C o . o f P it t s b u r g h .
All conversions of foreign currencies to dollars used herein have been made at
par of exchange. Statements contained in this circular, while not guaranteed,
are based upon information and advice which we believe accurate ancf reliable.
March, 1929.
K r e u g e r & T o ll Co.,
(Aktiebolaget Kreuger & Toll)
Stockholm, Sweden, March 5, 1929.
Messrs. L e e , H ig g in s o n & Co.
D e a r S i r s : In connection with the new issue of $50,000,000 Kreuger & Toll
Co. 5 per cent secured sinking fund gold debentures, due March 1, 1959, bearing
warrants for the purchase of American certificates representing participating
debentures of the company, the following information is submitted:
BUSINESS
Kreuger & Toll Co., organized in 1911 under Swedish laws, is an organizing,
managing, and financing company with assets including interests in some of the
world s largest and most important enterprises. It is the largest stockholder in
Swedish Match Co. and has at various times cooperated financially with that
company and its principal subsidiary, International Match Corporation.
Kreuger & Toll Co. also maintains relations with other enterprises, in Sweden
and abroad, in order to facilitate financing incident to large industrial and com
mercial transactions. Through these connections the company enjoys, without
cost, the benefits of an organization of the highest type with representatives
throughout the world.
PURPOSE OF ISSUE
In obtaining government concessions for the right to manufacture and sell
matches in various countries, large amounts of securities are frequently acquired
by Swedish Match Co. and,International Match Corporation in return for ad
vances made by them to the governments from which concessions are obtained.
Thus, agreements have already been concluded involving the acquisition of
$75,000,000 bonds of the Republic of France; $6,000,000 bonds of the Republic of
Poland; $2,000,000 bonds of the Republic of Ecuador; $1,000,000 bonds of the
Mortgage Bank of Ecuador (guaranteed by the Republic of Ecuador); $6,000,000
bonds of the Republic of Latvia; $22,000,000 bonds of the Kingdom of Serbs,
Croats, and Slovenes (Jugoslavia); $36,000,000 Hungarian land reform mortgage
bonds; $30,000,000 bonds of the Kingdom of Roumania; £380,690 bonds of the
Kingdom of Roumania; £1,000,000 bonds of the Republic of Greece; and negoti
ations with other countries are pending.
These operations have in recent years become increasingly important and as
the business of Swedish Match Co. and International Match Corporation is
essentially industrial in character it has been deemed advisable in general to
transfer to Kreuger & Toll Co. the handling of such securities. As the prices
paid by Swedish Match Co. and International Match Corporation for bonds
purchased in connection with match concessions are in some cases above the current
market prices for similar securities and as Kreuger & Toll Co. in acquiring those
bonds purchases them at the same prices, it has been agreed that the company
should receive a participation, with Swedish Match Co. and International Match
Corporation, in the profits of certain of the concessions it thus aids in financing.
Proceeds of this issue of $50,000,000 secured debentures, and of kr. 16,250,000
participating debentures being simultaneously offered to existing holders of
participating debentures and ordinary shares, will be applied toward the acqui
sition from Swedish Match Co. and/or International Match Corporation of
approximately $78,000,000 par value securities now owned by those companies,
or to be presently acquired by them under pending negotiations.
STOCK EXCHANGE PRACTICES
1197
SECURITY
The secured debentures will be the direct obligation of Kreuger & Toll Co.,
issued under a debenture agreement to Lee, Higginson Trust Co., Boston, as
trustee, and will be secured by deposit with the trustee or with Skandinaviska
Kreditaktiebolaget, Stockholm, as depositary, of securities of the following
character (and cash as hereinafter provided):
(a) Bonds or notes issued or guaranteed by any sovereign state or any political
subdivision thereof including any municipality, having authority to issue or
guarantee bonds or notes and having a population in excess of 300,000.
(b) Bonds or notes issued or guaranteed by mortgage banking, institutions or
societies (in which the company may but need not have an interest) and secured
by mortgages on agricultural or city property or entitled by special law to priority
on such property.
(c) Shares in railway or other companies on which dividends at a minimum
rate are guaranteed by any sovereign state.
There will now be pledged the following securities, of which approximately
half are now owned and the balance is included in the securities to be acquired
through the present financing:
Kingdom of the Serbs, Croats and Slovenes, 6 % per cent dollar bonds,
Par value
due 1958_______________________________________________________ $7, 000, 000
Republic of Latvia 6 per cent dollar bonds, due 1964______________ 6, 000, 000
Republic of Poland 7 per cent dollar bonds, due 1945_____________
5, 100, 000
Republic of Ecuador 8 per cent dollar bonds, due 1953____________
1, 986, 900
Mortgage Bank of Ecuador 7 per cent dollar bonds, due 1949 (guar
anteed by the Republic of Ecuador)------------------------------------------- 1, 000, 000
Republic of Greece 8% per cent bonds, due 1954, £979,902, equiva
lent to _________________________________________________________
4, 768, 693
Kingdom of Roumania 4 per cent bonds, due 1968, £380,690, equiva
lent to_________________________________________________________
1, 852, 628
Republic of France 3 per cent and 4 per cent rentes, fcs. 344,000,000,
equivalent t o ___________________________________________________ 13, 477, 576
Kingdom of Roumania 7 per cent dollar bonds, due 1959__________ 2, 000, 000
Belgian National Railways Co. participating preferred stock (6 per
cent dividend guaranteed by Belgian Government), belgas
2, 224, 640
16.000.000, equivalent to _______________________________________
Prussian Mortgage Bank 8 per cent bonds, due 1959, reichsmarks
12.000.000, equivalent to _______________________________________
2, 858, 400
Hungarian land reform mortgage 5% per cent dollar bonds, due 1979- 12, 000, 000
Total par value____________________________________________ 60, 268, 837
Total par value of such securities is equivalent to not less than 120 per cent
of the $50,000,000 par value secured debentures now to be issued, and the annual
income from such securities (at rates of interest and guaranteed dividends cur
rently payable thereon) is equivalent to not less than 120 per cent of the $2,500,000
annual requirement for interest on the secured debentures.
The company will agree that in the event the ratio of par value of pledged
securities to par value of outstanding secured debentures and/or the ratio of
annual income from pledged securities to the annual requirement for interest on
outstanding secured debentures, are at any time less than 120 per cent it will
deposit such additional securities of the required character as it may then own in
order to restore said 120 per cent ratio. So long as'no default is made in the
payment of interest and/or sinking fund on the secured debentures, however,
failure of the company to maintain the foregoing ratios shall not in itself constitute
default under the debenture agreement.
The debenture agreement will provide for the issuance of additional secured
debentures, in unlimited amount, provided that upon such issuance the above
ratios obtain. The debenture agreement will permit withdrawal of pledged
securities provided that such withdrawal does not impair the above ratios, and
will permit substitution of securities of the required character for securities
pledged provided the above ratios (or the ratios existing prior to such substitution
if, prior to such substitution, the ratios were less than 120 per cent) are not
impaired. These provisions are, however, subject to the condition that any part
of the pledged securities may be withdrawn upon substitution of cash in an
amount equivalent to that proportion of the principal amount of outstanding
secured debentures which the par value of securities withdrawn bears to the total
value of securities pledged at the time of such withdrawal.
1198
STOCK EXCHANGE PRACTICES
Capitalization of Kreuger & Toll Co. to be outstanding upon completion of presen
financing (issuance of $50,000,000 secured debentures and issuance of Kr.
16,250,000 additional participating debentures)
Five per cent secured sinking fund gold debentures, due March 1, 1959
(additional debentures issuable under provisions of debenture agreement),
$50,000,000; participating debentures, authorized Kr. 130,000,000, outstanding
Kr. 81,250,000 par value, equivalent to $21,775,000; reserved for exercise of
warrants, Kr. 16,000,000. Ordinary shares, authorized and outstanding Kr.
65,000,000 par value, equivalent to $17,420,000.
Based on present quotations the Kr. 65,000,000 ($17,420,000) par value
participating debentures and Kr. 65,000,000 ($17,420,000) par value ordinary
shares now outstanding have a total market value of over $270,000,000.
ASSETS
Total net assets of Kreuger & Toll Co. and its wholly-owned subsidiaries
(Swedish American Investment Corporation and N. V. Financieele Maatschappij
Kreuger & Toll), based on the December 31, 1928, consolidated balance sheet
adjusted to give effect to the present financing, amount to more than $212,000,000,
or over 4 times this issue of $50,000,000 secured debentures. In addition to
securities of approximately $78,000,000 par value to be acquired out of proceeds
of present financing, such assets include the following investments (as carried,
at cost, at December 31, 1928):
Industrial stocks:
Swedish Match C o__________________________________________ $28, 922, 044
Grangesberg C o_____________________________________________
17, 553, 800
10, 280, 704
Other industrial stocks______________________________________
Real estate stocks:
Hufvudstaden Real Estate Co. (Sweden)____________________
6, 427, 980
13, 591, 943
Real-estate interests in other European countries____________
Bank stocks_____________________________________________________
15, 231, 961
Notes secured by real-estate mortgages______________ ____________
3, 474, 000
Foreign government bonds______ _____ ___________________________ 21, 071, 744
2, 684, 065
Foreign railroad shares_________________________________ - _______
Other stocks and bonds_________________________________ _________
2, 100, 038
121, 338, 279
Swedish Match Co. and International Match Corporation, with their subsidiary
companies, constitute the largest match manufacturing and distributing organi
zation in the world with plants in over 35 different countries. Net profit of
Swedish Match Co. for the past 25 years has averaged over 24 per cent per annum
on capital stock from time to time outstanding and participating in dividends.
The present dividend rate on its Kr. 270,000,000 ($72,360,000) capital stock
is 15 per cent.
Grangesberg Co. with its affiliated companies is the largest producer of iron
ore in Europe. Properties in Sweden, owned directly by Grangesberg Co. or
controlled jointly with the Swedish Government, comprise the most extensive
iron ore deposits commercially developed and used in the world to-day, with
reserves estimated at over 2,000,000,000 metric tons. Ore produced is of a par
ticularly high grade, with an iron content averaging over 60 per cent. Company
also has substantial interests in iron mines in Northern Africa.
The real estate interests of Kreuger & Toll Co. in Germany include valuable
business buildings and apartment house properties in Berlin. Hufvudstaden
Real Estate Co. is the largest owner of city real estate in Sweden and has in
recent years been paying dividends at the rate of 8 per cent per annum, with
earnings at a rate substantially greater. Bank stocks owned consist of share
holdings in Skandinaviska Kreditaktiebolaget and Stockholm Mortgage Bank in
Sweden, and in banks in France, Germany, Holland, Switzerland, and Poland.
EARNINGS
Consolidated net earnings of Kreuger & Toll Co. and its wholly owned sub
sidiaries (Swedish American Investment Corporation and N. V. Financieele
Maatschappij Kreuger & Toll) for the three years ended December 31, 1928,
before interest on debentures and after adjustment for intercompany items and
dividends on Swedish American Investment Corporation participating preferred
stock now retired, are as follows:
STOCK EXCHANGE PRACTICES
1199
$7, 981, 325
Year ended Dec. 31, 1926
12, 409, 606
Year ended Dec. 31, 1927
21, 025, 988
Year ended Dec. 31, 1928
Such net earnings for the above three years average over three and three-fourths
times the $3,588,750 annual requirement for interest on the $50,000,000 secured
debentures and interest, at the fixed minimum rate of 5 per cent on the Kr,
81,250,000 participating debentures to be outstanding upon completion of this
financing. For the year 1928 such net earnings were over five and three-fourths
times this requirement.
The above earnings include no income from securities and participations to be
acquired out of proceeds of the present financing or full annual income from pro
ceeds of participating debentures issued in September, 1928. Additional income
from these sources can conservatively be estimated at not less than $7,000,000
per annum.
Net earnings for 1928, as above, together with the $7,000,000 estimated
minimum additional income, after deducting the annual requirement for interest
<on the $50,000,000 secured debentures, amounts to $25,525,988 or 65 per cent of
the total Kr. 146,250,000 ($39,195,000) par value participating debentures and
ordinary shares to be outstanding upon completion of this financing, and is
equivalent to $3.48 per American certificate. No allowance has been made in
these calculations for American certificates (representing participating deben
tures) which may be issued against exercise of warrants.
In no year since its organization has Kreuger & Toll Co. failed to earn and pay
dividends on its ordinary shares from time to time outstanding and participating
in dividends. Such dividends for the past 9 years have been at the present
annual rate of 25 per cent.
DESCRIPTION OF SECURED DEBENTURES
The present issue of $50,000,000 secured sinking fund gold debentures will be
dated March 1, 1929, will mature March 1, 1959, and will bear interest at the
rate of 5 per cent per annum, payable semiannually March 1 and September 1.
Principal and interest will be payable, free of any present or future Swedish taxes
on debentures held by other than a resident of Sweden, in United States gold
coin of the present standard of weight and fineness at the offices of Lee, Higgin
son & Co., fiscal agents, in New York, Boston, or Chicago, or at option of holder
in sterling, at fixed rate of £205 per $1,000, at offices of Higginson & Co., London.
The debentures will be in coupon form in denominations of $1,000 and $500;
interchangeable. They will be callable, in whole or in part, at any time on 30
days’ notice, at 105 and accrued interest.
SINKING FUND
There will be provided a sinking fund, payable semiannually (first payment
September 1,1929), in cash or debentures at par, and calculated at a rate sufficient
to retire the entire issue by maturity. Payments will be applied to the purchase
o f debentures up to the call price and, if not obtainable, to redemption of deben
tures by lot. The amount of this sinking fund will be adjusted on retirement of
debentures other than through sinking fund, or on issuance of additional deben
tures, but will in any event provide for retirement of all debentures by maturity.
PURCHASE W ARRAN TS FOR AMERICAN CERTIFICATES REPRESEN TING PARTICIPATIN G
DEBENTURES
Each secured debenture of this issue will carry a nondetachable warrant for
the purchase, at any time on or prior to December 31, 1930, or the redemption
date of the secured debenture to which it shall be attached, whichever is earlier,
of 16 or 8 American certificates (according as the secured debenture is of the
denomination of $1,000 or $500) representing participating debentures of Kreuger
& Toll Co., upon presentation of the secured debenture with warrant attached,
at the offices of the fiscal agents, and upon payment of $45 per American certificate.
Unexercised warrants will be void after December 31, 1930, or the redemption
date of the secured debenture to which they shall be attached, whichever is
earlier. The debenture agreement under which the secured debentures are to
be issued will contain appropriate provisions with reference to the interests of the
holders of warrants in case of issuance of additional participating debentures as
a bonus or for a consideration in cash or property less than the equivalent of $45
per American certificate. The company will authorize and reserve kr. 16,000,000
participating debentures to be issued and deposited, under the deposit agreement
1200
STOCK EXCHANGE PRACTICES
hereinafter referred to, against issuance of the corresponding amount of American
certificates as warrants are exercised.
DESCRIPTION
OF
AMERICAN
CERTIFICATES
AND
PA RTICIPATIN G
DEBEN TU RES
American certificates representing participating debentures are issued by
Lee, Higginson Trust Co., Boston, as depositary under a deposit agreement
dated September 1, 1928, in the proportion of 1 American certificate for each
20 kronor par value of debentures deposited. In accordance with the terms of
the deposit agreement, at any time, participating debentures may be deposited
against issuance of American certificates and American certificates may be
exchanged for participating debentures represented thereby. The proportional
part of any interest, principal, redemption price or other payments, applicable to
deposited participating debentures, will be paid by the company in dollars at
present parity of exchange (1 kr. = $0,268) and distributed to holders of American
certificates by Lee, Higginson & Co., fiscal agent for American certificates.
The participating debentures bear interest, payable July 1 annually, at the
rate of 5 per cent per annum, and are entitled to additional interest at the rate
of 1 per cent for each 1 per cent by which the dividend paid or declared on the
ordinary shares in any fiscal year exceeds 5 per cent. The present dividend rate
on the ordinary shares is 25 per cent per annum.
As more fully set forth in the deposit agreement, to which reference is made,
such participating debentures are entitled, in liquidation, to redemption before
any distribution is made to shareholders, but only after a1! other debts of the
company have been paid, and are redeemable at the option of the company at
a price equivalent to the average quotation for the preceding three months, but
not less than par and accrued interest at the rate of 5 per cent per annum. In
the deposit agreement, however, the company has covenanted that participating
debentures on deposit thereunder will not be called for redemption unless the
average quotation for the three months preceding the month in which notice of
redemption is given is equivalent to or exceeds five times par value of the par
ticipating debentures; nor will the amount payable in voluntary liquidation be
less than five times par value.
APPLICATION TO LIST
American certificates (representing participating debentures) now outstanding
are listed on the New York Stock Exchange and application will be made to list
the secured sinking fund gold debentures.
Very truly yours,
By
A k t ie b o l a g e t K
Ivar K reuger.
reuger
&
T
oll,
All conversions of foreign currencies to dollars used herein have been made at
par of exchange.
American certificates representing Kreuger & Toll Co. (Aktiebolaget Kreuger
& Toll), Stockholm, Sweden, participating debentures, bearing interest at the
rate of 5 per cent per annum (payable annually) and entitled to additional
interest at the rate of 1 per cent for each 1 per cent by which the dividend paid or
declared on ordinary shares in any fiscal year exceeds 5 per cent. Present divi
dend rate on ordinary shares, 25 per cent per annum.
For a statement of the conditions under which, and the prices at which, partici
pating debentures may be redeemed by the company and of their relative rank in
liquidation, reference is made to the accompanying letter.
American certificates representing participating debentures are issued by Lee,
Higginson Trust Co., Boston, depositary under a deposit agreement dated
September 1, 1928, in the proportion of 1 American certificate for each 20 kronor
par value of debentures deposited. At any time, and in accordance with the
terms of the deposit agreement, participating debentures may be deposited against
issuance of American certificates and American certificates may be exchanged for
participating debentures represented thereby. The proportional part of any
interest, principal, redemption price or other payments, applicable to deposited
participating debentures, will be paid in dollars at present parity of exchange
(1 Swedish krona=$0,268) and distributed to holders of American certificates by
Lee, Higginson & Co., fiscal agent for American certificates. Interest at the rate
of 25 per cent is equivalent to $1.34 per American ceitificate.
STOCK EXCHANGE PRACTICES
1201
From the accompanying letter of Kreuger & Toll Co., signed by Ivar Kreuger,
Esq., he further summarizes as follows: Capitalization of Kreuger & Toll Co.
after giving effect to the present proposed increase in capital:
5 per cent secured sinking fund gold debentures, due Mar. 1, 1959
(additional debentures issuable under provisions of debenture
- agreement)------------------------------------------------------------------------------$49, 625, 000
Participating debentures (kr. 190,000,000 authorized; kr. 16,000,000
reserved for exercise of warrants attached to secured deben
37, 296, 665
tures), kr. 139,166,660,1 equivalent to _________________________
Share capital, par value kr. 100 per share (kr. 76,000,000 author
20, 368, 000
ized), kr. 76,000,000, equivalent to ____________________________
Kreuger & Tpll Co., organized in 1911 under Swedish laws, is an organizing,
managing, and financing company. It is the policy of the company to make
investments in diversified fields of activity, thus broadening the basis for its
growth, and to maintain relations with leading enterprises, in Sweden and abroad,
with a view to facilitating financing operations incident to large industrial and
commercial transactions.
Directly or through its subsidiary holding companies, the company owns sub
stantial stock interests in the following enterprises: Swedish Match Co., con
trolling International Match Corporation and, with its subsidiaries, comprising
the largest match manufacturing and distributing organization in the world;
Grangesberg Co., with its affiliated companies the largest producer of iron ore in
Europe; real estate companies in Sweden, Germany and France; banks and bank
ing companies in Sweden, France, Germany, Holland, Switzerland and Poland.
The company’s assets also include large holdings of foreign government bonds.
Kreuger & Toll Co. has recently contracted to acquire controlling stock in
terests in 10 companies engaged in the lumber and wood-pulp industries of North
ern Sweden. All of the concerns have established businesses and together com
prise the largest factor in their field in Sweden, their combined output of pulp
representing approximately 30 per cent of the total for the country and their out
put of sawn lumber, about 15 per ceat.
Present increase in capital: At this time it is proposed to offer to the holders of
participating debentures and shares, rights to subscribe to Kr. 37,916,660 par
value additional participating debentures and Kr. 10,833,400 par value additional
shares, and also to sell privately, at a price substantially in excess of the subscrip
tion price, Kr. 20,000,000 par value additional participating debentures and Kr.
166,600 par value additional shares.
Funds thus realized will enable the company to acquire the above mentioned
interests in the Swedish lumber and wood-pulp industries, and also to cooperate
with Swedish Match Co. and International Match Corporation in certain trans
actions connected with the match industry.
Financial condition: Based on the December 31, 1928, consolidated balance
sheet of the company and its wholly-owned subsidiary holding companies (Swed
ish American Investment Corporation and N. V. Financieele Maatschappij
Kreuger & Toll) adjusted to give effect to acquisition of certain assets and issuance
of certain securities since that date as well as the present proposed capital increase,
total net assets, after deducting all liabilities having priority over the participat
ing debentures and share capital, are more than $245,000,000.
Earnings: In no year since its organization has the company failed to earn and
pay dividends on its share capital from time to time outstanding and participat
ing in dividends. Dividends for the past 10 years have been at the present annual
rate of 25 per cent.
Consolidated net earnings of the company and its wholly owned subsidiary
holding companies for the three years ended December 31, 1928, before interest
on participating debentures and after adjustment for intercompany items and
dividends on a subsidiary company’s preferred stock now retired, are as follows:
1926.
1927.
1928.
$7, 981, 325
12, 409, 606
21, 025, 988
1 In addition to the kr. 16,000,000 participating debentures reserved for exercise of warrants, up to a total
of kr. 5,333,340 additional participating debentures m ay be issued in the event that any of said warrants
shall have been exercised in time to participate in the rights to subscribe now being offered.
1202
STOCK EXCHANGE PRACTICES
Such net earnings for 1928 are equivalent to 60 per cent on the total Kr.130,000,000 par value participating debentures and share capital outstanding a t
the end of that year, or the equivalent of $3.23 per American certificate. Prelim
inary figures for the first nine months of 1929 indicate that net earnings are at
an annual rate of not less than 67 per cent on the total Kr. 146,250,000 par value
participating debentures and share capital outstanding at the end of that period,
or the equivalent of approximately $3.60 per American certificate.
These earnings do not include any allowance for income from the assets now
proposed to be acquired and the foregoing calculation, therefore, includes noadjustment for the additional securities to be issued under the terms of the present
proposed increase in capital. The assets now to be acquired will afford new
sources of income and will add substantially to the earnings o f the company for
the coming year.
The American certificates are listed on the New York Stock Exchange. Price
at market. The proposed increase in capital and offering of rights are subject
to the approval of an extraordinary general meeting of the shareholders of the
company which has been called for November 1, 1929. All legal matters in
connection with the issuance of the American certificates are subject to the
approval of Messrs. Ropes, Gray, Boyden & Perkins and Messrs. Carter, Ledyard
& Milburn.
Lee, Higginson & Co., Guaranty Co. of New York, Brown Bros. & Co., Clark,
Dodge & Co., The National City .Co., Dillon, Read & Co., The Union Trust Co.
of Pittsburgh.
All conversions of foreign currencies to dollars used herein have been made at
par of exchange. At par, 1 Swedish krone=$0,268. Statements contained
in this circular, while not guaranteed, are based upon information and advice
which we believe accurate and reliable.
October, 1929.
K r e u g e r & T o l l C o .,
Stockholm, Sweden, October 23, 1929.
Messrs. L e e , H ig g in s o n & Co.,
D e a r S i r s : In connection with the proposed increase in capital of Kreuger
& Toll Co., the offering to holders of participating debentures and shares o f
rights to subscribe to kroner 37,916,660 par value additional participating deben
tures and kroner 10,833,400 par value additional shares, and the private sale
of kroner 20,000,000 par value additional participating debentures and krona
166,600 par value additional shares, all of which will be submitted to shareholders
for approval oh November 1, 1929, the following information is submitted:
BUSINESS
Kreuger & Toll Co., organized in 1911 under Swedish laws, is an organizing,
managing, and financing company. It is the policy of the company to make
investments in diversified fields of activity, thus broadening the basis for its
growth, and to maintain relations with leading enterprises, in Sweden and abroad,
with a view to facilitating financing operations incident to large industrial and
commercial transactions. Through these connections the company enjoys the
benefits of an organization of tbe highest type with representatives throughout
the world.
Assets owned by Kreuger & Toll Co. directly or through its subsidiary holding
companies, include substantial stock interests in the following enterprises:
Swedish Match Co., controlling International Match Corporation and, with
its subsidiaries, comprising the largest match manufacturing and distributing
organization in the world. Operations of these companies extend to over 35
different countries in Europe, North and South America and the Far East. The
outstanding capital stock of Swedish Match Co. has a current market value o f
over $220,000,000. Kreuger & Toll Co. is the largest stockholder in the company.
Grangesberg Co., with its affiliated companies, the largest producer of iron-ore
in Europe. Properties in Sweden, owned directly by the company or controlled
jointly with the Swedish Government, comprise the most extensive iron-ore
deposits commercially developed and used in the world to-day, with reservesestimated at over 2,000,000,000 tons. Grangesberg Co. also has substantial
interests in iron-ore mines in Northern Africa.
Real estate companies in Sweden, Germany, and France, including H ufvudstaden Real Estate Co., the largest owner of city real estate in Sweden.
Banks and banking companies in Sweden, France, Germany, Holland, Switzer
land and Poland including, in Sweden, the Skandinaviska Kreditaktiebolaget and
the Stockholm Mortgage Guaranty Co.
STOCK EXCHANGE PRACTICES
1203
The company’s assets are broadly distributed and include, in addition to the
stock interests mentioned above, large holdings of foreign government bonds.
Many of the latter have been acquired as a result of the company’s affiliations
with Swedish Match Co. and International Match Corporation, which concerns,
in obtaining government concessions for the right to manufacture or sell matches
in various countries, frequently grant loans to the governments from which
concessions are obtained. These operations have in recent years become in
creasingly important and, as the business of the match companies is essentially
industrial in character, it has been deemed advisable, in general, to transfer to
Kreuger & Toll Co. the handling of securities so acquired. During the past
year, therefore, Kreuger & Toll Co. has purchased from the match companies,
bonds acquired by them in connection with their obtaining concessions in France,
Poland, Ecuador, Greece, Yugoslavia, Latvia, Rumania, and Hungary. Kreuger
& Toll Co. will also receive a participation with the match companies in the
profits of the last four named concessions.
AMALGAMATION OF SW EDISH LU M BER AND W OOD-PULP INTERESTS
The company has recently contracted to acquire controlling stock interests in
the following concerns engaged in the lumber and wood-pulp industries of North
ern Sweden: Bergvik and Ala Nya Co., Skonviks Co., Sunds Co., Svartvik Co.,
Nyhamns Cellulose Co., Torpshammars Co., Bjorknas Saw Mill Co., Salsakers
Saw Mill Co., Holmsunds Co. and Kramfors Co. The stocks thus acquired will
be transferred to a holding company to be organized and wholly owned by
Kreuger & Toll Co.
All of these concerns have established businesses and together comprise the
largest factor in their field in Sweden, their combined output of pulp representing
approximately 30 per cent of the total for the country and their output of sawn
lumber, about 15 per cent. The position of Sweden as a producer of wood pulp
has been steadily growing in importance and wood and wood products constitute
the largest single item of the country’s export trade.
Book value of the total assets included in the amalgamation, determined on a
conservative basis, is approximately $85,000,000. Property owned by the com
panies exceeds 4,000,000 acres and comprises some of the most valuable timber
land in the world. To the new holding company will also be transferred control
of the Hammarsforsens Water Power Co. (previously held by Kreuger & Toll
Co.), thus making available water power to an amount of over 250,000 horse
power of which 65,000 horsepower is developed and in use. Total annual pro
ductive capacity of the group will be 260,000 tons of sulphite pulp, 100,000 tons
of sulphate pulp, 130,000 tons of mechanical pulp, 30,000 tons of paper and
140,000 standards of sawn timber. A new sulphate pulp mill of 100,000 tons
capacity is being constructed, and will be in operation in 1931. As a result of the
amalgamation, it is expected that increased profits will be derived from operating
economies, particularly in working of the timber lands, and from the extension of
the industrial activities of the several companies.
PR E SEN T IN C R E A SE
IN
CAPITAL
At this time it is proposed to offer to the holders of participating debentures and
shares, rights to subscribe to Kr. 37,916,660 par value additional participating
debentures and Kr. 10,833,400 par value additional shares and also to sell privately,
at a price substantially in excess of the subscription price, Kr. 20,000,000 par
value additional participating debentures and Kr. 166,600 par value additional
shares.
Funds thus realized will enable the company to acquire the above mentioned
interests in the Swedish lumber and wood-pulp industries, and also to cooperate
with Swedish Match Co. and International Match Corporation in certain transac
tions connected with the match industry.
After giving effect to the proposed increase, the outstanding capitalization of
Kreuger & Toll Co. will be as follows:
Five per cent secured sinking fund gold debentures, due March 1, 1959 (addi
tional debentures issuable under provisions of debenture agreement), $49,625,000.
Participating debentures, Kr. 139,166,66c,1 equivalent to $37,296,665 (Kr.
190,000,000 authorized; Kr. 16,000,000 reserved for exercise of warrants attached
to secured debentures).
1 In addition to the Kr. 16,000,000 participating debentures reserved for exercise of warrants, up to a total of
Kr. 5,333,340 additional participating debentures m ay be issued in the event that any of said warrants shall
have been exercised in time to participate in the rights to subscribe now being offered.
1204
STOCK EXCHANGE PRACTICES
Share capital, par value Kr. 100 per share, Kr. 76,000,000, equivalent to
$20,368,000 (Kr. 76,000,000 authorized, divided into Kr. 10,000,000 “ A ” shares
and Kr. 66,000,000 “ B ” shares).
Both classes of shares are alike in all respects save as to voting power, the “ A ”
shares having one vote per share and the “ B ” shares, one one-thousandth vote
per share.
The participating debentures and shares are listed in Stockholm, London, Paris,
Amsterdam, Basle, Berne, Geneva, Lausanne, and Zurich, and the participating
debentures are also listed in Berlin, Hamburg, and Frankfort and, in the form of
“ American certificates,” on the New York and Boston Stock Exchanges.
FIN AN C IAL CONDITION
The December 31, 1928, consolidated balance sheet of Kreuger & Toll Co. and
its wholly owned subsidiary holding companies (Swedish American Investment
Corporation, of Delaware, United States of America, and N. V. Financieele
Maatschappij Kreuger & Toll, of Holland) adjusted to give effect to the acquisi
tion of certain assets since that date and the issuance, in March, 1929, of
$50,000,000 5 per cent secured sinking fund gold debentures and Kr. 16,250,000
par value participating debentures, is as follows:
ASSETS
Investments:
Industrial stocks—
Swedish Match C o_________ $28, 922, 044
Grangesberg C o____________
17, 553, 800
Other industrial stocks_____
10, 280,704
-------------------- $56, 756, 548
Real estate stocks—
Hufvudstaden Real Estate
Co. (Sweden)____________
6, 427, 980
In other European countries. 13, 591, 943
-------------------- 20, 019, 923
Bank stocks__________ _______________________
15,231,961
Foreign Government bonds___________________ 83, 447, 414
Other stocks and bonds_______________________ 18, 594, 435
Notes secured by real estate mortgages_______
3, 474, 000
-------------------- $197)
Accounts receivable____________________________________________
20,
Cash and banking account______________________________________
12,
Special deposit for retirement of preferred stock_________ _______
Furniture and fittings_____________ _____________________________
524} 281
703, 584
058, 930
94, 007
1
230, 380, 803
LIABILITIES
Sundry creditors (including accrued interest and
reserve for United States income tax)___________
17, 495, 423
Preferred stock of subsidiary (called for redemption) _
41, 000
-------------------5 per cent secured sinking fund gold debentures___________________
Participating debentures (Kr. 81,250,000 par value) _ 21, 775, 000
Share capital (Kr. 65,000,000 par value)___________ 17, 420, 000
95, 390,194
Reserve funds____________________________________
Profit and loss surplus____________________________
28, 259, 186
--------------------
17, 536, 423
50, 000, 000
162, 844, 380
230, 380, 803
Based on the above balance sheet adjusted to give effect to the present pro
posed increase in capital, total net assets, after deducting all liabilities having
priority over the participating debentures and share capital, amount to more
than $245,000,000.
STOCK EXCHANGE PRACTICES
1205
EARNINGS
&
In no year since its organization has Kreuger Toll Co. failed to earn and pay
‘dividends on its share capital from time to time outstanding and participating in
*tividends. Such dividends for the past 10 years have been at the present annual
rate of 25 per cent.
Consolidated net earnings of Kreuger
Toll Co. and its wholly owned sub*
rsidiary holding companies (Swedish-American Investment Corporation and
N. V. Financieele Maatschappij Kreuger & Toll) for the three years ended Decem
ber 31,1928, before interest on participating debentures and after adjustment for
intercompany items and dividends on Swedish-American Investment Corpora
tion preferred stock now retired, are as follows:
Tear ended Dec. 31, 1926__________ _______ _____________ _____ - $7, 981, 325
Year ended Dec. 31, 1927-----------------------------------------.— ;------------ 12, 409, 606
Tear ended Dec. 31, 1928______________________________________ 21, 025, 988
Such net earnings for 1928 are equivalent to 60 per cent on the total Kr.
130,000,000 par value participating debentures and share capital outstanding
tit the end of that year, or the equivalent of $3.23 per American certificate.
Preliminary figures for the first nine months of 1929 indicate that net earnings
are at an annual rate of not less than 67 per cent on the total Kr. 146,250,000 par
value participating debentures and share capital outstanding at the end of that
■period, or the equivalent of approximately $3.60 per American certificate.
These earnings do not include any allowance for income from the assets now
proposed to be acquired and the foregoing calculation, therefore, includes no
adjustment for the additional securities to be issued under terms of the present
proposed increase in capital. The assets now to be acquired will afford new sources
•of income and will add substantially to the earnings of the company for the coming
.year.
&
DESCRIPTION OP PARTICIPATING DEBENTURES AND AMERICAN CERTIFICATES
The participating debentures of Kreuger & Toll Co. constitute an authorized
issue of kr. 190,000,000 in coupon form. Provision has been made for the pay
ment of principal and interest, at the option of the holder, in Stockholm in Kronor
or in London, Amsterdam, Brussels, Paris, Germany or Switzerland in the respec
tive currency at bankers’ buying rates for sight drafts on Stockholm on date of
presentation of debenture or coupon.
The particij>atmg debentures bear interest at the rate of 5 per cent per annum
rand if the dividend paid or declared on the ordinary shares of the company in
respect of any fiscal year exceeds 5 per cent, are entitled in respect of such fiscal
.year to additional Interest at the rate of 1 per cent for each 1 per cent so paid or
declared on the ordinary shares in excess of 5 per cent. Interest is payable annu
ally on July 1 in respect of the year ended the preceding December 31 and the
amount of the payment is determined by the share dividend fixed at the annual
meeting of the shareholders usually held in May. At the present dividend rate
•of 25 per cent on the shares, the participating debentures are entitled to receive
interest at the same rate. The participating debentures included in the increase
now proposed will be entitled to interest in respect of the calendar year 1929 and
subsequent years.
American certificates representing participating debentures are issued by Lee,
Higginson Trust Co., Boston, as depositary under a deposit agreement dated
September 1, 1928, in the proportion of one American certificate for each 20
kronor par value of debentures deposited. At any time, and in accordance with
the terms of the deposit agreement, participating debentures may be deposited
against issuance of American certificates and American certificates may be
exchanged for participating debentures represented thereby. The proportional
part of any interest, principal, redemption price or other payments, applicable to
deposited participating debentures, will be paid by the company in dollars at
present parity of exchange (1 Swedish krona=$0,268) and distributed to holders
of American certificates by Lee, Higginson & Co., fiscal agent for American cer
tificates. Interest at the rate of 25 per cent is equivalent to $1.34 per American
certificate.
As more fully set forth in the deposit agreement, to which reference is made,
the participating debentures are (1) entitled in liquidation to redemption before
Any distribution of assets is made to shareholders but only after all other debts
of the company have been paid, and are (2) redeemable at the option of the com
pany on any interest date, on three months’ notice—in each case at a price
^equivalent to the average quotation for the three months preceding that in which
119852—33—PT4-----5
1206
STOCK EXCHANGE PRACTICES
the company is placed in liquidation or in which notice of redemption is given,
but not less than par and accrued interest at the rate of 5 per cent per annum.
In the deposit agreement, however, the company has covenanted that partici
pating debentures on deposit thereunder will not be called for redemption unless
such average quotation is equivalent to at least five times par value of the partici
pating debentures; nor will the amount payable in voluntary liquidation be less
than five times par value. The debentures are redeemable, at the option of the
holder, on July 1, 2003, or on any interest date thereafter, on six months’ notice,
at par and accrued interest at the rate of 5 per cent per annum.
Very truly yours,
A k t ie b o l a g e t K r e u g e r & T o l l .
By I v a r K r e u g e r .
N o t e .— All conversions of foreign currencies to dollars used herein have been
made at par of exchange. At par, 1 Swedish Krone=$2.68.
Mr. M a r r i n a n . Mr. Durant, when did you first suffer some suspi
cions regarding the business integrity of Mr. Kreuger?
Mr. D u r a n t . Shortly after his suicide.
M r . M a r r i n a n . A f t e r h is s u ic id e ?
D u r a n t . Yes.
M r . M a r r i n a n . This is not a question
Mr.
that properly bears on
legislation. It might satisfy inquiry which, if Senators get it as fre
quently as I have had it put to me, will perhaps render a small public
service. The colossal deceptions practiced by Kreuger lead many
people to think he is still alive. Is there any possible basis for sucn
a thought?
Mr. D u r a n t . Not in my judgment.
Mr. M a r r i n a n . Mr. Durant, who sent the confidential cable re
ceived by Mr. Murnane, one of your partners, on the morning of
March 1 2 , 1 9 3 2 , at your New York offices advising of Mr. Kreuger’s
death?
Mr. D u r a n t . I did.
Mr. M a r r i n a n . Why was this information withheld from the
American public until after the close of the stock market on that
date?
Mr. D u r a n t . I said in the telegram, which I believe is in the
record there, that the matter had not been passed by the police yet,
and no announcement should be made by anybody until the police
in Paris had made the announcement. Now, what they did I do not
know.
The C h a i r m a n . In other words he was not officially dead.
Mr. M a r r i n a n . Will you submit a copy of your cablegram to
Mr. Murnane?
Mr. D u r a n t . Certainly.
M r . M a r r i n a n . N o w , there has been written the statement that
the responsibility for that suppression really lay with the bankers, not
only Lee, Higginson & Co., but other bankers in the international
group present in Paris at the time of the suicide, who exerted the
very greatest pressure upon the French police authorities to suppress
the news until you gentlemen could get together and see what could
be done to stabilize that situation. Now, what is the fact?
Mr. D u r a n t . Absolutely nothing in it so far as I have ever heard
or know.
M r . M a r r i n a n . Why did the French authorities suppress the
information?
Mr. D u r a n t . I do not know what they did or how they did it.
When I heard the information the police were just going. A friend
had seen Mr. Kreuger and notified the police and notified me. I did
STOCK EXCHANGE PRACTICES
1207
not think it was my duty—I did not think I should release that in
formation to the public until the police, who had it in charge, had
given it out. Now I am sure there was no pressure brought to bear.
I never had any relation with the police myself.
Mr. M a r r i n a n . Well, certainly the firm of Lee, Higginson & Co.,
of New York, need not have been responsive to the judgment of
others on what should be done about this fact known to them. In
other words, Lee, Higginson & Co. can not take the position that it
withheld or suppressed this news because of some judgment reached
by the police force of Paris. In other words, you had the news in
New York on the morning of March 12 at—shall we say a few moments
after 10—I understand it was there before-—but-it was not called to
Mr. Mrunane’s attention until a few moments after 10, the trading day
had a considerable time yet to run, and yet it was withheld until
after the close of the stock market? Isn’t that true, sir?
Mr. D u r a n t . Well, I was in Paris. I sent the telegram about
half past 1, or something of that sort. And I did not know until I
got back what was done.
Mr. M a r r i n a n . Will you answer the question? Do you think Lee,
Higginson & Co. should have been responsive in any way to the French
Government in withholding the news?
Mr. D u r a n t . Well, I do not know what they should have done
with the French Government. It was not a question of the Govern
ment. I had sent them this information and said that in my judg
ment it should not be made public until the authorities had made the
announcement.
Senator C o s t i g a n . What was the New York time when you sent
the telegram?
Mr. D u r a n t . M y best recollection is that it was about half past 1
or 2 o’clock Paris, which would make it about-----The C h a i r m a n . A. m. or p. m.?
Mr. D u r a n t . P. m., Paris time. Would be five hours difference.
About half past 8 or 9, I think.
The C h a i r m a n . In the morning.
Senator C o s t i g a n . In the morning.
The C h a i r m a n . At New York.
Mr. D u r a n t . I think so. But I am not clear, Senator, just when
I sent it.
Senator C o s t i g a n . Probably prior to the opening of the New York
Stock Exchange on that day.
Mr. D u r a n t . I think it was sent prior, but I don’t think it was
opened until later.
Senator C o s t i g a n . May I ask you whether any advantage of this
knowledge of the death of Mr. Kreuger was taken in the way of sales
of any of the Kreuger securities by your associates before the news of
Kreuger’s death had become public?
Mr. D u r a n t . I am glad you asked that because I can say that no
advantage was taken of it whatsoever.
Senator R e y n o l d s . Mr. Chairman, I should like to ask the witness
a question.
The C h a i r m a n . Senator Reynolds.
Senator R e y n o l d s . What was the official hour of the death of
Kreuger?
Mr. D u r a n t . That, sir; I do not know.
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Senator R e y n o l d s . You were in Paris at the time, weren’t you?
Mr. D u r a n t . Yes, sir.
Senator R e y n o l d s . H o w far were you living from him?
Mr. D u r a n t . Oh, a few miles. Just 2 or 3 miles.
Senator R e y n o l d s . Y o u knew him quite well?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . He was a friend of yours?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . Y ou were a director in his company?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . When were you notified as to his death?
Mr. D u r a n t . I think it was about half past 1, that is my best
recollection, or 1 o’clock.
Senator R e y n o l d s . Half past 1 on what date?
Mr. D u r a n t . March 12, Saturday.
Senator R e y n o l d s . Did they tell you at that time what time he
had committed suicide?
Mr. D u r a n t . N o.
Senator R e y n o l d s . Did you not inquire?
Mr. D u r a n t . Well, we had been waiting for Mr. Kreuger, and he
did not come to the meeting.
Senator R e y n o l d s . Did you afterwards learn what time he
committed suicide?
Mr. D u r a n t . No; I did not learn what time he committed suicide.
I did not know the exact hour.
Senator R e y n o l d s . D o you mean to tell me, Mr. Durant, as
closely as you were associated with Mr. Kreuger as director inter
ested in all his financial affairs, and knowing him personally as you
did, that you did not even make inquiry as to the time that he com
mitted suicide?
Mr. D u r a n t . I never did. The exact minute. I knew it was-----Senator R e y n o l d s . No, the hour.
Mr. D u r a n t . The two hours that we were waiting for him.
Senator R e y n o l d s . What hour of the day did he commit suicide?
Mr. D u r a n t . Just about 11 o’clock.
Senator R e y n o l d s . Just about 11 o’clock?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . When did the police pass upon this matter
officially?
Mr. D u r a n t . I haven’t any idea.
Senator R e y n o l d s . Haven’t you just told the committee that
you sent a wire at half past 1 in the day?
Mr. D u r a n t . I said the minute I heard about it. It had not
been released by the police.
Senator R e y n o l d s . What time did you hear about it?
Mr. D u r a n t . My best recollection it was around 1 o’clock or
half past 1.
Senator R e y n o l d s . One o’clock?
Mr. D u r a n t . Yes.
The C h a i r m a n . In the morning?
Senator R e y n o l d s . In the morning?
Mr. D u r a n t . N o ; in the daytime.
Senator R e y n o l d s . In the daytime?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . One o’clock noon, so to speak?
STOCK EXCHANGE PRACTICES
1209
Mr. D u r a n t . Yes.
Senator R e y n o l d s . All right. Now, when you heard that, how
long after that was it that you sent this wire to America?
Mr. D u r a n t . It was very soon after that.
Senator R e y n o l d s . H o w soon?
Mr. D u r a n t . I do not recall.
Senator R e y n o l d s . Well, you have some idea, haven’t you?
Mr. D u r a n t . Well, it was very soon. At the first opportunity
I went out and sent a cablegram.
Senator R e y n o l d s . Y ou did not send a cablegram until the French
police had passed upon it officially?
Mr. D u r a n t . N o, sir.
Senator R e y n o l d s . Who did you send that wire to?
Mr. D u r a n t . I immediately, as soon as I could get out, sent a
cablegram and I notified my partner of this confidential news that I
had heard.
Senator R e y n o l d s . Where were your partners?
Mr. D u r a n t . In New York.
Senator R e y n o l d s . In New York. Then you did communicate
the information to the members of your firm in New York?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . What did you say in your cablegram?
Mr. D u r a n t . I said that he had died suddenly.
Senator R e y n o l d s . What time? Did you say that?
Mr. D u r a n t . I did not know.
Senator R e y n o l d s . You did that before the police had passed
upon it?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . That is true, isn’t it?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . Then the members of your firm knew all about
the suicide of Kreuger before anybody else knew about it?
Mr. D u r a n t . No, sir; I beg your pardon. I had not mentioned
suicide in my cablegram.
Senator R e y n o l d s . But you knew that he had died?
Mr. D u r a n t . I said that he died suddenly. They knew that.
Senator R e y n o l d s . Didn’t you tell them that he had killed himself?
Mr. D u r a n t . No.
Senator R e y n o l d s . Y ou told them that he had died?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . Y ou knew that that was going to affect the
securities in this country?
Mr. D u r a n t . I thought so.
Senator R e y n o l d s . Y ou knew as a business man, and, if I may
employ the word, promoter, that it was going to affect materially
those who had invested their money in these investments, didn’t you?
Mr. D u r a n t . I thought so.
Senator R e y n o l d s . Well, didn’t you deem it then your duty to
advise the world as to the death of Kreuger when you knew that he
had committed suicide, and when you knew that thousands of
investors had millions of dollars invested in those securities?
Mr. D u r a n t . I heard that he had committed suicide. I did not
know it. I was not there.
Senator R e y n o l d s . Well, you knew it?
Mr. D u r a n t . The matter was in the hands of the police.
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STOCK EXCHANGE PRACTICES
Senator R e y n o l d s . The matter was in the hands of the police,
but you did advise the members of your firm and gave them that
confidential information, that is true, is it not?
Mr. D u r a n t . That Kreuger had died suddenly.
Senator R e y n o l d s . And you knew that that was going to affect
thousands and thousands of investors in this country?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . And thereby you neglected to advise the
American investment public who were interested in and who had
invested in the securities of an organization in which you were a
director, that is true, is it not?
Mr. D u r a n t . I do not think that I should give that information
to the— —
Senator R e y n o l d s . Why, as a director of that company you were
interested in those that were investing their money in the securities
of your organization, were you not?
Mr. D u r a n t . Yes; I was.
Senator R e y n o l d s . Did you not deem it your duty, your moral
obligation to the investors in your various and sundry organizations,
to advise them to the effect that the man who was heading this
mammoth institution had committed suicide? Did you not deem
it your moral duty?
Mr. D u r a n t . I deemed it my duty to let the proper officials make
the statement.
Senator R e y n o l d s . Why, you were a director in the company,
were you not?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . Well, who could have been a more proper
official than yourself?
Mr. D u r a n t . I think the officials in Paris were the proper ones.
Senator R e y n o l d s . What officials in Paris? The police officials?
Mr. D u r a n t . Yes*
Senator R e y n o l d s . What interest did they have in the American
public?
Mr. D u r a n t . Well, they had an interest in any violent death in
Paris.
Senator R e y n o l d s . Well, but did the American people have any
interest in it?
Mr. D u r a n t . Why, Senator, I did not have the details. I had
not seen the case.
Senator R e y n o l d s . I know, but you were right there. You were
a director of his company. Why did you not make inquiry about it?
Mr. D u r a n t . Well, I did not deem it my duty to make the
announcement to the world.
Senator R e y n o l d s . All right. You did convey confidential infor
mation to the members of your firm to the effect that this man was
dead, did you not?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . All right. And you later sent a cablegram,
did you not?
Mr. D u r a n t . Later?
Senator R e y n o l d s . Yes; after you had conveyed that confidentially
to the members of your firm? Did you not?
Mr. D u r a n t . I do not recall.
Senator R e y n o l d s . Well, I will ask you if you did?
STOCK EXCHANGE PRACTICES
1211
Mr. D u r a n t . On this particular subject?
Senator R e y n o l d s . Yes.
Mr. D u r a n t . I think that later on they sent a telegram saying
there was a rumor that he had committed suicide.
Senator R e y n o l d s . Who sent it?
Mr. D u r a n t . I think my partners.
Senator R e y n o l d s . Your partners. I will ask you if you were not
right there with them when it was sent?
Mr. D u r a n t . I was in Paris.
Senator R e y n o l d s . Well, you were with them when they sent the
cablegram, were you not?
Mr. D u r a n t . They were in New York, sir.
Senator R e y n o l d s . Well, who was with you there in Paris?
Mr. D u r a n t . One of my partners.
Senator R e y n o l d s . One of your partners. Who sent the cable
gram, you or he?
Mr. D u r a n t . I sent the first cablegram.
Senator R e y n o l d s . Y ou sent the first cablegram. Who sent the
second cablegram?
Mr. D u r a n t . I do not at the present time recall. I will be glad
to refresh my memory.
Senator R e y n o l d s . I will ask you, Mr. Durant, if you were not
right there at the time it was sent and saw it written? Or do you
know it was sent?
Mr. D u r a n t . I do not know the cablegram that the Senator is
referring to.
Senator R e y n o l d s . I will ask you if you did not just state that a
second cablegram was sent? Now which is correct? Did he sent
it or didn’t he?
Mr. D u r a n t . I sent a telegram saying Mr. Kreuger died suddenly.
Senator R e y n o l d s . Y ou told me about that. I am talking about
the second cablegram.
Mr. D u r a n t . I have no present recollection of a second cablegram.
Senator R e y n o l d s . Didn’t you just a moment ago state that a
second cablegram was sent? Did you not just state that a moment
ago? Was that right or was it wrong?
Mr. D u r a n t . I have some recollection that a second-----Senator R e y n o l d s . Y o u are not answering m y question, Mr.
Durant. Answer the question, please.
Mr. D u r a n t (continuing). That there might have been a second
cablegram.
Senator R e y n o l d s . Answer my question, please. My question is
this: Did you not state just a moment ago that you sent a second
cablegram? Now is that right or wrong?
Mr. D u r a n t . I said I had some recollection that there might have
been some other cablegram sent. I will be delighted to look it up.
Senator R e y n o l d s . Just a minute. If a second cablegram was
not sent, how do you have any recollection that one was sent? Can
you answer that?
Mr. D u r a n t . I will be glad to look up the cables.
Senator R e y n o l d s . All right. Now, that you say that you have a
recollection that a second cablegram was sent, what were the contents
of that second cablegram?
Mr. D u r a n t . I do not recall, except that I-----
1212
STOCK EXCHANGE PRACTICES
Senator R e y n o l d s . Well, then, you do know that a second cable
gram was sent, do you not?
Mr. D u r a n t . Sir, I am trying to give you my best recollection of
this, Senator.
Senator R e y n o l d s . I am trying to get you to answer me. I am
asking you about this second cablegram. What this committee
wants to know on this particular point is this: Why you should have
advised the members of your firm, giving them confidential informa
tion at the time that you gave them that confidential information? I
will ask you, Mr. Durant, if you did not know then that they were
going to hold that in confidence, and that they were not going to let
the American investing public know that Mr. Kreuger had taken his.
own life? Isn’t that true?
Mr. D u r a n t . I had no idea what they were going to do with it.
Senator R e y n o l d s . Why, do you mean to tell this committee that
when you wired your firm confidentially, that you, an intelligent
business man, had any idea that they would convey all that informa
tion to the American public?
Mr. D u r a n t . I hoped they would not.
Senator R e y n o l d s . Y o u hoped they would not? Why did you
hope that they would not convey that confidential information to the
American investing public?
Mr. D u r a n t . Because I did not think it was my duty to give out,
the information.
Senator R e y n o l d s . Y ou did not think it was your duty, and you
were a member of that institution? Why, you do not mean to tell
us that, do you, Mr. Durant? Did you have any interest in those
who had invested their millions in these securities?
Mr. D u r a n t . Certainly.
Senator R e y n o l d s . Y ou had, didn’t you? Then why didn’t youdeem it your duty to advise the American public?
Mr. D u r a n t . Because I had not the exact information. I had:
not seen the-----Senator R e y n o l d s . Why, you were right there?
Mr. D u r a n t . I was n o t where he killed himself.
Senator R e y n o l d s . Y ou were a director of the company. Was.
there any man in the Kreuger organization that had a greater
interest in that institution than yourself? Was there any such man?’
You were a director, were you not?
Mr. D u r a n t . I was a director.
Senator R e y n o l d s . Well, was there any man in the organization,
that had a greater interest in it than you?
Mr. D u r a n t . In which organization?
Senator R e y n o l d s . In the Kreuger organization.
Mr. D u r a n t . Why, there were many men in the Kreuger organ
ization.
Senator R e y n o l d s . Y o u were a director. Were there any other
directors there beside you?
Mr. D u r a n t . Yes, sir.
Senator R e y n o l d s . Did any of those other directors send cable
grams advising of the death of Kreuger?
Mr. D u r a n t . I do not know.
Senator R e y n o l d s . Did you discuss it with them?
Mr. D u r a n t . I do not know.
STOCK EXCHANGE PRACTICES
1213
Senator R e y n o l d s . What were the contents of that second cable
gram?
Mr. D u r a n t . I will look it up.
Senator R e y n o l d s . Who was it sent to?
Mr. D u r a n t . I will give you my best recollection, Senator.
Senator R e y n o l d s . Yes, sir.
Mr. D u r a n t . I am not at all sur'e that there was a second cable
gram. I have a recollection that later on that day my partners said
there was a rumor that Mr. Kreuger had committed suicide, and was
that correct? My first telegram, as I did not have all the details—I
knew that he had been-----Senator R e y n o l d s . Just a moment. Did you send that telegram
to your firm on a rumor?
Mr. D u r a n t . I did not know whether he had committed suicide or
not. I was not sure.
Senator R e y n o l d s . No; I am asking you this: Did you send that
cablegram to America on a mere rumor?
Mr. D u r a n t . Not at all.
Senator R e y n o l d s . Not at all. Then you knew that he was dead?
Mr. D u r a n t . I had been told that he was dead by one of his friends
that saw him.
Senator R e y n o l d s . Did you see him after he was dead?
Mr. D u r a n t . No, sir.
Senator R e y n o l d s . Y ou do not know whether he is dead or not,
then, do you?
Mr. D u r a n t . Not of my own personal knowledge.
Senator R e y n o l d s . What do you think about it? Is he or isn’t he?
Mr. D u r a n t . I have testified this morning-----Senator R e y n o l d s . I am asking you again.
Mr. D u r a n t . I b e lie v e h e is dead.
Senator R e y n o l d s . Why do you b e lie v e he is dead?
Mr. D u r a n t . Because some-----Senator R e y n o l d s . Because what?
Mr. D u r a n t . Because some associates of mine, people I know,
saw him.
Senator R e y n o l d s . Now you knew him intimately, did you not?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . You went over on the boat with him, did you
not?
Mr. D u r a n t . Yes.
Senator R e y n o l d s . Y ou were with him every day and every
evening, were you not?
Mr. D u r a n t . I was with him a good deal.
Senator R e y n o l d s . Associated with him frequently while he was
in Paris?
Mr. D u r a n t . I did not see him from the time we got to Paris
until he died.
Senator R e y n o l d s . Do you mean to tell this committee that after
that man was supposed to have committed suicide that you did not
go to view his remains?
Mr. D u r a n t . That is correct.
Senator R e y n o l d s . Why didn’t you?
Mr. D u r a n t . Because I do not care to do that. I do not like to
:see my friends after they are dead.
1214
STOCK EXCHANGE PRACTICES
Senator R e y n o l d s . A s you stated, you do not know whether he
is dead or not?
Mr. D u r a n t . I said i believed he is.
Senator R e y n o l d s . Y ou believe he is?
The C h a i r m a n . I s that all, Senator?
Senator R e y n o l d s . That is all.
The C h a i r m a n . Y o u may proceed, Mr. Marrinan.
Mr. M a r r i n a n . Mr. Durant, you have answered some questions
very satisfactorily that I had intended to ask, and I am going by
those. Did your house execute buying or selling orders for clients,
not on your own account or on the accounts of any of your partners,
but for clients during that morning of March 12?
Mr. D u r a n t . I, of course, was not here. I have been advised by
my firm that when that cablegram was opened that all orders to buy
for clients were canceled that stood on the books. I do not think
the telegram was opened until after the market was opened.
Mr. M a r r i n a n . The time is getting short, and I wish to hurry over
some of this. But I would like to paint the picture, as I understand
it and just ask you whether I am accurate in my statement of it. On
that morning there was very considerable—I say considerable by
comparison with the usual market movements—there was very
considerable liquidation from Paris. There were about 165,400 shares
of Kreuger & Toll stock, the American certificates, which are tied up
in this picture by reason of the warrants, sold on the exchange that
morning. Mr. Gray's investigation disclosed that 148,000 of that
total originated in Paris. Can you give us any assistance as to
whether that statement is substantially correct?
Mr. D u r a n t . I have no information whatsoever of it.
Mr. M a r r i n a n . Mr. Chairman, may I insert in the record at this
time a report made by an accountant of the firm of George K. Watson
to Mr. William A. Gray---- The C h a i r m a n . The counsel for this committee.
:
Mr. M a r r i n a n . The counsel for this committee—of selling of
Kreuger & Toll on March 11 and 12, 1932. There is this very inter
esting paragraph in this report which I would like to have you com
ment upon if you care to do so:
It may be noted that a large volume of selling of Kreuger & Toll had been done
for foreign accounts for some time preceding the date of Mr. Kreuger’s death.
Have you any knowledge of that, Mr. Durant?
Mr. D u r a n t . N o , sir; I h a v e n o t .
Mr. M a r r i n a n . I would like to insert this in the record, if the
committee approves.
The C h a i r m a n . If there is no objection it will be printed in the
record.
(The memorandum from George K. Watson & Co. to William A.
Gray is here printed in the record in full, as follows:)
GEORGE K . W ATSON & CO., OFFICE MEMORANDUM
Date: June 2, 1932.
From: Frederic E. Benton.
T o: William A. Gray.
Subject matter: Selling of Kreuger & Toll, March 11 and 12, 1932.
Since the date of Mr. Kreuger’s death, March 12, was a Saturday, the sales of
that day are combined on the clearing-house records with those of F'riday,
STOCK EXCHANGE PRACTICES
1215
March 11. During the two days 354,700 shares of Kreuger & Toll were cleared;
this amount including borrowings of one house by another.
I visited approximately 20 of the houses whose volume of shares cleared on
that date were the largest and found that the majority of the selling was for the
account of foreign houses. Following is a list of the approximate number of
shares sold for various accounts:
Societe Financiere Suisse et Scandinave, Stockholm, approximately through
Hirsch-Lilienthal, Wertheim & Co., H. Hentz & Co., 60,000 shares.
S. Japhet & Co. (Ltd.), London. This was a joint account with Wagner Stott,
a stock-exchange house, and sold 16,000 shares.
A. G. Marcator (Ltd.), Switzerland, through H. Hentz & Co., 15,500 shares.
J. Koch, Amsterdam, through Wertheim & Co., White, Weld & Co., 6,500
shares.
Kalker Polack, Amsterdam, through Herzfeld & Sterm, 20,000 shares.
Jacobson Ponsbach, Stockholm, through Herzfeld & Sterm, 10,000 shares.
London Arbitrage Account, through Hirsch-Lilienthal. This was a joint
account which sold approximately 20,000 shares.
In several instances large volumes of stock were sold for a short position,,
which were later delivered into the accounts of these customers by Lee, Higgin
son & Co.
I was informed that while Lee-Higginson did not sell on that day, they also'
did not execute buying orders which had been received by them from their
customers.
It may be noted that a large volume of selling of Kreuger & Toll had been
done for foreign accounts for some time preceding the date of Mr. Kreuger’s
death.
If this matter is gone into further, it might be of interest to find out why
the Societe Financiere particularly knew of the condition of the Kreuger & Toll
companies, at this time, while Lee-Higginson, who handled such a large volume
for the American houses, was in ignorance of it.
Mr. M a r r i n a n . I have here a letter from your distinguished
counsel, Mr. Durant. It is signed by Judge Joseph M. Proskauer,
under date of June 2 , 1 9 3 2 , which was offered to Mr. Gray in answer
to certain queries, which he raised. It shows, generally speaking,
the number of transfers of American certificates representing partici
pating debentures of Kreuger & Toll Company issued during the
month of March, 1 9 3 2 , and delivered to various people where con
versions were being made abroad from the participating debentures
held abroad into American certificates. I find through totaling
some of the figures submitted that those transactions amounted dur
ing that month to 1 5 7 ,9 1 0 shares. Is it reasonable to state that that
is evidence of a liquidation movement from Europe—an unloading of
these securities upon the American market?
Mr. D u r a n t . It would not necessarily follow, Mr. Marrinan.
M r . M a r r i n a n . It might be, though?
Mr. D u r a n t . It might be.
M r . M a r r i n a n . Yes, sir. Do you know anything about a situa
tion wherein a member firm of the New York Stock Exchange with
4 0 0 ,0 0 0 shares of Kreuger & Toll stock in its possession, and in a
very awkward situation, proceeded similarly to dispose of some 4 0 0 ,0 0 0
shares of Kreuger & Toll stock?
Mr. D u r a n t . N o, sir. It means nothing to me.
Mr. M a r r i n a n . In another table furnished by Judge Proskauer,
as counsel, is given all deliveries of American certificates on March 14
made to complete sales as of March 11 and 12. This shows that Lee,
Higginson & Co. sold in behalf of customers some 3 ,2 7 0 American
certificates on those two days. No record was given of purchases.
It is my understanding that you say now that in so far as March 12
was concerned your firm executed no buying orders for its clients?
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Mr. D u r a n t . After they opened the telegram. I believe I learned
in the last few days that the telegram was not received by a partner
and opened until after the market had opened, but the minute they
got that information they canceled all buying orders on behalf of
clients.
Mr. M a r r i n a n . Then it becomes very necessary for us to know
right down to the split second when that telegram was opened. Can
you give us that information?
Mr. D u r a n t . I can not, but I will try to get it for you.
Mr. M a r r i n a n . Will you furnish that information?
Mr. D u r a n t . I will be glad to.
M r . M a r r i n a n . All right, sir. I would like to submit for the rec
ord at this point, if the committee please, the letter from Judge
Proskauer to which I referred, and the accompanying data, and ask
that it be printed in the record.
The C h a i r m a n . If there is no objection it m a y be so ordered.
(The letter from Joseph M. Proskauer to William A. Gray and the
accompanying data is here printed in the record in full, as follows:)
N ew Y ork,
W illia m
A.
G ray,
June 8, 1932.
Esq.,
New York City.
Mb. G r a y : Following our conversation yesterday, I instructed the proper
clerk at Lee, Higginson & Co. to make up a complete statement of all Kreuger &
Toll certificates delivered out on March 14, 1932. I send you herewith two
schedules, one showing the certificates delivered out by Lee, Higginson & Co. as
transfer agents, and the other showing certificates delivered out to complete sales
made for account of customers.
As neither of these schedules checked up with the information that large
deliveries had been made to Wertheim & Co., Hirsch, Lillienthal & Co., and Hentz
& Co., I requested a complete statement of all deliveries to those three firms
made during the entire month of March, and I send you three schedules covering
such deliveries.
I confirm on behalf of my clients that they made no deliveries for their own
account on the 14th of March.
If for any reason the information which I now send you and which was hurriedlyput together does not check with your own records, I trust you will not hesitate
to put your investigator in touch with us, as we wish to be sure that all informa
tion on this subject is placed freely at your disposal.
Yours faithfully,
J o s e p h M. P r o s k a u e r .
D ear
American certificates, representing deposited 'participating debentures of Kreuger &
Toll Co. issued during month of March, 1932
Date of issue
Am ount
Mar. 4, 1932___
800
M ar. 7 ,1 9 3 2 ....
M ar. 8 ,1 9 3 2 ....
500
400
M ar. 14,1932...
M ar. 15,1932...
300
12,400
M ar.
M ar.
M ar.
M ar.
16, 1932...
17,1932...
18,1932...
21, 1932...
D o . . ............
T o whom delivered
Wertheim & C o.................. .
7.000 ____ d o........................................
8,700 ____ d o........................................
3.000
500
12,300
Date of
delivery
Mar.
7,1932
M ar.
Mar.
8,1932
9,1932
Mar. 15,1932
M ar. 16,1932
M ar.
M ar.
M ar.
M ar.
17,1932
18,1932
21,1932
22,1932
____ do_______
For account of—
BYZE
(Societe
Financiere
Suisse et Scandinave, Stock
holm) .
D o.
Hollandsche
Koopm ansbank,
Amsterdam.
W ertheim & C o., Amsterdam.
BYZE
(Societe
Financiere
Suisse et Scandinave, Stock
holm ).
D o.
D o.
D o.
Hollandsche Koopm ansbank,
Amsterdam.
BYZE
(Societe
Financiere
Suisse et Scandinave, Stock
holm.
1217
STOCK EXCHANGE PRACTICES
American certificates, representing deposited participating debentures of Kreuger &
Toll Co. issued during month of March, 1932— Continued
Date of issue
Am ount
Mar. 31, 1932.
1,000
T otal___
46,900
Mar. 2, 1932___
900
T o whom delivered
Date of
delivery
W ertheim & Co..
Apr.
1,1932
BYZE
(Societe
Financiere
Suisse et Scandinave, Stock
holm.
Hirsch,
Hirsch Lillienthal & C o ___
Mar.
3,1932
Societe Financiere Suisse et
Scandinave, Stockholm.
Do.
Do.
Jacobson & Ponsbach, Stock
holm.
H. Englander.
D o.
Lloyds Bank (L td .), London
account N o. 173.
Sune Scheele.
Societe Financiere Suisse et
Scandinave, Stockholm.
Do.
Do.
Swiss Bank Corporation, Basle.
Union des Banques Suisses,
Geneva.
Do.
Mar. 4, 1932___
Mar. 5, 1932.___
Mar. 7, 1932....
500 ____ do.
1,000 ____ do.
2,800 . . ..d o .
Mar. 7,1932
____do_______
Mar. 8,1932
Mar. 9 ,1 9 3 2 ....
M ar. 14, 1932...
Mar. 15, 1932.__
7,000 ____ do.
4,000 ____ do.
6,000 ____ do-
Mar. 10,1932
Mar. 15,1932
Mar. 16,1932
D o ______
Mar. 16, 1932.
5,000 -------do.
1,000 ____ do.
____d o_______
Mar. 17,1932
Mar. 17, 1932.
Mar. 18,1932.
Mar. 21, 1932.
D o ______
5,000
4,500
185
1,400
Mar. 18,1932
Mar. 21,1932
Mar. 22,1932
____d o_______
Mar. 24,1932. _
____ do.
____ do.
____ do.
____ do
300 ____ do
T otal___
40,585
Mar. 1, 1932...
Mar. 5, 1932___
Mar. 14, 1932D o _______
3.000
3.000
400
1,100
H . Hentz & C o.
------ d o _________
------d o................
------ d o__________
4.000
14,400
4,700
8.000
4,900
.d o _______
.d o _______
.d o _______
-d o ______
.d o ______
Mar.
Mar.
M ar.
Mar.
Mar.
15,
16,
17,
21,
24,
1932.
19321932.
1932.
1932-
T otal.
For account o f-
Mar. 28,1932
Mar. 2,1932
Mar. 7,1932
Mar. 15,1932
....... d o ............
Mar.
Mar.
Mar.
Mar.
Mar.
16,1932
17,1932
18,1932
22,1932
28,1932
E. Gruenberg, Berlin.
D o.
D o.
Societe Financiere pour Valeurs
Scandinave en Suisse, Geneva.
E. Gruenberg, Berlin.
D o.
D o.
D o.
Societe Financiere pour Valeurs
Scandinave en Suisse,Geneva.
43,500
N ote .—All of the above American certificates were issued b y Lee, Higginson & Co. as transfer agents
pursuant to authorization given b y Lee, Higginson Trust Co., depositary, against the deposit with agents
of the depositary abroad of equivalent amounts o f participating debentures, such deposits having' been
made presumably for the account of the persons, firms, etc., listed above in the column “ For account of.’
American certificates representing deposited participating debentures of Kreuger &.
Toll Co. issued by Lee, Higginson & Co., as transfer agents, pursuant to authori
zation from Lee, Higginson Trust Co., depositary, against deposit abroad with
agents of the depositary of equivalent amounts of participating debentures and
delivered on March 14, 1932
Date of issue
Mar. 11,1932...
D o .— ........
D o ..............
D o .........
M ar. 12, 1932...
D o ...............
D o .........
Total___
Am ount
2,100
Delivered to-
For account of—
Central Hanover Bank Swiss Bank Corporation,
& Trust Co.
London.
Herzfeld & Stern.......... Richard Hagglof, Stockholm.
1,000 ____ do.............................. Jacobson & Ponnsbach,
Stockholm.
2,975 Morrison & T ow n Singer & Friedlander, Lon
don.
send.
10,000 Hayden, Stone & C o .. Bankirflrman a w Hogman
& Co., Stockholm.
7,850 Wagner, Stott & C o . . . S. Japhet & Co. (L td .),
London.
2, 700 Abraham & C o_______ P. N . Kemp-Gee, L o n d o n ...
300
26,925
Registered in name o fSuydam & Co.
Herzfeld & Stern.
D o.
Morrison & T ownsend.
H ayden, Stone & C o.
Wagner, Stott & Co.
Abraham & Co.
1218
STOCK EXCHANGE PRACTICES
American certificates, representing deposited participating debentures o f Kreuger &
Toll Co., delivered on March 14, 1982, to complete sales made for the account of
customers
Quantity
500
100
200
70
1,000
100
200
100
100
100
400
200
200
Delivered to—
Jackson & Curtis......................
-------d o ................................................
........d o __________________ _________
Carlisle, Mellick & C o...................
D . T . M oore & C o........................
-------d o ___________________________
W . J. Fahy & C o.....................
-------d o ______________________ _____
Stern, Kemnner <fe C o....... - .........
----- d o ....... .....................................
- - . - . d o ..................... . .........................
-------d o ....... ..........................................
-------d o ........................................ .
Sold for account of—
D ate of sale
Price
Mar. 11,1932
M rs. Viola D . Sinnock
Charles H . M o s e s ..................
James J. Lee........ ..................
M rs. E m ily S. Lee
Thomas J. C u m m in s ,
Mar. 12,1932
54H
5
5^
5H
5H
5
5H
5X
•3,270
Mr. M a r R i n a n . I may say, Mr. Durant, that in one of Mr. Gray’s
reports to this committee made available to me in my part of the
inquiry, this statement appears: “ I was informed” —I say this now
in order that I may be entirely fair with you, because I propose to
introduce evidence from other witnesses which would be in conflict
with this statement. I read: “ Report to Mr. Gray from an account
ant.” It is already, I believe, in one of the exhibits. If it is not,
then I will have it incorporated as a document, so that you will have
an opportunity to see that it is an authentic document. “ I was
informed that while Lee, Higginson did not sell on that day’’—March
12— “ they also did not execute buying orders which had been received
by them from their customers.” It is now my understanding that
you upon the basis of information recently disclosed to you wish to
amend that in behalf of Lee, Higginson?
Mr. D u r a n t . I am not sure that I wish to amend it. I would like
to look it up, sir.
•Mr. M a r r i n a n . Good enough. That is all about that.
Senator C o s t i g a n . Are you going to suspend now, Mr. Chairman?
The C h a i r m a n , You have something else?
M r . M a r r i n a n . Yes, sir. Just one moment.
The C h a i r m a n . When you get through.
M r . M a r r i n a n . I w o u l d lik e t o s u s p e n d , S e n a t o r , f o r a fe w
m o m e n t s in o r d e r t o g e t s o m e o f m y p a p e r s t o g e t h e r .
The C h a i r m a n . Y o u may go ahead, Senator, while
he is looking at
his papers.
Senator C o s t i g a n . References were made, Mr. Durant, recently
to cablegrams to America sent following the death of Kreuger. Nothing has been said about telephone messages. Did you or did you
not telephone to your associates in the United States about the
Reported death of Kreuger?
Mr. D u r a n t , N o , s ir ; I d id n o t .
Senator C o s t i g a n . There were no telephone messages?
Mr. D u r a n t . Not on that subject.
Senator C o s t i g a n . On that subject?
Mr. D u r a n t . No, sir.
Senator C o s t i g a n . On that day?
Mr. D u r a n t . N o, sir; not by me, and I certainly do not think by
anyone else.
STOCK EXCHANGE PRACTICES
1219
Mr. M a r r i n a n . Well, Mr. Durant, do you think it a fair statement
that foreign holders of Kreuger & Toll securities appeared to have
had better information, and to have had an opportunity to act upon
that information, than American holders during the period immedi
ately preceding Kreuger’s death and on the morning during which
this information was withheld from the American public? Is that a
fair statement?
Mr. D u r a n t . I have no way of knowing. I do not think the
European investor had anything different.
Mr. M a r r i n a n . What would you draw from the fact that there
were these very definitely traced transactions originating in Paris
and totaling, we know, 148,000 shares out of a total of 165,400, all
coming through American houses, most of them with branches in
Paris? Isn’t it a reasonable conclusion that the French were acting
upon the information?
Mr. D u r a n t . Not necessarily. I would be surprised, Mr. Marri
nan, if they were.
M r . M a r r i n a n . All r ig h t , sir.
The C h a i r m a n . But at least the Americans did not have the infor
mation on that day when the French were unloading the Kreuger
& Toll stocks?
Mr. D u r a n t . They did not know it through us.
Mr. M a r r i n a n . Mr. Durant, to leave that Paris situation. Why
did the firm of Lee, Higginson & Co. fail to require any audit of the
books of Kreuger & Toll in connection with this secured debenture
issue?
Mr. D u r a n t . The books of Kreuger & Toll have been audited
since the start of the company in accordance with Swedish customs,
Swedish law, which provides that the stockholders appoint each year
an auditing committee to audit the books for the——
The C h a i r m a n . One moment. The Swedish law, then, does, not
require a Government audit? It simply requires that the owners
themselves, who are the directors, of which you were one, provide
for an audit in your own way; is that it?
Mr. D u r a n t . That is not correct, sir; I would not say that.
The C h a i r m a n . Well, what is it, then? If I have got it wrong,
you state it.
Mr. D u r a n t . The stockholders of the company, I believe, appoint
a committee to audit the books of the company. Thaft is not done
by the directors. I was not a director of the company when we
bought this issue, Senator.
The C h a i r m a n . The owners of the company-----Mr. D u r a n t (interposing). The stockholders.
The C h a i r m a n (continuing). Which desired to sell these bonds,
debentures, or stocks, make their own audit, and that is all the Swedish
law requires, is that it?
Mr. D u r a n t . Well, I know-----The C h a i r m a n . Well, is that your statement?
Mr. D u r a n t . The statement was that this company had audits in
connection with its business according to the best Swedish practice.
The C h a i r m a n . N o , your statement was that it was made in accord
ance with the Swedish law, and you told us what the Swedish law was,
and I am trying to have you just repeat it.
Mr. D u r a n t . Well, Senator Norbeck, I am not a lawyer, and I do
not mean to quote Swedish law.
STOCK EXCHANGE PRACTICES
1 22 0
The C h a i r m a n . Well, the question was asked you why didn’t you
have an audit, and you said it was audited according to Swedish law.
So, therefore, we are asking you what the Swedish law was. You
are a director of the company.
Mr. D u r a n t . Well, we had had a connection with this company
before that—the Swedish-American Investment Corporation, which
was the most important subsidiary of Kreuger & Toll, I believe, the
largest one.
The C h a i r m a n . But, anyhow, the point was that your firm made
no audit of Kreuger & Toll?
Mr. D u r a n t . We made no outside American audit by American
auditors.
The
C
h a ir m a n .
No.
Mr. D u r a n t . We have mentioned before, Senator, the reports of'
Kreuger & Toll for many years, since the start, with the certificate
of the Swedish auditing committee for each one, and we have them
here if the committee would like to have them to put in the record..
The C h a i r m a n . I shall take that up when I have a full committee
here as to whether to print all of them in the record, but you may
state for the record briefly what they contain. What you are
offering for the record now is what?
Mr. D u r a n t . Annual reports of Kreuger & Toll since from 1911 to1930. Which contain the certificates of the auditing committeeeach year.
The C h a i r m a n . Well, that matter will be held in abeyance for thecommittee to act upon, because of its volume. I do not know
whether there is any occasion for printing all that. If you care to
make a summary of what it contains you may do so.
Senator C o s t i g a n . Have you any nst identifying the members of
the respective auditing committees so that the committee will know
something of the responsibility of such members?
Mr. D u r a n t . I have not. I will have to get it for you, Senator..
Senator C o s t i g a n . Will you endeavor to do so?
Mr. D u r a n t . Certainly.
Mr. M a r r i n a n . Mr. Durant, as I understand it then, you were
satisfied to accept in behalf of your own interest as bankers, and in:
connection with your responsibility to American holders, the Swedish
law and the Swedish provisions for accounting, is that correct?
Mr. D u r a n t . We had—of course we had-----Mr. M a r r i n a n . N o w please answer. Is that the situation? You
did in fact accept that set-up, did you not, sir? .
Mr. D u r a n t . We accepted the standing of the company and in
fact with certain checks, though, that I would like to explain.
Mr. M a r r i n a n . All right, sir; go ahead. Do not make it too long,
I am not trying to shut you off, or make you answer on a yes or no
basis, but I am trying to economize the time of members of the
committee.
Mr. D u r a n t . Well, may I suggest, if you want to economize the
time—may I just make a little memorandum on that and present it
to the committee?
Mr. M a r r i n a n . No; while we are at it perhaps it would be better
to put it in right here, if it is not too long.
T h e C h a i r m a n . Y ou m a y m a k e a b r ie f s t a t e m e n t n o w , a n d w e w ill
a ls o c o n s id e r th e q u e s t io n w h e t h e r w e w ill p r in t a fu r t h e r m e m o
ran dum .
STOCK EXCHANGE PRACTICES
1221
M r . M a r r in a n . G o a h ead , M r . D u ra n t.
Mr. D u r a n t . Before this issue was bought
we had many years;
probably five or six years’ contact with the Kreuger associations, some
of his companies, our London office of the Swedish Match Co., with
their accountants, and the International Match with their accountants
on that. Also the Swedish-American Investment Corporation, which
was the first subsidiary of Kreuger & Toll of that nature that was
offered here. There was a firm of American accountants employed
on that. That later became part of—was more or less merged into
Kreuger & Toll, and was primarily the biggest part of it. The same
auditors who were officially engaged in some of these other companies
that I just spoke of assisted us in trying to get the figures. Their
frequent trips to Sweden gave them a position of knowing something
about ihe company.
M r . M a r r i n a n . We have M r . Berning here.
Mr. D u r a n t . The figures in the listing statement were collated
by American accountants on the spot, although the name does not
appear-—although they were not hired formally, and the name does
not appear on the work.
The C h a i r m a n . The committee will have to recess soon.
There is one question here which has not been answered. We can
release you now after recess, but you will continue under subpoena.
There is one matter here that must be cleared up, and that is: When
was that indenture written? Was it after the securities were sold or
was it before? Another one: When did the substitutions take place
as relating to the sales?
Mr. D u r a n t . I will be glad to look up the dates, Senator.
The C h a i r m a n . We will have to get that into this record.
Mr. D u r a n t . Certainly.
Senator G o l d s b o r o u g h . Y ou have been asked to give short
answers, but questions being long necessarily you will have to give
long answers.
Mr. D u r a n t . Sometimes. Not always, sir.
The C h a i r m a n . You may proceed, Mr. Marrinan.
Mr. M a r r i n a n . Mr. Durant, in the light of your experience prior
to and subsequent to the death of Kreuger would you now promote
the securities or handle as a banker the securities of a foreign holding
company without an adequate audit of the parent company and also
of its subsidiaries?
Mr. D u r a n t . Well, that leads to a conclusion. That is a pretty
hard question to answer as a general question. I think each case,
Mr. Marrinan, would have to be taken on its merits.
Mr. M a r r i n a n . I want to be fair about it. May I limit the ques
tion. Would you be very much more painstaking in your regard for
accurate information than you seem to have been in the Kreuger &
Toll situation?
Mr. D u r a n t . Well, that would be—I would be very keen to get
accurate information. In this particular case the information which
came from certain accountants in Sweden proved to be inaccurate,
as the court records in Sweden have shown since. The question
o f— ■
—
Mr. M a r r i n a n . But you had an opportunity to audit independ
ently if you had undertaken the job; isn’t that true?
119852—33— p t 4-------- 6
1222
STOCK EXCHANGE PRACTICES
Mr. D u r a n t . Well, I would not say that we had an opportunity.
If don’t know. This was the leading company in Sweden. And
Sweden did not-----Mr. M a r r i n a n . Is it not a fact that Ernst & Ernst, who repre
sented you in the International Match situation, did constantly try
to get that job of auditing this outfit?
fr Mr. D u r a n t . I think they had some conversations with the com
pany about it—with Mr. Kreuger.
Mr. M a r r i n a n . And conversations with you about it?
Mr. D u r a n t . I think they had some with us.
Mr. M a r r i n a n . And chased Kreuger all over Europe and tried to
get the job, but never could catch him to discuss that question; isn’t
that true?
"
Mr. D u r a n t . I would doubt that, sir.
Mr. M a r r i n a n . Well, we will have that taken u p later.
Senator C o s t i g a n . Has the Kreuger & Toll experience not led to
certain changes in your practice designed to bring about better pro
tection of the public in its investment in such securities as were
marketed for Kreuger & Toll by Lee, Higginson & Co.?
Mr. D u r a n t . I am sorry to say, sir, that the old firm of Lee,
Higginson & Co. is not in active issue business any longer.
Senator C o s t i g a n . Read my question, Mr. Reporter.
(Thereupon the last question was read by the reporter as above
recorded.)
Senator C o s t i g a n . My question was not intended to be directed
to a change in the practice of Lee, Higginson & C o . , but a change in
the practice of marketing securities in this country.
Mr. D u r a n t . I think, Senator, I answered it as far as I can with
regard to Lee, Higginson.
Senator C o s t i g a n . Well, let us make it a personal question. Do
you yourself not feel that the public should be better safeguarded
than it was in the transaction about which you have been testifying
this morning?
Mr. D u r a n t . I think the public should be safeguarded in every
possible way to prevent this kind of thing.
S e n a to r C
o s t ig a n .
D
o
y o u f e e l i t w a s s a fe g u a r d e d ?
Mr. D u r a n t . I feel that certain things—in the light of hind-sight—
perhaps we might have done some other things.
Senator C o s t i g a n . What corrections in future practice do you
submit to the committee?
Mr. D u r a n t . I find that is a little hard to answer, Senator, in
regard to this question, because the trouble with this company was
the head of it was apparently trying to give inaccurate information.
In other words if one had that feeling About the head of a company
one would not want to be his banker anyway.
Senator C o s t i g a n . D o you know of no legislation or changes in
stock-exchange practice which would better safeguard the public?
Mr. D u r a n t . I believe that out of all this there will come clear
lines on which that could be done, but I would say as a layman that
the present time is perhaps too soon in all these troubles to find out
just what the right procedure would be in the future. I think some
thing will come out of it. But perhaps we may be too prejudiced
just now.
Senator C o s t i g a n . Y o u have no recommendations to offer the
committee?
STOCK EXCHANGE PRACTICES
1223
Mr. D u r a n t . Plenty of information in regard to securities. I am
a great believer in that—more and more all the time.
Senator C o s t i g a n . Y o u have no legislative recommendations?
Mr. D u r a n t . Not at this time. I would feel that I was too soon.
Mr. M a r r i n a n . M y examination of Mr. Durant is completed. I
wish to thank especially the members of the committee for permitting
me to continue without interruption. As far as I am concerned, Mr.
Durant is excused. I may say that Mr. Durant has given me all
information that I required in New York. And in pressing him I
was not endeavoring to in any manner trip him over the representa
tions that were made to me in New York.
Mr. D u r a n t . That is right. Thank you.
The C h a i r m a n . The committee will recess until 2.30, at which
time we will reconvene for the purpose of hearing three witnesses.
The session is expected to last an hour. I say we will reconvene if
we can get a majority of the committee present, which I think we
can. We will now recess until 2.30, to meet in this room.
(Thereupon at 12.30 p. m. a recess was taken until 2.30 p. m. the
same day, Wednesday, January 11, 1933.)
(Mr. Durant submitted the following additional information for
the record upon request of the committee:)
& Co.,
New York, January 17, 1933.
L e e , H ig g in s o n
Jo h n M a r r i n a n , E sc..,
Senate Committee on Banking and Currency,
Washington, D. C.
D e a r M r . M a r r i n a n : With reference to my testimony before the Senate
committee on January 11, I am inclosing the following additional data for which
you asked at that time:
1. List of partners of Lee, Higginson & Co. as of the date of the hearings.
2. List of the members of the syndicate which purchased the Kreuger & Toll
Co. 5 per cent secured debentures, due 1959, which were taken in the United
States.
3. Photostat copy of my cable of March 12, 1932, to my partners in New
York informing them of the death of Mr. Kreuger.
With regard to the last inclosure, I wish to state, in answer to your question
as to the exact time the cable was received, that the member of the firm who first
saw the cable is at present abroad so that I am only able to establish the time
on the basis of information furnished me by other members of our organization
who were present. To the best of their recollection, the cable was given to my
partner, Mr. George Murnane, on his arrival at the office at about 10 o ’clock or
shortly thereafter on the morning of March 12, 1932. The cable, you will note,
is addressed “ For partners only” and Mr. Murnane was the first member of the
firm to arrive at the office on that day.
I am informed by the man in charge of our order department that at about
10.15 o’clock, he was instructed to cancel all buying orders on hand for clients
in Kreuger & Toll securities and execute no further buying orders pending further
instructions.
It is his definite recollection that he immediately returned to the order depart
ment and proceeded with all possible dispatch to communicate with our brokers,
of which there were a number, and cancel all such orders with them and he feels
certain that the cancellations were completely effected by 10.30 or 10.35 o’clock
at the latest. M y information is that the only buying orders executed that day
were in this short interval until cancellations were effected.
I understood that Senator Norbeck was anxious to have the date on which the
debenture agreement of March 1, 1929, was prepared. This information, I
believe, was subsequently furnished in detail by Mr. Roland Redmond, who
testified following me.
I am not sure whether or not you required any further information with regard
to the dates of withdrawals and substitutions made in the collateral pledged for
the debenture issue. Senator Norbeck asked for the dates of the substitutions
1224
STOCK EXCHANGE PRACTICES
in relation to the date on which the offering of secured debentures was made.
This latter date was March 7, 1929, as you know, and I think the list of col
lateral withdrawals and substitutions which you have shows that the first change
in the underlying collateral took place on July 1, 1929, in the nominal amount
of approximately $14,000 par value Republic of Ecuador 8 per cent bonds which
were withdrawn to satisfy sinking-fund requirements on that issue.
Respectfully yours,
D onald D u r a n t .
PARTNERS OF THE FIRM OF LE E, HIGGINSON & CO.
George C. Lee, N. Penrose Hallowell, Francis L. Higginson, Frederic W. Allen*
Charles H. Schweppe, Sir W. Guy Granet, Jerome D. Greene, Barrett Wendell, jr.,
James Nowell, Charles E. Gotting, Donald Durant, George Murnane, Edward H.
Osgood, William McCormick Blair, Edward N. Jesup, Ralph Lowell. (As of
January 11, 1932.)
LIST OF MEMBERS OF SYNDICATE W HICH OFFERED THE K REU G ER & TOLL CO. 5 PER.
CENT SECURED SIN K IN G FUND GOLD DEBEN TU RES IN THE UNITED STATES
Merchants Bank & Trust Co., Daytona Beach, Fla.
Florida National Bank, Jacksonville, Fla.
Bank of Bay Biscayne, Miami, Fla.
Citizens Security Co., Tampa, Fla.
First National Bank, Miami, Fla.
Courts & Co., Atlanta, Ga.
Fourth National Co., Atlanta, Ga.
Trust Co. of Georgia, Atlanta, Ga.
Baker, Watts & Co., Baltimore, Md.
Alex. Brown & Sons, Baltimore, Md.
Mackubin, Goodrich & Co., Baltimore, Md.
Strother, Brogden & Co., Baltimore, Md.
C. T. Williams & Co. (Inc.), Baltimore, Md.
Sloan & Sloan, Jersey City, N. J.
Trust Co. of New Jersey, Jersey City, N. J.
Fidelity Union Stock & Bond, Newark, N. J.
Post & Flagg, Newark, N. J.
The Standard Security Corporation of New Jersey, Newark, N. J.
First Trust Co. of Albany, Albany, N. Y.
John A. Langan, Albany, N. Y.
The National Commerce Bank & Trust Co., Albany, N. Y.
New York State National Bank, Albany, N, Y.
National Bank of Auburn, Auburn, N. Y.
Baker, Trubee & Putnam (Inc.), Buffalo, N. Y.
Brody, Herod & Co., Buffalo, N. Y.
Glenny, Monro & Moll, Buffalo, N. Y.
Manufacturers & Traders-Peoples Trust Co., Buffalo, N. Y.
The Marine Trust Co. of Buffalo, Buffalo, N. Y.
Schoellkopf, Hutton & Pomeroy (Inc.), Buffalo, N. Y.
Vietor, Common & Co. (Inc.), Buffalo, N. Y.
First National Bank, Cooperstown, N. Y.
Chemung Canal Trust Co., Elmira, N. Y.
Livingston County Trust Co., Geneseo, N. Y.
First National Bank, Glens Falls, N. Y.
Fulton County National Bank of Gloversville, Gloversville, N. Y.
National Chautauqua County Bank, Jamestown, N. Y.
The Peoples Bank, Johnstown, N. Y.
Anglo California Co., New York City.
American Trust Co., New York City.
Auerbach, Poliak & Richardson, New York City.
Bankamerica Corporation, New York City.
Bankers Co. of New York, New York City.
Charles D. Barney & Co., New York City.
Battelle, Ludwig & Co., New York City.
August Belmont & Co. New York City.
Bonbright & Co., New York City.
Brown Bros & Co., New York City.
Calloway, Fish & Co., New York City.
Clark, Dodge & Co., New York City."
STOCK EXCHANGE PRACTICES
Colston, Heald & Trail, New York City.
Craigmyle & Co., New York City.
Du Bosque, De Witt & Co. New York City.
Eastern Exchange Corporation, New York City.
Equitable Trust Co. of New York, New York City.
Fidelity Trust Co. of New York, New York City.
Samuel Frankenheim, New York City.
Glidden, Morris & Co., New York City.
Guaranty Company of New York, New York City.
Hallgarten & Cfo., New York City.
H. W. Halsey & Co. (Inc.), New York City.
Hambleton & Co. (Inc.), New York City.
W. A. Harriman & Co. (Inc.), New York City.
Hayden, Stone & Co., New York City.
Hemphill, Noyes & Co., New York City.
Howe, Snow & Co. (Inc.), New York City.
International Germanic Co. (Ltd.), New York City.
A. Iselin & Co., New York City.
Kelley, Converse & Co. (Inc.), New York City.
Ladenburg, Thalmann & Co., New York City.
Lamhorn, Hutchings & Co., New York City.
Lee, Higginson & Co., New Y ork City.
Lehman Brothers, New York City.
Lord & Crossman (Inc.), New York City.
Manufacturers Trust Co., New York City.
Maynard, Oakley & Lawrence, New York City.
McDonnell & Co., New Y ork City.
M. J. Meehan & Co., New York City.
Merrill, Lynch & Co., New York City.
Minsch, Mon ell & Co. (Inc.), New York City.
Montreal Co. of New York (Inc.), New York City.
J. P. Morgan & Co., New York City.
Muller, Sinclair & Co., New York City.
National City Co., The, New York City.
The National Park Bank of New York, New York City.
Naumburg, Dixon & Co., New York City.
New York Financial & Community Corporation, New York City.
New York & Hanseatic Corporation, New York City.
Otis & Co., New York City.
Phelps, Ellis & McKee, New York City.
Phelps, Fenn & Co., New York City.
C . A. Preim & Co., New York City.
C . B. Richard & Co., New York City.
J. A. Ritchie & Co. (Inc.), New York City.
Charles D. Robbins & Co., New York City.
P. A. Rockefeller, New York City.
R. J. Ross & Co., New York City.
L. F. Rothschild & Co., New York City.
Salomon Bros. & Hutzler, New York City.
J. Henry Schroder Banking Corporation, New York City.
J. & W. Seligman & Co., New York City.
Shields & Co. (Inc.), New York City.
Edward B. Smith & Co., New York City.
Sutro & Kimbley, New York Citv.
Lionel Sutro, New York City.
Trust Co. of North America, New York City.
R. F. Westerfield & Co., New York City.
J. G. White & Co. (Inc.), New York City.
White, Weld & Co., New York City.
F. A. Willard & Co., New York City.
Clark Willian s & Co., Isew York City.
Winslow, Lanier & Co., New York City.
The Oswegatchie Security Corporation, Ogdensburg, N. Y.
Hibbard, Paln er & Kitchen, Rochester, N. Y.
Little & Hopkins, Rochester, N. Y.
I. W. Steel & Co., Rochester, N. Y.
City Bank & Trust Co., Syracuse, N. Y.
First Trust & Deposit Co., Syracuse, N. Y.
1225
1226
STOCK EXCHANGE PRACTICES
Syracuse Trust Co., Syracuse, N. Y.
Charles A. Stone & Co., Troy, N. Y.
Orton H. Thomas, Troy, N. Y.
Citizens Trust Co., Utica, N. Y.
Jefferson Securities Corporation, Watertown, N. Y.
Northern New York Securities Corporation, Watertown, N. Y.
Watertown National Corporation, Watertown, N. Y.
R. V. Mitchell & Co., Canton, Ohio.
Fifth-Third Union Co., Cincinnati, Ohio.
First National Bank, Cincinnati, Ohio.
The George C. Riley Co., Cincinnati. Ohio.
Central National Bank, Cleveland, Ohio.
Hayden, Miller & Co., Cleveland, Ohio.
The Herrick Co., Cleveland, Ohio.
Hord, Curtiss & Co., Cleveland, Ohio.
Harry W. Hosford, Cleveland, Ohio.
Midland Bank, Cleveland, Ohio.
Maynard H. Murch & Co., Cleveland, Ohio.
The Union Trust Co., Cleveland, Ohio.
First Citizens Corporation, Columbus, Ohio.
Huntington National Bank, Columbus, Ohio.
Ohio National Bank, Columbus, Ohio.
The Dayton Savings & Trust Co., Dayton, Ohio.
The Huffman Co., Dayton, Ohio.
Collin, Norton & Co., Toledo, Ohio.
Wick & Co., Youngstown, Ohio.
First National Bank, Braddock, Pa.
Erie Trust Co., Erie, Pa.
Charles Messenkoff & Co., Erie, Pa.
Graham & Co. (Ltd.), Masontown, Pa.
Norristown-Penn Trust Co., Norristown, Pa.
Bioren & Co., Philadelphia, Pa.
Cadbury, Ellis & Haines, Philadelphia, Pa.
Cassatt & Co., Philadelphia, Pa.
E. W. Clark & Co., Philadelphia, Pa.
Fitch, Crossman & Co., Philadelphia, Pa.
J. W. Fry & Co., Philadelphia, Pa.
C. H. Geist Securities Corporation, Philadelphia, Pa.
Harrison, Smith & Co., Philadelphia, Pa.
Janney & Co., Philadelphia, Pa.
Lloyd & Palmer, Philadelphia, Pa.
Luckey & Co., Philadelphia, Pa.
W. H. Newbold’s Son & Co., Philadelphia, Pa.
Smith Bros. & Co., Philadelphia, Pa.
Walter Stokes & Co., Philadelphia, Pa.
Rufus Wafles & Co., Philadelphia, Pa.
Townsend, Whelen & Co., Philadelphia, Pa.
George G. Applegate, Pittsburgh, Pa.
City Deposit Bank & Trust Co., Pittsburgh, Pa.
Colonial Trust Co., Pittsburgh, Pa.
Diamond National Bank, Pittsburgh, Pa.
Farmers Deposit National Bank, Pittsburgh, Pa.
First National Bank at Pittsburgh, Pittsburgh, Pa.
Glover & MacGregor, Pittsburgh, Pa.
J. H. Holmes & Co., Pittsburgh, Pa.
Mellon National Bank, Pittsburgh, Pa.
Moore, Leonard & Lynch, Pittsburgh, Pa.
Peoples Savings & Trust Co. of Pittsburgh, Pittsburgh, Pa.
K. W. Todd & Co., Pittsburgh, Pa.
Union National Bank, Pittsburgh, Pa.
The Union Trust Co. of Pittsburgh, Pittsburgh, Pa.
S. M. Vockel & Co., Pittsburgh, Pa.
First National Bank, Sharon, Pa.
Dime Bank Title & Trust Co., Wilkes-Barre, Pa.
The South Carolina National Bank, Charleston, S. C.
Investment Corporation of Norfolk, Norfolk, Va.
Grace Securities Corporation, Richmond, Va.
Frederick E. Nolting & Co., Richmond, Va.
STOCK EXCHANGE PRACTICES
State Planters Bank & Trust Co., Richmond, Va.
John L. Williams & Sons, Richmond, Va.
Y. E. Booker & Co., Washington, D. C.
Henderson-Winder Co., Washington, D. C.
Hill & Blackman, Bridgeport, Conn.
Merritt, E. B., & Co. (Inc.), Bridgeport, Conn.
Putnam & Co., Hartford, Conn.
Scranton, Chas. W ., & Co., New Haven, Conn.
Merrill Securities Corporation, Bangor, Me.
Beyer & Small, Portland, Me.
Fidelity Trust Co., Portland, Me.
Gilman, C. H., & Co., Portland, Me.
Ireland & Co., Portland, Me.
Jones, Gould, Bartlett & Clark Co., Portland, Me.
Adams Mudge & Co., Boston, Mass.
Atlantic Merrill Oldham Corporation, Boston, Mass.
Bond & Goodwin (Inc.), Boston, Mass.
Burgess & Leith, Boston, Mass.
Burr, Geo. H., & Co., Boston, Mass.
Burr, Gannett & Co., Boston, Mass.
Chase & Co., Boston, Mass.
Claflin, Hubbard & Jenkins, Boston, Mass.
Collins, Breed & Sharp, Boston, Mass.
Curtis & Sanger, Boston, Mass.
Dowling, Swain, Shea (Inc.), Boston, Mass.
Eaton & Howard, Boston, Mass.
Estabrook & Co., Boston, Mass.
Exchange Trust Co., Boston, Mass.
Federal National Bank, Boston, Mass.
First National Old Colony, Boston, Mass.
Hornblower & Weeks, Boston, Mass.
Hutchinson, James A., & Co., Boston, Mass.
Hutchins & Parkinson, Boston, Mass.
Jackons & Curtis, Boston, Mass.
Lee Higginson Trust Co., Boston, Mass.
March & Kimball, Boston, Mass.
McMichael & Co. (Inc.), Boston, Mass.
Moseley, F. S., & Co., Boston, Mass.
Old Colony Corporation, Boston, Mass.
Paine, Webber & Co., Boston, Mass.
Pearson, Erhard & Co., Boston, Mass.
Putnam, F. L., & Co. (Inc.), Boston, Mass.
Rollins, E. H., & Sons, Boston, Mass.
Shawmut Corporation of Boston, Boston, Mass.
Stone & Webster and Blodget (Inc.), Boston, Mass.
Stokes, Edward Lowber, & Co., Boston, Mass.
Spencer Trask & Co., Boston, Mass.
Tucker, Anthony & Co., Boston, Mass.
U. S. Trust Co., Boston, Mass.
Watson, E. A., & Co., Boston, Mass.
Whitney, Byam & Co., Boston, Mass.
Whitney & Elwell, Boston, Mass.
The Kidder Co. of Lowell, Lowell, Mass.
Agricultural National Bank, Pittsfield, Mass.
Pittsfield Securities Corporation, Pittsfield, Mass.
Hawkins, John Torrey, Springfield, Mass.
Pirnie, Simons & Co. (Inc.), Springfield, Mass.
Barrett Cummings & Evans, Rhode Island.
Brown, Liale & Marshall, Rhode Island.
Mandeville, Brooks & Chaffee, Rhode Island.
Anglo London Paris Co., San Francisco, Calif.
Lewis Miller Co., San Francisco, Calif.
W. W. Armstrong Co., Aurora, 111.
G. R. Wortman Co., Aurora, 111.
Kenneth H. Smith & Co., Champaign, 111.
Babcock, Rushton & Co., Chicago, 111.
Bacon, Whipple & Co., Chicago, 111.
Alfred L. Baker & Co., Chicago, 111.
1227
1228
STOCK EXCHANGE PRACTICES
Central Trust Co. of Illinois, Chicago, 111. (Successors to Bank of America.)
Blyth & Co., Chicago, 111.
Alexander Byfield, Chicago, 111.
H. M. Byllesby & Co., Chicago, 111.
Central Trust Co. of Illinois, Chicago, 111.
Ralph Chapman & Co., Chicago, 111.
Chapman, Grannis & Co., Chicago, 111.
Wm. R. Compton & Co., Chicago, 111.
Paul H. Davis & Co., Chicago, 111.
The Detroit Co., Chicago, 111.
Drovers National Bank, Chicago, 111.
Fidelity Trust & Savings Bank, Chicago, 111.
Field, Glore & Co., Chicago, 111.
Foreman Trust & Savings Bk., Chicago, 111.
Porter, Fox & Co., Chicago, 111.
Illinois Merchants Trust Co., Chicago, 111.
Irving Park National Bank, Chicago, 111.
Jefferson Park National Bank, Chicago, 111.
Kaspar-American State Bank, Chicago, 111.
Kimbell Trust & Savings Bank, Chicago, 111.
John P. Lavin & Co., Chicago, 111.
Lewis-Dawes & Co. (Inc.), Chicago, 111.
Market Traders State Bank, Chicago, 111.
Marshfield Trust & Savings Bank, Chicago, 111.
W. B. McMillan & Co., Chicago, 111.
Mitchell, Hutchins & Co. (Inc.), Chicago, 111.
National Republic Co., Chicago, 111.
Northern Trust Co., Chicago, 111.
Northwestern Securities Co., Chicago, 111.
Wm. L. Ross & Co. (Inc.), Chicago, 111.
C. L. Schmidt & Co. (Inc.), Chicago, 111.
Sheridan Trust & Savings Bank, Chicago, 111.
State Bank of Chicago, Chicago, 111.
Taylor, Ewart & Co., Chicago, 111.
State Bank & Trust Co., Evanston, 111.
Moline State Trust & Savings Bank, Moline, 111.
National Stock Yards National Bank, National Stock Yards, 111.
Merchants & Illinois National Bank, Peoria, 111.
State Savings Loan & Trust Co., Quincy, 111.
Catlin, Mulford & Smith (Inc.), Rockford, 111.
Ramey, Bassett & Co., Rockford, 111.
City Securities Corporation, Indianapolis, Ind.
Continental National Bank, Indianapolis, Ind.
Fletcher Savings & Trust Co., Indianapolis, Ind.
First National Bank & Trust Co., La Porte, Ind.
American Trust Co., South Bend, Ind.
Citizens Trust & Savings Bank, South Bend, Ind.
St. Joseph Loan & Trust Company, South Bend, Ind.
Peoples Trust & Savings Bank, Clinton, Iowa.
American Commercial & Savings Bank, Davenport, Iowa.
First National Bank, Davenport, Iowa.
Union Savings Bank & Trust Co., Davenport, Iowa.
Des Moines National Co., Des Moines, Iowa.
Metcalf, Cowgill & Co. (Inc.), Des Moines, Iowa.
Wheelock & Company, Des Moines, Iowa.
American Savings Bank, Muscatine, Iowa.
Muscatine State Bank, Muscatine, Iowa.
C. W. Britton Co., Sioux City, Iowa.
Woodbury County Savings Bank, Sioux City, Iowa.
Hibernia Securities Co. (Inc.), New Orleans, La.
Watson, Williams & Co., New Orleans, La.
First National Co., Detroit, Mich.
National Union Bank & Trust Co., Jackson, Mich.
Kalamazoo National Co., Kalamazoo, Mich.
Central Trust Co., Lansing, Mich.
Drake-Jones Co., Minneapolis, Minn.
Lane, Piper & Jaffray (Inc.), Minneapolis, Minn.
Justus F. Lowe & Co. (Inc.), Minneapolis, Minn.
1229
STOCK EXCHANGE PRACTICES
First Minneapolis Co., Minneapolis, Minn.
Minnesota Co., Minneapolis, Minn.
Wells-Dickey Co., Minneapolis, Minn.
Grubbs, Booraem & Co., St. Paul, Minn.
Merchants National Co., St. Paul, Minn.
C. H. F. Smith & Son, St. Paul, Minn.
Harold E. Wood <$; Co., St. Paul, Minn.
Commerce Trust Co., Kansas City, Mo.
Home Trust Co., Kansas City, Mo.
Stern Bros. & Co., Kansas City, Mo.
L. E. Anderson & Co., St. Louis, Mo.
Oliver J. Anderson & Co., St. Louis, Mo.
Augustine & Co., St. Louis, Mo.
Daly, Seddon & Co., St. Louisy Mo.
Federal Commerce Trust Co., St. Louis, Mo.
Hawes & Co. (Inc.), St. Louis, Mo.
Kauffman, Smith & Co., St. Louis, Mo.
Knight, Dysart & Gamble, St. Louis, Mo.
Reinholdt & Co., St. Louis, Mo.
Smith, Moore & Co., St. Louis, Mo.
Mark C. Steinberg & Co., St. Louis, Mo.
Wetzel Bros. & Co., St. Louis, Mo.
First Trust Co., Lincoln, Nebr.
Burns, Potter & Co., Omaha, Nebr.
Clarke, Lewis & Co., Omaha, Nebr.
First Trust Co., Omaha, Nebr.
Peters Trust Co., Omaha, Nebr.
Wachob, Bender & Co., Omaha, Nebr.
The First National Bank of Lead, Lead, S. Dak.
t Minnehaha National Bank, Sioux Falls, S. Dak.
Security National Bank, Sioux Falls, S. Dak.
Ameil Brinkley & Co., Memphis, Tenn.
Republic National Co., Dallas, Tex.
Dunn & Carr, Houston, Tex.
Swaner & Co., Salt Lake City, Utah.
Baillargeon, Winslow & Co., Seattle, Wash.
Smith & Strout (Inc.), Seattle, Wash.
Murphy, Favre & Co., Spokane, Wash.
Beloit State Bank, Beloit, Wis.
First National Bank, Janesville, Wis.
Merchants & Savings Bank, Janesville, Wis.
Bank of Wisconsin, Madison, Wis.
Central Wisconsin Trust Co., Madison, Wis.
Commercial National Bank, Madison, Wis.
Madison Trust Co., Madison, Wis.
Badger State Bank, Milwaukee, Wis.
First Wisconsin Co., Milwaukee, Wis.
Marshall & Ilsley Bank, Milwaukee, Wis.
The Milwaukee Co., Milwaukee, Wis.
National Bank of Commerce, Milwaukee, Wis.
National Exchange Bank, Milwaukee, Wis.
The Quarles Co., Milwaukee, Wis.
First National Bank, Monroe, Wis.
POSTAL TELEGRAPH
JB2
SRI
21 Paris
PU D O N D U RAN T N Y =
For Partners Only Oak Died Very
Suddenly Today Not Public Yet Please
Say Nothing Until Announced Here
206 PM
12th Mar
DONALD
909 AM CF
N e w Y o r k , February 3, 1933.
Esq.,
Senate Committee on Banking and Currency, Washington, D. C.
D e a r M r . M a r r i n a n : I have delajed answering your letter of January 19
to enable me to give a fuller reply to it than I could have written at once.
J ohn M a r r in a n ,
1230
STOCK e x c h a n g e p r a c t i c e s
On the subject of the auditing of the accounts of Kreuger & Toll Co. I submit
the following information: Since 1911, the year in which Kreuger & Toll Co. was
organized, the company’s accounts have been certified by auditors elected by the
shareholders at their annual meeting, in accordance with the company’s statutes.
Copies of the company’s annual reports in Swedish with the annexed auditors’
certificates were submitted to the committee at the Senate hearing on January
11, 1933, and those reports should be annexed to this letter.
None of the auditors were directors or officers of the company. For the years
1912 to 1918, inclusive, G. C. A. Lindencrona and Per Tamm were the auditors.
For 1919 to 1929, inclusive, Tamm was replaced by Ernst BefgenStrom, and in
1930 A. Wendler was added as a third auditor. I am informed that Lindencrona
was a civil servant, employed by the Swedish Government as a first assistant to
the Government’s supervisor of roads, water supplies, and buildings; Bergenstrom was a banker and broker of Stockholm; and Wendler was an accountant
approved by certificate of the Stockholm Chamber of Commerce. His firm
consisted of six partners who were auditors for many Swedish companies apart
from those in the Kreuger & Toll group. J. Wendler, a partner in the firm and
a brother of A. Wendler, was at one time appointed an auditor of the Granges
berg Co., in whose principal subsidiary the Swedish Government has a naif
interest.
For the years 1912 and 1913 the language of the auditors’ certificate is essen
tially the same. The certificate covering the 1913 report reads, in translation, as
follows:
S t o c k h o l m , April 7, 1914The undersigned, who were appointed to examine the accounts and adminis
tration of the Aktiebolaget Kreuger & Toll for the year 1913, have examined
the accounts of the company, which we found were conducted with exceptional
care, accompanied by complete vouchers; furthermore the balance sheet, the
profit and loss account, and the statements of write-offs (amortizations) agree
with the accounts. The documents of value entered in the balance sheet issued
as assets have been found in the possession of the company.
We have no objections to make to the suggestions of the board as regards the
balance sheet issued, recommending that out of the amount on hand at the end
of the year, namely, 209,397.54 crowns, 12 per cent be distributed among the
stockholders in the amount of 120,000 crowns; that 14,000 crowns be used for
the stamp charges on the new shares of stock; that 50,000 crowns be set aside for
a profit-regulating fund and that the balance of 25,397.54 crowns be carried for
ward to the profit and loss account for 1914.
We are of the opinion that the reasons set forth in the report of the manage
ment for the write-offs on machines and the entries of material which were also
set forth in the report of the board for 1911, and which reasons also apply at the
present time, are well taken.
In view of the above we herewith recommend to the meeting that the board
be discharged from any responsibility.
G. C. A. L i n d e n c r o n a ,
Per T a m m .
The type of certificate given for the years 1914 to 1921, inclusive, is illustrated
by that given for 1921, which reads, in translation, as follows:
S t o c k h o l m , April 29, 1922.
The undersigned, who were appointed to examine the accounts and administra
tion of the Aktiebolaget Kreuger & Toll for the year 1921, have examined the
accounts of the company and have found them to be carefully kept and accom
panied by complete vouchers, while at the same time the balance sheet and the
profit ^nd loss account agree with the books.
The shares and documents of value entered in the balance sheet as assets were
in the possession of the company as of December 31, 1921.
We have no objections to the suggestion of the board with r e g a r d to the disposal
of the means available.
In view of the foregoing, we recommend that the board be discharged from
responsibility.
G. C. A. L i n d e n c r o n a .
E
rn st
B
ergen strom
.
1231
STOCK EXCHANGE PRACTICES
The certificate for 1922, in translation, is as follows:
S t o c k h o l m , March 29, 1923.
The undersigned, who were appointed to examine the accounts and adminis
tration of the Aktiebolaget Kreuger & Toll for the year 1922, have examined the
accounts of the company and found them to be carefully kept and supplied with
complete vouchers, while at the same time the balance sheet and profit and loss
account agree with the books (accounts).
It is a satisfaction for the auditors to be able to advise the stockholders that
the activity of the company which was mainly confined to a few lines, with the
conditions of which the management of the company has been thoroughly ac
quainted for a long time, has been able to continue even after the depression
without any considerable losses and with undiminished returns from its different
activities.
We agree to the suggestion of the board as to the disposal of the means available,
and suggest to the meeting to declare the board discharged from responsibility.
G. C. A. L in d e n c r o n a .
E rnst B ergen stro m .
The type of certificate given for the years 1923 to 1926, inclusive, is illustrated
by that given for 1926, which reads, in translation, as follows:
S t o c k h o l m , May, 1927.
“ The undersigned, who were appointed auditors by the stockholders’ meeting
for the year 1926 of the Aktiebolaget Kreuger & Toll, after completed examina
tion of the accounts and administration of the company for the year 1926, here
with submit the following report:
‘ The accounts have been found to be in good order, carefully and conscien
tiously kept, and all the necessary vouchers have been submitted.
‘ The shares and documents of value contained in the balance sheet were found
to be in the possession of the company at the end of the year.
‘ With regard to the result of the company’s activities during the year 1926
we refer to the directors’ report and the attached balance sheet and profit and
loss account which have been found to be in accordance with the books, as a
result of which we are able to recommend that the balance sheet be accepted as
well as the board’s suggestion for the disposal of the means available.
‘ In connection with the audit which has been made, we submit that the meeting
declare the board discharged from responsibility for their administration during
1926.”
G. C. A. L in d e n c r o n a .
E rnst B e r g en str o m .
The type of certificate given for the years 1927, 1928, and 1929 is illustrated
by that given for 1929, which reads, in translation, as follows:
S t o c k h o l m , April, 1930.
“ The undersigned, who were appointed by the stockholders’ meeting of the
Aktiebolaget Kreuger & Toll for the year 1929, as auditors for the company, after
completed examination of the accounts and administration of the company
during the year 1929, beg to submit the following report:
*The accounts have been found in good order, carefully and conscientiously
kept, and all the necessary vouchers have been submitted.
‘ The shares of stock and documents of value recorded in the balance sheet
have been found to be in the possession of the company at the end of the year.
‘ With regard to the result of the company’s activity during the year 1929, we
refer to the directors’ report and the attached balance sheet and profit-and-loss
account which have been found to be in accordance with the books as a result of
which we are able to recommend that the balance sheet be accepted as well as the
board’s suggestion for disposal of the means available.
‘ In connection with the audit which has been made, we submit that the meeting
declare the board discharged from responsibility for their administration during
1929.”
G. C. A. L i n d e n c r o n a .
E
rnst
B
ergenstrom .
1232
STOCK EXCHANGE PRACTICES
For the year 1930, the certificate reads, in translation, as follows:
S t o c k h o l m , April, 1931.
“ The undersigned, who were appointed to examine the accounts and adminis
tration of Aktiebolaget Kreuger & Toll for the year 1930, having completed
the examination beg to submit the following report:
‘ The accounts have been found to be in good order, carefully and conscien
tiously kept and all the necessary vouchers have been available.
‘ We have made an inventory of the company’s holding of shares, bonds, and
other documents of value, which have been found perfectly in order. We have
also checked the cash at bank and in hand and debts due to the company.
‘ With regard to the result of the company’s activity during the year 1930
we refer to the directors’ report and the attached balance sheet and profit and
loss account which have been found to be in accordance with the books, as a result
of which we are able to recommend that the balance sheet be accepted as well as
the board’s suggestion for disposal of the means available,
‘ In connection with the audit which has been made, we submit that the meet
ing declare the board discharged from responsibility for their administration
during 1930.”
G. C. A. L in d e n c r o n a .
E rnst B e r g en str o m .
A. W e n d l e r .
The annual audits of the Kreuger & Toll accounts were, I am informed, in
accordance with the best Swedish practice. Swedish counsel advise that the
requirements of the Swedish law were strictly complied with and the chairman
Of the Association of Certified Accountants of Sweden, Prof. Oscar Sillen, a
Swedish accountant of high standing, to whom the Kreuger & Toll annual report
for the year 1936 was submitted on March 26, 1932, certified as follows:
S t o c k h o l m , March 26, 1932.
I,
the undersigned, Oscar Sillen, am a resident of Stockholm, Sweden, and am
48 years of age. M y occupation is that of a certified accountant and I am a pro
fessor at the Business College at Stockholm (Stockholms Handelshogskola) in
Sweden, where I teach accounting, auditing, and business organization. I am
chairman of the Association of Certified Accountants of Sweden. I am also a
member of the accounting firm of Aktiebolaget Industribyran and have been
engaged in the profession of accounting in Stockholm for 20 years. I have dur
ing these years regularly audited many commercial and industrial concerns in
Sweden, among others Allmanna Svenska Elektriska Aktiebolaget, Aktiebolaget
Sveriges Litografiska Tryckerier with 35 subsidiaries and Sandvikens Jernverks
Aktiebolag and am thoroughly familiar with the practice in this country regarding
the annual auditing of business concerns and the manner and form of auditors'
reports in Sweden.
I have read the auditors’ report of Aktiebolaget Kreuger & Toll, Stockholm,,
for the year 1930. In my opinion the manner and form of the said report is in
accordance with the usual and accepted practice in corporations of the highest
standing in Sweden.
O . S il l e n .
It is well known that in the case of the sale of the securities of many important
American companies abroad, including many o f our leading railroad and industrial
companies, it has always been regarded as good investment and banking practice
for European bankers and investors to accept the statemeate and audits of Ameri
can companies made by their own officials or by American auditors, without
requiring any audit of the accounts of those companies by English or continental
auditors. During more than two generations this practice o f investors and bankers,
abroad has been deemed reasonable and prudent. This standard of practice has
been followed reciprocally in the United States. The securities of many important
Eur opeancompanies have been sold in this country on the basis of accounts
audited in accordance with the accepted practice of corporations in the countries
where the companies were located.
The first financing for Kreuger & Toll Co. in the United States was an issue
of its participating debentures (in the form of American certificates) in the fall
of 1928. At that time, Lee, Higginson & Co. had known Kreuger and his com
panies for over five years. Ivar Kreuger himself had an established reputation
as a successful business man who enjoyed the confidence of the Government and
people of his own country and of leading statesmen and financiers of Europe.
His building-up of the match industry was evidence of solid achievement and he
STOCK EXCHANGE PRACTICES
1233
had attained added prestige through the success of such transactions as his
$75,000,000 loan to the French Government in 1927, which played an important
part in France’s program for stabilizing the franc. He stood in the front rank
of that group of leading financiers of the principal European countries whose
attention has been given since the war to the problem of economic reconstruction
in all its phases; and his own contribution to the solution of that problem,
through his loans to many of the weaker countries, in which the match industry
furnished a basis of credit when hardly any other was available, was regarded as
of great constructive significance.
By 1928, Kreuger & Toll Co. was generally considered to be one of the largest
and most important concerns in Sweden. Its securities had been widely known
and highly regarded in Europe for a number of years prior to the time they
were introduced to the American market. At the time of the participating
debenture issue here the common stock of the company was listed on the stock
exchanges of Stockholm, London, Paris, Amsterdam, Geneva, Lausanne, Basle,
and Zurich.
Among the important banks and bankers abroad who showed confidence in
the Kreuger enterprises and in Mr. Kreuger by their participation in the security
issues and banking credits of the companies were Skandinaviska Kreditaktiebolaget, A. B., Svenska Handelsbanken, Stockholms Enskilda Bank, Stockholms
Intecknings Garanti A. B., A. B. Goteborgs Bank, in Sweden; N. M. Rothschild
& Sons, in England; Credit Lyonnais, Banque de Paris et des Pays-Bas, in France;
Deutsche Bank, Berliner Handels-Gesellschaft, Commerz-und Privat Bank A. G.,
Darmstadter und Nationalbank, Direktion der Disconto-Gesellschaft, Dresdner
Bank, Mendelssohn & Co., Reiehs-Kredit-Gesellschaft A. G., Lazard, SpeyerElissen, L. Behrens & Sohne, Simon Hirschland, M. M. Warburg & Co., A. Levy,
in Germany; Hope & Co., Teixeira de Mattos Bros., in Holland; Societe de Banque
Suisse, Union Financiere de Geneve, Banque Federale S. A., Banque Commerciale
de Bale, Leu & Co.’s Bank Limited, Union de Banque Suisses, Banque Popularie
Suisse, Pictet & Cie, in Switzerland; Societe de Belgique S. A., Mutuelle Solvay
S. A., Compagnie, Financiere et Industrielle de Belgique S. A., in Belgium.
In order to answer that part of your letter which deals with the purchases of
Kreuger & Toll certificates by Lee, Higginson & Co. on March 12, 1932, I have
endeavored to make a complete investigation of our own records as well as those
of the various brokers who handled transactions in Kreuger & Toll securities for
our account. Until I appeared before the committee in Washington, I had
never had occasion to make any independent study of the subject of purchases
of Kreuger & Toll certificates by Lee, Higginson & Co. on March 12, 1932. It
does not appear that our firm was asked for information with reference to pur
chases at the time when Mr. Greene gave your committee certain information
which you requested last June. I do not know, of course, where Mr. Benton
obtained the information contained in his report which is made a part of the
record on pages 2581 and 2582 in which he states: “ I was informed that while
Lee, Higginson did not sell on that date they also did not execute buying orders
which had been received by them from their customers.” While the spirit of
that statement is essentially true, it is technically incorrect because there were,
as I testified, executions for clients between the time the market opened and the
time cancellations could be effected.
Referring again to the committee’s inquiry of last June, it was my under
standing that the inquiry was whether or not Lee, Higginson & Co., or any of its
partners, had disposed of any of their Kreuger & Toll certificates on that day,
and in answer to that we were able to state that we had not.
In order to determine as definitely as possible, the question of the time on
Saturday, March 12, 1932, when we ceased to make purchases of Kreuger & Toll
certificates for the account of clients, we have requested our brokers to report to
us all purchase transactions in Kreuger & Toll certificates for our account on
that day showing the time of the transactions. We are submitting herewith
photostatic copies of such reports. 1These reports are from the following brokers:
D. T. Moore & Co.; Jenks, Gwynne & Co.; Walter J. Fahy & Co.; Clark, Dodge
& Co.; Ladenburg, Thalmann & Co.; B. N. Hamlin; Watson & White; De Coppet
& Doremus; Carlisle, Mellick & Co.; Jackson & Curtis; Stern, Kempner & Co.
The reason why cancellations were effected earlier in Boston than in New York
was due to the fact that one of the Boston partners was directly in charge of their
stock department, while in New York it was necessary for the partner here to
send for the head of the trading department and explain what he wanted done.
1 These reports are marked “ Broker’ s transactions in Kreuger & T oll on m orning of Mar. 12, 1932”
and are retained in the committee files.
1234
STOCK EXCHANGE PRACTICES
The head trader then had to return to his own office and reach a number of
brokers by telephone.
The summary of the situation, as I read these letters, is that the only buying
orders executed for customers were those which had been placed and were exe
cuted before our trader could carry out his instructions to cancel them. You
understand that our trader had to complete communication with these brokers
and they had to complete communication with their men on the floor of the
exchange before the cancellations became completely effective. The mechanics
of this took some time, but none the less, from the investigation I have made, it
appears that our trader put through no purchase orders for clients in certificates
which bear a time of execution later than 10.36 a. m. on Saturday morning. Any
transactions after that hour were dealers’ orders and not for clients.
The reason for postponing an announcement of Kreuger’s death was due to
the same considerations which justified the postponement of the announcement
of the suicide of Mr. Riordan, the head of the County Trust Co. of New York
City, and the announcement of the suicide of Mr. George Eastmen, the head of
the Eastman Kodak Co.
I appreciate very much the time you have allowed me to collect the foregoing
information and the data herewith submitted.
Respectfully yours,
D onald D u ran t.
AFTER RECESS
The committee resumed at 2.30 o’clock p. m. on the expiration of
the recess.
The C h a i r m a n . The committee will now resume. Is Mr. Redmend here?
Mr. R e d m o n d . Yes; Mr. Chairman.
The C h a i r m a n . Please come forward, hold up your right hand
and be sworn. You do solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth regarding the matter now
under investigation by the committee, so help you God?
Mr. R e d m o n d . I d o .
The C h a i r m a n . Just take a seat at the table opposite the commit
tee reporter.
TESTIMONY OF ROLAND L. REDMOND, OF THE LAW FIRM OF
CARTER, LEDYARD & MILBURN. NEW YORK CITY
(The witness was duly sworn by the chairman as shown above.)
Senator C o s t i g a n . Where are the firm’s offices?
Mr. R e d m o n d . At 41 Broad Street, New York City.
Mr. M a r r i n a n . You are a member of the firm of Carter, Ledyard
& Milburn, is that correct?
Mr. R e d m o n d . Yes, sir.
Mr. M a r r i n a n . •Have you business connections other than that
professional arrangement?
Mr. R e d m o n d . I am a director of one or two companies, but
otherwise have no other business connections.
Mr. M a r r i n a n . Are you a director in the Fulton Trust Co. of
New York?
Mr. R e d m o n d . I a m .
Mr. M a r r i n a n . Are you a director in the Transamerica Corpora
tion?
Mr. R e d m o n d . I a m n o lo n g e r . I w a s .
Mr. M a r r i n a n . Y o u were such a director?
Mr. R e d m o n d . Yes, sir.
Mr. M a r r i n a n . Are you identified with the law firm of Carter*
Ledyard & Milburn as counsel for the New York Stock Exchange?
STOCK EXCHANGE PRACTICES
1235
Mr. R e d m o n d . M y firm has been counsel for the exchange a great
many years, and I am one of the active partners in the firm.
M r . M a r r i n a n . And you are frequently designated as the active
counsel of the New York Stock Exchange?
Mr. R e d m o n d . I suppose I may be the most active member of my
firm as counsel for the exchange. It is not an individual matter at
all, however, as the firm are counsel.
Mr. M a r r i n a n . The firm are their counsel?
Mr. R e d m o n d . Exactly.
Mr. M a r r i n a n . Some years ago, Mr. Milbum, as I remember,
of the firm of Carter, Ledyard & Milburn, did the most active work
as counsel for the New YoFk Stock Exchange?
Mr. R e d m o n d . That is true.
Mr. M a r r i n a n . And you appeared this year before a House com
mittee as counsel for the New York Stock Exchange, did you not?
You were at least present, I believe the testimony shows, with Mr.
Whitney, and that M r . Whitney deferred to you and introduced you
as counsel, and you have an official appearance there in that capacity?
Mr. R e d m o n d . I suppose you are referring to the hearings before
the Committee on the Judiciary?
Mr. M a r r i n a n . That is correct.
Mr. R e d m o n d . That is so. I appeared as counsel there.
M r . M a r r i n a n . Didn’t you have a very similar relation here
before this committee? I do not recall whether you actually made
the record, but you were here present as counsel for the New York
Stock Exchange in the earlier part of these inquiries?
Mr. R e d m o n d . Well, I was present. But there was no appearance,
and I think Mr. Whitney appeared without counsel, or that is true
as I remember it.
M r . M a r r i n a n . Y ou m e a n h e a p p e a r e d o ffic ia lly w it h o u t c o u n s e l?
Mr. R e d m o n d . Well, the witness was not represented with counsel
at all.
Mr. M a r r i n a n . But you sat at his elbow, with all of the papers,
and fed them to him while the proceedings went on, is that not true?
Mr. R e d m o n d . No. I did not feed papers to Mr. Whitney. I
sat at his elbow. And I gave him papers when he asked for them.
M r . M a r r i n a n . I say that with all respect. I did not mean to be
in any way offensive. Mr. Redmond, will you please examine the
document which I now pass along the table to you, and tell me
whether that is, as far as you can identify it, a true copy of the socalled debenture agreement involving certain arrangements between
the Kreuger & Toll Co., Lee, Higginson & Co., as fiscal agents, and
the Lee, Higginson Trust Co. as trustee?
Mr. R e d m o n d . It is in regard to the $50,000,000 security deben
tures.
Mr. M a r r i n a n . Mr. Chairman, this is called a 5 per cent secured
sinking fund gold debenture issue, and I will request that it be offered
as an exhibit and inserted at this time.
The C h a i r m a n . That is a pretty large document to print.
Senator C o s t i g a n . But Senator Gore particularly requested that
it be made a part of the record, Mr. Chairman, and he was assured
by me that it would go in.
Mr. M a r r i n a n . It is a rather important document, and the
printing will not involve very much. It is very illuminating and
interesting.
1236
STOCK EXCHANGE PRACTICES
The C h a i r m a n . This is an agreement relating to substitutions,
covering substitutions of stock and other matters. I say, Mr.
Redmond, this is the agreement that binds the trustee as to what
they are bound to do?
Mr. R e d m o n d . Yes.
The C h a i r m a n . Commonly called a debenture?
Mr. R e d m o n d . It is the debenture agreement under which the
bonds were issued.
The C h a i r m a n . It will be printed in the record of our proceedings
if there is no objection. The Chair hears none, and it is so ordered.
(The printed volume entitled “ Debenture Agreement, dated
March 1, 1929, $50,000,000 5 per cent Secured Sinking Fund Gold
Debentures” and referring to the Kreuger & Toll Co. will be found
at the end of the day’s proceedings.)
Mr. M a r r i n a n . Mr. Redmond, who of counsel in the firm of
Carter, Ledyard & Milburn did the actual work on the secured
debenture agreement?
Mr. R e d m o n d . It was started, and I might explain that I have;
refreshed my recollection from my firm’s records since I talked to
you, Mr. Marrinan. When 1 spoke to you the other day I could not
remember the details. The work on this agreement was started by
my partner, Mr. Bechtel, with the members of the firm of Ropes,
Gray, Boyden & Perkins of Boston, who were joint counsel with
our firm representing Lee, Higginson & Co. in connection with this
issue.
That was about the middle of February of 1929. My partner, Mr.
Bechtel, married and sailed abroad at the end of February, and left
me to supervise our end of this work. The partners of Ropes, Gray,;
Boyden & Perkins, and ourselves, and certain of our junior law clerks,
worked on this agreement until about the 20th of March, when due
to the difficulty of getting copies of this agreement abroad and into
the hands of representatives of the company and counsel for the
company there, we sent a draft abroad to Mr. Leon Frazer, who was
formerly a partner of Ropes, Gray, Boyden & Perkins, and who
undertook to represent Lee, Higginson & Co. upon the final closing
of the agreement in Paris.
Senator C o s t i g a n . Do you recall the date when work on the de
benture began?
Mr. R e d m o n d . I find that a draft was made by my partner, Mr.
Bechtel, in the latter part of February. I actually worked on it for
the first time myself around the 4th or 5th of March, and the draft
we sent abroad was sent I think or dated the 20th of March.
The C h a i r m a n . What year?
Mr. R e d m o n d . 19 29 .
Mr. M a r r i n a n . Am I to understand, Mr. Redmond, that this
indenture then was not completed until March 20, 1929?
Mr. R e d m o n d . It was not put in final form— and I say this from
hearsay because I was not present in Paris when it was done—until
the date of execution, which was the 28th of March.
M r . M a r r i n a n . Do y o u r e c a ll w h a t d a t e a p p e a r s o n t h e in d e n t u r e ?
Mr. R e d m o n d . It is dated as of the 1st of March, but it was
executed, as the acknowledgements show before the vice consul of the
United States in Paris, under date of the 29th of March. I believe
the actual date of the signing of the indenture was the 28th of March.
Mr. M a r r i n a n . Were any bonds on the market prior to that date?
1237
STOCK EXCHANGE PRACTICES
Mr. R e d m o n d . N o . Interim receipts for the debentures were
delivered as I remember it at the date of the execution of the instru
ment, or shortly before then. The issue was made on a “ when issue ”
basis, and interim receipts were issued.
M r . M a r r i n a n . Were in t e r im r e c e ip ts p u b li c ly o ffe r e d p r io r t o th e
c o m p le t io n o f th e d 3 b 3 n tu r e a g r e e m e n t?
Mr. R e d m o n d . The issue was offered
publicly as
I
remember it
around the 6th of March.
M r. M
a r r in a n .
T h a t is m y u n d e r s t a n d in g .
Mr. R e d m o n d . But in the form o f interim receipts.
Senator C o s t i g a n . Was any explanation given of the fact that the
indenture had not been completed when those interim receipts were
issued?
Mr. R e d m o n d . Interim receipts simply recite that the holder is
entitled to a bond of this issue when, as and if the bonds are issued,
and if the bonds are not issued he is entitled to a return of his money,
or a specified sum, which is usually set forth in the interim receipt.
Senator C o s t i g a n . Nothing was said about the indenture?
Mr. R e d m o n d . It simply stated an indenture would b e executed.
I have forgotten the precise language, but perhaps I have here the
circular and I can furnish it if the committee desires, in order to get
the language of the interim receipt. As a matter of fact, I have it
in Washington, but not in the room with me at this moment.
Senator C o s t i g a n . Your testimony in the case is that the pur
chaser of a bond in that interim period was not aware of the precise
conditions covering the securities behind the indenture. Is that a
fact?
Mr. R e d m o n d . He was informed, Senator Costigan, by reason of
the offering circular, which specified the provisions that were to be
incorporated in the indenture.
Senator C o s t i g a n . Among those specifications is there reference
to the substitution clause?
Mr. R e d m o n d . There is.
S e n a t o r C o s t i g a n . Will y o u r e a d it?
Mr. R e d m o n d . After reciting the security there appears the
following:
The secured debentures will be the direct obligation of Kreuger & Toll Co. and
will be secured by pledge, under a debenture agreement, of securities of the fol
lowing character:
(а) Bonds or notes issued or guaranteed by any sovereign state or any political
subdivision thereof including any municipality, having authority to issue or
guarantee bonds or notes and having a population in excess of 300,000.
(б) Bonds or notes issued or guaranteed by mortgage banking institutions or
societies (in which the company may but need not have an interest) and secured
by mortgages on agricultural or city property or entitled by special law to priority
on such property.
(c)
Shares in railway or other companies on which dividends at a minimum
rate are guaranteed by any sovereign state.
Securities pledged will have a total par value equivalent to not less than
120 per cent of the $50,000,000 par value secured debentures now to be issued,
and an annual income (at rates of interest and guaranteed dividends currently
payable thereon) equivalent to not less than 120 per cent of the $2,500,000 annual
requirement for interest on the secured debentures.
For a list of securities so to be pledged and provisions of the debenture agree
ment regarding issuance of additional secured debentures (in unlimited amount)
and withdrawal and substitution of pledged securities, reference is made to the
accompanying letter.
119852— 33— pt 4-------------7
1238
STOCK EXCHANGE PRACTICES
Which appear on the folder but on the inside.
Senator C o s t i g a n . From what have you just read?
Mr. R e d m o n d . I have read from the first page of the circular, which
contains, unless I am mistaken, substantially the same thing as appears
in the advertisement which was put in the record this morning. And
then the circular provides, on the second page:
The debenture agreement will permit withdrawal of pledged securities provided
that such withdrawal does not impair the above ratios, and will permit substi
tution of securities of the required character for securities pledged provided the
above ratios (or the ratios existing prior to such substitution if, prior to such
substitution, the ratios were less than 120 per cent) are not impaired. These
provisions are, however, subject to the condition that any part of the pledged
securities may be withdrawn upon substitution of cash in an amount equivalent
to that proportion of the principal amount of outstanding secured debentures
which the par value of securities withdrawn bears to the total par value of securi
ties pledged at the time of such withdrawal.
Senator C o s t i g a n . Mr. Redmond, if you had read the paragraph
which you have just read to us, not as a member of the bar with
technical equipment but as an average investor, wouldn’t you have
concluded that the substitution was to be of securities equal not
merely in par value but in actual value to the original securities?
Mr. R e d m o n d . I do not think so, Senator Costigan. It is clearly
stated that the security is a ratio of 120 per cent in par value; and
where substitution is permitted it provides that it may be made,
provided that the ratio, which is dependent upon par value, is not
impaired.
Senator C o s t i g a n . I submit that by way of technical construction
what you say has force. But I also ask you on reconsideration to
state whether or not in your judgment the ordinary investor would
not be inclined to infer that his security would never be impaired by
such substitution.
Mr. R e d m o n d . Impaired, may I ask, by what?
Senator C o s t i g a n . Impaired in actual value.
Mr. R e d m o n d . There was no means by which the ordinary investor
could determine the actual value of the securities originally pledged.
Senator C o s t i g a n . Perhaps that fact does enter and give additional
complication to a difficult situation. But it is not pertinent to my
particular inquiry. You may proceed, Mr. Marrinan.
Mr. M a r r i n a n . Mr. Redmond, we were discussing the part which
you personally played in the drafting of this indenture. As I take
it you took hold of the matter about the 6th of March, and you
participated in the various discussions which proceeded from that
day on and terminated in its final approval in so far as counsel were
concerned about the 20th of March; is that correct?
Mr. R e d m o n d . Substantially so; yes.
M r . M a r r i n a n . A l l t h a t I w is h t o d e v e lo p h e re is t h a t y o u h a d
a m p le o p p o r t u n i t y t o fa m ilia r iz e y o u r s e lf w it h a ll o f it s d e t a ils .
Mr. R e d m o n d . What do you refer to when you say “ its” ?
Mr. M a r r i n a n . All the details of the indenture.
Mr. R e d m o n d . Yes.
M r . M a r r i n a n . T h e in d e n t u r e o n l y I h a v e in m in d .
Mr. R e d m o n d . Yes.
Mr. M a r r i n a n . I am not trying to split hairs with you. I would
not feel qualified to do that, Mr. Redmond. Now, is it customary
to refer a draft of such contracts or agreements to law clerks in large
STOCK EXCHANGE PRACTICES
1239
law offices and have them do most of the preliminary, shall we say
work in the formulation of such contracts or agreements?
Mr. R e d m o n d . I am afraid I can not testify as to the custom
among other firms.
Mr. M a r r i n a n . That is not the practice in your office, then?
Mr. R e d m o n d . It is not the practice in m y office.
Mr. M a r r i n a n . Could you disclose without divulging professional
secrets what a company might usually pay as a charge for the prepara
tion and approval of an indenture of the general character of the one
here under examination?
Mr. R e d m o n d . I am afraid-----M r . M a r r i n a n (c o n t in u in g ). I d o n o t m e a n t o p in y o u d o w n t o
th is t r a n s a c t io n , b u t m e a n f o r y o u t o g iv e u s g e n e r a l in fo r m a t io n .
Mr. R e d m o n d . I have no general knowledge, but I am perfectly
willing to testify to anything in which my firm has been involved.
Mr. M a r r i n a n . I do not think I care to press you on that particular.
Senator C o s t i g a n . Presumably there is no objection to you stat
ing what the fee was that your firm charged for the preparation of
this indenture.
Mr. R e d m o n d . Unless my memory fails to serve me, for our work
in connection with the issue a bill of $20,000 was submitted, to which
subsequently Mr. Kreuger voluntarily made an additional payment
of $5,000, which compensation he thought my firm was entitled to,
or $25,000.
Senator C o s t i g a n . All right. Proceed, Mr. Marrinan.
Mr. M a r r i n a n . Mr. Redmond, you say that your fee in this
instance was a total of $25,000. Is this fee based on professional
services alone, or does it take into account the use of the firm’s name
in advertising the issue?
Mr. R e d m o n d . It is for professional services alone.
M r. M
a r r in a n .
Y
ou
are q u it e su re o f t h a t ?
Mr. R e d m o n d . I a m p o s it iv e .
Mr. M a r r i n a n . In so far as your firm is concerned you are sure,
but you are not sure of the item with respect to the gentleman who
paid the fee?
Mr. R e d m o n d . You asked me the question as to whether the use
of my firm’s name was paid for in this case, and my answer is no.
Mr. M a r r i n a n . No, I did not say that. Let the committee
reporter read that to you again. [Which was done.] Now, you
can’t throw any additional light on that matter?
Mr. R e d m o n d . The charge of my firm was for professional services
rendered. I can not tell you whether there was any motive in the
mind of the man who paid my firm’s fees other than to pay for what
had been done.
The C h a i r m a n . But all this advertising matter does carry your
firm’s name.
Mr. R e d m o n d . No, they do not.
The C h a i r m a n . This particular one referred to here does.
Mr. R e d m o n d . That one does.
The C h a i r m a n . And this is the first one that advertised the bond
issue.
Mr. R e d m o n d . This particular issue; yes.
M r . M a r r i n a n . I do not wish to press this matter to undue length.
But you have a bill here for professional services, $20,000. And then
1240
STOCK EXCHANGE PRACTICES
you have, shall we say, a voluntary payment from Ivar Kreuger of
$5,000?
Mr. R e d m o n d . That is true.
Mr. M a r r i n a n . Can you express any opinion as to whether Mr.
Kreuger in volunteering the additional $5,000 was animated by his
regard for your professional services, or whether he thought the use
of your firm’s naine was worth $5,000 more to him?
Mr. R e d m o n d . I can not look into Mr. Kreuger’s mind. I can
tell you what I believe was the case or the cause of that payment if
the committee wishes to know it.
Mr. M a r r i n a n . We would like to have your impression in the
matter.
Mr. R e d m o n d . Well, the charge of my firm in this instance was
made in relation to the fact that we had joint counsel—that is,
Ropes, Gray, Boyden & Perkins, as well as Carter, Ledyard & Milbum
— and furthermore additional counsel bills abroad. So that the
aggregate counsel bills would be very substantial in regard to the
size of the issue. We therefore very deliberately made our charge
lower than the charge I assume would be customarily made for a
$50,000,000 bond isue.
The C h a i r m a n . Mr. Kreuger was evidently quite satisfied with
your work here in the United States?
Mr. R e d m o n d . I think it was the volume of the work that he had
knowledge of which we did, and that he thought we were entitled to
higher compensation.
Senator C o s t i g a n . Did you confer with Mr. Kreuger before the
indenture was prepared?
Mr. R e d m o n d . Not at all. Mr. Kreuger was then in Sweden.
Senator C o s t i g a n . How did the contents of the indenture reach
you?
Mr. R e d m o n d . The basis or terms under which the debentures
were to be offered to the public had been agreed upon between the
bankers and the company. And it was our task then to draw an
indenture that would carry out those terms.
Senator C o s t i g a n . Did the substitution clause originate in your
office or elsewhere?
Mr. R e d m o n d . No; it originated between the bankers and the
company.
Senator C o s t i g a n . I believe it was testified this morning that it
originated with Mr. Kreuger. Do you know whether that is a fact?
Mr. R e d m o n d . I have no absolute knowledge of the subject. I
know the precise form of the substitution clause as it is in the indenture
now did not wholly originate with Mr. Kreuger because there were
certain changes which we thought ought to be made and we insisted
on having incorporated.
Senator C o s t i g a n . Did you on any prior occasion prepare anything
corresponding to this substitution clause?
Mr. R e d m o n d . Do you mean me personally?
Senator C o s t i g a n . In any legal document that you drew.
Mr. R e d m o n d . I personally? No, Senator Costigan.
Senator C o s t i g a n . Were you aware of any such substitution clause
in other legal agreements prior to the preparation of this particular
clause?
Mr. R e d m o n d . I know of no identical substitution clause.
STOCK EXCHANGE PRACTICES
1241
Senator C o s t i g a n . In other words, you pioneered in this field so
far as you decided on the forms and precedents employed?
Mr. R e d m o n d . Well, Senator Costigan, I think if I am going to
draw an indenture I will make it my own instrument, and not simply
a copy of anybody else’s form.
Senator C o s t i g a n . T o be sure, but you are not unwilling to consult
accepted forms, are you?
Mr. R e d m o n d . I do not know of any accepted form for a large
bond issue.
Senator C o s t i g a n . Do you know of any form for a substitution
clause? It is to that I refer.
Mr. R e d m o n d . N o. I think every substitution clause is drawn to
fit a particular case. We drew this substitution clause to fit the facts
of this case.
Mr. M a r r i n a n . Mr. Redmond, am I correct in the impression that
the law firm of Ropes, Gray, Boyden & Perkins, which collaborated
with you in this work, is one professionally equally distinguished
with the firm of which you are an able member?
Mr. R e d m o n d . I would say it is one of the outstanding firms of
Boston.
Mr. M a r r i n a n . Mr. Perkins, who is a member of that firm, is
Thomas Nelson Perkins, is that correct?
Mr. R e d m o n d . I b e lie v e so.
M r . M a r r i n a n . Thomas Nelson Perkins is also a director in the
Lee, Higginson Trust Co., is he not?
Mr. R e d m o n d . I do not know.
Mr. M a r r i n a n . I might say that all the standard investment
manuals, and Poor’s Register, and so forth, show Mr. Thomas
Nelson Perkins as a director of the Lee, Higginson Trust Co. in 1929,
during the time that this indenture was drafted, and I believe he is
as of this date as well.
Now, Mr. Redmond, we have this situation, and correct me if*!
am in error: You are a member of a firm which acted in this instance
for Lee, Higginson & Co., and the Kreuger & Toll Co., in the drafting
of the indenture. You are also a member of a firm which is counsel
for the New York Stock Exchange. In Boston there is another
firm of equal professional place, ana a member of that firm was also
a director in the Lee, Higginson Trust Co., which is named as the
trustee of this issue; is that correct?
Mr. R e d m o n d . No.
M r. M
a r r in a n .
I n w h a t w a y is i t in c o r r e c t ?
Mr. R e d m o n d . My firm, Carter, Ledyard & Milburn, acted as
counsel for Lee, Higginson & Co. and not as counsel to the Kreuger
& Toll Co. The Kreuger Toll Co. was represented by a Swedish
lawyer whose name I believe was Ivar Engellau, of Stockholm,
Sweden.
Mr. M a r r i n a n . And that is the only error in my statement?
Mr. R e d m o n d . Still it is fairly fundamental.
M r . M a r r i n a n . Is the Lee, Higginson Trust Co. of Boston the
sole trustee in this issue?
Mr. R e d m o n d . I do not know.
Mr. M a r r i n a n . They were at the time you drafted the agreement?
Mr. R e d m o n d . They were, under the agreement.
Mr. M a r r i n a n . D o you know whether there is any truth in a
report that Thomas Nelson Perkins was nominated by the State
1242
STOCK EXCHANGE PRACTICES
Department, and I merely ask you now whether you have knowledge,
to conduct certain negotiations with foreign governments growing
out of such situations as the existing Kreuger & Toll difficulty?
Mr. R e d m o n d . I have no knowledge.
M r. M
a r r in a n
. Y
ou
h a v e n o k n o w le d g e o f t h a t ?
Mr. R e d m o n d . No.
Mr. M a r r i n a n . Will you explain to the committee what your
impression may be of what constitutes the limits of the moral responsi
bility imposed upon a lawyer—and I will have this repeated if it is
too long—towards his client in such a situation as is presented in the
approval of this indenture?
Mr. R e d m o n d . I may not have understood your question.
M r . M a r r i n a n . One moment. Will the committee reporter
please repeat the question. I do not want any misunderstanding
about it but want to start out right in propounding the question.
[The question was read.]
Mr. R e d m o n d . I should think that the moral responsibility of a
lawyer was to see that the indenture was drawn so as to carry out the
arrangements that had been made between his clients, or in this case
Lee, Higginson & Co., and the Kreuger-Toll Co., in regard to the
issuance of those debentures.
Senator C o s t i g a n . Was there no moral responsibility to the public,
in your judgment?
Mr. R e d m o n d . I think, Senator Costigan, you are asking me a
different question now, aren’t you? I was asked what my moral
responsibility was to my client, and my client was Lee, Higginson
& Co.
Senator C o s t i g a n * Will you be good enough to answer it, even if it
is a different question?
Mr. R e d m o n d . A s to the public generally?
Senator C o s t i g a n . Yes.
Mr. R e d m o n d . I think that any law firm of standing should see
that the indenture created a legal obligation, and that the securities
issued under the agreement complied strictly with what was offered
to the public, so that the public would not be misled.
Mr. M a r r i n a n . N o w , to return to that question. I deliberately
placed the question on the basis of the obligation or relationship
between you and your client. Do you think it reasonable to inquire,
I will put the question in that way, whether you ought to have antici
pated your client’s responsibility to the public in such a situation as
this, and deported yourself professionally in such a manner as would
comprehend a responsiveness of your client toward the public?
Mr. R e d m o n d . I am frankly confused by your question.
M r . M a r r i n a n . Well, let me split it up.
The bankers involved
in offering securities, I think you will agree, have some responsibility
to the public.
Mr. R e d m o n d . Well, let us define that responsibility.
M r. M
Mr. R
a r r in a n .
N
o
sir.
I w ant y ou — —
(continuing). We can not use a vague term like
“ responsibility” without defining it.
Mr. M a r r i n a n . N o sir. Answer as to some responsibilities to
the public.
Mr. R e d m o n d . I feel they have the responsibility of offering to the
public securities——
edmond
STOCK EXCHANGE PRACTICES
1243
M r . M a r r i n a n (in t e r p o s in g ). H o w m u c h c o n s id e r a t io n d id y o u
g iv e t o t h a t q u e s t io n in th e fo r m u la t io n o f th is in d e n t u r e ?
Mr. R e d m o n d . According to my recollection'—and you must let
me answer that question fully or not at all, and in order to do so
properly I am going to define, first, what I feel the responsibility is
in answering your question.
Senator C o s t i g a n . The committee desires to hear you fully.
Mr. R e d m o n d . I feel that the responsibility of a banker offering
securities to the public is to see that the securities are genuine securi
ties, that the nature of the rights of the company and the purchasers
of those securities is clearly set forth in the offering circular or adver
tisement, and that they have confidence in the soundness of the
enterprise, whether that confidence is generated by long series of
dealing, reliance on accountants’ reports or expert reports, or some
other ground. And if they are reasonably assured of the soundness
of the enterprise I think they are justified in offering the securities
if they fulfill other requirements.
Senator C o s t i g a n . Do you mean to imply that on consideration of
the entire Kreuger & Toll transaction the public was not misled as to
the nature of the securities behind the indenture?
Mr. R e d m o n d . I do not think they were, sir. And let me say
further in that connection, that at the time this debenture issue was
brought out the credit of Kreuger & Toll was so great throughout the
world that I fancy the issue could have been brought out whether or
not there had been any collateral bonds behind the debenture issue.
Senator C o s t i g a n . May I ask you whether the credit of Lee, Hig
ginson & Co. was not also of such a nature as to warrant acceptance
of the debentures offered by them largely upon their reputation?
Mr. R e d m o n d . I do not think so. I think the success or failure
of any issue of securities depends not solely upon the name of the
sponsoring banker but upon the merits of the issue and the merits of
the issuing company.
Senator C o s t i g a n . I s it your idea that the name of Lee, Higginson
& C o . was not a factor in the public credit given to the Kreuger &
Toll issue?
Mr. R e d m o n d . A factor, yes, but not a controlling factor.
Senator C o s t i g a n . H o w large a factor was it?
Mr. R e d m o n d . I am afraid there is no way in which I could esti
mate it more nearly than to say that I do not think it was the con
trolling or dominating factor.
Senator C o s t i g a n . There is no doubt that great public credit
attached at that time to Lee, Higginson & Co.
Mr. R e d m o n d . But much greater credit attached to Kreuger, and
any number of banking houses might equally well have brought out
the Kreuger & Toll issue.
Senator C o s t i g a n . Admitting the union of those two factors in
creating public credit, are you disposed to think that the public was
duly advised of the nature of the substitution clause in its bearing on
the intrinsic value of the securities offered?
Mr. R e d m o n d . I think the nature of the substitution clause was
as clearly expressed as could be done. What bearing it might have
had on what you call intrinsic worth I could not really undertake
to say.
Mr. M a r r i n a n . I take it, Mr. Redmond, that there was no special
consideration given to the question of moral responsibility as we here
1244
STOCK EXCHANGE PEACTICES
would understand that word, not perhaps with quite the precision
that a lawyer might understand it, in the question of substitution or
eligibility or interchange or conversion of collateral at par value;
moral responsibility did not enter very much into your consideration
of these points in the indenture.
Mr. R e d m o n d . Y ou have remarked upon moral considerations as
you understood them and as lawyers probably do not. But let us
take up the separate things you have referred to. There has been
reference here this morning as to the looseness of these various clauses.
Actually these clauses are very much tighter than most people think,
and-----The C h a i r m a n (interposing). But they did not prevent the sub
stitution or the putting in of poor paper for good.
Mr. R e d m o n d . Yes, they did. And reference was made here this
morning to a suppositious case of a Chinese bandit who might issue
obligations eligible for deposit if there was a population of over
300,000 in the territory that he might be at the time controlling. The
substitution clause sets forth: “ Bonds or notes issued or guaranteed
by any sovereign State.” Now, that does not refer to a bandit chief.
The C h a i r m a n . It was also admitted this morning that French
bonds that were valuable were taken out in the substitution.
Mr. R e d m o n d . D o you mean French bonds that are to-day valu
able were taken out?
The C h a i r m a n . Yes.
Mr. R e d m o n d . Value is a question of time.
The C h a i r m a n . Exactly so. And time has shown there wasn't
any value in what is left.
Mr. R e d m o n d . In 1922 those very French bonds would not have
been as valuable as other bonds substituted.
The C h a i r m a n . Those were not sold in 1922.
Mr. R e d m o n d . But w e are talking as o f the time.
Senator B l a i n e . When were the French bonds taken out?
Mr. R e d m o n d . I have not that date but it is in the record.
M r . M a r r i n a n . J a n u a r y 23, 1930, I believe.
Senator C o s t i g a n . Mr. Redmond, in an article in the Nation of
May 25, 1932,1 find these statements, which I assume are based upon
accurate quotations. At least the article is of interest:
In this connection, it is of interest to quote from an article in the Svenska
Dagbladet, written by Gustav Cassel, the renowned economist. Professor Cassel
says:
“ When such firms as Lee, Higginson & Co. placed their names under Kreuger
emissions, it was natural that we in Sweden imagined that they had carefully
examined the firm’s position and that they exercised reliable and thorough super
vision over its leadership. In this we have been deceived. If abroad at this
moment we are held responsible to a large degree for the Kreuger fiasco, we too,
to a lesser degree, may hold foreign interests responsible. * * * Year after
year they have given Kreuger & Toll tremendous moral backing without bother
ing to test the firm’s position. Responsibility for this lies with these people,
not with Sweden.”
Have you any comment to make on that charge of responsibility
resting on Lee, Higginson & Co., and presumably indirectly on
yourself?
Mr. R e d m o n d . Senator Costigan, I am hardly qualified to answer
that, because whatever my responsibility may be in this case, certainly
I have not given credit to Kreuger himself. All that I have done is
STOCK EXCHANGE PRACTICES
1245
to pass upon a certain indenture of the Kreuger & Toll Co. I hesitate
to comment upon an article of that kind. It is rather outside my field.
Senator C o s t i g a n . Y ou have, however, been commenting upon the
moral responsibility in this field.
Mr. R e d m o n d . When I was questioned upon it, yes.
Senator C o s t i g a n . My question is directed to that moral responsi
bility.
Mr. R e d m o n d . If you want my personal reaction to that article it
is this: Kreuger & Toll is a Swedish company. Its start was in
Sweden. It grew and became a large enterprise. It sought capital
outside, representing that it was a successful Swedish company, whose
affairs had been conducted as required by the Swedish law, and its
credit was built up by a series of very spectacular and successful
transactions. The part of American bankers, or of American inves
tors, in giving further credit to Kreuger, was originally based upon
the credit which Sweden itself had placed upon him.
Senator C o s t i g a n . Pictured as this story is, the committee is
primarily interested in the safeguards thrown around the public in
the Kreuger & Toll transactions, and the safeguards which ought to
be thrown hereafter around such developments—I mean around
similar sales of securities. From that viewpoint have you any
suggestions to make to the committee?
Mr. R e d m o n d . Senator Costigan, before answering simply in the
negative may I point out to the committee the reason for my con
clusion?
Senator C o s t i g a n . Yes.
Mr. R e d m o n d . It is assumed, of course, that safeguards are neces
sary because this present issue is selling at a low price. This issue
was predicated, first, upon the general reputation of the assets and
business of Kreuger & Toll. And in addition it had a security at the
time which was worth 120 per cent at par in securities that were on
a gold basis, or at par of exchange for American dollars. The com
pany’s credit has disappeared because it has been discovered that the
most important head of this company was dishonest. Now, there is
no rule or regulation that I know of that can guard against dishonesty
in high places. That to my mind has been the fundamental cause of
the collapse of the Kreuger enterprises. As far as the decline in
value of the collateral back of this issue is concerned, that I think, as
Mr. Durant pointed out this morning, is largely due to the difficulty
of the transfer of funds from the debtor countries to the United States.
It is not that these issues are valueless, or that these governments
won’t ultimately meet their obligations.
Senator C o s t i g a n . Mr. Durant so testified with respect to Hun
gary. Does that testimony hold good with regard to Yugoslavia?
Mr. R e d m o n d . I believe Yugoslavia is also off the gold basis.
Senator C o s t i g a n . Has Yugoslavia prevented the exportation of
capital, or the payments of interest?
Mr. R e d m o n d . I believe they have defaulted in the payment of
their obligations.
Senator C o s t i g a n . Have they defaulted?
Mr. R e d m o n d . Yes.
Senator C o s t i g a n . Mr. Durant’s testimony was to the effect that
Hungary had not defaulted but that payments were held in Hungary,
if I understood him correctly, and may not at this time be passed
beyond the borders of Hungary.
1246
STOCK EXCHANGE PRACTICES
Mr. R e d m o n d . Possibly I am a little too technical, but as I re
member it the Hungarian obligations are dollar obligations. There
fore I think it would have to be considered a default, a failure to pay
in dollars in accordance with the terms of the bonds. I know that
Hungary has set up a method of interior exchange, which they credit
in a blocked account, but I personally think that nevertheless would
be a default in any obligation calling for American dollars.
Senator C o s t i g a n . It has been publicly reported that when French
and other bonds of considerable value were withdrawn, more Yugo
slavia bonds were deposited, and that they had no market value.
Do .you know whether that is a fact?
Mr. R e d m o n d . I do not know.
Senator C o s t i g a n . If it is true, then the substitution permitted the
replacing of bonds of substantial value with bonds of a lesser value.
Mr. R e d m o n d . Marketwise, yes.
Senator C o s t i g a n . And legally it was true, was it not, that any
substitution, which met the general conditions you have read to the
committee, would suffice.
Mr. R e d m o n d . Senator Costigan, I have read to you only a brief
statement of those conditions which appear in the prospectus. I
think that the indenture itself deserves a study if we are to under
stand the nature of that substitution clause.
Senator C o s t i g a n . I s there any clause in the indenture which pre
served the actual value of the substituted bonds rather than the par
value?
Mr. R e d m o n d . No. The whole indenture was set up upon the
basis of par value.
Senator C o s t i g a n . I s there any other clause in the indenture which
this committee ought to be advised about which protects investors
with respect to substituted securities?
Mr. R e d m o n d . Oh, yes; I think there is.
Senator C o s t i g a n . Will you read it to the committee?
Mr. R e d m o n d . I will read the clause gladly, but I think an expla
nation might be more understandable. This is rather legal jargon,
if you please.
Senator C o s t i g a n . You may read and explain, or explain without
reading, whichever you prefer.
Mr. R e d m o n d . Suppose I explain, and then refer to any of the
papers if necessary.
Senator C o s t i g a n . Very good.
Mr. R e d m o n d . The basis controlling the substitution clause was
with reference to applying the ratio of par value and the ratio of
income, so that both factors have to be considered in order to de
termine the effect of the substitution clause. I have heard it said
that bonds in default might be substituted herein. That is so,
strictly speaking, when you speak only of the terms defining the ratio
of principal. But such defaulted bonds would not be possible of
substitution except to increase the protection of the debenture
holders, without giving any corresponding benefit to the company,
because they would not add to the ratio of income, and the ratio of
income had also to be maintained.
Furthermore-----Senator C o s t i g a n (interposing). None the less a default in sub
stituted bonds might occur speedily after the substitution.
STOCK EXCHANGE PRACTICES
1247
Mr. R e d m o n d . In just the way a default might occur in bonds
which were already under the debenture.
Senator C o s t i g a n . Your argument impresses me, but perhaps I
am wrong in viewing it, as technical. You do not mean by the last
observation to imply that the Yugoslavian bonds which were substitued were equal in value to the French bonds which were with
drawn, do you?
Mr. R e d m o n d . I do not know when the substitution was made,
or the rate of the coupons attached to the bonds, but there have been
times, and many times, when a bond with a 7 per cent coupon of a
comparatively small country would have had a larger value than the
French 3 per cent bonds.
Senator C o s t i g a n . You are making a theoretical argument rather
than basing it upon the actual facts.
Mr. R e d m o n d . I do not know the facts about that.
Senator C o s t i g a n . Very well. Proceed, Mr. Marrinan.
Mr. M a r r i n a n . Mr. Redmond, were you consulted as counsel in
the various substitutions which were made under the substitution
provisions of this indenture?
Mr. R e d m o n d . N o . Substitutions were made between the com
pany and the trustee. My firm has never acted for the trustee.
M r. M
a r r in a n .
W h a t fir m a c t e d f o r th e t r u s te e ?
Mr. R e d m o n d . I think Ropes, Gray, Boyden & Perkins, but that
would be subject to verification.
Mr. M a r r i n a n . That would mean the firm of which Mr. Perkins
is a member?
Mr. R e d m o n d . I b e lie v e so.
Mr. M a r r i n a n . Do you regard this issue as a bond issue, Mr.
Redmond?
Mr. R e d m o n d . Technically they are bonds. That is, they are
instruments under seal. But they ware offered to the public as se
cured debentures.
Mr. M a r r i n a n . What is the difference from the layman’s viewpoint,
if you can translate a professional opinion into such terms, between
a bond and a secured debenture?
Mr. R e d m o n d . I do not know that I can translate it when you
deprive me of the benefit of having any intelligence. You say “ from
the layman’s point of view,” and then are asking me to translate
technical terms. I can tell you what the difference is.
Mr. M a r r i n a n . Proceed in your own way.
Mr. R e d m o n d . The term “ debenture” means normally an unse
cured obligation. It comes from the Latin, simply “ I owe” and is
used in Europe, where there are debentures often in the form of stock,
and even debenture shares. A bond, classically, is a formal instrument
attached to which there would be a penalty in event of failure, and
from that we have come to our mortgage bond. So that in this
country the term “ bond” is usually associated with a mortgage
bond. We used the English term “ debenture” to indicate an obliga
tion of a lesser rank.
Mr. M a r r i n a n . You say that the term “ debenture” carries the
idea with it of an unsecured obligation?
Mr. R e d m o n d . Classically, a debenture is unsecured.
Mr. M a r r i n a n . Then you call this particular issue a secured
debenture. How do you reconcile that terminology?
1248
STOCK EXCHANGE PRACTICES
Mr. R e d m o n d . Because, as I say, in this country we use the term
inexactly. For instance, General Motors a few years ago had deben
ture preferred stock. Preferred stock is not an obligation, but it was
attached to it.
M r . M a r r i n a n . I h a v e b e e n t o ld , p e r h a p s s o m e w h a t c y n i c a l l y ,
th a t th e te r m “ s e c u r e d d e b e n t u r e ” is a l a w y e r ’ s d e v ic e t o c o n v e y s
th e id e a o f a b o n d w h ile a v o id i n g s o m e o f th e le g a l r e s p o n s ib ili t y
in v o l v e d in a b o n d issu e.
I s th e r e a n y t h in g in t h a t ?
Mr. R e d m o n d . Not to my knowledge. The term, I think, was
used because it expressed more exactly than anything else the nature
of this obligation.
M r . M a r r i n a n . Let us take the specific description of this issue.
That was called a 5 per cent secured sinking-fund gold debenture.
Would you say in the light of all we know now that that particular
description appears more like advertising copy than a true legal or
even a banking description of the issue?
Mr. R e d m o n d . Oh, I think it is still an exact description of the
nature of the obligation. It was secured. It was a debenture.
There was a sinking fund. And they were payable in gold.
Mr. M a r r i n a n . Mr. Redmond, do you know whether this par
ticular debenture agreement was ever registered or otherwise passed
upon under the British companies act?
Mr. R e d m o n d . I do not know. I do not think so, because Kreuger
& Toll are a Swedish company, and therefore there would be no par
ticular reason for registering it under the British companies act.
M r . M a r r i n a n . D o you think it would qualify from your knowl
edge of the British companies act?
Mr. R e d m o n d . I can not undertake to express any opinion in
regard to British law. I have enough trouble studying the laws of
the State of New York and of the United States.
Mr. M a r r i n a n . In handling this matter of the debenture agree
ment were you professionally engaged with a single client, Lee,
Higginson & Co., or did you have a dual responsibility, partly in
behalf also of the New York Stock Exchange?
Mr. R e d m o n d . I was not representing the New York Stock
Exchange in regard to the issue, and was not consulted by them
about it whatsoever.
M r . M a r r i n a n . Y ou have already answered the next question
that I was going to ask you. Would it have been possible for you to
have professionally represented Lee, Higginson & Co. and the New
York Stock Exchange in these matters?
Mr. R e d m o n d . Only if both of my clients were willing to consent
to such an arrangement I might say in explanation, that my firm
has, over a period of years, on account of our connection as counsel
for the exchange,, more or less avoided acting for companies or
bankers in connection with the issue of securities. We have acted in
a few cases, but if any conflict of interest ever appears I go to the
exchange and say to them that they are free of course to have other
counsel, or if they prefer it I will cease to act for the other client and
will represent them.
M r . M a r r i n a n . A r e c o n flic t s o f in t e r e s t w h i c h a r is e , f o r th e m o s t
p a r t , c o n flic t s o f in t e r e s t b e t w e e n th e e x c h a n g e a n d b a n k in g in s t it u
tio n s , o r h a v e y o u in m i n d q u e s t io n s t h a t in v o l v e th e p u b li c ?
Mr. R e d m o n d . I was thinking more of questions where there would
be a real difference of opinion as to the propriety, let me say, of some
STOCK EXCHANGE PRACTICES
1249
accounting practice, when the company for some reason or other
might feel that a certain policy was justified, and the committee of
the exchange might feel that it was not.
Mr. M a r r in a n . Where in this general picture as we have developed
it so far does the investor or shareholder or bondholder have the
benefit of counsel prior to the organization of creditor committees?
Mr. Redm ond. Well, I should say that the investor has the benefit
of counsel, in that he has the efforts of counsel for the bankers to
make sure that the securities that are issued are exactly as described
in the circular. In other words, the investor knows from the circular
what he is buying.
Mr. M a r r in a n . Then all that proceeds on the “ buyer beware”
basis.
Mr. Redm ond. Not at all. It is not buyer beware. It is a full
disclosure being made. The investor can then determine whether he
wishes to buy the bond.
M r. M a r r in a n . Doesn’t that presume that the investor has a
great deal more technical knowledge than he usually has?
Mr. Redm ond. I do not think so.
M r. M a r r in a n . That is all.
The Chairm an. Mr. Redmond, you will be excused, subject to the
subpoena for further notice.
Mr. Redm ond. Might I ask whether it would be proper for me to
return to New York to-night because I have made an engagement
which I s lould like to keep.
The Chairm an. Yes; you m ay go for the pressnt.
(T-ie 'eupon the witness was excused for the present.)
The Chairm an. The next witness is A. D. Berning.
You do solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth, regarding the matter now under
investigation by the committee, so help you God.
Mr. B e rn in g . I do.
TESTIMONY OF A. D. BERNING, OF THE FIRM OF ERNST & ERNST,
PUBLIC ACCOUNTANTS, NEW YORK CITY
(The witness was duly sworn by the chairman, as shown above.)
Mr. M a r r in a n . Mr. Berning, you are associated with the firm of
Ernst & Ernst?
Mr. B erN ing. Yes, sir.
Mr. M a r r in a n . Public accountants; is that correct?
Mr. B e rn in g . Yes, sir.
Mr. M a r r in a n . What companies in the general Kreuger & Toll
set-up has the firm of Ernst & Ernst audited?
Mr. B e rn in g . Through all these various years, or are you speaking
any particular time?
M r. M a r r in a n . Well, let us say, since this issue was publicly
offered, which would be 1929.
Mr. B e rn in g . International Match Corporation, Swedish-American Investment Corporation, Vulcan Match Co. There were
several companies that were later to be acquired, including New.
Hampshire Match Co., the Union Match Co., tne Federal Match Co.,
and there may be some other smaller ones.
Mr. M a r r in a n . Did you ever, Mr. Berning, engage in an audit of
the Kreuger & Toll Co. itself, the parent company?
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STOCK EXCHANGE PRACTICES
Mr. B e r n i n g . N o, sir.
Mr. M a r r i n a n . S o far as you know was any such audit made of
the Kreuger & Toll Co. prior to the suicide of Mr. Kreuger?
Mr. B e r n i n g . According to the printed annual reports of the
company that I have seen there were audits made by so-called elected
auditors of the company, and some of the years I noticed on the for
eign edition of such reports a certificate representing an audit—an
auditor’s certificate signed by a man whom I understand is an inde
pendent accountant.
The C h a i r m a n . That was the audit ordered by the stockholders?
Mr. B e r n i n g . Yes, sir; I believe so.
The C h a i r m a n . In other words, that was Mr. Toll or Mr. Kreuger
auditing himself, and some one certifying to that effect?
Mr. B e r n i n g . No, I am sure one of the men was an independent
accountant. The certificate of a Swedish accountant.
The C h a i r m a n . He was selected by what interests?
Mr. B e r n i n g . Selected by the shareholders or the management, I
am not sure, but I believe it was by the shareholders.
Mr. M a r r i n a n . In the audits of International Match Co. that
you have handled, has the emphasis been placed upon the financial
condition of the company or upon its earning condition?
Mr. B e r n i n g . In so far as our examinations are concerned?
M r. M
a r r in a n .
Y e s , sir.
Mr. B e r n i n g . I do not think there was any particular emphasis
on either one, Mr. Marrinan.
Mr. M a r r i n a n . Under the existing circumstances is it usual for
firms in accountancy to give unqualified certificates as to earnings?
Mr. B e r n i n g . Where the scope of the work covers an examination
of the books sufficient to audit earnings accounts no qualified certifi
cate is given.
Mr. M a r r i n a n . Where qualified statements are rendered what is
the usual nature of the qualification and its purpose?
Mr. B e r n i n g . Well, the kinds of qualifications are quite numerous
and fit the various needs of the particular case. The purpose is
naturally to put the reader on notice that the work did not include
certain verification.
Mr. M a r r i n a n . In American practice to whom is the accountant
or auditor usually answerable? To the company or to the share
holders?
Mr. B e r n i n g . Usually to the company, the management or the
directors.
Mr. M a r r i n a n . May I ask if you have knowledge of the com
parable situation under the British companies act?
Mr. B e r n i n g . I have read a number of things about that; yes, sir.
M r . M a r r i n a n . Where is that answerability under the provisions
of that act?
Mr. B e r n i n g . The auditors in England are elected by sharehold
ers, and I believe are responsible to them.
Mr. M a r r i n a n . Is it the American practice to accept audits from
a holding company without actual backing in the form of other
audits from subsidiaries?
Mr. B e r n i n g . I did not understand that question. May I have
that question again?
STOCK EXCHANGE PRACTICES
1251
Mr. M a r r i n a n . I do not believe I put it very clearly. In auditing
an American holding company would you bring in also as a matter
of usual form an audit also of all its subsidiaries?
Mr. B e r n i n g . It could be done; yes, sir.
M r . M a r r i n a n . It could be done, but is it usually done?
Mr. B e r n i n g . Quite often, I believe.
M r . M a r r i n a n . In American practice?
M r . B e r n i n g . Yes.
Mr. M a r r i n a n . In the audit of the International Match Corpora
tion you audited the American company, but you found it necessary,
for certain doubtless controlling reasons, to merely make a qualified
statement of opinion as to the audits of subsidiaries; am I correct?
Mr. B e r n i n g . With regard to the foreign subsidiaries, yes, sir.
M r . M a r r i n a n . As a m a t t e r o f a s s is tin g th e c o m m i t t e e t o an u n d e r
s t a n d in g o f th is a u d it in g s it u a t io n , I w is h t o a sk y o u f o r a p r o fe s s io n a l
o p in io n o n a fe w m a tt e r s .
I d o n o t w is h t o e m b a r r a s s y o u in a
b u sin e s s w a y , a n d i f y o u fin d i t d iffic u lt t o a n sw e r th e q u e s t io n s n o
o n u s w ill b e im p o s e d u p o n y o u i f y o u w ill s o s ta te .
Have professional standards in accountancy reached a stage of
development generally in the United States which would support an
immediate requirement for independent audits in connection with all
marketed public issues?
Mr. B e r n i n g . Would you mind reading that question to me again?
Mr. M a r r i n a n . Read it, Mr. Reporter.
(The last portion of the question above recorded was read by the
reporter.)
Mr. B e r n i n g . I believe it is.
Senator C o s t i g a n . Y ou refer now to legal requirements?
Mr. M a r r i n a n . Any requirements that there might be, yes.
Senator C o s t i g a n . Imposed b y the stock exchange?
Mr. M a r r i n a n . Imposed by the stock exchange or imposed by-----Senator C o s t i g a n . By law.
Mr. M a r r i n a n . Is the form of certification to Ernst & Ernst
audit of the financial condition of the International Match Corpora
tion the usual form employed, or is that just a special form of
certification employed to cover that special situation?
Mr. B e r n i n g . The certificate attached to that report—that
statement is naturally a certificate to cover that particular situation.
Mr. M a r r i n a n . That particular form of certification then would
not have any broad application in accountancy?
Mr. B e r n i n g . Not necessarily; no, sir.
Mr. M a r r i n a n . Well, not necessarily, I understand that-----Mr. B e r n i n g . I may add excepting in cases where it is not neces
sary, then such a qualification would not be added.
Mr. M a r r i n a n . There were some variations in the wording of that
certificate in the various years going back as far as 1927 and coming
forward. In your certificate for the year 1930, the annual report on
the International Match Corporation for the year ended December
31, 1930, there is appended to that certificate:
In January, 1931, the corporation issued $50,000,000 10-year 5 per cent con
vertible gold debentures, in connection with which the authorized participating
preference stock was increased to 2,500,000 shares.
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STOCK EXCHANGE PRACTICES
Is it customary to make such a statement in an auditing certificate?
Mr. B e r n i n g . In cases where important transactions have trans
pired so quickly following the close of the fiscal year it is customary
to make reference to it.
Mr. M a r r i n a n . Then there is no basis for the belief that that was
advertising over the name of Ernst & Ernst?
Mr. B e r n i n g . Certainly not.
Mr. M a r r i n a n . I would like to submit this certificate only, for the
record, and have it identified as a certificate attached to the annual
report of the International Match Corporation for the year ended
December 31, 1930, and approved or signed by the firm of Ernst
& Ernst.
The C h a i r m a n . If there is no objection it will be printed in the
record.
(The certificate attached to the annual report of the International
Match Corporation for the year ended December 31, 1930, is here
printed in the record, as follows:)
We hereby certify that we have examined the books of account and record of
International Match Corporation and its American subsidiary companies at
December 31, 1930, and have received statements from abroad with respect
to the foreign constituent companies as of the same date. Based upon our
examination and information submitted to us it is our opinion that the annexed
consolidated balance sheet sets forth the financial condition of the combined com
panies at the date stated, and that the related consolidated income and surplus
account is correct.
The item of “ Other investments” in the amount of $49,448,313.87 is stated in
the annexed balance sheet after deducting allowance to reduce Government bonds
and marketable securities to a value below current market quotations of similar
securities.
In January, 1931, the corporation issued $50,000,000 10-year 5 per cent con
vertible gold debentures, in connection with which the authorized participating
preference stock was increased to 2,500,000 shares.
E rnst & E r n st .
May 21, 1931.
Mr. M a r r i n a n . Just what is the nature, Mr. Berning, of the
assurances to be taken by an investor as to Ernst & Ernst professional
opinion of the financial condition of this corporation as it appears
in the annual report of International Match Corporation?
Mr. B e r n i n g . T o my mind the inference to be gained from the
certificate is what is said. I can not tell you what others may derive
from it except what I expect they do. They take the matter for
what it reads—that we made the examination of the books of those
companies which are mentioned, and accepted reports from other
companies and have consolidated them, naturally eliminating all
intercompany transactions as far as technical matters are concerned,
and this is the result.
M r . M a r r i n a n . Then—if I am in error correct me— the account
ant’s viewpoint is quite similar to that of the lawyer: He makes
precise technical statements and he expects the public to understand
them, is that correct?
Mr. B e rn in g . I can not understand why a statement of that kind
is technical. It is pretty clear in my opinion as to what it means.
It is in simple language and I think it expresses the circumstances.
Mr. M a r r i n a n . Do you believe that the average investor reads
carefully the form and context of auditing statements?
Mr. B e r n i n g . I have no way of knowing what they do read.
STOCK EXCHANGE PRACTICES
1253
Mr. M a r r i n a n . D o you believe that the average investor fully
comprehends the import of such limitations or qualifications as are
to be found in that particular certificate that we have inserted in the
record?
Mr. B e r n i n g . I am sorry that I can not answer that question.
I really do not know what import they may derive from it.
M r . M a r r i n a n . T h e n th e r e is r o o m f o r d o u b t as t o w h e t h e r th e
in v e s t o r r e a lly g e t s th e s a m e n o t io n f r o m it t h a t y o u w o u ld g e t fr o m i t ?
Mr. B e r n i n g . Quite possibly.
M r . M a r r i n a n . D o y o u th in k it fa ir t o s a y t h a t th e in v e s t o r is
in flu e n c e d f a v o r a b l y b y a n y c e r t ific a t e w it h o u t r e g a r d t o its p r e c is e
d e t a ils , w h ic h b e a r s th e s ig n a t u r e o f a r e p u t a b le fir m in a c c o u n t a n c y ,
s u c h as y o u r o w n fir m , f o r e x a m p le ?
Mr. B e r n i n g . In all my experience I do not believe I have ever
heard or known of a case where an investor bought securities on certi
fication of accounts. I have never had any definite evidence of that,
so I can not say just how they judge the value of securities by reason
of the audit.
Senator C o s t i g a n . What is the basis of such purchases within your
knowledge? On what does the investor rely?
Mr. B e r n i n g . I think on the type of industry in which the company
is engaged. The apparent strength of it. Its reputation as to man
agement, and all other things of that character. Probably to some
extent on the reputation of the banking firm which sponsors it.
Possibly the directors, and other things connected with it.
Mr. M a r r i n a n . Mr. Berning, is it true that the firm of Ernst &
Ernst requested that its qualified certificate of International Match
Corporation found in the annual reports of the company be not
publicly used by the bankers?
Mr. B e r n i n g . I do not think so.
M r . M a r r i n a n . I t h o u g h t I r e a d a n e w s p a p e r s t o r y t o t h a t e ffe c t ,
a n d w is h e d e it h e r t o h a v e it c o n fir m e d o r it s in a c c u r a c y e x p la in e d .
I t is n o t tr u e ?
Mr. B e r n i n g . It is not true with regard to International Match
Corporation.
Mr. M a r r i n a n . Did the firm of Ernst & Ernst endeavor through
contacts with officers of Lee, Higginson & Co. to secure the business
involved in an audit of Kreuger & Toll Co.?
Mr. B e r n i n g . Yes; we did.
Mr. M a r r i n a n . You were unsuccessful in securing t h a t business?
Mr. B e r n i n g . We were unsuccessful in finally consummating it,
although arrangements had been made for such an examination to
be done for the year ended December 31, 1931.
The C h a i r m a n . But it never took place?
Mr. B e r n i n g . No, sir.
Senator C o s t i g a n . H o w long in advance of the death of Ivar
Kreuger was that arrangement consummated?
Mr. B e r n i n g . It had been discussed several times, as I recall
it—some time during 1930— and finally came to some definite
understanding regarding it in the summer of 1931.
Mr. M a r r i n a n . Am I correct—there was a definite agreement to
proceed with an audit of Kreuger & Toll Co.?
Mr. B e r n i n g . There was a definite understanding that we were
to go into Kreuger & Toll Co. for the year 1931. There was not any
definite agreement as you are speaking of; not a written document.
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STOCK EXCHANGE PRACTICES
Mr. M a r r i n a n . When were you supposed to start that?
Mr. B e r n i n g . I should judge—some time during the early part of
March, I should imagine would be the proper time.
Mr. M a r r i n a n . What assistance, if any, was given your firm, in
undertaking to get this business, by the firm of Lee, Higginson & Co.?
Mr. B e r n i n g . Why, I think, considerable. I had talked with Mr.
Durant, and I think Mr. Allen, about it, and I am sure they en
couraged the idea, and they told me that they would speak to Mr.
Kreuger, and they later told me that they had, and I think as the
result of that the matter was arranged.
M r. M
a r r in a n .
W h e n d id y o u fir st t r y t o g e t t h e j o b ?
Mr. B e r n i n g . Well, I took whatever proper opportunities were
afforded to me in the professional sense. I should judge it was
probably somewhat later than the dates of these security issues when
the Kreuger & Toll Co. became interested in American markets.
They had, as far as I could see, no American accountants or English
auditors, and naturally, being desirous of expanding the business of
our own firm, we thought this was a proper part of the picture for us
to take care of, and I presume it came just quickly or some time after
these various security issues were put out.
M r . M a r r i n a n . Well, the original Kreuger & Toll securities were
offered in the American market I believe back as far as 1923. The
bond issue was offered in 1929. The participating debentures and
the American certificates in 1928, a year prior. Am I to understand
that you first manifested an interest in getting that contract in 1923,
or in 1928, or in 1929?
Mr. B e r n i n g . I do not recall that there were any securities of the
Kreuger & Toll Co. sold in this country-----M r . M a r r i n a n . S u b s id ia r ie s .
Mr. B e r n i n g (continuing). Any
securities of that company sold
in this country prior to the end of 1928—September or October,
something of that sort, of 1928. I know of no securities of that
company sold prior to that time.
The C h a i r m a n . Were there securities in other companies sold prior
to that time?
Mr. B e r n i n g . There were in the International Match Co.; yes, sir.
Mr. M a r r i n a n . Well, when did you start, Mr. Berning, to get
the job of actually auditing Kreuger & Toll Co.?
Mr. B e r n i n g . Why, as a matter of hazarding a guess, Mr. Marri
nan, I should judge that it would probably have been some time in
the spring of 1929 when I first broached the subject to Mr. Kreuger.
M r . M a r r i n a n . Then shortly after this bond issue in which we
are now interested was floated on the market?
Mr. B e r n i n g . I think that must be the time.
Mr. M a r r i n a n . That was issued in March, I believe.
Mr. B e r n i n g . Yes.
Mr. M a r r i n a n . And admitted to listing on the stock exchange in
August. When did you first suspect irregularities, Mr. Berning, in
the accounts of Kreuger & Toll Co., or any of its subsidiaries?
Mr. B e r n i n g . That is a difficult date to set, Mr. Marrinan.
You ask me just that particular question. That would probably be
some time in the early—the first week of March, 1932.
Mr. M a r r i n a n . The first week of March, 1932.
Senator C o s t i g a n . Prior to the death of Mr. Kreuger?
STOCK EXCHANGE PRACTICES
1255
Mr. B e r n i n g . It is a question in my mind just how to answer this
question. The matter of uneasiness came to me about that time,
which was later confirmed when I was abroad, arriving in Paris two
days after he died. I then confirmed what I think I might say was an
uneasiness up to that time—prior to that time.
M r . M a r r i n a n . What was the nature of your discovery?
Mr. B e r n i n g . In the latter part of February-—I think the 27th or
28th of February—I had a conference with Mr. Kreuger, and in that
conference I asked him a question concerning the availability of some
securities or the possession of some securities, and he gave me an
answer that was peculiar for him. I could not understand it. And
the more I pressed him for an understandable answer the more con
fused he apparently became. That made me quite uneasy. And
it was from that date that I became considerably concerned not only
over his inability to answer my question but also his apparent ill
health.
Senator C o s t i g a n . Where was the conference held?
Mr. B e r n i n g . In New York City.
Senator C o s t i g a n . Was anyone present except you and h im ?
Mr. B e r n i n g . That is all, sir.
Mr. M a r r i n a n . Did that situation involve a discovery regarding
the transfer of certain German bonds?
Mr. B e r n i n g . Yes, sir.
Mr. M a r r i n a n . You had facilities within your own business
organization to check that transaction quickly and accurately?
Mr. B e r n i n g . Yes, sir.
M r . M a r r i n a n . You d id so?
Mr. B e r n i n g . Yes, sir.
M r . M a r r i n a n . And you had a part personally, perhaps the prin
cipal role, in the situation crowding in on Kreuger which resulted in
his suicide, is that true?
Mr. B e r n i n g . Maybe so, Mr. Marrinan. I have no way of judging
to what extent.
Mr. M a r r i n a n . Were you not trying to get in touch with him from
Berlin at the time that he put the gun, or whatever he used, to his
head?
Mr. B e r n i n g . No, sir; I was at sea—at least I was on the sea—
at the time this happened.
Mr. M a r r i n a n . Was your man Brown in Berlin?
Mr. B e r n i n g . Miller?
Mr. M a r e i n a n . Miller, I should say?
Mr. B e r n i n g . Yes, sir.
Mr. M a r r i n a n . Trying to disclose that situation to proper parties?
Mr. B e r n i n g . No, sir; Mr. Miller was the gentleman who responded
to my cablegram to attempt to verify the fact that these German
bonds were or were not at this bank, and he did that for me, and that
was the extent of his activities.
Mr. M a r r i n a n . Did you communicate your doubts about this
situation to Mr. Donald Durant of Lee, Higginson & Co.?
Mr. B e r n i n g . Yes, sir.
M r. M a r r in a n . W h ere?
Mr. B e r n i n g , In New York City.
Mr. M a r r i n a n . What instructions did Mr.
Mr. B e r n i n g . He gave me no instructions.
Durant give you?
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STOCK EXCHANGE PRACTICES
Senator C o s t i g a n . When did you so communicate your impression?
Mr. B e r n i n g .. The morning following my discovery of this matter
which made me uneasy,
Senator C o s t i g a n . That was before the return of Mr. Kreuger
to Paris?
Mr. B e r n i n g . Yes, sir.
Senator C o s t i g a n . On his final trip?
Mr. B e r n i n g . Yes, sir.
Mr. M a r r i n a n . Mr. Durant, as I understand it, accompanied Mr.
Kreuger abroad?
Mr. B e r n i n g . I believe so.
M r . M a r r i n a n . And you w e r e r ig h t on h is h e e ls ?
Mr. B e r n i n g . I sailed two days later.
Mr. M a r r i n a n . Did you move at the instance of Durant, or at
the instance or on the initiative of your own firm?
Mr. B e r n i n g . I went over at the request of Mr. Durant.
Mr. M a r r i n a n . You verified the transaction, or you verified
your suspicions then after Kreuger’s death, and not, as I understood
it, immediately before?
Mr. B e r n i n g . I verified it immediately following Kreuger’s
death, although I determined the fact that the bonds were not in
Berlin as they were supposed to be, before that date.
The C h a i r m a n . How long before Kreuger’s death did you deter
mine that question?
Mr. B e r n i n g . I think it was either the 5th or 6th of March,
Senator.
The C h a i r m a n . And his death was on what date?
Mr. B e r n i n g . The 12th.
The C h a i r m a n . And you went to Paris at the suggestion of Mr.
Durant?
Mr. B e r n i n g . Yes, sir.
Mr. M a r r i n a n . I have heard much of alleged frequent informal
reports, both verbal and in writing, which you are said to have written
to Mr. Durant regarding the Kreuger & Toll situation. You spent
a short time of each year for several years in Stockholm. You had
an opportunity for at least a casual inspection of the situation over
there. Were these reports which you made to him, which I under
stand were of an informal character, reports on the condition of
companies, or were they more in the nature of a voluntary service
which you were rendering primarily with a view to securing business?
Is that question too long? Let me be fair.
Mr. B e r n i n g . I shall attempt to answer.
Mr. M a r r i n a n . I want to be clear. I know that you were
sending such informal communications. I want to know whether
those were regarded as business documents which you would
wish to stand for as an accountant, or whether they were in
the nature of informal, voluntary reports which you made as a
matter of accommodation and in order to promote your firm so that
it would get additional business?
Mr. B e r n i n g . I will try to answer that question, Mr. Marrinan.
I do not recall any system of reports, informal or otherwise, that
I may have given Mr. Durant. I do know that whenever anything
came to my attention by way of a printed annual report of the com
panies in the group, or anything which came to my mind in which
I thought he would be interested, I would convey it to him. In no
STOCK EXCHANGE PRACTICES
1257
case were these reports or memoranda the results of any auditing
or accounting work such as I am sure that ou'r firm is.qualified to do.
Nor did he understand that they were such. I am pretty sure he
understands fully the sources as well as the extent to which anything
that I told him was verified.
Senator C o s t i g a n . Precisely what was the discovery in Berlin
which verified your suspicion?
Mr. B e r n i n g . May I go back to this conversation with Mr.
Kreuger in order that I may draw the picture for you, Senator?
At the time of this conversation with Mr. Kreuger the International
Match Co. owned $50,000,000 par value of German bonds which they
had secured in connection with the monopoly. These bonds were
on the books of the American company and were held for safe keep
ing in a bank in Berlin. In going over the situation with Mr. Kreuger
at the time this thing developed he explained to me that these bonds
had been transferred from International to its wholly owned sub
sidiary company abroad, which meant, in other words, putting it
from one pocket into another. And the ownership was still in the
group, but just once removed. I questioned him as to why that had
been done. It was a very large proportion of the International parent
company’s direct assets.
And at that time these explanations that he attempted to give me
were those either of. a sick man or of some one that was not entirely
in his right mind. It concerned me a great deal. I was with him
quite a few hours that evening—it went on to about 7 or 8 o ’clock—
and I left with a very great feeling of uneasiness, because I had no
explanation of the reason why this had been done, or the purpose or
the significance.
I reported the matter to Mr. Durant the following morning. He
immediately took the matter up with Mr. Kreuger, as I understand
the circumstance, and he promised to reverse the deal at once. A
few days later Mr. Kreuger showed me a cablegram from Germany,
which was in the German language, which he translated to me, and
which I understood myself, as I have a knowledge of the German
language, stating that the bonds were again in the bank at Berlin
free and clear for the account of the International Match Corporation.
I immediately returned to my office to cable to our representative,
Mr. Miller, in Berlin, to verify that, and this was on a Saturday, and
on the following Monday I received his reply that the bonds were not
there.
The C h a i r m a n . Wliat were the amounts of those bonds?
Mr. B e r n i n g . What is that, sir?
The C h a i r m a n . What was the value of those bonds?
Mr. B e r n i n g . The par value was $50,000,000. And following my
arrival in Paris after meeting with Mr. Durant I suggested that
possibly the best thing I could do would be to go to Stockholm im
mediately, which I did, and when I went to Stockholm I discovered
what had been done with the bonds.
Mr. M a r r i n a n . Am I to understand, Mr. Berning—I am merely
trying to repeat so that I may understand clearly—you do not believe
that Mr. Durant should have relied on informal reports in a degree
which should greatly influence his opinion and the opinion of his
various business associates on the Kreuger & Toll situation?
&
?■ Mr. B e r n i n g . That is a hard question to answer, Mr. Marrinan,
if I understand it correctly. I have no way of knowing to what extent
1258
STOCK EXCHANGE PRACTICES
Mr. Durant may have relied on anything, but I would be quite
surprised if anything that I gave him caused him to rely upon the
financial statements of the company any more than he had every
reason to do, knowing the source and the extent to which they were
verified.
Mr. M a r r i n a n . Mr. Berning, is it your professional opinion that
the American investors in the secured debentures of Kreuger & Toll
Co. would have been better protected had there been a proper audit
of the company’s affairs?
Mr. B e r n i n g . If you will include in that a proper audit of all of the
companies, whether they were directly owned or affiliated, I will have
to say “ yes.”
Senator C o s t i g a n . Pardon me just a moment. In the New York
Times of January 10, 1933, appears a reference to a reported publi
cation by Price, Waterhouse & Co., of New York City, of a report on
the business transactions of Kreuger & Toll. In that report, according
to the New York Times, appeared this paragraph:
The frauds could not have been consummated without assistance— witting
or unwitting— of some of his associates, including some of the officers of the
holding and financial companies, nor could they have been concealed if either the
audits of the companies had been coordinated under a single control, or if the
audits, though not so coordinated, had been carried out in all cases with proper
honesty, efficiency, and independence.
Does your judgment concur with the statements I have read?
Mr. B e r n i n g . You will understand, Senator, that I have person
ally never seen the books of Kreuger & Toll nor examined them, nor
many of the hundreds of companies on which that information is
based. I have, however, had quite some considerable contact with
representatives of Price, Waterhouse & Co., and in accordance with
what I have learned from them I think that is absolutely correct.
Mr. M a r r i n a n . Mr. Berning, if American practice had required
responsibility of the auditor to shareholders instead of to the com
pany, do you think it would have been easier for your firm to have
secured a contract to make this audit of Kreuger & Toll, which
apparently you tried to arrange for some two years without much
success, and which was finally consummated just a little too late?
Mr. B e r n i n g . Y ou understand that this Kreuger & Toll Co. was
a Swedish company, and as to the election of auditors by shareholders
of a Swedish company I am not familiar. Nor to what extent we
would have participated in that election unless the management
possibly would recommend us and the shareholders would approve.
Now I just want to point out that this was a Swedish company and
not an American company, and we would not be working under
American practices.
M r . M a r r i n a n . Yes; I realize that, but in this secured-debenture
issue most of the holders were in the United States.
M r . B e r n i n g . P o s s ib ly .
M r . M a r r i n a n . That is
all, gentlemen, in so far as I wish to
examine Mr. Berning. It is only fair to say this, that in order to
answer the summons of this committee without undue expense at
these times, Mr. Berning came specially from Winston-Salem, N. C.,
to New York and voluntarily offered himself for service.
Senator C o s t i g a n . May I ask one further question? Have the
German bonds which you were endeavoring to trace in Berlin ever
been located?
STOCK EXCHANGE PRACTICES
1259
Mr. B e r n i n g . They have been located; yes, sir.
Senator C o s t i g a n . Where were they?
Mr. B e r n i n g . They have been pledged— I am speaking now some
what from hearsay, and somewhat from information given to me by
Price, Waterhouse, and the representatives abroad with whom I have
worked on this particular matter, and to whom I gave all the evidence
that I have been able to gather, that a large part of those bonds have
been pledged to secure personal obligations of Mr. Ivar Kreuger, and
I believe they are still so held. I am not certain about them.
Senator C o s t i g a n . I s there anything known as to what use was
made of the proceeds of those bonds?
Mr. B e r n i n g . No, sir.
Senator C o s t i g a n . By Mr. Kreuger?
Mr. B e r n i n g . I can not answer that question; I do not know.
Senator C o s t i g a n . Thank you.
Mr. B e r n i n g . Am I finished?
Mr. M a r r i n a n . Yes.
The C h a i r m a n . Thank you, Mr. Berning. George O. May is the
next witness.
You do solemnly swear that you will tell the truth, the whole truth,
and nothing but the truth, regarding the matter now under investi
gation by the committee, so help you God.
TESTIMONY OF GEORGE 0 . MAY, SENIOR PARTNER OF PRICE,
WATERHOUSE & CO., AUDITORS; RESIDENCE, SOUTHPORT,
CONN.; OFFICE IN NEW YORK CITY
(The witness was duly sworn by the chairman, as shown above.)
The C h a i r m a n . Give your name and address to the reporter,
please.
Mr. M ay . George O. May; my residence is Southport, Conn.; my
office is in New York.
Mr. M a r r i n a n . Mr. May, you are a partner in the firm of Price,
Waterhouse & Co., of New York?
Mr. M ay . Yes.
M r . M a r r i n a n . Is that company an American company?
Mr. May. It is an American partnership.
M r . M a r r i n a n . An American partnership?
Mr. M ay . Yes.
Mr. M a r r i n a n . In its management it is wholly independent of the
Price, Waterhouse & Co., of London, although there are certain
affiliations between the two companies?
Mr. M ay . That is so.
Mr. M a r r i n a n . I wish to have that clearly understood. Mr.
May, the firm of Price, Waterhouse & Co. was retained some seven or
eight months ago to make an audit for the receivers and liquidators in
this Kreuger & Toll situation; is that not true?
Mr. M ay . Well, to make it quite clear, the firm of Price, Water
house & Co. on the Continent of Europe, with headquarters in Paris,
was so retained. That is another affiliated firm. And the senior
partner of that firm in Paris, Mr. Seatree, who is also an American
citizen, and formerly of the United States, had charge of the investiga
tion.
Mr. M a r r i n a n . Yes. Is that audit now complete?
Mr. M ay . I believe so.
1260'
STOCK EXCHANGE PRACTICES
Mr. M a r r i n a n . Then the summary report which was made public
on Monday I believe, in Stockholm and New York, is the final product
in that audit?
Mr. M a y . Unless the parties request us to do some further work.
Mr. M a r r i n a n . Mr. May has very kindly furnished the committee
with a copy of that report, which I would like to have incorporated
in the record.
The C h a i r m a n . If there is no objection it will be printed in the
record.
(The final report dated November 28, 1932, of Price, Waterhouse &
Co., on A. B. Kreuger & Toll group of companies, is here printed in the
record in full, as follows:)
A.
B.
K reuger
N ovem ber
& T o l l G r o u p o f C o m p a n ie s — F i n a l R e p o r t D a t e d
28, 1932— P r ic e , W a t e r h o u s e & Co., S t o c k h o l m
Co.,
Stockholm, November 28, 1932.
P r ic e , W a t e r h o u s e &
L i q u id a t o r s o f A. B. K r e u g e r & T o l l ,
T r u s t e e in B a n k r u p t c y o f t h e I n t e r n a t i o n a l M a t c h C o r p o r a t io n ,
A d m in is t r a t o r s o f t h e S w e d i s h M a t c h C o .,
L iq u id a t o r s o f t h e E s t a t e o f I v a r K r e u g e r , D e c e a s e d , S u c c e s s o r s
t o t h e C o m m it t e e A p p o in t e d b y t h e B o a r d o f D ir e c t o r s o f A . B . K r e u
g e r & T o l l t o I n v e s t ig a t e t h e A f f a ir s o f t h e K r e u g e r & T o l l G r o u p
of C o m p a n ie s .
T he
T he
T he
T he
D e a r S i r s : We have now completed our investigations of the A. B. Kreuger
& Toll group of companies and beg to submit our final report thereon.
S c o pe o f I n v e s t ig a t io n
A s you are aware the work was commenced under instructions received on
March 23, 1932, from the committee appointed, following the death of Ivar
Kreuger on March 12, to investigate the affairs of these companies, and was
continued, on the termination of the functions of that committee on May 21,
1932, for your joint account under a 4-party arrangement thereafter entered
into.
; At the outset our investigations were directed to the affairs of the principal
holding and finance companies within the group enumerated below whose books
and accounts are kept at the cities mentioned:
In Stockholm.— A. B. Kreuger & Toll, the parent company; N. V. Financieele
Maatschappij Kreuger & Toll (the 100 per cent owned Dutch subsidiary company
of A. B. Kreuger & T oll); Continental Investment A. G. (the 100 per cent owned
Liechtenstein subsidiary company of International Match Corporation of New
Y ork); Svenska Tandsticks A. B. (The Swedish Match C o.); N. Y. Financieele
Maatschappij Garanta.
In New York.— International Match Corporation.
In Berlin.— Deutsche Unionbank A. G.
In Zurich.— Finanzgesellschaft fur die Industrie.
In Warsaw.— Bank Amerykanski w Polsce.
In Paris.— Banque de Sufede et de Paris.
In Amsterdam.— N. V. Hollandsche Koopmansbank.
In Geneva.— Soci6t6 Financiere pour Valeurs Scandinaves en Suisse.
In Bucharest.— Banca Danubiana S. A.
As the investigation developed it soon became apparent that there were serious
irregularities in the affairs of the four principal companies whose accounts were
kept in Stockholm and the one in Zurich and that the scope of the investigation
should necessarily be broadened to include certain other companies also, and our
instructions were accordingly extended to embrace the following:
In Stockholm.— Nederlandsche Bank voor Scandinavischen Handel; Soci6t6
Financiere Suisse et Scandinave A. B.; Polish-American Products Corporation;
American European Match Co.; American Manufacturers and Dealers Corpora
tion; Lutzelburg Holding Co.; Holding Company Hollandia; Exportaktiebolaget Norden.
In Paris.— Soci6t6 Im m obilize Birka; Compagnie Foncidre Vendome Banque
Contant.
STOCK EXCHANGE PRACTICES
1261
In London.—The
Alsing Trading Co. (Ltd.).
On June 20, 1932, our instructions were again extended to include the scrutiny
of the accounts of 140 subsidiary manufacturing and trading companies situated
throughout the world comprising an examination of their financial statements
and returns (received in response to a detailed questionnaire which we prepared
for transmission to them), and as regards the more important of the European
companies, the attendance at their offices in Paris, Brussels, Amsterdam, Eind
hoven (Holland), Berlin, Budapest, Belgrade, Bucharest, and four points in
Finland, to make an examination of their accounts, or to assist in the preparation
of their reports.
As the work progressed it also became evident that serious irregularities had
extended back for at least 15 years and that during this period, under Kreuger’s
administration, the accounting as between six of the principal companies and
also that with himself was most irregular, whereupon we were requested to make
a detailed investigation of these current accounts from their inception. This
was rendered essential in order to make it possible for the various interests con
cerned (now that bankruptcy had intervened for some of them) intelligently to
prepare their respective claims against each other. Moreover in respect of a
number of so-called suspense accounts through which large sums of money had
been appropriated and concealed, it became necessary to make detailed investiga
tions and inquiries in Stockholm, Berlin, Hamburg, Amsterdam, Brussels, Paris,
Milan, Rome, Madrid, London, Montreal, New York, and Buenos Aires.
Our task under the 4-party agreement has been to ascertain and report fully
and impartially upon the material facts relating to the companies and to the
transactions between them, but to refrain from any attempt to interpret the
records in so far as the rights and obligations as between companies were involved
or to arrive at final conclusions as to the actual financial position of the different
groups, which can only be established when the legal position is more clearly
defined.
From time to time we have also furnished the committee with such memoranda
as were required in its efforts to assist the police authorities in their detailed
investigations.
RESULTS OP INVESTIGATIONS
The results of our investigations are embodied in 57 separate detailed reports
we have prepared and submitted on various phases of the matter during the course
of our work and while it is unnecessary to recapitulate these here, or to comment
upon them further it is, we think, desirable, as a matter of record, to submit
herewith a complete list which is contained in the attached appendix, marked “ A.”
These reports are voluminous and having regard to this fact and to the range
of the subjects covered, it is not practicable to reduce our findings to a brief
summarization of them. It is nevertheless possible to set forth firstly, an indi
cation of the subjects dealt with and secondly, some of the conclusions we have
reached.
Of the subjects dealt with in these reports specific mention may be made of
the following:
(1) The establishment as far as was practicable of the financial position of the
companies above set forth as at the date selected, viz, March 31, 1932, subject
to the disposition of questions affecting intercompany rights and obligations.
(2) The ascertainment of their earnings and income.
(3) An examination into the financial stability and earnings for the past three
years of 140 controlled subsidiary manufacturing and trading companies.
(4) The position in regard to match monopoly concessions and the profits
derived from them.
(5) The facts and circumstances surrounding share and debenture issues and
the disposition of the proceeds thereof.
(6) Particulars of the acquisition of shareholdings in subsidiary companies
and of other investments.
(7) The facts in regard to intercompany accounting relations as between the
five principal companies within the group, with the two Kreuger & Toll companies,
Swedish Match Co., International Match Corporation, and Continental Invest
ment A. G.
(8) The affairs of and the business relations with Alsing Trading Co., Exportaktiebolaget Norden and Finanzgesellschaft ftir die Industrie.
(9) Analysis of account with Ivar Kreuger.
(10) The facts and situations relating to such matters as:
(а) Italian bonds.
(б) German bonds.
1262
STOCK EXCHANGE PRACTICES
(c) Diamond and Ohio match shares.
(d) Polish and other suspense accounts.
(e) Garanta account.
(J) A. Goldschmidt account, etc. (11)
Facts and particulars of all accounts and transactions of importance
which appeared to be irregular, fraudulent or fictitious.
CONCLUSIONS
In concluding this report we propose to deal briefly with three questions of
general interest, namely:
(1) Where has the money gone which the public has subscribed?
(2) To what extent were reported earnings real?
(3) How early did Kreuger’s irregularities begin and what enabled them to be
concealed?
T o answer the first question it is necessary to deal with the combined position
of five of the principal companies taken collectively, i. e., the three which sought
money from the public on a large scale comprising (1) A. B. Kreuger & Toll;
(2) International Match Corporation; and (3) Svenska Tandsticks A. B. (the
Swedish match com pany); and the two underlying finance companies, viz,
(4) N. V. Financieele Maatschappij Kreuger & Toll; and (5) Continental Invest
ment A. G.
The aggregate funds made available to these companies during the period of
14yi years from January 1, 1918, to March 31, 1932, inclusive, and the eventual
disposition thereof, as revealed by our investigations, expressed in Swedish
kroner at par and in round numbers, is shown in the following statement:
Funds provided:
(1) Net proceeds of share and debenture issues, i. e., includ
ing premiums and deducting discounts and issue ex
penses______________________________________________ 2, 104, 569, 000
(2) From bank loans and bill credits______________________
613,892,000
5, 320, 000
(3) From other credits (net)______________________________
(4) From revenue sources—
Net income before providing for shrinkage in value of
150, 962, 000
securities, debenture interest, and dividends paid___
Total funds provided_______________________S. Kr. 2, 874, 743, 000
Disposition of funds:
(1) Debenture interest and dividends paid to security holders
outside the group___________________________________
668, 280, 000
(2) Withdrawn by Ivar Kreuger—
On current accounts_______ 347, 363, 000
Securities and other assets
appropriated____________ 468, 492, 000
-------------------- 815, 855, 000
Less assets introduced__________________ 383, 809, 000
-------------------432, 046, 000
(3) Invested in securities ac
quired and in associ
ated and subsidiary
companies (net)—
In Government and
other marketable
securities_______ 1, 127, 405, 000
In associated com
panies_________
548, 544, 000
Together_________ 1, 675, 949, 000
Less appropriated by
Ivar Kreuger (in
cluded in appropria
tions shown above)__
207, 341, 000
----------------------- 1, 468, 608, 000
In subsidiary manufacturing and trad
ing companies____________________
241, 585, 000
----------------------- 1, 710, 193, 000
(4) Invested in intangible assets (monopoly concessions)__
64, 224, 000
Total accounted for__________________________ S. Kr. 2, 874, 743, 000
STOCK EXCHANGE PRACTICES
1263
The approximate value of the investments at March 31, 1932, as based on the
best information available (i. e. market quotations, carefully considered estimates
and, as regards investments in subsidiary manufacturing and trading companies,
their provisional book values), is about S. kr. 775,000,000, which, when com
pared with the aggregate book value above shown of S. kr. 1,710,193,000, reveals
& shrinkage of about S. kr. 935,000,000.
Turning to the second question, our examination has disclosed that during the
same period of 14% years the apparent reported earnings and income of these
companies combined in the aggregate were grossly overstated. The extent of
this overstatement is shown in the following comparison of the reported earnings
(adjusted to eliminate intercompany dividends, debenture interest and other
items irrelevant to the present consideration) with the approximate aggregate
combined earnings and income as now ascertained:
Earnings and income as based on published or book figures
adjusted to eliminate intercompany dividends, debenture
interest, and other items irrelevant to the present considera
tion__________________________________________________ 1,179, 357, 000
Approximate real earnings and income (both normal and extra
ordinary) on the same basis, which is before providing for
shrinkage in value of investments estimated at about S. kr.
150, 962,000
935,000,000____________________________________________
Excess of reported earnings as above over real earnings as
above_________________________________________ S. kr.__ 1, 028, 395, 000
This difference of S. kr. 1,028,395,000 is made up of fictitious credits to income
accounts, aggregating S. kr. 1,043,693,000, less a sum of S. kr. 15,298,000
representing the net adjustment of normal profit and loss items.
The amount of fictitious earnings and income includes some items which may
have had an appearance of reality when considered solely from the standpoint of
the individual companies receiving the credits, in that they were supported by
what purported to be guarantees of another company within the group or by
actual cash remittances.
There are a number of items, aggregating a fairly substantial sum, the genuine
ness of which is doubtful, and in regard to these the lenient view has been taken
in that for the purpose of this analysis they have been classed as “ genuine.”
The total earnings of S.Kr. 150,962,000 shown above, which, it should be
reiterated, are before providing for debenture interest and shrinkage in invest
ment values are equivalent to about 1% per cent on the relative average capital
(share and debenture) invested in these companies during the same period.
Neither these earnings nor any other facts developed by our examination lend
any support to the view that Kreuger possessed business ability so extraordinary
as to warrant the grant to him of the freedom from control or disclosure of his
actions which he enjoyed.
With regard to the third question, we have already indicated that the manipu
lation of accounts goes back at least as far as 1917. The fraudulent practices
Assumed large proportions in 1923 and 1924 and continued thereafter, culminat
ing in the fabrication of £21,000,000 (nominal) of Italian Government bonds.
The perpetration of frauds on so large a scale and over so long a period would
have been impossible but for (1) the confidence which Kreuger succeeded in
inspiring, (2) the acceptance of his claim that complete secrecy in relation to
vitally important transactions was essential to the success of his projects, (3) the
autocratic powers which were conferred upon him, and (4) the loyalty or unques
tioning obedience of officials, who were evidently selected with great care (some
for their ability and honesty, others for their weaknesses), having regard to the
parts which Kreuger intended them to take in the execution of his plans.
The absolute powers with which Kreuger was vested gave him complete dom
ination of the entire group and of all the executive and administrative staffs.
Indeed, he conducted the entire business as though he was accountable to no
one, as evidenced by his action in intercompany matters in respect of which the
rights of third parties, such as the security holders and creditors of each unit,
were completely ignored.
Closely related to the causes already mentioned are the complicated and con
fused bookkeeping in regard to many important transactions and the gross inade
quacy of the documentary evidence in support of accounting entries which our
examination has disclosed.
The frauds could not have been consummated without assistance—witting or
unwitting—of some of his associates, including some of the officers of the holding
and financial companies, nor could they have been concealed if either the audits
1264
STOCK EXCHANGE PRACTICES
of the companies had been coordinated under a single control, or if the audits,
though not so coordinated, had been carried out in all cases with proper honesty,
efficiency, and independence. It is apparent that the employment of different
auditors for different closely associated companies, restrictions in the scope o f
examinations, subserviency if not complicity on the part of some of the employees
and some of the auditors, and forgery of documents in order to meet demands for
evidence confirmatory of book entries, all contributed to prevent such audits as
were made from resulting in exposure.
The history of this group of companies emphasizes anew the truth that enter
prises in which complete secrecy on the part of the chief executive officer as to
the way in which important parts of the capital are employed is, or is alleged to
be, essential to success are fundamentally unsuited for public investment, since
such secrecy undermines all ordinary safeguards and affords to the dishonest
executive unequaled opportunities for the perpetration and concealment o f
frauds.
Upon the conclusion of our investigation, which has now extended over seven
months, we desire to place on record that in the course of our work we have re
ceived throughout the most sympathetic cooperation and support of the various
committees, liquidators, and administrators, as well as the whole-hearted assist
ance of the present officials and staff. Our cordial thanks are due for this co
operation and for the unfailing patience and courtesy in difficult circumstanceswhich have everywhere been accorded to us.
Yours very truly,
P r ic e , W a t e r h o u s e & Co.
Kreuger & Toll group of companies— list of reports submitted, 1982
Apr.
3.
10.
24.
May 3.
5.
9.
10.
11.
12.
12.
12.
12.
13.
14.
14.
17.
17.
19.
20.
28.
30.
30.
June 7.
30.
July 12.
12.
16.
Aug.
22.
2.
11.
16.
16.
16.
20.
26.
28.
First preliminary report.
The Italian bond situation.
Memorandum re Holm, Huldt & Lange.
Banca Danubiana S. A., Bucharest.
Combined preliminary statement of position.
Soci6t6 Financi&re pour les Valeurs Scandinaves en Suisse, Geneva.
Soci6t6 G6n6rale des Allumettes, Paris.
Banque de SuMe et de Paris, Paris.
Commercial & Industrial Properties Corporation, New York.
Bank Amerykanski w Polsce, Warsaw.
N. V. Hollandsche Koopmansbank, Amsterdam.
Estate of Ivar Kreuger, deceased.
Abnormal Inter-Company transactions.
Memorandum on Garanta contract and Polish suspense account.
Deutsche Unionbank A. G., Berlin.
Soci6td Immobili&re Brika, Paris.
Compagnie Foncieire Vendome, Paris.
International Match Corporation, New York.
A. B. Kreuger & Toll, approximate statement of liabilities.
Memorandum re Diamond Match Co. shares.
Supplementary memorandum re Diamond Match Co. shares.
Accounts of Mr.'Sune Scheie.
Supplementary report re Bank Amerykanski w Polsce.
Swedish Match Co. re cash shortage.
Polish suspense account and related matters.Swedish Match Co., earnings.
Continental Investment A. G., current account with A. B. Kreuger &
Toll.
Alsing Trading Co (Ltd.), London.
A. B. Kreuger & Toll, current account with Continental Investment
A. G.
Continental Investment A. G., current account with Swedish Match'Co.
Continental Investment A. G., current account with International
Match Corporation.
Suspense accounts and related matters.
Supplementary report to A. B. Kreuger & Toll, current account with
Continental Investment A. G.
Swedish Match Co., current account with International Match Cor
poration.
German Reich 50-year 6 per cent external gold loan 1930.
Swedish Match Co., current account with Continental Investment A /G .
STOCK EXCHANGE PRACTICES
1265
31.
31.
31.
Sept. 3.
6.
Continental Investment A. G., main report.
Exportaktiebolaget Norden.
Swedish Match Co., current account with A. B. Kreuger & Toll.
A. B. Kreuger & Toll, main report.
Supplementary memorandum to Kreuger & Toll main report re Mr.
Bergman’s memorandum.
15. Swedish Match Co., main report.
26. Supplementary report to Swedish Match Co., current account with
A. B. Kreuger & Toll.
28. N. V. Financieele Maatschappij Kreuger & Toll.
29. A. B. Kreuger & Toll, current account with N. V. Financieele Maat
schappij Kreuger & Toll.
Oct.
7. Swedish Match Co., share capital and debenture issues.
12. A. B. Kreuger & Toll, current account with the Swedish Match Co.
15. Monopoly contracts.
24. Polish American Products Corporation, American European Match
Corporation, American Manufacturers & Dealers Corporation.
26. Finanzgesellschaft fur die Industrie, Zurich.
Subsidiary companies:
Swedish Match Co.—
31.
Domestic.
31.
Foreign.
31.
International Match Corporation.
31.
A. B. Kreuger & Toll.
31.
Finanzgesellschaft fur die Industrie.
31.
Miscellaneous.
Nov. 26. Ivar Kreuger, current account with A. B. Kreuger & Toll.
Mr. M arrin an . M r. May, I think you would be very helpful to
the committee in drawing out of this Kreuger & Toll situation any
possibilities for remedies if you find it possible to answer a few ques
tions which may be regarded as professional. I hope they will be
professional in the asking. From your experience in this Kreuger-----Mr. M ay . I beg to remark, before I do that-----Mr. M arrin an . Yes, sir.
Mr. M a y . I, of course, would be delighted to do anything I can to
aid the committee, but I would like to make this point, that the
usefulness of my firm in the situation has arisen from the fact that
we have acted in a purely impartial capacity between all the interests,
Swedish and American, that are involved, and therefore I would
like to avoid, if possible, any questions which seem to bear directly
on this particular issue, answers to which might be calculated to
impair in any way that attitude of impartiality. With that one
reservation I would like to answer as fully as I can any questions you
wish to put to me.
M r. M arrin an . Specifically what limitation do you think that
places upon questions?
Mr. M ay. Well, I do not know that it will on any, but I thought
if any question seems to impinge on that section I would like to ask
you to reconsider before pressing me to answer it, and I will give my
reasons if and when the necessity arises.
Mr. M arrin an . Very well, sir. I asked the second question
because I can not conceive of any question before this committee
which by a proper stretch of the imagination could not be led right
into that situation.
From your experience in this entire Kreuger & Toll picture what
is your professional opinion of an arrangement wherein the auditor
reports to shareholders rather than to the company, Mr. May?
Mr. M ay . Well, as the result of all my professional experience I
am heartily in favor of such an arrangement^ and I have strongly
advocated it, and I have had some part in bringing about the action
1266
STOCK EXCHANGE PRACTICES
of the New York State Chamber of Commerce recently favoring that
action.
Mr. M arrin an . May I ask as a matter of helpfulness to the com
mittee that you give us your professional opinion as to the relative
development of accountancy in England and in the United States?
Mr. M ay . Well, that is rather a large order. It is by no means a
one-sided question. In some respects English practice has gone
ahead of American. In other respects I think American practice has
gone distinctly ahead of English. I think it may surprise you, but
American practice is distinctly ahead of English in the amount of
information which is given to shareholders—unquestionably.
The C hairman . Do they seem to need more information over here?
Mr. M a y . Well, if you like I will tell you—I do not want to volun
teer remarks, but if it will throw any light I will tell you how that has
come about in my judgment It happens to be a situation that I have
studied rather intensively the last two or three years. And I think
there is a strong feeling to the same effect in England that information
is inadequate in England. And the reason has largely been that the
regulation in England is statutory. And of course statutes can only
lay down what I may call minimum standards, failure to comply
with which subjects them to penalty. What we want is much higher
standards than that. And the result of these standards laid down by
law in England has been that company officials who were reluctant
to give information have said, “ Well, that is all the law requires, and
you have got no right to ask us to give more.” And some auditors
have accepted that position. Whereas here I think the profession has
taken the position that what is due to shareholders is a matter of good
conscience and good business practice. And there are no legal limita
tions on it. So they must use their own judgments when they con
sider that the directors are giving reasonable amount of information
to the shareholders. That, I think, is the history of the development.
M r. M arrin an . That does not, of course, prevent the possibility
of regulation which would compel all necessary information?
Mr. M a y . Well, that is a difficult branch of legislation when you
come to formulate it I think you will find, for the reason that I have
said you can only set down a standard which everybody is bound to
observe, and that must be a relatively low standard. .You can not
put it as high as the best practice should be when you establish a
practice by law.
Mr. M arrin an . Mr. May, gentlemen, is head of the firm in New
York, head of Price, Waterhouse & Co. in New York, and associated
with the continental Price, Waterhouse & Co. which made this audit
of Kreuger & Toll. But I would like to ask him, although we shall
have it in the record, to tell us briefly what are the outstanding points
in that situation. That is a matter of public record now.
Mr. M ay . Oh, yes; it is no embarrassment at all.
M r. M arrin an . N o embarrassment.
Mr. M ay. This report was prepared in response to a request from
some of the people in Sweden who thought that in addition to the
57 technical reports that our firm has already made, some of which
run to hundreds of pages, there should be some short report that
would deal with the major points in which there was general interest.
The first part of the report sets out the extent of the examination
and recites the reports that have been rendered, all of which have
been furnished to the four parties in interest. Our firm acted since
STOCK EXCHANGE PRACTICES
1267
May under an arrangement with the liquidator of Kreuger & Toll
in Sweden, the trustee in bankruptcy of the International Match,
the administration of the Swedish Match, and the liquidator of the
estate of Ivar Kreuger on the basis that we would confine ourselves
strictly to an impartial determination of facts which would be put
at the disposition equally of all parties, whichever way they cut,
leaving the people to determine their rights on the basis of those
facts in whatever way might later develop. We were not to concern
ourselves with that problem. We were to keep ourselves in that
state of impartiality. And we have done our best to do that and to
keep an open mind on all original questions that have arisen.
Now, the report sets out what we have done in pursuance of that,
and then it states certain general conclusions answering three ques
tions in a general way:
(1) Where has the money gone which the public has subscribed?
(2) To what extent were reported earnings real?
(3) How early did Kreuger’s irregularities begin and what enabled them to
be concealed?
We have attempted to deal briefly with those three questions.
The C hairman . Let me ask, was the money lost in speculative
enterprises?
Mr. M ay . Well, I will answer these questions.
The C hairman . Y ou are going to answer them. Very well.
Mr. M a y . We have dealt with the companies collectively, because
there are a great number of intercompany transactions, and if you
added together the apparent losses of all the different companies, or
the apparent amount of money, you would get it all multiplied, be
cause it passed from one company to another, so this report cuts out
the intercompany transactions and takes the group as a whole, which
shows that during the period from January, 1918, to March 31, 1932,
the group of companies raised from the public a total amount on
shares and debenture issues of 2,100,000,000 kroner. A krone is
about 26.8 cents at par.
Senator C ostigan . That figure is given as 2,104,000,000 kroner
in your transcript.
Mr. M ay . Yes. 2,104,000,000 kroner. I misread it. I beg your
pardon.
And from bank loans and bills 614,000,000 kroner in round figures.
Then paid out in debenture interest and dividends 668,000,000
kroner.
And as far as we can ascertain the real net income before providing
for shrinkage in value of securities, the interest was 151,000,000
kroner.
So that of the 2,700,000,000 roughly that they had raised in capital
some 513,000,000 kroner was paid out in dividends and interest that
had not been earned.
Then Kreuger took out securities and failed to account for them, or
cash. How that was expended it is impossible to say. Some of it
may have been in what he believed to be methods that were useful
to the company, such as supporting the market, or something of
that kind.
The C hairman . Kreuger took out how much?
Mr. M ay . Four hundred and thirty-two million Kroner.
The C hairman . More than $100,000,000?
Mr. M ay . Yes; more than $100,000,000.
1268
STOCK EXCHANGE PRACTICES
The C hairman . That disappeared there?
Mr. M ay . Yes. One billion one hundred and twenty-seven
million kroner was expended in the purchase of Government and
other marketable securities; 548,000,000 kroner was expended in
investments in associated companies. There is a deduction from
that of 200,000,000 kroner for securities which Kreuger took, which
were already included in the 400,000,000 kroner; and then 240,000,000 kroner in subsidiary manufacturing and trading companies.
So that there is a net expenditure for investments of 1,710,000,000
kroner; and 64,000,000 kroner that we traced as invested in monopoly
concessions and similar intangible assets.
Senator C ostigan . Of course the figures that you are giving are
in round numbers.
Mr. M ay. They- are all in round numbers, naturally.
The C hairman . Does it appear that there was not an operating
profit in the companies?
Mr. M ay . Well, we show that over the 18 years the operating
profit for the whole period, as far as we can find, is about 151,000,000
before interest.
The C hairman . And the dividends were how much?
Mr. M ay. Six hundred and sixty-eight million kroner.
The C hairman . $150,000,000.
Mr. M ay. $150,000,000, yes.
The C h airman . And they paid in dividends more than four times
what they earned?
Mr. M a y . Exactly. Now the investments, as far as one could
value them—they were valued by a committee in Sweden—Mr. Jacob
Wallenberg was the head of it-y-and the subsidiaries were valued, I
think, on the basis of their tangible assets, as shown by their books.
On that basis there is a shrinkage of 935,000,000 kroner in the value
of the investments. So that the amount of dividends paid in excess
of earnings, plus what Mr. Kreuger took, accounts for just another
1,000,000,000. And the shrinkage in investments is another 1,000,000,000. And that is what has brought this company down.
The C hairman . And that leaves out of the original 2,700,000,000
kronor; about 700,000,000 kroner?
Mr. M a y . About 700,000,000 kroner of securities, yes.
Senator C ostigan . Have you translated the figures into dollars?
Mr. M ay . We have not in this report. This report was rendered
in Sweden. It is about a quarter—a little over a quarter, because
they were at par nearly all this time.
Now the reported earnings over the same period were 1,179,000,000
kroner. And the actual, as I said, were 151,000,000 kroner. So that
the fictitious earnings are apparently 1,028,000,000 kroner.
Senator T ownsend . Or about $250,000,000?
Mr. M ay . About $250,000,000; yes. In doing that we have
treated a number of doubtful items as genuine so as not to exaggerate
the picture. So that that 151,000,000 kroner may be a little above
the true earnings.
There is one point that we mention in the report which I think
should be brought in fairness to all parties. That this is a collective
picture. And some of these transactions between companies, while
they are obviously fictitious, when you see the picture as a whole
may well have appeared entirely genuine to the particular companies
STOCK EXCHANGE PRACTICES
1269
that received them, because in some cases they were supported by
what purported to be guaranties from other solvent companies.
The C h airm an . In other words, those $50,000,000 of bonds if
they went to one company would show that strong and when they
went to another company would show that strong?
Mr. M ay . N o; I was thinking of the other. That some of the
items that were received as earnings by one of the subsidiaries might
well have appeared genuine earnings to them, but when you look at
where they come from in the original company they were fictitious;
so the people who received them in the second company are not to be
blamed if they thought they were genuine.
The C h airman . But it is a boosting of one company at the expense
of another one?
Mr. M ay. Not entirely that. For instance, Company A may
show that it has received 200,000,000 kroner of earnings which are
fictitious. Out of that it pays a dividend to another company. And
that company receives it as a dividend in cash, possibly, and has no
reason to doubt that it has perfectly good earnings in its hands. But
when you trace the whole chain you will find that that 200,000,000
kroner is probably a return to it of 200,000,000 kroner that it paid
out for an investment in another company, that had been paid out
to a third company possibly as an income that comes out of another
company as a dividend. I want to make that clear, because when
you see the picture as a whole the fiction is apparent. But anybody
seeing only a part of the picture may be not in the least blameworthy
for being deceived.
Senator C ostigan . Is it correctly reported that you investigated
140 Kreuger companies?
Mr. M ay . I think that is something like the number.
Senator C ostigan . Were there other companies in the Kreuger
group not investigated by you?
Mr. M ay . Well, we did not make a detail investigation of all.
But as a matter of fact, to give you the picture, the greater part of
this fraudulent work was handled through two companies, which
were obviously formed by Kreuger for that purpose.
Senator C ostigan . What were the names?
Mr. M ay . One is the Continental Co., and the other is the Dutch
Kreuger & Toll. Those he kept well under his thumb with creatures
of his own in charge, and auditors, and he knew he could get a cer
tificate from them at any time of anything that he wanted. And
that is where he buried this stuff. So that it was only by getting
into those companies that you could see at once that the whole
structure was honeycombed with irregularities.
Senator C ostigan . They were clearing houses for manipulation?
Mr. M ay . Well, they were sinks.
Now the question with which you gentlemen are concerned is really
the third question, of how was it possible that these things could
happen and be concealed, because I imagine your real purpose is to
do something constructive in drawing lessons from the past for the
benefit of the future.
Senator C ostigan . Yes.
Mr. M ay . Now perhaps the best thing is for me to read what my
senior partner in Paris, of our continental firm, wrote after a very
119852— 33— p t 4-------------9
1270
STOCK EXCHANGE PRACTICES
deliberate and careful study of the situation dealing with that ques
tion. He says:
The perpetration of frauds on so large a scale and over so long a period would
have been impossible but for (1) the confidence which Kreuger succeeded in
inspiring, (2) the acceptance of his claim that complete secrecy in relation to
vitally important transactions was essential to the success of his projects, (3) the
autocratic powers which were conferred upo.n him, and (4) the loyalty or unques
tioning obedience of officials, who were evidently selected with great care (some
for their ability and honesty, others for their weaknesses), having regard to the
parts which Kreuger intended them to take in the execution of his plans.
The absolute powers with which Kreuger was vested gave him complete domi
nation of the entire group and of all the executive and administrative staffs.
Indeed he conducted the entire business as though he was accountable to no
one, as evidenced by his action in intercompany matters in respect of which the
rights of third parties, such as the security holders and creditors of each unit,
were completely ignored.
And then touching on the question of audit, which Mr. Marrinan
was asking about, he expresses the opinion:
The frauds could not have been consummated without assistance—witting or
unwitting—of some of his associates, including some of the officers of the holding
and financial companies, nor could they have been concealed if either the audits
of the companies had been coordinated under a single control, or if the audits,
though not so coordinated, had been carried out in all cases with proper honesty,
efficiency, and independence.
We know, of course, that the Swedish criminal courts have found
that the Swedish auditors did not display those qualities. So that
that at least is thoroughly established.
It is apparent that the employment of different auditors for different closely
associated companies, restrictions in the scope of examinations, subserviency if
not complicity on the part of some of the employees and some of the auditors,
and forgery of documents in order to meet demands for evidence confirmatory
of book entries, all contributed to prevent such audits as were made from resulting
in exposure.
When it came to the point, Kreuger was always prepared to forge
a document, or to have some one forge it to produce to auditors to
confirm a statement that appeared on the books.
Senator C ostigan . Has there been any confirmation of the rumors
widely circulated at one time that Kreuger had forged Italian bonds?
Mr. M ay. Oh, yes. I might have read you that paragraph of the
report which shows that we have satisfied ourselves that the irregular
ities began at least as early as 1917 and assumed a large scale in 1923,
culminating in the forgery of 21,000,000 pounds nominal value of
Italian bonds. That was the climax.
Now that, I think, answers your question, Mr. Marrinan.
Mr. M arrin an . Very well, Mr. May. It is my understanding
that somewhere in this report the statement is made that the earn
ings of these companies going back over some 14% years show a 1% per
cent average return on capital'——
Mr. M ay . One and one-half per cent, yes.
M r. M a rrin an . Both stocks and bonds, over that period?
Mr. M ay . Total capital invested.
Mr. M a rrin an . Was there any effort to segregate and get that
figure for the period during which Kreuger was getting his principal
financial support in the United States?
Mr. M ay . Well, this is a summary report. In the detailed reports
for each company it is shown by years for the whole period of years.
Mr. M arrin an . Were there any real earnings during the period, we
will say, from 1929 on?
STOCK EXCHANGE PRACTICES
1271
Mr. M ay . From 1929 on?
M r. M arrin an . Yes.
Mr. M ay . I would not like to say. Of course for 1931 there was
a heavy loss, undoubtedly. I am not sufficiently familiar with the
details myself to say. I have no first-hand knowledge.
Mr. M a rrin an . There are many factors involved and that would
not, perhaps, be a true picture.
Mr. M ay . Yes.
Mr. M arrin an . I have heard this entire Kreuger & Toll situation
described or set up, rather, as a blind’ pool.
Mr. M ay . Well, that is rather a loose expression. I imagine that
refers to the fact that Kreuger claimed that secrecy on his part was
essential in regard to some of these most important transactions.
Secret agreements which he could not disclose without bringing dis
astrous consequences to the company—loss of profits.
Mr. M arrin an . He was paying earnings out of capital right alongj,
was he not? By paying dividends I should say.
M r. M a y . Yes, oh, yes.
M r. M arrin an . There is a certain similarity then to the Ponzi
affair?
Mr. M ay . Oh, yes; he had the same idea only on a much larger
scale.
Mr. M arrin an . I take it from your statement, Mr. May, that
your firm has taken a very strong position against such set-ups as
we have here, for one reason on the ground of its great secrecy?
Mr. M a y . M y personal judgment on it concurs with what my
partner expresses here, that if there is secrecy as to the way the money
is being spent, a large part of it—there are certain amounts that you
can not get full details of, but where they assume major proportions
that it does not seem to me that that kind of security is a proper
thing for the ordinary investor. I do not know a similar case to this
where earnings from sources that could not be fully divulged from
every aspect constituted any material element of the situation. This
is an absolutely unique case, and I think for that reason there is danger
of legislating for it because I do not suppose there has been anything
to compare with it since the South Sea Bubble.
Mr. M arrin an . Y ou do not believe that there is any compara
bility between this situation and its impenetrability on account of
secrecy, and certain very complex holding company situations in
the United States which are exceedingly difficult to get into?
Mr. M ay . They are difficult to unravel. But there isn’t any
ultimate secrecy. A painstaking person will always be permitted to
get to the bottom of it. Of course I think the trouble with that is
mainly that it is an inverted pyramid. That is quite a different
phenomenon, to my mind.
M r. M arrin an . They are penetrable to the accountant, but are
they penetrable to the average stockholder or to the public?
M r. M a y . Y ou know life is getting too complicated for the ordinary
individual in every way, I think.
Mr. M arrin an . Mr. May, it is my understanding that your firm
was retained by the International Telephone & Telegraph Co. to
make an investigation of certain misrepresentations involved in the
so-called Ericsson Telephone deal. Is that true?
1272
STOCK EXCHANGE PEACTICES
Mr. M ay . Well, they were not known to be misrepresentations
when we started to investigate them.
M r. M a rrin an . They were not known?
Mr. M ay . N o. There were certain representations made, as is
customary in such contracts. The contracts are based on certain
representations. And if those representations on verification fail
of substantiation then the deal is off. That is a eery common form.
And we went up to find whether the representations were or were
not true.
Mr. M arrin an . Did you find certain misrepresentations?
Mr. M ay . The first important point I think that our people dis
covered was that money that was shown in the statement as cash in
bank was actually money due from some companies in the Kreuger
group, and we formed the opinion very rapidly that that was not
necessarily identical with cash.
Mr. M arrin an . All this led to the rescission of that contract, did
it not?
Mr. M ay . Yes.
Mr. M ar rin an . When was this discovery made, Mr. May?
Mr. M ay . I believe the first word of it came through about the
20th of February, 1932.
M r. M arrin an . The 20th of February?
Mr. M ay . Yes.
Mr. M arrin an . Was this information immediately communicated
to the I. T. & T. people?
M r. M a y . Yes.
Mr. M arrin an . Would you care to state what action they took?
Mr. M a y . I do not know myself actually, because I went myself
to Europe afterwards and I have no first-hand knowledge of what
happened.
Mr. M arrinan . Am I correct, Mr. May, in the statement that for
a good many years your firm has been consulting accountants for the
New York Stock Exchange?
Mr. M a y . For some years. I do not know quite how many.
Three or four, perhaps.
M r. M arrin an . This may be an uninformed question. Are you
obligated in any way by reason of that consulting relationship to
communicate information of such character as you developed in this
I. T. & T. deal to the officers of the New York Stock Exchange?
Mr. M ay . Oh, no. We have no right to do so.
M r. M arrin an . Y ou have no right to do so?
Mr. M ay . Oh, no. Ours is merely a retainer to give them advice
when they ask for it.
M r. M arrin an . It is my understanding that the New York Stock
Exchange’s recent ruling with respect to independent audits provides
that this regulation is applicable to all new applications for listing,
and effective July 1; am I correct in that statement?
Mr. M a y . Yes; I understand so.
Mr. M arrin an . Were you consulted or did you participate in the
various discussions which led up to that?
M r. M a y . Yes.
M r. M arrin an . H ow long has this regulation been under considera
tion?
Mr. M ay . Oh, a matter of months—several months.
first I heard of it was about late last summer.
I think the
STOCK EXCHANGE PRACTICES
1273
M r. M arrin an . Are there any practical accounting reasons for the
long notice—that is, until July 1—before the regulation becomes
effective?
Mr. M a y . Well, I do not think that is an unreasonably long notice
in view of the comparative novelty of the development taken as a
whole, and I do not think it has any very great practical significance
because I do not imagine the new listings would be so very important
in the next six months.
Mr. M arrin an . I do not mean to put any emphasis on the matter
one way or another by my question. Are you acquainted with any
technical difficulties, Mr. May, confining yourself wholly to account
ing, in the way of applying this rule to all issues at present listed on
the exchange?
M r. M a y . All issues—from an accounting standpoint—let me see.
It might be a little difficult probably to handle the work competently
if it extended to all the railroads. But generally speaking since they
have had Interstate Commerce regulation they have avoided the
expense of an independent audit as well. So that there are not many
railroad auditors going about in the country to-day. Professional
firms are not specially well equipped to handle a large number of new
railroad audits, but otherwise it would be merely a matter of time.
Mr. M arrin an . Then with the reservation on the point of rail
roads, you believe that there are facilities in accounting to proceed
with the application of that regulation to all listed issues, of course
keeping out of your statement any suggestion that there are not other
difficulties in the way?
Mr. M ay . Oh, yes. But whether there are no other difficulties
I do not attempt to say. But I should say, leaving out the railroads
and a few special companies, there must be between 80 and 90 per
cent already audited, so that making it universal would not unduly
add to the burden.
Mr. M arrinan . We of course are searching the picture here, Mr.
May, for any safeguards that may be discovered in this Kreuger &
Toll secured debenture issue situation in behalf of stockholders or
investors. Would you say that in the field of accounting, and con
fining yourself wholly to the secured debenture issue, any adequate
safeguards were set up in the matter of accounting?
M r. M a y . I am not familiar with that particular issue. I have seen
the prospectus, but I have not carefully studied it. I do not know
what kind of protection there was, if any.
Mr. M arrinan . There was no audit, Mr. May, of any kind, as
nearly as we can ascertain. Would you think it possible to keep
faith with investors without an audit?
M r. M a y . In 1929; yes. To-day, perhaps not. Then I would say,
especially with a security issue, I would not have thought that an
audit was a normal part of the protective machinery that was pro
vided. That is one of the good things that I think has come out of
this. That people have realized that, however trustworthy people
may seem to be, some objective study is eminently desirable. In fact,
the whole advance of accounting in this country is marked by a series
of events like this. The Claflin incident gave tremendous impetus
to accounting. Banks in those days used to say that they would not
give that for an audit certificate when they had a name like Claflin
on the papers. Now they have come to find that, even though it
may be only one case out of a hundred, it may sometimes be a valu
1274
STOCK EXCHANGE PRACTICES
able additional protection. And I think it has developed fairly
logically and fairly satisfactorily.
Of course, all these things are a question of balancing risks against
costs. If you create a machinery of protection that is unduly expen
sive, you kill industry and you put a burden on new financing that
is out of proportion to its value. It is a very nice question of adjust
ing the degree of precaution to the reasonable expense. And you
will always find some outstanding cases where an exceptionally clever
crook will beat the precautions that are, as a practical matter, advis
able for the general run of business. It is no good legislating to
surround every transaction with every precaution that seems necessary
when you are dealing with a supercrook. And if you did so in ordi
nary banking, you would make ordinary banking out of the question.
And if you take every precaution, you will realize that there will be
a certain amount that will slip through in spite of the high degree
of protection that you put forth.
M r. M arrinan . By that statement you do not wish to be under
stood as minimizing the recommendations that you have made in
your report?
Mr. M ay . Not at all. I think those are well within the limits,
and I think if I should be erring I should err on the side of a little
extra precaution. But at the same time it would be disastrous
to attempt to weigh down business with precautions that would be
very expensive and in ninety-nine cases out of a hundred would be
supererogatory.
Mr. M a rrin an . I believe, gentlemen, that I should tell the mem
bers of the committee that Mr. May came out of a sick bed to-day
to make an appearance, and in so far as I am qualified to speak I
think he has been most helpful.
The C hairman . Thank you, Mr. May.
That will be all for to-day. The committee will meet in the morn
ing at 10 o’clock in this room, and Doctor Winkler will be the first
witness.
(Thereupon, at 4.50 o’clock p. m., Wednesday, January 11, 1933,
an adjournment was taken until 10 o’clock a. m. the next day,
Thursday, January 12, 1933.)
A k t ie b o l a g e t K r e u g e r & T o l l a n d L e e , H ig g i n s o n T r u s t C o., a s T r u s t e e ,
a n d L e e , H ig g i n s o n & Co., a s F i s c a l A g e n t
.
DEBENTURE AGREEMENT DATED MARCH 1, 1929
($50,000,000 5 per cent secured sinking fund gold debentures, dated March 1,
1929; due March 1, 1959; interest payable March 1 and September 1, principal
and interest payable at the offices of Lee, Higginson & Co. in New York,
Boston, and Chicago)
This agreement dated the 1st day of March 1929, made in the city of Paris,
France, by and between Aktiebolaget Kreuger & Toll, a limited liability company
duly organized and existing under the laws of the Kingdom of Sweden, having
its principal office in Stockholm, Sweden (hereinafter called Kreuger & Toll Co.
or the company), party of the first part, Lee, Higginson Trust Co., a corporation
organized under the laws of the Commonwealth of Massachusetts, having its
principal office in the city of Boston, Mass. (hereinafter called the trustee),
party of the second part, and Lee, Higginson & Co., a copartnership having
offices in the city of Boston, Mass., in the city of Chicago, 111., and in the borough
o f Manhattan, city and State of New York (hereinafter called the fiscal agent),
party of the third part:
STOCK EXCHANGE PRACTICES
1275
Whereas, the company is duly authorized by law to borrow money and to issue
its obligations, secured and unsecured, and to mortgage, hypothecate, and
pledge its properties in order to secure the payment of such obligations; and
Whereas, the company has determined to create and issue debentures as in
this agreement provided, to be known as “ secured sinking-fund gold debentures,”
(hereinafter called “ Secured debentures” and any one of which being hereinafter
called a “ Secured debenture” ), without limit as to aggregate principal amount
and which may be issued in one or more different series as hereinafter provided,
of which $50,000,000 principal amount, are to be issued forthwith upon the
execution and delivery of this agreement; and
Whereas, the company has duly authorized the execution and delivery of this
agreement and the form, terms, and conditions hereof, for the purpose of securing
the payment of the principal of, the premium, if any, and interest on all secured
debentures at any time outstanding equally and ratably, without priority or
distinction and irrespective of the dates of issue or maturity thereof; and
Whereas, the secured debentures and coupons to be attached thereto and the
certificate of authentication by the trustee to appear thereon are to be substan
tially in the following forms respectively (the blanks therein to be appropriately
filled in from time to time), with appropriate omissions, insertions, and variations,
as may be from time to time determined by the company:
[Form of secured debenture]
( K rexjger & T o l l
Co., S t o c k h o l m , S w e d e n , ( A k t ie b o l a g e t K r e u g e r & T o ll ) )
PER CENT SECURED SINKING FUND GOLD DEBENTURE
Due---------N o .---------$---------Kreuger & Toll Co. (Aktiebolaget Kreuger & Toll, a limited liability company,
duly organized and existing under the laws of the Kingdom of Sweden, hereinafter
called the company), for value received hereby promises to pay to the bearer on
----------or earlier as hereinafter provided, the sum of $ -----------in gold coin of the
United States of America of or equal to the standard of weight and fineness
existing March 1, 1929, at the office of the fiscal agent, Lee, Higginson & Co., a
copartnership in the Borough of Manhattan, city and State of New York, or in
the cities of Boston, Mass., or Chicago, 111., in the United States of America, and
to pay interest thereon fr o m ----------at the rate o f ----------- per cent per annum
semiannually o n ----------a n d ----------- in each year, in like gold coin of the United
States, at any of said offices in the United States of America, until this debenture
shall be paid or redeemed or the payment or redemption thereof provided for;
but only upon the presentation and surrender of the interest coupons hereto
annexed as they severally mature.
At the option of the holder, said payments of principal and/or interest will be
made in like gold coin of the United States or in pounds sterling at the fixed rate
of exchange of £205 for every $1,000 at the office of Higginson & Co., in London,
England; or in like gold coin of the United States or in the national currency of
the place of presentation at the buying rate of exchange for bankers’ sight drafts
for dollars on New York current on the date of presentation and surrender of
this debenture and/or said interest coupons at the offices of the paying agents,
appointed as provided in the agreement hereinafter mentioned, in Stockholm,
Sweden; Amsterdam, Holland; and Basle, Switzerland.
Both the principal of and interest on this debenture shall be paid in time of
war as well as in time of peace, without regard to the nationality or residence of
the holder hereof, and without deduction or diminution for any taxes, imposts,
levies, or duties of any nature now or at any time hereafter levied or imposed by
the Kingdom of Sweden or by any taxing authority thereof or therein, provided
the holder hereof is not a resident of the Kingdom of Sweden, all as provided in
the agreement hereinafter mentioned.
This debenture is one of the----------per cent (— per cent) debentures due----------of an authorized issue of debentures of the company known as secured sinkingfund gold debentures, and herein termed “ secured debentures” unlimited as to
the aggregate principal amount at any one time outstanding and issued or to be
issued under and equally secured by an agreement dated March 1, 1929, made
by the company, Lee, Higginson Trust Co., as trustee, and Lee, Higginson & Co.,
as fiscal agent, pursuant to the terms of which the company has deposited with
the trustee and/or with the depositary therein named and has assigned to the
trustee certain securities, bonds, notes, obligations, stock, and other property
for the further security of the holders of secured debentures. For a description
of the nature and extent of the security and of the rights of the holders of the
1276
STOCK EXCHANGE PEACTICES
secured debentures and of the trustee in respect thereof and the terms and condi
tions upon which secured debentures may be issued, and upon which the securities
and property deposited as security for the secured debentures may be withdrawn
or changed, reference is made to said agreement.
This debenture is entitled to the benefits of the sinking fund provided in said
agreement. In case additional- secured debentures shall be issued, the sinkingfund payments may be adjusted, as provided in said agreement.
This debenture is subject to redemption at the option of the company at any
time prior to maturity at 105 per cent of the principal amount thereof, together
with interest accrued to the date fixed for such redemption, upon- 30 days’ prior
notice, as provided in said agreement, by publication once a week for two suc
cessive calendar weeks in a daily newspaper of general circulation printed in the
English language and published in the Borough of Manhattan, city and State of
New York; the first publication to be not less than 30 days nor more than 60
days prior to the designated redemption date.
In case an event of default, as defined in said agreement, shall occur, the princi
pal of all secured debentures issued thereunder may be declared or may become
due. and payable prior to the maturity thereof in the manner and with the effect
provided in said agreement.
As provided in said agreement, secured debentures of this issue of the denomi
nation of $1,000, or $500, at any time outstanding, when surrendered with all
unmatured coupons attached, and upon the payment of charges, if required, may
be exchanged for an equal aggregate principal amount of secured debentures of
the other denomination of the same issue with all unmatured coupons attached.
No recourse shall be had for the payment of the principal of or the premium,
if any, or the interest on this debenture, or for any claim based hereon or other
wise in respect hereof, or on said agreement under which this debenture is issued,
against any incorporator or against any past, present, or future shareholder, par
ticipating debenture holder, officer or director of the company, or of any successor
corporation, directly or indirectly, whether by virtue of any constitution, statute,
or rule of law or by the enforcement of any assessment or penalty, or otherwise,
any and all such liability being, by the acceptance and as part of the consideration
for the issuance hereof, expressly waived and released.
This debenture is, and is intended by the parties hereto to be, a New York
contract, and shall be performed, governed, and construed in accordance with the
laws of the State of New York.
The company recognizes that the trustee is the general representative and
attorney of all the holders of the debentures and, except as otherwise provided
in the agreement, may institute and carry on in their behalf all and any legal,
equitable, administrative, or other appropriate or necessary proceedings for the
enforcement of the rights of said debenture holders, without being required to
produce the debentures.
This debenture and the coupons appurtenant hereto shall pass by delivery.
Each successive holder of this debenture by the acceptance hereof agrees to this
provision and invites all other persons to rely thereon.
This debenture and the coupons appurtenant hereto shall not be valid or become
obligatory for any purpose unless this debenture shall have been authenticated
by the execution of the certificate hereon indorsed by the trustee under said
agreement.
In witness whereof, Aktiebolaget Kreuger & Toll has caused this debenture to
be signed and sealed in its name by one of its directors or deputy directors there
unto duly authorized, and coupons for said interest bearing the facsimile signature
of one of its duly authorized directors or deputy directors to be attached hereto
as of the first day of March, 1929.
A k t ie b o l a g e t K r e u g e r & T o l l ,
B y ---------------------- , Director.
form
of in t e r e s t
coupon
N o.______
$______
On t h e ______ day o f _______ , 19-_, unless the secured debenture hereinafter
mentioned shall have been called for previous redemption, and payment duly
provided therefor, Aktiebolaget Kreuger & Toll will pay to bearer at any of the
offices of the fiscal agent, Lee, Higginson & Co., in the cities of New York, Boston,
and Chicago, in the United States of America, on surrender of this coupon ($_____ )
in gold coin of the United States of America of or equal to the standard of weight
and fineness existing on March 1, 1929, without deduction or diminution for any
STOCK EXCHANGE PRACTICES
1277
taxes, imposts, levies, or duties of any nature now or at any time hereafter
levied or imposed by the Kingdom of Sweden or by any taxing authority thereof
or therein, provided the holder hereof is not a resident of the Kingdom of Sweden,
all as in said secured debenture provided, being six (6) months’ interest then due
on its $______ per cent secured sinking-fund gold debenture d u e_______, N o . ______
At the option of the holder the interest represented by this coupon is payable
in like gold coin of the United States or in pounds sterling at the fixed rate of
exchange of £205 for every $1,000, at the office of Higginson & Co. in London,
England; or in like gold coin of the United States or in the national currency of
the place of presentation at the buying rate of exchange for bankers’ sight drafts
for dollars on New York current on the date of the presentation and surrender of
this coupon at the offices of the paying agents, appointed as provided in the agree
ment securing said secured debenture, in Stockholm, Sweden; Amsterdam,
Holland; and Basle, Switzerland.
----------------------, Director.
FORM OF TRU STE E ’ S CERTIFICATE
This is one of the secured debentures referred to in the within-mentioned
agreement.
L e e , H ig g in s o n T r u s t Co., Trustee,
B y --------------------- j Authorized Officer.
FORM OF E XC H AN G EA B ILITY LEGEND FOR REVERSE OF DEBENTURES
As provided in the within-mentioned agreement, secured debentures of the
denomination of $1,000 or $500, at any time outstanding, when surrendered with
all unmatured coupons attached and upon the payment of charges, if required,
may be exchanged for an equal aggregate principal amount of secured debentures
of the other denomination of the same issue, with all unmatured coupons attached.
Whereas all acts, conditions, and things necessary to make the secured deben
tures, when executed by the company and authenticated by the trustee, and the
coupons thereto attached to be valid, binding, and legal obligations of the company
and to make this agreement a valid and binding agreement for the enforcement
of the payment of the secured debentures and the interest thereon, have been
done and performed, and the execution and issue of the secured debentures and
the execution and delivery of this agreement in all respects have been duly
authorized.
Now, therefore, this agreement witnesseth:
That in consideration oi the premises and of the sum of $1 lawful money of
the United States of America to the company duly paid by each of the parties
hereto at or before the execution and delivery of this agreement and of the
acceptance of the secured debentures by the respective holders and of other good
and valuable consideration, the receipt whereof is hereby acknowledged, and in
order to secure the payment of the principal of and premiums, if any, and interest
on the secured debentures now authorized, issued, and outstanding hereunder, as
well as of or on any secured debentures which may hereafter from time to time
be authorized, issued, and outstanding hereunder according to their tenor and
effect and the terms of this agreement and to secure the performance and observ
ance of all of the covenants and conditions therein or herein contained, the com
pany has executed and delivered this agreement and has caused to be delivered
to the trustee and/or to the Skandinaviska Kreditaktiebolaget of Stockholm,
Sweden, as depositary hereunder, and does hereby assign, transfer, mortgage,
hypothecate, and pledge unto the trustee, the following described property (herein
with all other property at any time deposited and assigned, transferred, mort
gaged, hypothecated, and pledged hereunder or intended so to be, and all money
and property and the cash and other proceeds of or substitutions for any of the
foregoing at any time deposited, assigned, transferred, mortgaged, hypothecated,
and pledged hereunder or intended so to be, or from time to time held by the
depositary hereunder, generally referred to as the “ deposited property ” ) namely:
$7,000,000 Kingdom of the Serbs, Croats, and Slovenes 6% per cent bonds,
due 1958.
$6,000,000 Republic of Latvia 6 per cent bonds, due 1964.
$5,100,000 Republic of Poland 7 per cent bonds, due 1945.
$1,973,275 Republic of Ecuador 8 per cent bonds, due 1953.
1278
STOCK EXCHANGE PRACTICES
$1,000,000 mortgage bank of Ecuador 7 per cent bonds, due 1949 (guaranteed
by tne Republic of Ecuador).
£979,902 Republic of Greece 8% per cent bonds, due 1954.
£380,690 Kingdom of Rumania 4 per cent bonds, due 1968.
344.000.000 francs Republic of France 3 per cent and 4 per cent rentes.
$2,000,000 Kingdom of Rumania 7 per cent bonds, due 1959.
12.000.000 reichsmarks Prussian mortgage bank 8 per cent bonds, due 1959.
$12,000,000 Hungarian land reform mortgage 5% per cent bonds, due 1979.
16.000.000 belgas par value of Belgian National Railways Co. participating
preferred stock.
Together with the income, issues, and profits thereof and of every part and parcel
thereof; and all of the estate, right, title, interest, property, claim, and demand of
every nature, kind, character, ana description whatsoever which the company
now has or hereafter may have in law, equity, or otherwise in and to the same
and every part and parcel thereof:
To have and to hold all and singular said deposited property unto the trustee,
its successors and assigns, forever, but, in trust, nevertheless, for the equal and
proportionate benefit of all the present and future holders of the secured deben
tures issued and to be issued under this agreement and of the bearers of the cou
pons thereunto belonging, without any preference, priority, or distinction what
ever of any one secured debenture or coupon over any other secured debenture
or coupon by reason of priority in the issue, sale, or negotiation thereof, or other
wise, except as provided in section 1 of Article X of this agreement.
And it is hereby covenanted and declared that the terms and conditions upon
which the secured debentures with the coupons for interest are to be issued,
authenticated, and delivered and the trusts and conditions upon which the depos
ited property is to be held and disposed of are as follows:
A r t ic le
FORM ,
AM OUNT,
E XE CU TIO N ,
I
D E LIV E R Y, AND
DEBEN TU RES
A UTH EN TICATION
OF
SECURED
S e c t i o n 1. From time to time secured debentures signed on behalf of the com
pany by one of its directors or deputy directors thereunto duly authorized and
sealed with its corporate seal and delivered to the trustee for authentication by
it shall thereupon, subject to the provisions of Article III, and not otherwise, be
authenticated by the trustee and when so authenticated shall be delivered to the
company or on its written order.
The authorized aggregate principal amount of secured debentures which may
be executed by the company and authenticated by the trustee shall not be
limited, except as the company may otherwise determine in respect of any par
ticular series at the time of the initial issue thereof.
The secured debentures shall bear interest from such dates at such rates and
payable on such semiannual dates and shall mature at such time or times as may
be fixed and determined by the company and as shall be stated therein and such
secured debentures and the coupons, if any, attached thereto shall be in such
form and contain such provisions not inconsistent with the provisions of this
agreement and may have annexed to them such warrants as shall from time to
time be determined by the company.
In case the directors or deputy directors of the company who shall have signed
and sealed any of the secured debentures shall cease to be such directors or
deputy directors before the secured debentures so signed and sealed shall have
been actually authenticated and delivered by the trustee, such secured debentures
may nevertheless be adopted by the company, issued, authenticated, and delivered
as though the persons who had signed and sealed the same had not ceased to be
directors or deputy directors of the company; and also any such secured deben
tures may be signed and sealed on behalf of the company by such persons as at
the actual time of the execution thereof shall be the director or deputy director
of the company thereunto duly authorized although at the date of such secured
debentures any such person shall not have been a director or deputy director of
the company. The coupons to be attached to such secured debentures shall be
authenticated by the facsimile signature of any present or future director or
deputy director and the company may adopt and use for that purpose the fac
simile signature of any person who shall have been such director or deputy
director, notwithstanding the fact that he may have ceased to be such director or
deputy director at the time said secured debentures shall be actually authenti
cated and delivered.
STOCK EXCHANGE PRACTICES
1279
Only such secured debentures as shall bear thereon indorsed an authentication
substantially in the form hereinbefore recited, executed by the trustee, shall be
valid and obligatory for any purpose or shall be secured by this agreement or
entitled to any right or benefit hereunder and such authentication by the trustee
upon any such secured debenture shall be conclusive evidence that the secured
debenture so authenticated has been duly issued under and that the holder is
entitled to the security of this agreement and to the benefits hereof.
Before authenticating or delivering any secured debenture, all coupons then
matured shall, except as provided in section 3 of this article, be detached and
canceled and, on its written demand, delivered to the company.
Sec . 2. Secured debentures may be issued in series. The secured debentures
of each series shall be distinctly designated and shall be in such amounts, with
such maturity, rate of interest, redemption, conversion, and other provisions, not
inconsistent with the provisions of this agreement, as shall be determined by the
company at the time of the creation of any such series and expressed in the
secured debentures of such series and in a supplemental agreement to be executed
and delivered by the company to the trustee.
All secured debentures of the same series shall be identical in tenor and effect,
except for the appropriate differences in form between coupon and registered
secured debentures and between secured debentures of various denominations.
From the secured debentures of any series there may be omitted or there may be
inserted therein any provision for the reimbursement of, or the payment thereof
either as to principal or interest, without deduction for any taxes, assessments, or
governmental charges.
From the coupon secured debentures of any series there may be omitted or
there may be inserted therein any provision for the exchangeability of such
secured debentures of one denomination for secured debentures of another or of
other denominations of the same series or for the registration of secured deben
tures as to principal or the exchangeability of such secured debentures for regis
tered secured debentures and from the registered secured debentures of any
series there may be omitted or there may be inserted therein any provision for
the exchangeability of such registered secured debentures for coupon secured
debentures. The secured debentures may also contain such further specifica
tions, letters, numbers, legends, or indorsements as may be required in order to
conform to any rule of any stock exchange or to conform to any usage in respect
thereof.
Sec . 3. In case a secured debenture shall become mutilated or be destroyed,
lost, or stolen, the company in its discretion may issue and thereupon the trustee
shall authenticate and deliver a new secured debenture of like number, amount,
tenor, and series in exchange and substitution for and upon cancellation of the
mutilated secured debenture and its coupons, if any, or the mutilated registered
secured debenture or in lieu of and substitution for the coupon secured debenture
and its coupons, if any, or the registered secured debenture so destroyed, lost, or
stolen which shall thereafter be deemed to have been canceled within the meaning
of any provision of this agreement in respect of the cancellation of secured de
bentures. The applicant for such substituted secured debenture shall furnish to
the company and the trustee and the fiscal agent evidence of the destruction,
loss, or theft, which evidence shall be satisfactory to the company and the trustee
and the fiscal agent, respectively, and said applicant shall also furnish indemnity
satisfactory to the company and the trustee and the fiscal agent in their discre
tion and shall comply with such other reasonable regulations as they or any of
them may prescribe. The trustee may authenticate and deliver such substituted
secured debenture upon the written request of the company and shall incur no
liability to anyone by reason of anything done or omitted by it in good faith
under the provisions of this section. The company may require the payment of
all reasonable expenses incurred by it or the trustee in connection with the issue
of any new secured debenture under this section.
A rticle II
ISSUE OF FIRST SERIES DEBENTURES
Section 1. Forthwith upon the execution and delivery of this agreement the
company may execute and deliver to the trustee $50,000,000 principal amount
of secured debentures and thereupon and without further action on the part of
the company, the trustee shall authenticate such secured debentures and deliver
them to the company or upon its written order.
1280
STOCK EXCHANGE PEACTICES
Said secured debentures shall be dated March 1, 1929, and shall mature on
March 1, 1959, and shall be issued as coupon debentures in denominations of
$1,000 and $500, shall bear interest at the rate of 5 per cent per annum from
March 1, 1929, payable semiannually on the 1st days of March and September
in each year and shall be substantially in the form hereinabove set forth. Said
secured debentures or any additional secured debentures of the same series are
hereinafter called “ First series debentures.”
S ec . 2. Without unreasonable delay the company shall cause definitive first
series debentures to be prepared and executed. Until such definitive debentures
can be prepared, the company may execute and deliver to the trustee and the
trustee shall thereupon authenticate and deliver to the company or upon its
order a temporary debenture or debentures of any denomination or denomina
tions substantially of the tenor hereinbefore recited, with or without coupons,
and with appropriate omissions, insertions, and variations as may be required.
As soon as the definitive debentures shall have been prepared, the company
shall upon surrender of any such temporary debenture with all unmatured
coupons, if any, attached, at its own expense, execute and deliver to the trustee
and upon the cancellation of such surrendered temporary debenture the trustee
shall authenticate and deliver in exchange therefor a definitive debenture or
debentures with all unmatured coupons attached for the same aggregate principal
amount as the temporary debenture surrendered and of such denomination or
denominations authorized hereby as may be requested by the holder of the
temporary debenture so surrendered. Until exchanged for a definitive deben
ture or debentures every such temporary debenture shall be entitled to all the
same rights and benefits under this agreement as the definitive debentures for
which it is exchangeable. In case any interest shall be payable upon any tem
porary debenture payment thereof shall be made only upon the presentation of
such temporary debenture for the indorsement of such payment thereon.
Sec . 3. In case any first series debentures, with all unmatured coupons attached,
o f the denomination of $1,000, or $500, shall be surrendered to the trustee in the
city of Boston, Mass., or to the fiscal agent in the Borough of Manhattan, city
and State of New York, for exchange for a like principal amount of first series
debentures of the other of said denominations, the company shall execute and
deliver to the trustee one or more new first series debentures of the denomination
of $500 or $1,000 as the case may be, with all unmatured coupons attached, and
the trustee shall, upon the cancellation of the first series debentures so surren
dered, authenticate the new debenture or debentures and deliver them to the
holder or holders of the first series debentures so surrendered. Upon any such
exchange the company may at its option require the payment of a sum sufficient
to reimburse it for any stamp tax or other governmental charge and for any other
expense connected therewith, and also of a further sum, not exceeding $2, for
each new first series debenture issued upon any such exchange.
A rticle III
THE DEPOSITED PR OPERTY, CONVENANTS FOR THE M AIN TEN AN CE T H E R E O F AND
RIGHTS OF W ITH D R AW A L THEREFROM AND SUBSTITUTION T H E R E FO R } W A R
R AN TY AND GENERAL CONDITIONS FOR ISSUANCE OF SECURED DE B EN TU R ES
S ection 1. The company may at any time and from time to time deposit
hereunder with the trustee or the depositary as part of the deposited property
and as security for the secured debentures issued and to be issued under this
agreement securities of the following character and description (herein called
“ eligible securities” ) or cash as hereinafter provided in section 3 of this Article
I II:
(1) Bonds or notes issued or guaranteed by any sovereign State, or any political
subdivision thereof, including any municipality, having authority to issue or
guarantee bonds or notes and having a population in excess of 300,000.
(2) Bonds or notes issued or guaranteed by any mortgage banking institution
or institutions, society or societies (in which the company may but need not have
a partial or controlling interest), and secured by mortgage on agricultural or city
property or entitled by special law to priority on such property.
(3) Shares in railroad or other companies, a minimum dividend on which is
guaranteed by any sovereign State.
Sec . 2. The company further covenants, subject, however, to the provisions of
section 3 of this Article III, that it will hereafter deposit with the trustee or with
the depositary eligible securities whenever at any time and from time to time it
may be necessary or requisite to maintain a ratio of 120 per cent between the par
STOCK EXCHANGE PRACTICES
1281
value in dollars (computed at par of exchange except as to any currencies which are
then selling below par of exchange in terms of dollars of the Unied States of
America and as to such currencies computed at current rates of exchange) of
the eligible securities which are then on deposit under this agreement and which
are not in default either in the payment of principal or interest, and the principal
amount of all secured debentures at the time outstanding hereunder (such ratio
being herein called the “ required ratio of principal” ), and/or to maintain a like
ratio between the total annual interest and guaranteed dividends then being paid
on the eligible securities then on deposit hereunder, after the deduction of all taxes,
assessments, and governmental charges payable therefrom, in dollars (computed
at par of exchange except as to any currencies which are then selling below par of
exchange in terms of dollars of the United States of America and as to such cur
rencies computed at current rates of exchange), and the aggregate interest pay
able annually on all secured debentures at the time outstanding hereunder (said
ratio being hereinafter called the “ required ratio of income” ), provided, however,
that the company shall not be required to deposit as aforesaid eligible securities
to maintain said required ratio of principal and/or said required ratio of income
except out of any eligible securities available for deposit which it or any subsid
iary company or corporation wholly owned by it may then own or which it or
any such subsidiary may thereafter acquire. The failure of the company to main
tain the required ratio* of principal and/or required ratio of income under the
foregoing covenants shall not constitute an event of default under this agreement
unless the company shall own or shall acquire eligible securities available for
deposit and the company shall fail to deposit or cause the same to be deposited
with the trustee or with the depositary as hereinbefore provided.
In the event of a deficiency in the required ratio of principal and/or the required
ratio of income which shall not have been remedied by the company, the com
pany covenants that if any of its wholly owned or substantially wholly owned
subsidiaries owns or acquires eligible securities available for deposit, the company
will exercise all diligent effort and take all such measures as may be appropriate
and legally acceptable to cause such subsidiary to deposit such eligible securities
with the trustee or with the depositary.
For the purpose of computing the required ratio of principal and/or the required
ratio of income hereunder when any cash shall form part of the deposited property
hereunder, the principal amount of all secured debentures at the time outstanding
hereunder shall be deemed to be reduced by the amount of cash (computed at
par of exchange except as to any currencies which are then selling below par of
exchange in terms of dollars of the United States of America and as to such
currencies computed at current rates of exchange) then forming pait of the
deposited property.
Sec . 3. The deposited property is and shall at all times remain subject to the
right of the company to withdraw any part or portion thereof and to substitute
for any part or portion or for all thereof other eligible securities or cash upon
the following terms and conditions:
(a) The company may withdraw at any time or from time to time any part
or portion of the deposited eligible securities provided such withdrawal shall not
impair the required ratio of principal and/or the required ratio of income.
(b) The company may withdraw at any time or from time to time any part or
portion or all of the deposited eligible securities and even though the required
ratio of principal and/or the required ratio of income shall then be impaired,
provided the company shall simultaneously deposit hereunder sufficient addi
tional eligible securities so that as a result of such withdrawal and deposit neither
the required ratio of principal nor the required ratio of income shall be further
impaired. In case any of the eligible securities to be withdrawn under the
provisions of this subdivision (b) shall then be in default in the payment of prin
cipal or interest the par value thereof shall nevertheless be included in deter
mining whether such withdrawal will result in further impairing the required
ratio of principal.
(c) The company may withdraw at any time or from time to time any part
or portion or all of the deposited eligible securities, provided the company shall
simultaneously deposit hereunder an amount of cash that will bear the same
proportion to the principal amount of all secured debentures then outstanding
hereunder as the aggregate par value in dollars (computed at par of exchange
except as to any currencies which are then selling below par of exchange in terms
of dollars of the United States of America and as to such currencies computed
at current rates of exchange) of the eligible securities so to be withdrawn bears to
the aggregate par value, computed in like manner, of all eligible securities on de
posit hereunder immediately previous to such withdrawal.
1282
STOCK EXCHANGE PRACTICES
(d)
The company may withdraw at any time or from time to time any part or
portion or all of the cash forming part of the deposited property, provided either
(a) that as a result of such withdrawal the required ratio o f principal and/or the
required ratio of income shall not be impaired or (&) the company shall simul
taneously deposit hereunder eligible securities equal in par value in dollars (com
puted at par of exchange except as to any currencies which are then selling below
par of exchange in terms of dollars of the United States of America and as to such
currencies computed at current rates of exchange) to 120 per cent of the cash so
to be withdrawn, and currently paying interest and/or dividends at at least
120 per cent of the interest rate on the secured debentures unless some lower rate
of interest and/or dividends shall be sufficient to maintain the required ratio of
income, having regard to the aggregate income receivable from all the eligible
securities then on deposit and the aggregate interest payable on all the secured
debentures then outstanding.
S e c . 4. The company warrants that the securities deposited with the trustee
and/or the depositary hereunder upon the execution of this agreement, and herein
before more particularly described, are eligible securities as in this article defined
and that the aggregate par value thereof in dollars (computed at par of exchange
except as to any currencies which are at the date of the execution hereof selling
below par of exchange in terms of dollars of the United States of America and as to
such currencies computed at current rates of exchange) is equal to at least 120 per
cent of the aggregate principal amount of the $50,000,000 first series debentures to
be initially issued hereunder, and that the total annual interest and guaranteed
dividends being paid thereon at the date of the execution of this agreement, after
deducting all taxes, assessments, and governmental charges payable therefrom,
in dollars (computed at par of exchange except as to any currencies which are at the
date of the execution hereof selling below par of exchange in terms of dollars of the
United States of America and as to such currencies computed at current rates of
exchange) is not less than 120 per cent of the annual interest payable on the
$50,000,000 principal amount first series debentures to be initially issued here
under.
Sec . 5. The trustee shall not authenticate or deliver to the company any
secured debentures in addition to the $50,000,000 principal amount of first series
debentures initially issued hereunder, if the authentication and delivery of such
additional secured debentures shall result in impairing the required ratio of prin
cipal and/or the required ratio of income of the eligible securities then on deposit
hereunder.
S e c . 6. In any case in which the trustee or the depositary desires proof as to
whether any securities tendered by the company for deposit hereunder are
eligible securities and/or any fact in respect of the required ratio of principal
and/or the required ratio of income, the trustee and/or the depositary may rely
upon a certificate of the company stating (a) that such securities are eligible
securities, (b) in reasonable detail the nature of the securities, the par amount
of the same, the rate of interest or guaranteed dividends thereon and the taxes,
assessments, and governmental charges payable therefrom, the name and location
o f the sovereign state, political subdivision, or municipality or of the mortgage
banking institution or society or of the company issuing or guaranteeing the same;
the source of the information that such sovereign state, political subdivision, or
municipality has a population in excess of 300,000 or that the obligations of such
mortgage banking institution or society are secured by mortgages on agricultural
or city property or are entitled by special law to priority on such property;
The trustee and/or the depositary shall be fully protected in relying on any such
certificate of the company, but it may in its discretion require from the company
such opinion or opinions of counsel or proof that the securities so tendered for
deposit hereunder are eligible securities, as the trustee and/or the depositary may
deem desirable.
A r t i c l e IV
«»
1
SIN K IN G FUND
S e c t io n 1. As and for a sinking fund for the retirement of the first series
debentures, the company covenants and agrees that it will from time to time
pay to the fiscal agent, at the office of the fiscal agent in the borough of Man
hattan, city and State of New York, the amounts in this Article IV hereinafter
stated, that is to say:
(1)
Semiannually on March 1 and September 1 in each year, beginning on
September 1, 1929, an amount equivalent to not less than three-quarters of 1 per
■cent of the principal amount of first series debentures originally issued, whether
STOCK EXCHANGE PRACTICES
1283
or not then outstanding unless retired in accordance with the provisions of
Article V of this agreement, plus an amount equal to six months’ interest at the
rate of 5 per cent per annum on (1) the principal amount of all first series deben
tures theretofore retired by operation of the sinking fund and (2) the unexpended
cash balance, if any, then in the sinking fund; said payments to be made either
in cash or in first series debentures taken at their principal amount.
(2) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount of accrued interest and the amount of any premium
paid by the fiscal agent on any first series debentures purchased by the fiscal
agent for the sinking fund as hereinafter provided.
(3) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount required for the payment of interest and premium
on any first series debentures called for redemption in accordance with the
provisions of this Article IV of this agreement.
(4) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount, if any, required under the provisions of section 5 of
this Article IV as and for a sinking fund in respect of first series debentures in
addition to the $50,000,000 principal amount thereof initially issued.
The company covenants and agrees that the amounts to be paid by it for the
account of the sinking fund as in this Article IV provided will be sufficient to
retire the entire issue of $50,000,000 principal amount of first series debentures
initially issued by the date of the maturity of the first series debentures, namely:
March 1, 1959.
S e c . 2. All moneys from time to time received by the fiscal agent for account
of the sinking fund shall be held by the fiscal agent for the purposes in this Article
IV stated and shall be applied by it as follows:
As soon as practicable after the receipt by the fiscal agent of any moneys for
account of the sinking fund, such moneys shall be applied by the fiscal agent to
the purchase of first series debentures at public or private sale at the lowest price
obtainable in the exercise of reasonable diligence, not exceeding their redemption
price to an amount equal, as nearly as may be (exclusive of premium and of ac
crued interest on the first series debentures so purchased) to the amount of the
sinking-fund moneys so held by the fiscal agent. From time to time as first series
debentures are purchased by the fiscal agent for the sinking fund aforesaid, the
fiscal agent shall notify the company thereof in writing, stating the amount of
. first series debentures so purchased, the amount of the purchase price thereof and
the amount of interest accrued on the first series debentures so purchased at the
time of the purchase thereof, and upon the receipt by the company of any such
notice the company will promptly pay to the fiscal agent the amount of such ac
crued interest and also the amount of any premium paid by the fiscal agent on
any first series debentures purchased by it at more than 100 per cent of the prin
cipal amount thereof.
If on the 1st day of January or of July, in any year, sinking-fund moneys to
the amount of $50,000 or more shall remain in the hands of the fiscal agent and
shall not have been applied by it to the purchase of first series debentures for the
sinking fund as aforesaid, the fiscal agent shall notify the company accordingly,
in writing or by cable, stating the amount of sinking-fund moneys so remaining
in the hands of the fiscal agent, the amount of first series debentures to be called
for redemption and any amount required to be paid by the company on the next
succeeding interest payment date for interest and premium on the first series
debentures then to be called for redemption, and requesting the company to call
for redemption on said next succeeding interest payment date first series deben
tures to the amount next hereinafter stated and to pay to the fiscal agent the
amount required for the payment of interest and premium thereon, and the com
pany shall thereupon call for redemption on the next succeeding 1st day of March
or of September, as the case may be, first series debentures to a principal amount
sufficient (exclusive of premium and of accrued interest) to exhaust as nearly as
may be, the amount of the sinking-fund moneys remaining in the hands of the
fiscal agent, and shall pay to the fiscal agent at least two days prior to the date for
which such first series debentures shall have been so called for redemption the
amount of the premium and of the interest accrued to such redemption date on
the first series debentures so called for redemption. In case the company shall
fail to call for redemption any first series debentures as above provided, the fiscal
agent is hereby irrevocably authorized on behalf and in the name of the company
and at its expense to make such call for redemption of any such first series de
bentures. Except as otherwise in this article expressly provided, the method of
calling first series debentures for the account of the sinking fund shall in all
1284
STOCK EXCHANGE PRACTICES
respects be similar to the method of calling first series debentures for redemption
as hereinafter provided in Article V of this agreement.
The amount of sinking fund moneys so remaining in the hands of the fiscal
agent required for the payment and redemption of the first series debentures so
called for redemption, together with the amount of the premium and of the accrued
interest received by the fiscal agent from the company as aforesaid, shall be
applied by the fiscal agent on and after such redemption date to the redemption
of the first series debentures which shall have been called for redemption upon the
surrender and presentation thereof to the fiscal agent for such purpose.
If, on the 1st day of January or July in any year, the amount of the sinking
fund moneys remaining in the hands of the fiscal agent and not applied prior to
such date to the purchase of first series debentures for the sinking fund, shall be
less than the sum of $50,000, such moneys shall be retained by the fiscal agent and
applied to the purchase of first series debentures for the sinking fund at public
or private sale at the lowest prices obtainable in the exercise of reasonable diligence
not exceeding their redemption price, to the extent that the same can be so pur
chased and to the extent that the same shall not be so applied, shall remain in
the sinking fund and be added to the next installment of the sinking fund received
by the fiscal agent from the company and shall be applied by the fiscal agent as
a part of the sinking fund as above provided. The company shall pay to the
fiscal agent, from time to time, in the same manner as hereinabove provided, the
amount of any accrued interest and the amount of any premium paid by the
fiscal agent upon the purchase of any first series debentures as in this paragraph
provided.
Sec . 3. Any interest allowed by the fiscal agent on any sinking fund moneys
held by it shall from time to time, so long as the company shall not be in default
under this agreement, be paid over by the fiscal agent, or credited by it, to the
company upon its written request.
Sec . 4. All first series debentures, together with the coupons appurtenant
thereto, that shall be purchased by the fiscal agent for the sinking fund, or that
shall be surrendered by the company for the sinking fund, or that shall be re
deemed as above provided, shall be canceled by the fiscal agent and shall be
delivered by it to the trustee which shall record upOn its records the fact of such
cancellation and the serial numbers of the first series debentures and appurtenant
coupons so canceled, and shall deliver such canceled first series debentures and
appurtenant coupons to the company or upon its written order. No other
first series debentures or coupons shall be issued under this agreement in place of
any first series debentures or coupons purchased or redeemed as provided in this
Article IV. The trustee may accept and rely upon the certificate or certificates
of the fiscal agent that such first series debentures and coupons have been duly
redeemed and paid as herein provided and shall be fully protected in relying
thereon.
Sec . 5. If at any time or from time to time the company shall issue and the
trustee shall authenticate and deliver any first series debentures in addition to
the $50,000,000 principal amount initially issued, the payments to be made by
the company to the fiscal agent under the provisions of section 1 of this Article
IV shall be augmented by an amount to be determined by the fiscal agent and
in its opinion sufficient to retire on or before the maturity of such first series
debentures the entire additional amount so issued by the company.
Sec . 6. If at any time or from time to time the company shall issue and the
trustee shall authenticate and deliver under any agreement supplemental to this
agreement any secured debentures of a series other than the first series, the com
pany covenants that such supplemental agreement shall contain provisions
requiring the company to pay to the fiscal agent as and for a sinking fund amounts
to be determined by the fiscal agent and in its opinion sufficient to retire on or
before maturity the entire principal amount of the series issued or to be issued
under such supplemental agreement.
A
r t ic l e
V
REDEM PTION OP SECURED D E BEN TU RES
Sec . 1. Secured debentures of any series which by their terms are redeemable
shall be subject to redemption at the option of the company at any time prior to
maturity as hereinafter provided as a whole or in part at such rate or price as
may be expressed in such secured debentures or in this agreement or any supple
mental agreement under which any such secured debentures may be issued,
together with interest accrued to the date of redemption.
STOCK EXCHANGE PRACTICES
1285
First series debentures shall be subject to redemption at the option of the com
pany at any time prior to maturity as hereinafter provided as a whole or in part
at the rate or price of 105 per cent of the principal amount thereof, together with
interest accrued to the date of redemption.
In case the company shall elect to redeem any or all of the secured debentures,
30 days’ prior notice of such election shall be given by publication once a week
for two successive weeks in daily newspapers printed in the English language
published and of general circulation in the Borough of Manhattan, city and State
of New York, and in the cities of Boston, Mass., and Chicago, 111., the first publi
cation to be not less than 30 nor more than 60 days prior to the designated
redemption date. Such publication shall state such election on the part of the
company and that interest on the secured debentures called for redemption will
cease on the designated redemption date and requiring that the secured debentures
called for redemption be then presented for payment and redemption at any one
of the peaces at which the same are expressed to be payable. In case less than all
of the outstanding secured debentures shall be called for redemption, the serial
numbers of the secured debentures so called for redemption shall be determined
by lot by the fiscal agent (in any manner deemed by it to be fait) upon the
written request of the company, and the serial numbers of the secured debentures
so called for redemption shall be stated in the notice of redemption to be given
as herein provided. No irregularity therein shall affect the validity of any
redemption proceedings. Notice of redemption having been given by publication
as above provided, the secured debentures called for redemption shall, on the
day designated in such notice, become due and payable at the rate at which the
same shall have been called for redemption in accordance with the provisions
contained in this agreement and in the secured debentures, including accrued
interest thereon to the date of redemption designated; and, unless the company
shall make default in the payment of the amount payable on any of the secured
debentures so called for redemption, from and after the date of redemption so
designated, interest on the secured debentures so called for redemption shall cease,
and on presentation, in accordance with said notice, at any of the places at which
the same are expressed to be payable, of the secured debentures so called for
redemption, with all coupons maturing on and after said redemption date, said
secured debentures shall be paid by the company at the rate aforesaid including
accrued interest to such redemption date. In the case of redemption of the
secured debentures as a whole the company, in lieu of cash as above provided, may
surrender to the fiscal agent secured debentures of the same series with all unma
tured coupons attached and such secured debentures shall be taken at the principal
amount thereof.
S e c . 2. If notice of redemption shall have been given as aforesaid, and if the
company shall deposit with the fiscal agent an amount in cash sufficient to pay in
full all secured debentures so called for redemption, any coupon for interest
appertaining to any secured debenture so-called for redemption and purporting
to mature after such date shall become and be null and void, and such deposit
shall, as between the company, the trustee, the fiscal agent, and the holders of
such secured debentures, constitute a full payment of each such secured deben
ture and of the interest accrued thereon to the date of redemption and a discharge
of all obligations by the company on all coupons appertaining thereto then unma
tured; and upon such deposit being made, all rights of the holder of any such
secured debenture under this agreement (except the right to receive from the
fiscal agent the amount so deposited with it for the redemption of such debenture)
shall wholly cease and determine. Subject to the provisions of section 2 of
Article V II of this agreement, all amounts so deposited with the fiscal agent for
the redemption of secured debentures shall be deposited by. the fiscal agent in
its name with the trustee and shall be held solely for the purpose of paying the
secured debentures so called for redemption at the redemption price thereof;
and the fiscal agent, upon the presentation and surrender to it of any such secured
debenture, together with the coupons appertaining thereto, purporting to mature
on and after the redemption date, shall pay out of said funds to the holder of each
such secured debenture the amount due thereon for principal and premium, to
gether with the interest accrued on such secured debenture to the date of redemp
tion. All secured debentures, together with the coupons appurtenant thereto,
that shall be redeemed and paid shall be canceled by the fiscal agent and de
livered by it to the trustee, which shall record upon its records the fact of such
cancellation and the serial numbers of the secured debentures and appurtenant
coupons so canceled, and shall deliver such canceled secured debentures and
appurtenant coupons to the company upon its written order. No other secured
debentures or coupons shall be issued under this agreement in place of any secured
119852— 33— PT 4--- 10
1286
STOCK EXCHANGE PRACTICES
debentures or coupons redeemed as provided in this Article V. The trustee may
accept and rely upon a certificate or certificates of the fiscal agent that such
secured debentures and coupons have been surrendered for redemption as con
clusive evidence of the fact of such redemption and payment, and shall be fully
protected in relying thereon.
A r t ic le
fis c a l
VI
agent
S e c t i o n 1. Lee, Higginson & Co., a partnership, doing business in the Borough
of Manhattan, city and State of New York, in the city of Boston, Commonwealth
of Massachusetts, and in the city of Chicago, State of Illinois, as said partnership
may from time to time be constituted, and notwithstanding any change in the
membership of said partnership, and the successor or successors of said partner
ship, shall be the fiscal agent under this agreement, and is hereby designated and
appointed as such fiscal agent, and shall exercise all the powers herein granted
to the fiscal agent. Said partnership or its successors may at any time, by notice
in writing to the company and to the trustee, resign as fiscal agent hereunder.
In the event of such resignation, or in the event that the fiscal agent for the time
being shall become bankrupt or insolvent or be liquidated or dissolved or shall
fail to perform its duties hereunder, the powers and duties of the fiscal agent
hereunder shall forthwith (upon written notice by the company, delivered to the
trustee) be exercised and performed by the trustee for the time being under this
agreement and the fiscal agent ceasing to act as such, shall thereupon become
obligated to pay over to the trustee all moneys then on deposit with said fiscal
agent. In such event the trustee shall thereafter be entitled to receive all pay
ments hereunder required to be made to the fiscal agent and shall use and apply
all such payments as if the trustee had been initially appointed fiscal agent here
under and all the provisions hereof with respect to the protection and duties of
the fiscal agent shall thereafter apply to the trustee.
Sec. 2. If the company shall order payment stopped on any secured deben
ture and/or coupon, the fiscal agent shall not be liable if such secured debenture
and/or coupon shall thereafter be paid by it inadvertently. If any secured deben
ture and/or coupon shall be issued by the company pursuant to section 3 of Article
I of this agreement in lieu of any secured debenture and/or coupon alleged to have
been destroyed, lost, or stolen, and thereafter the fiscal agent shall pay the original
secured debenture and/or coupon so alleged to have been destroyed, lost, or stolen,
the company, upon request of the fiscal agent, shall forthwith reimburse it for
the payment thereof, whether or not any order for the stopping of payment on
said secured debenture and/or coupon shall have been issued to the fiscal agent.
Sec . 3. Lee, Higginson & Co. or any member of said firm may itself or them
selves acquire, own, hold, deal in, underwrite, and dispose of secured debentures
and coupons and other securities of the company in the same manner and to the
same extent and with like effect as though said firm was not fiscal agent under this
agreement.
Sec. 4. The fiscal agent may, in its discretion, advise with counsel to be selected
and employed by it at the expense of the company, and shall be fully protected
in anything done or suffered by it in good faith in accordance with the opinion
of such counsel.
The fiscal agent shall not be liable or responsible for the default, neglect, or
misconduct of any agent or attorney appointed by it if such agent or attorney
shall have been selected with reasonable care, nor for the default, negligence, or
misconduct of the thxstee, nor for the exercise of any discretion or power, nor for
anything whatever in connection with this agreement or with the exercise of
any of the rights, powers, and duties of the fiscal agent under this agreement,
except only for its own individual willful misconduct or gross negligence.
Sec. 5. The company shall pay to the fiscal agent from time to time a reason
able compensation for all services rendered under this agreement, and also its
reasonable expenses, charges, counsel fees, and other disbursements and those
of its agents and attorneys, incurred in the performance of its powers and duties
under this agreement, and agrees to indemnify and save harmless the fiscal
agent against a,ny liabilities which it may incur in the performance of its powers
and duties under this agreement.
Sec. 6. In the event that the principal of all of the secured debentures at any
time outstanding shall become due and payable by the terms thereof, and default
shall be made in the payment of any part of such principal, or shall become due
and payable by declaration of the trustee pursuant to the terms of section 2 of
1287
STOCK EXCHANGE PRACTICES
Article X hereof, then, upon the written request of the trustee, the fiscal agent
shall (after payment of all of the expenses, disbursements, liabilities, and com
pensation of the fiscal agent) pay over to the trustee any moneys at the time held
by the fiscal agent under any of the provisions of this agreement, together with
the interest, if any, accrued thereon, to be applied by the trustee pursuant to the
provisions of section 11 of Article X hereof.
Sec . 7. Except as otherwise expressly provided herein, any moneys received
by the fiscal agent, pursuant to the terms of this agreement, shall be held by it
until required to pay out the same in conformity with the provisions of this
agreement, but no interest shall be allowed by the fiscal agent on moneys re
ceived by it from the company for the payment of interest on the secured deben
tures or for the payment of the principal thereof or of the premium thereon.
A r t ic l e
PAYM EN T
OP
PR IN C IPA L,
VII
PREM IUM , AND IN TER E ST
PAYIN G AGENTS, ETC.
ON
SECURED
DEBENTURES,
The company covenants with the trustee and the fiscal agent and with the
respective holders from time to time of the secured debentures as follows:
S e c t io n 1. The company will duly and punctually pay the principal and/or
interest on the secured debentures and the premium on any secured debentures
which shall be called for redemption pursuant to the provisions of Articles IV
and V at the times and places specified in said secured debentures and coupons
and in this agreement. Said principal, premium, and interest shall be payable
in the United States of America in gold coin of the United States of America of
or equal to the standard weight and fineness existing on March 1, 1929. At the
option of the holder of any such secured debenture or coupon said principal,
premium, and interest shall be payable in like gold coin of the United States or
in pounds sterling at the fixed rate of exchange of £205 for every $1,000 at the
office of Higginson & Co. in London, England; or in like gold coin of the United
States or in the national currency of the place of presentation at the buying
rate of exchange for banker’s sight drafts for dollars on New York current on
the date of the presentation and surrender of said secured debentures and/or
said coupons at the office of any paying agent appointed as hereinafter provided,
in Stockholm, Sweden; Amsterdam, Holland; and Basle, Switzerland.
The company further covenants that the principal and/or interest on first
series debentures shall be paid in time of war as well as in time of peace without
regard to the nationality or residence of the holders thereof and without deduc
tion or diminution for any taxes, imposts, levies, or duties of any nature now or
at any time hereafter levied or imposed by the Kingdom of Sweden or by any
taxing authority thereof or therein, provided the first series debenture or the
coupon appertaining to any first series debenture so presented for payment
shall be held by a person who is not a resident of the Kingdom of Sweden. The
company will assume and pay any such taxes, imposts, levies, or duties which
may be levied or imposed in respect of first series debentures and/or the coupons
appertaining thereto held by persons who are not residents of the Kingdom of
Sweden, and it will not require evidence of the residence of the holder of any
such first series debenture and/or coupon upon the presentation thereof for pay
ment, but will in the absence of proof to the contrary assume that such holder
is a nonresident of the Kingdom of Sweden.
S e c . 2. Notwithstanding any provisions contained elsewhere in this agree
ment or in the secured debentures with respect to the place or places for the
payment of the principal of and interest on said secured debentures, the company
covenants that it will in any event pay or cause to be paid to the fiscal agent at
its office in the borough of Manhattan, city and State of New York, in like gold
coin of the United States of America at least two days before the date on which
each installment of interest shall become payable the amount of such maturing
installment of interest; and at least two days before the date on which any of
the secured debentures shall be called for redemption a sum equal to the amount
payable on said date for principal, premium, and interest less any amount then
in the sinking fund applicable to the payment of the principal of any secured
debentures called for redemption pursuant to the provisions of Article IV hereof;
and at least two days before the maturity of the secured debentures as therein
expressed an amount equal to the principal of the outstanding secured deben
tures, together with all unpaid interest thereon to the date of maturity, less
any unexpended balance of cash then in the sinking fund. No interest need be
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STOCK EXCHANGE PEACTICES
allowed by the fiscal agent on any moneys paid to it as aforesaid. Except as
otherwise expressly provided herein, all moneys paid by the company to the
fiscal agent as in this section provided shall be applied by it to the payment
of the interest of or of the principal and/or premium for the payment of which
such amount shall have been received and held by the fiscal agent: Provided,
however, That any moneys paid to the fiscal agent as aforesaid and remaining
unclaimed by the holders of any secured debentures or coupons for six years
after the date upon which the moneys so paid to the fiscal agent shall have been
payable to the holders of such secured debentures and/or coupons shall after
the expiration of said period of six years be paid by the fiscal agent to the com
pany without any liability or responsibility of the fiscal agent or of the trustee
to the holder of any outstanding secured debenture or coupon: Provided, however,
That the fiscal agent may, at the expense of the company, cause to be published
once a week for four successive calendar weeks in a daily newspaper printed in
the English language, published and of general circulation in the borough o f
Manhattan, city and State of New York, and in a daily newspaper printed in
the English language and of general circulation in London, England, and in a
daily newspaper printed in the Swedish language published and of general cir
culation in the city of Stockholm, Sweden, notices, which need not be contem
poraneous, that said moneys remain unclaimed as aforesaid, and that after &
date named in said notice (not more than 60 days after the first publication
thereof), unless claimed by those entitled thereto said moneys will be repaid by
the fiscal agent to the company.
S e c . 3. In order to prevent any accumulation of coupons after maturity, the
company will not directly or indirectly extend or assent to the extension of the
time for the payment of any coupon upon any secured debenture and the company
will not directly or indirectly be a party to or approve any such arrangement by
purchasing or funding such coupons or in any other manner whatsoever.
S e c . 4. Notices, presentations, and demands in respect of the secured deben
tures and coupons and/or under this agreement may be served or made at any
office of the fiscal agent in the Borough of Manhattan, city and State of New
York, or in the city of Boston, Commonwealth of Massachusetts, or in the city
of Chicago, State of Illinois, or at the office of Higginson & Co. in London, Eng
land; each of said offices of the fiscal agent and said office of Higginson & Co.
being hereby designated as an agency of the company where secured debentures
and/or coupons appertaining thereto may be presented for payment and where
notices, demands, and presentations in respect of secured debentures and coupons
and/or under this agreement may be served. Notices, presentations, and demands
in respect of the secured debentures and coupons and/or under this agreement
may also be served or made at the office of any paying agent, appointed by the
company with the written consent and approval of the fiscal agent, in the city
of Stockholm, Sweden, or in the city of Amsterdam, Holland, or in the city of
Basle, Switzerland, but only so long as such appointment shall remain in full
force and effect; each said office of a paying agent so appointed being hereby
designated as an agency of the company where secured debentures and/or coupons
appertaining thereto may be presented for payment and where notices, presenta
tions, and demands in respect of secured debentures and coupons and/or under
this agreement may be served. Except as herein otherwise expressly provided
the fiscal agent and the paying agents so appointed shall not be under any liability
to the company or to any holder of secured debentures or coupons or to anyone
else in respect of any such notice, presentation, or demand other than to promptly
notify the company and the trustee of the receipt of such notice, presentation, or
demand.
A
p a r t ic u l a r
r t ic l e
covenants
V III
op
the
com pany
The company covenants with the trustee, the fiscal agent, and the respective
holders from time to time of the secured debentures as follows:
S e c t i o n 1. The company is duly and properly incorporated as a limited
liability company under the laws of the Kingdom of Sweden, has its principal
office at Stockholm, Sweden, and is registered under the Swedish companies’ act.
The company has due and proper power and authority to enter into this agree
ment and to issue the secured debentures as herein set forth. The execution and
delivery of this agreement and the execution, delivery, and issuance of the secured
debentures have in all respects been duly and properly authorized by the board
of directors and by the company and all due and proper corporate action and all
STOCK EXCHANGE PEACTICES
1289
action according to law has been duly taken with respect thereto, and all things
necessary to make the secured debentures, when executed, authenticated and
delivered as provided in this agreement, the legal, valid, and binding obligations
of the company and to constitute this agreement a legal, valid, and binding agree
ment enforcible in accordance with its terms have been duly, properly and legally
done and performed and have happened, and the secured debentures when
executed, authenticated, and delivered as herein provided will be the legal, valid,
And binding obligations of the company and will not be subject to any valid
defense of any kind, character, or description whatsoever
Sec. 2. The company will itself and will cause each wholly owned or controlled
subsidiary company or corporation of the company diligently to—
(a) Preserve its corporate existence except as otherwise permitted herein and
the continued existence of all of the other franchises and rights to it granted or
upon it conferred in so far as in the opinion of the company the preservation of
such subsidiary company or corporation and of such franchises or rights continues
to be advantageous to the company;
(b) Pay and discharge promptly all taxes, assessments, and governmental
■charges lawfully levied or imposed upon it, its property or any part thereof, or
upon its income or profits or any part thereof, or upon the interest of the trustee
hereunder or moneys or property in the possession of the depositary, the trustee,
or the fiscal agent, pursuant to the provisions hereof, but it shall have the right in
good faith to contest any such tax, assessment, charge, or claim and pending such
contest to delay or refuse payment thereof.
Sec . 3. The company will at any and all times promptly upon request of the
trustee, the depositary, or the fiscal agent hereunder furnish a verified statement
setting forth any facts known to it or which it can with due diligence ascertain
regarding the deposited property and will likewise promptly notify the trustee
o f any fact of which it may have knowledge at any time indicating a default or
possible default in respect thereof, the maturing of any portion thereof, or any
deficiency in the maintenance of the required ratio of principal and/or the required
ratio of income as set forth in Article III hereof.
Sec . 4. The company will, from time to time, upon the request of the trustee,
make, do, execute, acknowledge, deliver, and record or file in all places, if any,
wherever required for the proper protection of the holders of the secured deben
tures and of the trustee, all such further and additional acts, deeds, assurances,
and instruments and will take all such further action as may reasonably be re
quired by the trustee for assuring and confirming to the trustee all and singular
the property included or intended to be included in the deposited property and to
carry out the intention of this agreement or for assuring to the trustee or to the
holders of secured debentures the lien, rights, benefits, and security of this agree
ment and the covenants of the company herein contained and the payment of the
secured debentures.
A r t ic l e
c o n c e r n in g
the
IX
d e p o s it a r y
S e c t io n 1. Skandinaviska Kreditaktiebolaget of Stockholm, Sweden, a
■banking corporation duly organized under the laws of the Kingdom of Sweden,
is hereby appointed depositary under this agreement. The word "depositary”
as used in this agreement shall mean the depositary, whether original or successor,
at any time or from time to time acting hereunder.
Sec. 2. By written notice served upon the depositary, the trustee may at any
time remove the depositary. Such removal shall take effect upon the date speci
fied in such notice of removal, which shall be at least 20 days after the date of such
service. By written notice served upon the trustee, the depositary may resign
and be discharged from its undertakings and duties hereunder. Such resignation
of the depositary shall take effect on the day specified in such notice of resignation
which shall not be less than three months from the date of such service.
In case at any time the depositary shall be removed, or shall resign, or shall,
for any reason, become incapable of acting, the trustee, with the consent of the
company, shall appoint a successor depositary. Every such appointment shall
be in writing and executed in duplicate; one original thereof shall be filed with the
depositary ceasing to act, together with the written acceptance of such appoint
ment by the successor depositary and one original thereof with the successor
depositary, and the filing of such appointment and acceptance without further
act shall complete the appointment of the successor depositary as such. Im
mediately upon the filing of such appointment and acceptance with the deposi
1290
STOCK EXCHANGE PRACTICES
tary, the successor depositary named therein, without any further act, deed, con
veyance, or transfer, shall succeed to the rights, powers, duties, and obligations of
its predecessor as depositary, with like effect as if originally named as depositary
herein, and the retiring depositary shall deliver to the successor depositary, or its
agent, the deposited property then held by it hereunder. Upon the delivery of
such property to the successor depositary, all liability on the part of the retiring
depositary under this agreement or to the holders of the secured debentures issued
hereunder, with respect to the deposited property so delivered, shall immediately
cease and terminate.
Any successor depositary appointed by the trustee pursuant to the provisions
of this article shall be a banking corporation having a capital and surplus of at
least $5,000,000 or the equivalent thereof computed at par of exchange and shall
have its principal office either in the Borough of Manhattan, city and State of
New York, or in one of the principal cities of Europe.
S e c . 3. The deposited property held by the trustee and/or the depositary or
any successor depositary appointed by the trustee under the preceding section o f
this article shall be held in trust and as security for the equal and proportionate
benefit of all present and future holders of the secured debentures and coupons
issued and to be issued under this agreement, without preference or priority by
reason of the date of the issue, sale or negotiation thereof, or otherwise, and for the
purpose of securing the observance and performance of all the terms and condi
tions and covenants of this agreement. Such part or all of said deposited prop
erty held by the depositary shall be deemed to be held by the trustee for the pur
poses of this agreement. The trustee shall not be responsible or liable for the
care, custody or safekeeping of such part or all the deposited, property in the
possession of the depositary, and the depositary itself shall be liable and re
sponsible only for its own willfull default or gross negligence in respect of the care,
custody and safekeeping of such part of the deposited property as may be held
by it under the terms of this agreement. The depositary shall not be answerable
or accountable for any act, default, neglect or misconduct of any attorneys,
agents or employees if reasonable care has been exercised in the appointment and
retention thereof.
Sec . 4. The eligible securities deposited hereunder shall be delivered to the
trustee or thQ depositary accompanied by any necessary documentary stamps,
and if not already in bearer form shall be duly indorsed in blank for transfer or
shall be accompanied by appropriate instruments of assignment and transfer
duly executed in blank. The elegible securities so deposited may be in tempo
rary or definitive form and if interest bearing shall be accompanied by all unma
tured coupons, if any, appertaining thereto.
S e c . 5. Unless and until an event of default, as defined in Article X hereof,
shall happen and shall be continuing, and except as elsewhere in this agreement
otherwise expressly provided:
(a)
All shares of stock forming part of the deposited property shall at all times
be represented by certificates'in bearer form with coupons if any attached or
issued in the name of the company or in such other name or names as the company
from time to time in writing shall designate, and transfers from one name to the
other shall be made from time to time upon the written request of the company,
but all such certificates (unless in bearer form) shall be indorsed in blank for
transfer or shall be accompanied by appropriate instruments of transfer or assign
ment executed in blank.
(&) The company shall be entitled from time to time to collect and receive for
its own use all dividends which may be declared on all shares of stock forming part
of the deposited property and all sums which may become due and payable as
interest upon any interest bearing securities forming part of the deposited prop
erty and the trustee and the depositary shall from time to time upon the written
request of the company deliver to it when the same are declared or become due and
payable suitable assignments or orders for the payment of and/or coupons for all
such dividends and interest. All sums which may be received or collected by the
trustee or the depositary, respectively, representing dividends and/or interest
upon the deposited property shall upon the written request of the company be
paid over to it or upon its order.
(c)
The company shall be entitled to any and all subscription warrants or
other rights pertaining to the deposited property and shall also be entitled to
exercise any rights of exchangeability or conversion that may accrue in respect
of any part of such deposited property, and the trustee or the depositary, as the
case may be, from time to time upon the written request of the company shall
deliver to the company suitable assignments or other instruments for the transfer
and release of any such warrants or other rights and shall take such steps as may
STOCK EXCHANGE PRACTICES
1291
be necessary to effect any such exchange or conversion; provided however, the
required ratio of principal and/or the required ratio of income, as defined in
Article III hereof, shall not be impaired as a result of the exercise or release of
any such subscription warrants or other rights or as a result of any such exchange
or conversion.
(d)
The company shall have the right from time to time to vote and/or give
consents in respect of all the deposited property for all purposes not contrary to
the provisions of this agreement, and the company may waive notice of any and
all meetings or may consent to and ratify any action taken at any and all meet
ings of the holders of any of the securities forming part of the deposited property
with the same force and effect as though the deposited property were not subject
to the terms of this agreement, and if any part or parts of the deposited property
are securities registered in the name of the trustee or the depositary or one of
their nominees, the trustee or the depositary, as the case may be, shall, upon the
written request of the company, execute and deliver to the company or its
nominees suitable powers of attorney or proxies so that the company may
exercise the right to vote or give consents in respect of such securities.
Provided, however, That the company shall not be entitled to collect and
receive and the trustee and the depositary shall not pay over to the company
under the foregoing provisions any cash dividends that may become payable or
be paid in the course of the dissolution, liquidation, or winding up of any company
or corporation whose securities form a part of the deposited property, nor any
dividends payable in the shares of stock of the company declaring or authorizing
the same and declared or authorized in respect of any shares of stock forming a
part of the deposited property, nor any interest which shall have been collected
or paid out of the proceeds of the sale or other disposition of the property mort
gaged or pledged or otherwise held as security for the eligible securities then on
deposit hereunder, unless the required ratio of principal and/or the required
ratio of income, as defined in Article III hereof, shall be unimpaired as a result
of the payment to the company of any such dividends and/or interest.
S e c . 6. Neither the trustee nor the depositary shall be obliged to examine or
pass upon the validity or genuineness of any security tendered for deposit here
under, and they and each of them shall be entitled to assume without inquiry
that any security so tendered is genuine and valid and what it purports to be,
and that any indorsement thereon or assignment thereof is effective, genuine,
and valid. The trustee may accept and rely on the certificate of the depositary
to the effect that it has received from the company and holds in its possession
any specified amount of eligible securities as defined in Article III hereof, and
shall be fully protected in relying on any such certificate.
A r t ic l e
X
REM EDIES OF TRUSTEE AND OF HOLDERS OF SECURED DEBENTURES
S e c t io n 1. No coupon appertaining to any secured debenture which in any
way at or after maturity shall have been transferred or pledged separate and
apart from the secured debenture to which it relates shall, unless accompanied
by such secured debenture, be entitled in case of default hereunder to any right
or benefit of or from this agreement except after the prior payment in full of the
principal of all the outstanding secured debentures and of the premium on all
secured debentures which may have been called for redemption and of all coupons
not so transferred or pledged.
S e c . 2. The following events shall be events of default under this agreement
and the term “ event of default” or “ events of default” shall mean, wherever
the same is used in this agreement, one or more of the following events continued
for the periods, if any, hereinafter respectively specified:
(а) Default shall be made in the payment of any installment of interest on
any of the secured debentures when and as such installment of interest shall
become due and payable as therein and herein expressed and such default shall
continue for 60 days.
(б) Default shall be made in the payment of any of the amounts payable by
the company as provided by Article IV of this agreement as a sinking fund for
the retirement of the secured debentures when and as any such amount shall
become due and payable as provided in said Article IV and such default shall
continue for 60 days.
(c)
Default shall be made in the payment of the principal and/or premium of
any of the secured debentures when and as the same shall become due and pay
able, either by the terms thereof or by call for redemption as provided in Article
1292
STOCK EXCHANGE PRACTICES
V hereof or by declaration as provided in this article or otherwise as in this agree
ment provided.
(d) Default shall be made in the observance or performance of any other of
the covenants, conditions, and agreements on the part of the company in the
secured debentures or in this agreement contained and such default shall con
tinue for 60 days after written notice specifying such default and requiring the
same to be remedied shall have been given by the trustee, which may give such
notice in its discretion and which shall give such notice on the written request
of the holders of 25 per cent in principal amount of the secured debentures at
the time outstanding.
(e) The company shall be adjudicated bankrupt or become insolvent, or a
receiver shall be appointed of the property of the company and shall not be
discharged within 60 days after appointment.
(J) The company shall file a voluntary petition in bankruptcy or make a gen
eral assignment for the benefit of creditors or shall take any action for or any
order or direction or vote shall be made or had for its dissolution, liquidation, or
winding up.
In case any such event of default shall occur, then and in every such case the
trustee without notice to the company may in its discretion or upon request in
writing signed by the holders of 25 per cent in principal amount of the secured
debentures then outstanding shall declare the principal of all the secured deben
tures, if not already due, to be forthwith due and payable, and upon any such
declaration the secured debentures shall become due and payable immediately.
This provision, however, is subject to the condition that if at any time after the
principal of the secured debentures shall have been so declared due and payable
and before any sale of the deposited property shall have been made all arrears of
interest upon all the secured debentures with interest on overdue installments of
interest at the rate of 6 per cent per annum together with the reasonable charges,
expenses, liabilities, and advances under this agreement of the trustee, its agents
and attorneys, and all other sums which may have become due and payable by
the company hereunder, other than the principal of any of the secured debentures
which shall not have matured by their terms, shall either be paid by the company
or collected out of the income, issues, and profits of the deposited property and
all other defaults under the secured debentures or any of them or under this
agreement shall have been made good to the satisfaction of the trustee, then and
in that case the holders of a majority in principal amount of the secured deben
tures then outstanding by written notice to the company and to the trustee may
waive the default and its consequences; but no waiver shall extend to or affect
any subsequent default or impair any right consequent thereon.
S e c . 3. If one or more of the events of default shall happen, the trustee per
sonally, or by its agents or attorneys and when necessary or desirable acting
through or with the aid of the proper Swedish authorities, and in its discretion—
(a) May sell, subject to the then prior liens, if any, existing thereon, to the
highest bidder, the deposited property and all right, title and interest, claim and
demand therein, and right of redemption thereof, which sale or sales shall be made
at public auction at such pla,ce, which may be within or without the State of
New York, or within or without the Kingdom of Sweden, and at such time and
upon such terms as the trustee may fix and briefly specify in the notice of sale
to be given as herein provided or as may be required by the applicable law;
(&) May proceed to protect and to enforce its rights and the rights of the hold
ers of secured debentures under this agreement by a suit or suits in equity or at
law whether for the specific performance of any covenant or agreement contained
herein or in aid of any power herein granted or for the enforcement of any other
appropriate legal or equitable remedy (including any and all proceedings of
whatever nature permitted by Swedish law or custom) as the trustee being advised
by counsel learned in the law shall deem most effectual to holders of secured
debentures hereunder.
Prior to the institution of proceedings either under the foregoing subdivision
(a) or under the foregoing subdivision (b) the trustee shall have the right to call
upon the depositary for the immediate delivery to the trustee of all the deposited
property then held by the depositary hereunder and the depositary shall forth
with comply with such request of the trustee.
Sec . 4. Upon written request of the holders of 25 per cent in principal amount
of the secured debentures then outstanding, in case one or more of the events of
default shall happen, it shall be the duty of the trustee, upon being furnished with
indemnity satisfactory to it and upon production and deposit of such secured
debentures, to take all steps needful for the protection and enforcement of its
rights and the rights of the holders of secured debentures or to exercise the power
STOCK EXCHANGE PRACTICES
1293
of sale herein conferred or to take appropriate judicial proceedings in accordance
with the laws of Sweden or of the United States of America or other applicable
law, by action, suit, or otherwise as the trustee being advised by counsel shall deem
most expedient in the interest of the holders of the secured debentures; provided,
however, that nothing herein contained shall preclude the trustee whenever it
shall deem it desirable from taking all steps needful for the protection and enforce
ment of its rights and the rights of the holders of the secured debentures without
said written request and without being indemnified as aforesaid.
Sec. 5. In the event of any sale whether made under the power of sale herein
granted or pursuant to judicial proceedings, the deposited property may be sold
either in one parcel as an entirety or in several parcels, and if in several parcels
in such parcels as the trustee may determine and as it shall deem most advan
tageous for the holders of the secured debentures.
Sec . 6. Notice of any sale pursuant to any provision of this agreement shall
state the time and place when and where the same is to be held and shall contain
a brief general description of the property to be sold and shall be sufficiently
given if published once in each week for four successive calendar weeks prior to
the sale in a newspaper of general circulation published in the English language
in the Borough of Manhattan, city and State of New York, and in a newspaper of
general circulation published in the English language in Londoji, England, and
in a newspaper of general circulation published in the Swedish language in the
city of Stockholm, Sweden, but such publications need not be simultaneous.
Sec . 7. The trustee may adjourn from time to time any sale made by it under
the provisions of this agreement by announcement at the time and place appointed
for the sale or adjourned sale or sales, and without further notice or publication
it may make the sale at the time and place to which the sale shall be so adjourned.
Sec . 8. Upon the completion of any sale or sales under this agreement, the
trustee shall deliver to the purchaser the securities, bonds, stock notes, obligations,
and other property sold with good and sufficient transfers. The trustee and its
successors are hereby appointed the true and lawful attorneys irrevocable of the
company in its name and stead to make all necessary conveyances, assignments,
and transfers of the property thus sold; and for that purpose it may execute all
necessary instruments of transfer and may substitute one or more persons with
like power, the company hereby ratifying and confirming all that its said attorney
or said substitute or substitutes shall lawfully do by virtue hereof.
Any such sale or sales made under this agreement, whether under the power of
sale herein granted or pursuant to judicial proceedings, shall operate to divest all
right, title, interest, claim, and demand whatsoever either at law or in equity of
the company of, in, and to the property so sold and shall be a perpetual bar both
at law or in equity against the company, its successors and assigns and against
any and all persons claiming or purporting to claim the property sold or any part
thereof from, through, or under the company, its successors or assigns.
Sec . 9. The receipt of the trustee for the purchase money paid at any such
sale shall be a sufficient discharge therefor to any purchaser of the property or
any part thereof sold as aforesaid; and no purchaser or his representatives or
assigns after paying said purchase money and receiving said receipt shall be
bound to see to the application of said purchase money upon or for any trust or
purpose of this agreement or in any manner whatsoever be answerable for any
loss, misapplication, or nonapplication of any such purchase money or any part
thereof, or be bound to inquire as to the authorization, necessity, expediency, or
regularity of any such sale.
Sec . 10. In case of a sale, whether made under the power of sale herein
granted or pursuant to judicial proceedings, the principal of the secured deben
tures if not previously due shall immediately thereupon become due and payable,
anything in the secured debentures or in this agreement to the contrary notwith
standing.
Sec .
. The purchase money, proceeds, or avails of any such sale, whether
under the power of sale herein granted or pursuant to judicial proceedings, to
gether with any other sums that then may be held by the trustee under any of
the provisions of this agreement as part of the deposited property or the proceeds
thereof, or otherwise, except any funds held in trust for the payment or redemp
tion of any secured debentures or for the payment of any coupons which shall
have been called for redemption pursuant to Articles IV* or V hereof or which
shall then have matured shall be applied as follows:
First. To the payment of the costs and expenses of sale, including a reasonable
compensation to the trustee, the fiscal agent and the depositary, their agents,
attorneys, and counsel, and to all expenses, liabilities, and advances made or
incurred by the trustee, fiscal agent or depositary hereunder, and to the payment
11
1294
STOCK EXCHANGE PRACTICES
of all taxes, assessments, or liens superior to the lien of this agreement except the
superior liens and any taxes, assessments, or other charges subject to which the
property shall have been sold.
Second. T o the payment of the whole amount then owing and unpaid upon
the secured debentures for principal, premium, if any, and interest, with interest
at the rate of 6 per cent per annum on the overdue principal, premium, if any,
and installments of interest. In case said moneys shall be insufficient to pay in
full the whole amount so due and unpaid upon the secured debentures, then to
the payment of said principal, premium, and interest, without preference or
priority of principal or premium over interest or of interest or premium over
principal or of principal or interest over premium or of any installment of inter
est over any other installment of interest, ratably to the aggregate of such
principal, premium, and interest, subject, however, to the provisions of section 1
of this Article X .
Third. The surplus, if any, to the company, its successors or assigns or to
whomsoever may be lawfully entitled to receive the same or as a court of com
petent jurisdiction may direct.
S e c . 12. The company covenants that in case either or both of the events
of default specified in subdivisions (a) and (b) of section 2 of this Article X shall
happen, the company will pay to the trustee for the benefit of the holders of the
secured debentures and coupons then outstanding, the whole amount that shall
then have become due and payable on all secured debentures and coupons for
principal, premium and/or interest, as the case may be, with interest at the rate
of 6 per cent per annum upon the overdue principal, premium and installments
of interest; and in case the company shall fail to pay the same forthwith the
trustee in its own name and as trustee of an express trust shall be entitled to
recover judgment against the company for the whole amount so due and unpaid
with interest as aforesaid, and, in case of the pendency of any receivership,
insolvency, or bankruptcy proceedings affecting the company or its property, to
file and prove a claim for the whole amount so due and unpaid, with interest as
aforesaid.
The trustee shall be entitled to recover judgment and/or to file and prove such
claim as aforesaid either before or after or during the pendency of any proceedings
for the enforcement of this agreement; and the right of the trustee to recover
said judgment and/or to file and prove such claim shall not be affected by any
sale hereunder or by the exercise of any other right, power, or remedy for the
enforcement of the provisions of this agreement; and in case of a sale of the de
posited property and of the application of the proceeds of sale to the payment of
the debt hereby secured, the trustee in its own name and as trustee of an express
trust shall be entitled to enforce payment of and receive all amounts then remain
ing due and unpaid by the company under this agreement for the benefit of the
holders of the secured debentures and shall be entitled to recover judgment for
the entire amount so due and unpaid, with interest as aforesaid. No recovery of
any such judgment by the trustee, and no levy of any execution upon any such
judgment upon the deposited property or upon any other property, and no filing
and proving of any claim shall in any manner or to any extent affect or impair
the lien of this agreement upon the deposited property or any part thereof, or
any rights, powers, or remedies of the trustee hereunder or any lien, rights, powers,
or remedies of the holders of the secured debentures, but said lien, rights, powers,
or remedies of the trustee and of said holders shall continue unimpaired as before.
In case of any receivership, insolvency or bankruptcy proceedings affecting the
company or its property the trustee shall be entitled to file and prove a claim for
the entire amount due and payable by the company under this agreement at
the date of the institution of such proceedings and for any additional amount
which may become due and payable by the company hereunder after such date,
without regard to or deduction for any amount which may have been or which
may thereafter be received, collected, or realized by the trustee or the holders of
secured debentures from or out of the deposited property or any part thereof or
from or out of the proceeds thereof or any part thereof.
Any moneys collected by the trustee under this section 12 shall be applied by
the trustee in the same manner and in the same order of precedence as is herein
before provided in section 11 of this article in respect of the purchase moneys,
proceeds or avails of anv sale of the deposited property made by the trustee.
S e c . 13. All rights of action under this agreement or under any of the secured
debentures or coupons may be enforced by the trustee without the possession of
any of the secured debentures or coupons or the production thereof on any trial
or other proceeding relative thereto.
STOCK EXCHANGE PRACTICES
1295
S e c . 14. The company, so far as it lawfully may, hereby agrees to and does
hereby absolutely and irrevocably waive and relinquish the benefit and advantage
o f any and all valuation, stay, appriasement, extension or redemption law or
laws now existing, or which may hereafter be enacted, which, but for this agree
ment and waiver, might be applicable to any sale under any judgment, order or
decree based on any of the secured debentures or interest coupons or this agree
ment; and the company, so far as it lawfully may, hereby agrees to and does
hereby absolutely and irrevocably waive any and all rights of redemption which
it might or could otherwise have or be entitled to under any present or future
law in respect of any sale or sales of the properties, interests and rights of the
company, or any part thereof, under any judgment or any direction contained
in any decree entered upon any of the secured debentures or coupons issued here
under, or for the enforcement hereof or of any provision hereof; and the company,
so far as it lawfully may, hereby agrees that it, its successors and assigns, will
not in any manner set up or seek to take any benefit or advantage of any such
present or future valuation, stay, appraisement, extension or redemption law,
to prevent or hinder or delay such absolute and irredeemable sale of said proper
ties, interests and rights, as might, but for such law, be directed or decreed by a
court of competent jurisdiction.
Sec . 15. In case of a sale whether made under the power of sale herein granted
or in accordance with any direction contained in or based on any judgment for
the recovery by the trustee or by the holders of secured debentures for the ratable
benefit of all such holders similarly situated of any indebtedness evidenced by the
secured debentures or coupons or recovered hereunder, any purchaser shall be
entitled, in making any payment of the purchase price of the property purchased,
to present to the person or persons authorized to receive the payment of such pur
chase price and to turn in and use any of the secured debentures and coupons
issued hereunder and then payable, said secured debentures or coupons or both
being computed for that purpose at a sum equal to and not exceeding that which
shall be payable out of the net proceeds of such sale to such purchaser as the holder
thereof for his just share and proportion of said net proceeds; and, if the pro
portion so payable in respect of such secured debentures and coupons shall be
less than the amount for which the company may be liable thereon, then the
receipt indorsed thereon under direction of any person so authorized to receive
payment of the purchase price for the amount to be so allowed or credited thereon
shall constitute partial payment and shall be conclusive proof of the amount
thereof. At any such sale the trustee, as such, or any holder of secured debentures
may bid for and purchase the property sold and may make payment therefor as
aforesaid, and any such holder so purchasing any such property, upon compliance
with the terms of sale, may hold, retain, and dispose of such property without
further accountability.
Sec . 16. In case any of the remedies herein given or attempted to be given
the trustee, or the holders of the debentures and coupons secured hereby, shall at
any time be held invalid, or any provision of this agreement or of the debentures
or coupons secured hereby, shall be held illegal or invalid for any reason, such
illegality or invalidity shall not affect the remaining provisions of this agreement,
or of such debentures or coupons, or the other remedies given hereby, but this
agreement and said debentures and coupons shall be construed and enforced as if
all such illegal or invalid provisions had never been inserted therein.
Sec . 17. No holder of any debenture or coupon shall have any right to institute
any suit, action, or proceeding in equity or at law for the enforcement of this
agreement or for the execution of any trust hereunder, or for any other remedy
hereunder, unless (a) such holder previously shall have delivered to the trustee
written notice that some event of default specified in such notice has happened,
and (6) the holders of 25 per cent in principal amount of the secured debentures
then outstanding shall have requested the trustee to take such action and shall
have afforded to it a reasonable opportunity either to proceed to exercise the
powers hereinbefore granted or to institute such action, suit, or proceeding
in its own name, and (c) they shall have tendered to the trustee reasonable
security and indemnity satisfactory to the trustee against the costs, expenses,
and liabilities to be incurred therein or thereby; and such notification, request,
and offer of indemnity are hereby declared in every such case, at the option of the
trustee, to be conditions precedent to the execution of the powers and trusts of
this agreement and to any action or cause of action for the enforcement hereof
or for any other remedy hereunder; it being understood and intended that no
one or more holders of secured debentures or coupons shall have any right in
any manner whatever by his or their action to enforce any right hereunder,
except in the manner herein provided, and that all proceedings at law or in equity
1296
STOCK EXCHANGE PRACTICES
shall be instituted, had, and maintained in the manner herein provided and
for the equal and proportionate benefit of all holders of the outstanding secured
debentures and coupons, subject to the provisions of section 1 of this Article X .
Nothing contained in this agreement or in the secured debentures or coupons
shall, however, affect or impair the obligation of the company, which is uncon
ditional and absolute, to pay the principal and interest of the secured debentures,,
and the premium on all secured debentures which may be called for redemption,
to the respective holders of the secured debentures and the bearers of the coupons
appurtenant thereto at the times and places specified in this agreement and in
said secured debentures and coupons, or shall affect or impair the right of action,
which is also unconditional and absolute, of such holders and bearers to enforce
such payment.
Sec . 18. Except as herein expressly provided to the contrary, no remedy
herein conferred upon or reserved to the trustee, or to the holders of secured
debentures, is intended to be exclusive of any other remedy or remedies, and each
and every such remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity
or by statute.
Sec . 19. In case of any default which shall not have been satisfied no delay or
omission of the trustee or of any holder of secured debentures to exercise any
right or power accruing upon any such default shall impair any such right or
power or shall be construed to be a waiver of any such default or an acquiescence
therein; and every power and remedy given by this Article X to the trustees and
to the holders of secured debentures respectively may be exercised from time to
time and as often as may be deemed expedient by the trustee or by such holders
respectively.
Sec . 20. In case the trustee shall have proceeded to enforce any right under
this agreement, and such proceedings shall have been discontinued or abandoned
because of waiver or for any other reason or shall have been determined adversely
to the trustee, then and in every such case the company and the trustee shall
severally and respectively be restored to their former position and rights here
under, and all rights, remedies, and powers of the trustee shall continue as though
no such proceedings had been taken.
A r t ic le
XI
IM M U N ITY OF STOCKHOLDERS, OFFICERS AND DIRECTORS
No recourse shall be had for the payment of the principal or of the premium,
if any, or of the interest on any secured debentures issued under this agreement
or the enforcement of any obligation or covenant contained in this agreement or
for any claim based on such secured debentures or on said agreement against any
incorporator or against any past, present, or future shareholder, participating
debenture holder, officer, or director of the company or of any successor corpora
tion, directly or indirectly, whether by virtue of any constitution, statute, or
rule of law or by enforcement of any assessment, penalty, or otherwise, it being
expressly understood and agreed that this agreement and the obligations issued
hereunder and under the secured debentures are solely corporate obligations and
that no personal liability whatsoever shall attach to or be incurred by the incor
porators, shareholders, participating debenture holders, officers, or directors assuch of the company or of any successor corporation or any of them by reason of
the issue hereunder of secured debentures or by reason of any of the obligations,
covenants, or agreements herein contained and that any and all personal liability
of every name and nature and any and all rights and claims against either said
incorporator, shareholder, participating debenture holder, officer, or director, as
such, are hereby expressly waived and released as a condition of and as a part
of the consideration for the execution of this agreement and the issue of secured
debentures hereunder.
A r t i c l e X II
EVIDEN CE OF RIGHTS OF HOLDERS OF SECURED D E BEN TU RES
Any request or consent or other instrument required by this agreement to be
executed by the holders of the secured debentures may be in any number of con
current writings of similar tenor and may be signed or executed by the secured
debenture holders in person or by agents appointed in writing. Proof of the
execution of any such request or other instrument, or of the writing appointing
any such agent, and of the ownership of secured debentures, or of coupons apper
STOCK EXCHANGE PRACTICES
1297
taining to secured debentures, if made in the following manner, shall be sufficient
for any purpose of this agreement and shall be conclusive in favor of the trustee
and of the company with regard to any action taken by the trustee, or by the
company, upon said request or other instrument and/or in reliance upon the
ownership of secured debentures as so proved:
(a) The fact and date of the signing or execution by any person of any such
writing may be proved by the certificate of any officer in any jurisdiction who
by the laws thereof has power to take acknowledgments of deeds to be recorded
within said jurisdiction, that the person signing said writing acknowledged before
him the execution thereof, or by an affidavit of a witness of said execution.
(b) The fact of the holding by any secured debenture holder of secured deben
tures and of coupons appertaining to secured debentures, the amount and serial
numbers of any such secured debentures and the date of his holding the same may
be proved by a certificate executed by any trust company, bank, bankers, or other
depositary (wherever situated), if said certificate shall be deemed by the trustee or
by the company, as the case may be, to be satisfactory, showing that at the date
therein mentioned said person had on deposit with or had exhibited to said trust
company, bank, bankers, or other depositary, the secured debentures and/or
coupons described in said certificate; and said holding may (but need not) be
deemed by the trustee or by the company, as the case may be, to continue until
written notice to the contrary is served upon the trustee or the company, as the
case may be.
Nothing, however, in this Article X II contained shall preclude the acceptance
by the trustee or by the company in the discretion of either, as the case may be,
of any such request or consent without proof of the aforesaid character of the
execution thereof or of the power of any person signing the same as agent or of
the ownership of the secured debentures transferable by delivery, or of coupons
appertaining to debentures, if the trustee or the company, as the case may be,
shall otherwise be satisfied of said facts.
A
r t ic l e
X III
CONCERNING THE TRUSTEE
S e c t i o n 1. The trustee accepts the trust hereby created but only upon the
following terms and conditions, to all of which the holders of the secured deben
tures at any time outstanding, by their acceptance thereof, agree:
(а) The recitals herein and in the secured debentures contained shall be taken
as the statements of the company and the trustee assumes no responsibility for
the correctness of the same. The trustee makes no representation as to the value
or condition of the deposited property or any part thereof or as to the title of the
company thereto, or as to the security afforded thereby and hereby, or as to the
validity of this agreement or of the secured debentures and coupons issued
hereunder, and the trustee shall incur no responsibility in respect of such matters.
(б) The trustee shall be under no duty to record, register, or file or cause to be
recorded, registered, or filed this agreement or any agreement supplemental
thereto, or to rerecord, reregister, refile or renew the same, and the holders of all
the secured debentures at any time outstanding hereunder release the trustee
of and from its failure so to record, register, or file or rerecord, reregister, or refile
this agreement or any such supplemental agreement, and the holders of secured
debentures shall rely solely upon the company and not upon the trustee for said
recording, registering, or filing or rerecording, reregistering, or refiling or renew
ing. The trustee shall be under no duty to procure any further, other or addi
tional instruments of further assurance, or do any other act which may be suit
able to be done for the better maintenance or continuance of the lien or security
hereof or for giving notice of the existence of said lien or for extending or supple
menting the same, or to see that any property intended now or hereafter to be
deposited hereunder is subject to the lien hereof. The trustee shall not be under
any duty to procure or be liable for failure of the company to pay any tax in
respect of the deposited property or any part thereof or otherwise, nor shall the
trustee be under any duty in respect of any tax which may be assessed against
it or the owners of the secured debentures outstanding thereunder in respect of
the deposited property. The trustee shall be under no responsibility or duty with
respect to the disposition of the secured debentures authenticated and delivered
hereunder or the application of the proceeds thereof or of any moneys paid to the
company under any of the provisions hereof.
(c) The trustee may execute any of the powers hereof and perform any duty
hereunder either itself or by or through its attorneys, agents or employees, and it
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STOCK EXCHANGE PBACTICES
shall not be answerable or accountable for any act, default, neglect, or misconduct
of any such attorneys, agents, or employees if reasonable care has been exercised
in the appointment and retention thereof, nor shall the trustee be otherwise
answerable or accountable under any circumstances whatsoever, except for its
own bad faith or gross negligence. The trustee shall be under no obligation or
duty to perform any act hereunder or to institute, appear in or defend any suit in
respect hereof unless first indemnified to its satisfaction. The trustee shall not
be required to ascertain or inquire as to the performance of any of the covenants
and agreements herein contained on the part of the company. The trustee shall
not be required to take notice or be deemed to have knowledge of any default of
the company hereunder and may conclusively assume that there has been no
default unless and until specifically notified in writing of said default by the com
pany or by the holders of not less than 25 per cent in principal amount of the
secured debentures then outstanding. The trustee shall not be under any
obligation to take any action in respect of any default or otherwise or toward the
enforcement of any rights hereby created or to institute, appear in or defend any
suit or other proceeding in connection therewith, unless requested so to do by
writing delivered to the trustee by the holders of 25 per cent in principal amount
of the secured debentures then outstanding and furnished with security and
indemnity satisfactory to it against the costs and expenses of said proceeding;
but this provision shall not affect any discretionary power herein given to the
trustee.
(d) Except as herein otherwise provided, any notice or demand which by any
provision of this agreement is required or permitted to be given or served by the
trustee on the company, shall be deemed to have been sufficiently given and served
for all purposes by having been mailed by registered post, postage prepaid,
addressed (until another address is filed by the company with the trustee) as
follows: Aktiebolaget Kreuger & Toll, 17 Vastra Tradgardsgatan, Stockholm,
Sweden.
(e) The trustee shall not be bound to recognize any person as the holder of a
secured debenture outstanding hereunder unless and until the secured debenture
is submitted to the trustee for inspection, if required, and the title thereto satis
factorily established if disputed.
(J) The trustee shall be protected in acting upon any notice, resolution, request,
consent, order, certificate, report, appraisal, opinion, cable, radio, telegram, bond
or other paper or document believed by the trustee to be genuine and to have
been signed or presented by the proper party or parties. The trustee may
consult with counsel selected by it and the opinion of said counsel shall be full
and complete authority and protection in respect of any action taken, suffered,
or omitted by the trustee in good faith and in accordance with the opinion of said
counsel. The trustee shall not be under any responsibility for the selection,
appointment, or approval of any accountant, appraiser, counsel or other nominee
for any of the purposes expressed in this agreement.
(g)
Upon any application for the payment of any moneys held by the trustee
under any provision of this agreement, or for the execution of any release or upon
any other application to the trustee hereunder, the resolutions, certificates, state
ments, appraisals, opinions, reports, orders,’ and other papers required by any of
the provisions of this agreement to be delivered to the trustee as a condition of the
granting of said application or upon which the trustee may rely in accordance
with this agreement may be received by the trustee as conclusive evidence of
any statement therein contained and shall be full warrant, authority, and protec
tion to the trustee acting on the faith thereof not only in respect of the statements
therein made but also in respect of the opinions therein set forth. Before granting
any application the trustee shall not be under any duty to make any further in
vestigation into the matters appearing by or set forth in any said resolution, cer
tificate, statement, appraisal, opinion, report, order, or other paper, but if re
quested so to do by writing delivered to the trustee, prior to action had thereon,
by the holders of not less than 25 per cent in principal amount of the secured
debentures then outstanding, and only if furnished with security and indemnity
satisfactory to it against the costs and expenses of the investigation, the trustee
shall make such further investigation as to it may seem proper; but it may in its
discretion make any such independent inquiry or investigation as it may see fit.
If the trustee shall determine or shall be requested as aforesaid to make said fur
ther inquiry it shall be entitled to examine the books, records, and premises of the
company itself or by agent or attorney; and unless the trustee shall be satisfied
with or without said examination of the truth and accuracy of the matters stated
in said resolution, certificate, statement, appraisal, opinion, report, order, or other
paper, the trustee shall not be under any obligation to grant the application. If
STOCK EXCHANGE PEACTICES
1299
after said examination or other inquiry the trustee shall determine to grant the
application, it shall not be liable for any action taken in good faith. The reason
able expense of every examination shall be paid by the company, or if paid by the
trustee shall be repaid by the company, upon demand, with interest at the rate of
6 per cent per annum, and until said repayment, shall be secured by a lien on the
deposited property and the proceeds thereof prior to the lien of the then outstand
ing secured debentures issued hereunder.
(h)
The company covenants and agrees to pay to the trustee from time to time
on its demand a reasonable compensation for all services rendered by the trustee
hereunder and also all its reasonable expenses and counsel feeB and other disburse
ments and those of its attorneys, agents, and employees incurred in the perform
ance of the powers and duties hereunder, and agrees to indemnify and save the
trustee harmless against any liabilities which it may incur in the exercise and per
formance of its powers and duties hereunder. In default of payment by the
company and as security for said indemnity, the trustee shall have a lien therefor
on the deposited property and the proceeds thereof prior to the lien of the secured
debentures issued hereunder.
(t) The trustee shall not be liable for interest on any moneys paid to or de
posited with it or to its credit pursuant to any of the provisions of this agreement
during the period such moneys shall remain on deposit with it except such interest
as it may agree on with the company, or in the absence of agreement, such as is
allowed on demand commercial deposits in accordance with the regulations of the
New York Clearing House.
(j) The trustee, in its individual capacity, may purchase, own, and hold secured
debentures and coupons and any other securities of the company with the same
rights which it would have if it were not trustee.
Sec . 2. Any moneys which at any time shall be deposited by the company with
the trustee or with the fiscal agent for the purpose of paying any of the secured
debentures which shall have become due or payable either at the maturity thereof
or upon call for redemption, or otherwise, or for the purpose of paying any
coupons appertaining to any of the secured debentures, shall be and are hereby
assigned, transferred, and set over unto the trustee or the fiscal agent in trust
for the respective holders of the secured debentures or coupons for the purpose
of paying which the said moneys shall have been deposited, and in the event of
the appointment of a receiver or receivers of the company or of its property, such
receiver or receivers shall have no right, title, or interest in said moneys so de
posited, or in any part thereof.
Sec . 3. The trustee or any successor or successors hereafter appointed, or any
of them, may at any time resign and be discharged from its or their duties here
under by giving written notice to the company and thereafter published notice
thereof specifying a date when the resignation shall take effect, once a week for
three successive calendar weeks in a daily newspaper of general circulation pub
lished in the Borough of Manhattan, city and State of New York, and the resig
nation shall take effect on the day specified in the notice unless previously a
successor trustee shall have been appointed by the debenture holders or the com
pany as hereinafter provided, in which event the resignation shall take effect
immediately upon the appointment of said successor trustee.
The trustee or any successor trustee hereafter appointed may be removed at
any time by an instrument or concurrent instruments in writing filed with the
trustee or a successor trustee and signed by the holders of two-thirds in prin
cipal amount of the secured debentures then outstanding or their attorneys
thereunto duly authorized. Upon its resignation or removal the trustee shall be
entitled to the payment of reasonable charges for the services rendered by the
trustee under this agreement.
Sec . 4. In case at any time the trustee or any successor hereafter appointed
shall resign or shall be removed or shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or if a receiver of the trustee or of its property
shall be appointed, a successor trustee may be appointed at any time within one
year after the happening of any of said events by the holders of a majority in
principal amount of the secured debentures then outstanding, by an instrument
or concurrent instruments in writing signed and acknowledged by said secured
debenture holders or by their attorneys in fact duly authorized and delivered to
the new trustee, notification thereof being given to the company and the prede
cessor trustee; provided, however, that until a new trustee shall be appointed by
the secured debenture ho'ders as aforesaid the company by an instrument in
writing may appoint a trustee to fill the vacancy until a new trustee shall be ap
pointed by the secured debenture holders as herein authorized. The company
shall publish notice of any such appointment by it made once in each week for
1300
STOCK EXCHANGE .PRACTICES
two consecutive calendar weeks in a daily newspaper of general circulation in the
Borough of Manhattan, city and State of New York. Any new trustee ap
pointed by the company shall immediately and without further act be super
seded by a trustee appointed by the secured debenture holders as above provided.
If in a proper case no appointment of a successor trustee shall be made pur
suant to the foregoing provisions of this section 4 within one year after the
happening of any of the events set forth in the first paragraph of this section 4,
the holder of any secured debenture outstanding hereunder or any retiring
trustee may apply to any court of competent jurisdiction to appoint a successor
trustee. Said court may thereupon, after such notice, if any, as said court may
deem proper and prescribe, appoint a successor trustee.
Any trustee appointed under the provisions of this section 4 in succession to
the trustee shall be a trust company organized .under the laws of the State of New
York and doing business in the Borough of Manhattan, city and State of New
York (or a national or State banking association doing business in said borough)
having a capital, surplus, and undivided profits aggregating at least $10,000,000,
and in which the company shall have no stock ownership or financial interest, if
there be such a trust company or banking association walling and able to accept
the trust on reasonable and customary terms.
Any successor trustee appointed hereunder shall execute, acknowledge and
deliver to its predecessor trustee and also to the company an instrument accepting
the appointment hereunder, and thereupon said successor trustee without any
further act, deed, or conveyance shall become fully vested with all the estates,
properties, rights, powers, trusts, duties, and obligations of its predecessors
hereunder with like effect as if originally named as trustee herein; by the retiring
trustee shall nevertheless on the written request of the company or of the suc
cessor trustee execute, acknowledge, and deliver such instruments of conveyance
and further assurance and do such other things as may reasonably be required
for more fully and certainly vesting and confirming in said successor trustee all
the right, title, and interest of the retiring trustee which it succeeds in and to the
deposited property and said rights, powers, trusts, duties, and obligations; and
the retiring trustee shall also upon like request pay over, assign, and deliver to
the successor trustee any money and other property subject to the lien of this
agreement. Should any deed, conveyance, or instrument in writing from the
company be required by the new trustee for more fully and certainly vesting in
and confirming to the new trustee said property, rights, powers, and duties, any
and all said deeds, conveyances, and instruments, in writing shall on request be
executed, acknowledged, and delivered by the company.
S e c . 5. Any corporation into which the trustee may be merged, or with which
it may be consolidated, or any corporation resulting from any merger or consoli
dation to which the trustee shall be a party, shall be the successor trustee under
this agreement without the execution or filing of any paper or the performance of
any further act on the part of any of the parties hereto anything herein to the
contrary notwithstanding.
S e c . 6. Whenever, in order to comply with the law of any jurisdiction in which,
at the time, the company is doing business or has property, it shall be necessary
in the opinion of the trustee or is requested in writing by the holders of a majority
in principal amount of the secured debentures then outstanding by an instrument
or concurrent instruments in writing signed by such secured debenture holders
or by their attorney’s in fact duly authorized, the company and the trustee
shall join in the execution, delivery and performance of all instruments and agree
ments necessary to appoint any individual or individuals, corporation, or corpo
rations, approved by the trustee, to act hereunder, either as cotrustee or co
trustees, jointly with the trustee, or as separate trustee or trustees hereunder.
The individual or individuals, corporation or corporations, so appointed, upon
acceptance hereof in writing, shall thus effectively acquire and possess the rights
and powers, and be subject to the duties, specified in such appointment for the
term therein designated.
A
r t ic l e
d efeasan ce
X IV
clau se
S e c t i o n 1. If, when the principal of all the secured debentures shall become
payable whether by their terms or by call for redemption or otherwise, the
company shall well and truly pay or cause to be paid the whole amount of the
principal, premium, if any, and interest due on all the secured debentures and
coupons then outstanding, or shall provide for payment thereof by depositing
with the trustee the entire amount so due or to become due thereon, and* shall
STOCK EXCHANGE PRACTICES
1301
also pay or cause to be paid all other sums payable hereunder by the company
(including the reasonable compensation, expenses, and disbursements of the
trustee, the fiscal agent and the depositary) and shall well and truly keep and
perform all the things herein required to be kept and performed by it according
to the true intent and meaning of this agreement, then and in that case, at the
election of the company, the deposited property and all rights and interests
hereby conveyed or assigned shall revert to the company and the estate, right,
title, and interest of the trustee shall thereupon cease, determine, and become
void and this agreement shall cease to be of further effect, and the trustee on
written demand of the company and at the cost and expense of the company
shall enter satisfaction of this agreement upon the record and shall cause to be
assigned, transferred, and delivered all deposited property then held by the
trustee hereunder to the company.
_ Sec . 2. All moneys paid over to the trustee for the purpose of paying the prin
cipal or interest or redemption price of any of the secured debentures issued here
under that shall remain unclaimed by the holders of the secured debentures
and/or the coupons entitled to receive the same for six years after said moneys
shall have been so paid to the trustee, shall be repaid by the trustee to the com
pany upon its written request made to the trustee, and thereupon the trusteeshall be released from any and all further liability with respect to the payment
of any of the secured debentures or coupons then remaining outstanding; any
amount so received by the company may be used by it for any purpose without
incurring any liability to the holder of any of said secured debentures or coupons
who shall thereafter be entitled to enforce the right, if any, to the payment thereof
only against the company: Provided, however, That the trustee before being
required to make any such payments may at the expense of the company cause
notice that said moneys have not been so called for and that after a date named
therein they will be returned to the company, to be published once a week for
two successive calendar weeks in a newspaper of general circulation in the
Borough of Manhattan, city and State of New York.
A r t ic l e
XV
SUPPLEMENTAL AGREEMENTS
The company and the trustee, from time to time, and at any time, may enter
into an agreement or agreements supplemental hereto, each of which shall
thereafter form a part hereof for any one or more of the following purposes:
(1) To correct and amplify the description of any property hereby pledged,
sold, assigned, or transferred or intended so to be, or to pledge, sell, assign, transfer,
or convey to the trustee any other property or properties to be held as part of
the deposited property with the same force and effect as if included in the grant
ing clauses hereof;
(2) To add to the covenants and agreements of the company such further
covenants and agreements as the company shall consider to be necessary for the
protection of the holders of the secured debentures outstanding hereunder or for
the protection of the deposited property;
(3) To evidence a succession to the company or successive successions and the
compliance by any such successor with the covenents and obligations of the
company under the secured debentures and under this agreement and/or to evi
dence the appointment and the rights, powers, privileges, immunities and author
ity of any cotrustee or separate trustee, pursuant to the provisions hereof;
(4) T o make such provision for the purpose of curing any ambiguity or of
curing, correcting or supplementing any defective or inconsistent provision
contained in this agreement or in regard to omissions or questions arising under
this agreement as may be necessary or desirable and not inconsistent with the
security and protection intended to be conferred upon the trustee and the holders
of secured debentures;
(5) To provide for the issue of secured debentures of any series other than the
first series and the forms and provisions of such other series pursuant to the
provisions of this agreement; and
(6) To limit the authorized amount or the issue or purposes of issue of secured
debentures thereafter to be issued hereunder by imposing additional conditions
and restrictions to be thereafter observed.
(7) To provide for the issue of debentures of the first or other series without
warrants attached in the denomination of $100; such debentures however shall
not be interchangeable for debentures of a higher denomination with warrants
attached but may be exchangeable after the expiration or exercise of said warrants.
119852—33—PT4----- 11
1302
STOCK EXCHANGE PRACTICES
(8)
To modify, alter, or cancel this agreement and to add or substitute new
provisions for any existing provisions thereof, as provided in section 3 of Article
X V I of this agreement.
Provided, however, That nothing in this article shall affect or limit the obligation
of the company to execute and deliver to the trustee any instrument of further
assurance or other instrument which elsewhere in this agreement is requested to
be made to or with the trustee.
A r t ic l e
XVI
M ISCELLANEOUS PROVISION S
S e c t io n 1. Nothing in this agreement shall prevent the consolidation of the
company with any corporation or prevent any merger of any corporation into
the company or of the company into any corporation or prevent the sale by the
company of its property as an entirety or substantially as an entirety: Provided,
however, That the consolidation or merger shall be on such terms as to preserve
and not to impair the lien or security of this agreement or any of the rights and
powers of the trustee or of the holders of the secured debentures and that any
successor corporation formed by the consolidation or the corporation into which
the company shall be merged shall as a part of the consolidation or merger ex
pressly assume, the due and punctual payment of the principal of, and premium,
if any, and interest on, all the secured debentures and the observance and per
formance of all covenants and conditions of this agreement: And -provided further,
That as a condition of any such sale of its property by the company the cor
poration to which said property shall be sold shall as a part of the purchase price
thereof assume the due and punctual payment of the principal of, and the premium,
if any, and interest on, all of the secured debentures and the observance and per
formance of all covenants and conditions of this agreement and shall simultane
ously with the delivery to it of the instruments of conveyance, assignment, and
transfer thereof execute and deliver to the trustee a proper agreement in form
satisfactory to the trustee whereby the purchasing corporation shall so assume
the due and punctual payment of the principal of, and the premium, if any, and
interest on all of the secured debentures and the observance and performance of
all the covenants and conditions of this agreement.
Sec . 2. In case any corporation shall be consolidated with the company as
aforesaid, or in case the company shall be so merged into any other corporation
or in case of the sale by the company of its property as an entirety or substantially
as an entirety, the corporation formed by the consolidation or into which the
company shall have been merged or to which said sale shall have been made,
upon executing and causing to be recorded, registered, and/or filed, as required by
law, an agreement with the trustee whereby said corporation shall assume the
due and punctual payment of the principal of, and premium, if any, and interest
on, all of the secured debentures and the observance of all of the covenants and
conditions of this agreement, shall succeed to and be substituted for the com
pany with the same effect as if it had been named herein as the party of the first
part; and said corporation may thereupon cause to be signed and may issue either
in its own name or in the name of the company any or all of the secured debentures
which shall not theretofore have been signed by the company and delivered to
the trustee, and the trustee upon the order of said corporation in lieu of the com
pany and subject to all the terms, conditions, and restrictions herein prescribed,
shall authenticate any and all secured debentures which shall have been previously
signed by the officers of the company and delivered to the trustee for authentica
tion and any of the secured debentures which said company shall thereafter cause
to be signed and delivered to the trustee for that purpose. All secured deben
tures so issued shall in all respects have the same legal rank and security as the
secured debentures therefor issued in accordance with the terms of this agree
ment as though all of said secured debentures had been actually issued by the
company as of the date of the execution hereof.
Sec . 3. Any of the terms and provisions of this agreement may be modified,
altered, or canceled and new provisions may be added or substituted for any
existing provisions at any time by and with the consent of the holders of 75 per
cent of the aggregate principal amount of the secured debentures then outstanding.
Sec . 4. This agreement shall be executed in English only and so far as per
mitted by law the English text hereof shall govern in and outside of Sweden in
meaning and effect for every purpose. This agreement and the secured deben
tures issued hereunder wherever executed shall be deemed for all purposes to have
been executed in the State of New York in the United States of America and shall
be construed in accordance with and performance hereof and thereof shall be
STOCK EXCHANGE PEACTICES
1303
governed by the laws of the State of New York and of the United States of
America.
Sec . 5. This agreement may be executed in any number of counterparts, each
of which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.
In witness whereof, Aktiebolaget Kreuger & Toll, the party of the first part,
has caused this agreement to be executed and acknowledged by one of its direc
tors thereunto duly authorized and its corporate seal to be hereunto affixed and
attested, and Lee, Higginson Trust Co., party of the second part, has caused this
agreement to be executed and acknowledged and its corporate seal to be here
unto affixed by its duly authorized representative, and Lee, Higginson & Co. has
caused this agreement to be executed and acknowledged by one of its general
partners, all as of the day and year first above written.
A k t ie b o l a g e t K r e u g e r & T o l l ,
B y I v a r K r e u g e r , Director.
[s e a l .]
Attest:
K. R. B o k m a n ,
Authorized officer.
L e e , H ig g i n s o n T r u s t Co.,
[s e a l .]
B y D onald D u r a n t ,
Duly authorized representative.
Attest:
Duly authorized representative.
L e e , H ig g i n s o n & Co.,
B y D onald D u r a n t ,
A General Partner.
Skandinaviska Kreditaktiebolaget hereby accepts the appointment as deposi
tary under the foregoing agreement and on the terms and conditions therein set
forth.
In witness whereof, said Skandinaviska Kreditaktiebolaget has caused this
acceptance to be executed in its name by one of its directors this 29th day of
March, 1929.
S k a n d i n a v i s k a K r e d it a k t i e b o l a g e t ,
By
H. L a u r it z e n , Director.
C it y of P a r is , F r a n c e ,
Consulate of the United States of America, ss:
I, John R. Wood, vice consul of the United States of America at Paris, France,
duly commissioned and qualified, do hereby certify that on this 29th day of
March, 1929, before me appeared Ivar Kreuger, to me personally known, who,
being by me duly sworn, did depose and say that he resides in Stockholm, Swe
den; that he is one of the directors of Aktiebolaget Kreuger & Toll, one of the
corporations described in and which executed the foregoing instrument; that he
knows the corporate seal of said corporation; that the seal affixed to said instru
ment is such corporate seal, and that it was so affixed by authority of the board
of directors of said corporation, and that he signed his name thereto by like
order; and he acknowledges said instrument to be the act and deed of said cor
poration for the uses and purposes therein mentioned.
In witness whereof I have hereunto set my hand and affixed my official seal
this 29th day of March, 1929.
J o h n R. W o o d ,
Vice Consul of the United States of
America at Paris, France.
C it y of P a r is , F r a n c e ,
Consulate of the United States of America, ss:
I, John R. Wood, vice consul of the United States of America at Paris, France,
duly commissioned and qualified, do hereby certify that on this 29th day of
March, 1929, before me personally appeared Donald Durant, to me personally
known, who, being by me duly sworn, did depose and say that he resides in the
Borough of Manhattan, city and State of New York; that he is the duly author
ized representative of Lee, Higginson Trust Co., one of the corporations described
1304
STOCK EXCHANGE PEACTICES
in and which executed the foregoing instrument; that he knows the corporate
seal of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the board of directors of said corpora
tion, and that he signed his name thereto by like order and pursuant to the
authority vested in him as the representative of such corporation, and he acknowl
edges said instrument to be the act and deed of said corporation for the uses
and purposes therein mentioned.
In witness whereof I have hereunto set my hand and affixed my official seal
this 29th day of March, 1929.
Jo h n R . W ood ,
Vice Consul of the United States of
America at Paris, France.
C i t y of P a r is , F r a n c e ,
Consulate of the United States of America, ss:
I, John R. Wood, vice consul of the United States of America at Paris, France,
duly commissioned and qualified, do hereby certify that on this 29th day of
March, 1929, before me personally appeared Donald Durant, to me known and
known to me to be a member of the firm of Lee, Higginson & Co. and the person
who executed the foregoing instrument in the firm name of Lee, Higginson &
Co., and he acknowledged that he executed the same as the act and deed of
said firm.
In witness whereof I have hereunto set my hand and affixed my official seal
this 29th day of March, 1929.
J o h n R. W o o d ,
Vice Consul of the United States of
America at Paris, France.
STOCK EXCHANGE PBACTICES
THURSDAY, JANUARY 12, 1933
U nited States S enate ,
S ubcommittee of the C ommittee on B anking and C urrency ,
Washington, D. C.
The subcommittee met, at 10 o'clock a. m., pursuant to adjourn
ment on yesterday, in the Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Townsend, Blaine, Couzens,
Fletcher, and Costigan.
Present also: John Marrinan, economic adviser to the committee.
The C h airm an . The committee will come to order. The first
witness will be Doctor Winkler, who will please come forward, stand,
and hold up his right hand and be sworn:
You do solemnly swear that you will tell the truth, the whole truth,
and nothing but the truth in the matter now under investigation by
this committee. So help you God.
Doctor W in k le r . I do.
TESTIMONY OF DR. MAX WINKLER, ASSOCIATE PROFESSOR OF
ECONOMICS OF THE COILEGE OF THE CITY OF NEW YORK,
NEW YORK CITY
(The witness was duly sworn as shown above.)
The C hairman . Mr. Marrinan, the investigator, will make a
brief statement for the record first.
Mr. M arrinan . Gentlemen of the committee, although Doctor
Winkler has been formally subpoenaed before the committee, his
coming here is the result of an invitation to testify as an expert for
the committee. In qualifying him as a witness it will be noted that
in addition to his professional qualifications he is a member of a
firm which is a registered member of the New York Stock Exchange.
He also comes here with the indorsement of the joint committee of
debenture holders of Kreuger & Toll Co. of which Bainbridge Colby
is the chairman and Samuel Untermyer is counsel. There ought to
be some significance in the fact that we are willing to accept as an
expert a man who is associated with a stock-exchange firm.
I can only add that the other witnesses who are to appear here,
including two of the more important officials of the New York Stock
Exchange, while under subpoena, nevertheless, I believe, may be
regarded as wholly willing witnesses.
The C hairman . Y ou may proceed now to inquire of Doctor
Winkler.
Mr. M a rrin an . Doctor Winkler, you are associate professor of
economics at the College of the City of New York, is that true?
Doctor W in k ler . Correct.
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1306
STOCK EXCHANGE PRACTICES
Mr. M arrin an . Y ou serve also as economist for the North
American Newspaper Alliance, is that correct?
Doctor W in k ler . Correct.
Mr. M arrinan . And you are a member of the New York Stock
Exchange firm of Bernard Winkler & Co.?
Doctor W in k ler . Yes, sir.
Mr. M arrin an . Y ou are president of the American Council of
Foreign Bondholders, is that correct?
Doctor W in k ler . Correct.
M r. M arrin an . And you are a member of the joint protective
committee of debenture holders of the Kreuger & Toll Co., of which
Bainbridge Colby is chairman and Samuel Untermyer is counsel?
Doctor W in k ler . Correct.
Mr. M arrin an . And from 1922 to 1927 you were manager of the
foreign department of M oody’s Investors Service, one of the standard
services of that character in the United States?
Doctor W in k ler . Correct.
Mr. M arrin an . Doctor Winkler, will you give your address for the
record?
Doctor W in k ler . 315 West One hundred and sixth Street, New
York City.
M r. M arrin an . Doctor Winkler, will you tell us in nontechnical
language what is the difference between a debenture and a bond?
Doctor W in k ler . Kegardless of the legal definition, the two words,
to my way of thinking— that is, the terms bond and debenture—are
practically identical. The one is merely of Anglo-Saxon derivation
and the other of Latin derivation. A bond is an evidence of debt
binding the debtor to pay it. A debenture is an evidence of debt
which means that the one who owes the debt ought to pay it. There
is, therefore, to my way of thinking, practically no difference between
the two terms.
Senator F letcher . Both of them being obligations executed under
seal?
Doctor W in k ler . Correct.
Senator F letcher . As distinct from a promissory note not under
seal?
Doctor W in k ler . I am explaining the terms as the student of bond
values would do it, and not with a view to defining the terms from a
legalistic point of view. In other words the investor who purchases
securities looks upon a bond and a debenture as constituting somewhat
the same evidence of indebtedness. There are, however, certain
additional features with which the one or the other may be endowed.
Senator F letcher . All right. You may continue, Mr. Marrinan.
M r. M arrin an . Doctor Winkler, what do you think is meant by
a secured debenture? There seems to be an anomaly there to me.
Doctor W in k ler . A secured debenture is an evidence of debt which
in addition to being the obligation of the debtor is also secured by a
specific pledge of collateral or a specific lien on certain assets or income.
Mr. M a rrin an . Will you give a brief description, in your own way,
of the so-called Kreuger & Toll secured debenture issue, explaining
those features of the bond which an economist would examine in
appraising the obligation as an investment?
Doctor W in k ler . The Kreuger & Toll 5 per cent gold debentures
which were sold in March of 1929 to the extent of $50,000,000 were,
STOCK EXCHANGE PRACTICES
1307
in addition to being the obligation of the Kreuger & Toll Co., specifi
cally secured by a pledge of foreign government bonds and govern
ment guaranteed bonds, which at the time of the issue had a value of
a little over $60,000,000 at par, compared with $50,000,000 which
was the par value of the secured debentures. In other words, for
every one dollar of par-value debentures there was $1.20 of par value
of collateral.
Senator F letcher . Those are the same debentures that Mr. Durant
told us about yesterday?
Doctor W in k ler . Yes, sir.
M r. M arrin an . N ow you may continue with your answer.
Doctor W in k ler . If I understand the circular descriptive of the
bonds correctly, there were provisions whereby the company could
substitute for the pledged bonds other eligible bonds, providing the
ratio was not disturbed.
Eligibility was defined, if I understand the prospectus correctly, as
constituting bonds of any sovereign government, or of any political
subdivision with a population of 300,000 inhabitants. They might
also be bonds of mortgage companies guaranteed by governments, or
stock of railroad companies on which a minimum dividend was guar
anteed by a government.
The trustee could call upon the company to furnish proof as to
whether the substituted bonds were eligible. And, if I interpret the
prospectus correctly, the company had to merely furnish to the trus
tee a certificate indicating that the substituted bonds were eligible.
At the time the bonds were sold the collateral, aggregating at par
somewhat more than $60,000,000, had a probable market value of at
least the equivalent of the bonds that were sold to the public.
With very few exceptions the issues comprising the collateral were
regarded as fundamentally sound investments. And the income
derived from the pledged securities was in excess of the income needed
to pay interest on the 5 per cent debentures sold to the investing
public.
Mr. M arrinan . Doctor Winkler, you had reference in your con
cluding statement to the original collateral, am I correct in that?
Doctor W in k ler . Yes, Mr. Marrinan.
Mr. M a rrin an . Having been in charge of the Foreign Department
of Moody’s for quite some time, what rating would you have
accorded this Kreuger & Toll issue of 5’s upon the basis of their
circulars? A speculative, a business man’s investment, or what?
Doctor W in k ler . On the basis of the information contained in the
prospectus, particularly as regards the pledged collateral, I would
have accorded the Kreuger & Toll 5 per cent gold debentures a rating
of Baa, which is defined as an adequately protected business man’s
investment.
Mr. M arrin an . That is a very high rating comparatively speaking,
is it not?
Doctor W in k ler . It is, comparatively speaking.
Mr. M arrinan . I understand that you would give that rating to
the bond on the basis of the representations made about it in its
circular, is that correct?
Doctor W in kler . Partly on the basis of the representations made
in the circular, but particularly as regards the specific information as
to the nature of the pledged collateral.
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STOCK EXCHANGE PRACTICES
M r. M arrin an . The nature o f the pledged collateral; yes, sir.
Doctor W in k ler . That is it.
M r. M arrin an . Doctor Winkler, will you discuss this pledged
collateral in such fashion as will bring out fully the substitution
feature?
Senator F letcher . May I ask before you answer that question:
Did there appear in the circular, or any other representations made
to the public, a list of this collateral, as to what bonds they were,
and so forth?
Doctor W in k ler . Yes.
Senator F letcher . All right. Proceed.
Doctor W in k ler . Will you repeat that question, Mr. Marrinan?
Mr. M arrin an . May I withdraw the question and ask another
one: Doctor Winkler, what in your opinion was the force and scope
of the eligibility feature in this debenture agreement?
Doctor W in k ler . As I stated a while ago, eligibility was confined
to three types of bonds, providing that the withdrawal and the
putting in place of the withdrawn bonds, new issues, the ratio as
defined in the prospectus was adhered to. In other words, if for
every $1 in debentures there would be $1.20 of new bonds. There is,
however, another provision which to my way of thinking is a bit
unusual, and that is this: If after the substitution the ratio becomes
impaired the company is not obligated to make good the deficiency
unless it is in the possession of, or unless any affiliate company or
companies of Kreuger & Toll, have in their possession eligible bonds.
M r. M arrin an . And further, with respect to the matter of eli
gibility, in the examination yesterday reference was made, perhaps
not in well-chosen words, to the possibility of substituting bonds of a
minor political subdivision in China. Was there any basis for stating
or holding out such a possibility?
Doctor W in k ler . I believe there was if I understand the pros
pectus correctly, because eligibility is confined to any bond of a
political subdivision, regardless of locality, which has a population of
more than 300,000 inhabitants.
Mr. M a r rin an . Would it have been possible, Doctor Winkler,
under this substitution provision of the indenture to convert obliga
tions, sound obligations in the pledged collateral, into issues which
possessed no inherent merit or intrinsic value whatsoever?
Doctor W in k ler . Not entirely; because the substituted bonds had
to be of a type which would not disturb the ratio to which we alluded
a while ago.
Senator C otjzens. And who would be the judge of that?
Doctor W in k ler . The Kreuger & Toll Co., if I understand the
prospectus correctly.
Senator C ouzens . In other words, Kreuger served on all sides of
the question.
Doctor W in k ler . It would seem so.
Senator F letcher . The trustee had nothing to say about that.
Doctor W in k ler . The trustee had the right to ask the company to
furnish proof as to eligibility, and the company would merely have to
send a certificate to the trustee advising the trustee that the substi
tuted bonds were eligible.
Senator C ouzens . H ow many of this sort of indenture have you
examined?
STOCK EXCHANGE PRACTICES
1309
Doctor W in k ler . To be frank witb you, I have not been in the
habit of examining debentures. They are highly technical and
extremely difficult for the student of bonds to interpret accurately.
Senator C otjzens. Do you know whether this particular document
varied to any great degree from other documents of a like nature?
Doctor W in k ler . I could not answer as to that.
Senator C otjzens. The testimony seems to have been to the effect
that this was an unusually liberal indenture. But you could not
testify as to that?
Doctor W in k ler . It appears that the indenture, as I interpret it,
might be considered liberal. Whether it is unusually liberal or not I
am not in a position to state.
Senator F letcher . But they allowed the substitution of bonds or
securities at par instead of at market value?
Doctor W in k ler . That is correct.
Senator F letcher . Is that unusual in a debenture of this kind?
Doctor W in k le r . It would be except for the additional provision
in this case that substitution must not, at the time the substitution
is made, disturb the ratio. What happens immediately afterwards no
one can tell, but at the time of substitution a ratio of 120 per cent
with respect to both par value and income must be maintained.
Senator C otjzens. Was that ratio based on par or on actual value?
Doctor W in k ler . The ratio was based on par.
Senator C otjzens. But the return on the security must still main
tain the same 120 per cent ratio?
Doctor W in k ler . That is correct.
Senator C otjzens. Doctor Winkler, just what is the purpose in
giving to trustees authority m accept substitutions?
Doctor W in k ler . If I understand correctly the situation here the
authority for making the substitution was given to the company.
Senator C otjzens. Yes; but what was the purpose of it?
Doctor W in k ler . At the time of the drafting of the document I
could very readily see the purpose. Kreuger & Toll Co. was an
organization that was doing business in every part of the world, or
was alleged to be doing business in every part of the world. And the
time might very conceivably come when the Kreuger & Toll Co.
would obtain possession, let us say, of concessions in Bulgaria, which
would make it necessary for Kreuger & Toll to take over Bulgarian
Government bonds, in which case those Bulgarian bonds might be put
into this portfolio, in place, perhaps, of or in addition to certain other
bonds already existing in the collateral.
Senator F letcher . Did you ever have occasion to examine the
substituted collateral?
Doctor W in k ler . Yes, sir.
Senator F letcher . How did you find that?
Doctor W in k ler . Well, the collateral as such I did not examine,
but I did examine the published list of the collateral.
Senator F letcher . H ow did you find that to compare with the
original collateral?
Doctor W in kler . The substituted collateral was in a way similar
to that part of the original collateral which was distinctly inferior in
quality. But there were no new bonds added to the portfolio. For
instance, French Government bonds were withdrawn early in 1930
and in their place, in equal par value, Yugoslavia bonds were put in.
1310
STOCK EXCHANGE PRACTICES
Early in 1930 French Government bonds were regarded as funda
mentally secure investments, whereas early in 1930 Yugoslavia bonds
were regarded as a distinctly inferior type of security.
Senator C ouzens . Had you been a prospective purchaser of these
securities would you have relied upon the name of Lee, Higginson &
Co. for investing in the debentures?
Doctor W in k ler . I would personally have purchased the bonds
almost exclusively upon the nature of the pledged collateral.
Senator C otjzens. Y ou would have been an unusual investor if
you had done that, wouldn’t you?
Doctor W in k ler . Possibly so.
Senator C ouzens . From your general knowledge of investors is
it not a fact that they rely more on the integrity of the house selling
the securities than they do on the details of the flotation, and so forth?
Doctor W in k ler . I should think so, and also upon statements
made by what are known here as bond salesmen.
Senator C ouzens . Do you agree with Mr. May, I think it was,
who testified on yesterday that there was no legislative remedy for
these things?
Doctor W in k ler . At the moment I do not think there is.
Senator C ouzens . Wouldn’t it perhaps be a good thing if we put
some of these international bankers and these public accountants in
jail, who permit these things to go on and mislead the public?
Doctor W in k le r . If the provisions as contained in the various
prospectuses, including the official stock exchange listing, had been
adhered to, investors would have been afforded a considerable degree
of protection, because the requirements as I understand them which
are made by the New York Stock Exchange in reference to infor
mation to be furnished to the exchange, is to my way of thinking
much more comprehensive than any information demanded by any
other legitimate exchange in the world.
Senator C ouzens . D o you believe it is impossible for Congress to
legislate to punish people who violate those conditions?
Doctor W in k ler . I should think that few things are impossible
for Congress to legislate about. [Laughter.]
Senator C ouzens . I did not get your answer to my question,
Doctor Winkler.
Doctor W in k ler . I should say, Mr. Senator, that Congress might
be able to legislate about anything that is legislatable as it were.
Senator C ouzens . That is hardly an answer to my question.
I was asking with relation to specific cases. As I understood Mr.
May, of Price, Waterhouse & Co., certified public accountants, to
testify on yesterday, he did not believe that Congress could or should
legislate to protect the public against this sort of thing. I now ask
you if in this particular case you think any legislation could have
protected the public.
Doctor W in k ler . I should think so, because they have in Great
Britain a somewhat similar situation, where the investing public is
afforded a considerable degree of protection by virtue of their socalled companies act, and that is a governmental instrumentality.
I therefore see no reason why we could not copy from other nations
what is good and worth copying rather than to confine our copying
to what is not particularly good or worth copying.
STOCK EXCHANGE PEACTICES
1311
Senator C ouzens . In other words, you do not subscribe to the
general propagandist theory that Congress should leave business
alone?
Doctor W in k ler . That depends in my opinion upon specific
cases.
Senator C ouzens . If you do not care to answer such a question,
all right, I will excuse you.
Doctor W in k ler . It will depend in my opinion upon specific
cases, I say.
Senator C ouzens . Of course, Congress could not legislate to fit
specific cases. So I was asking you a general question.
Doctor W in k ler . I should have suggested that.
Senator C ouzens . And if my inquiry tends to embarrass you, you
need not answer it.
Doctor W in k ler . I should suggest in that case that we enact
legislation similar to that pertaining to the companies act in Great
Britain, which in my opinion affords ample protection to investors
by holding all those who may issue prospectuses, that sign state
ments, liable for the statements contained in such prospectuses or
statements.
Senator C ouzens . Liable in a criminal way as well as in a civil way?
Doctor W in k ler . Exactly.
Senator B a rk ley . Doctor Winkler, in making that answer do you
take into consideration that we operate in this country under a dual
system of government, and that ordinary crimes are punished by the
States and not by the Federal Government? And that the Federal
Government has jurisdiction only to legislate on such matters as per
tain to interstate commerce, or violation of some Federal function?
The ordinary fraud perpetrated by a company or a group of men upon
individuals is punished by the State and not by the Federal Govern
ment. Your suggestion that we copy the law of Great Britain with
reference to the matter which you have discussed, would be subject
to the difference that in Great Britain their legislative body has full
jurisdiction, whereas here, a part of the jurisdiction is under State
legislatures and in other matters with the Congress.
Doctor W in k ler . I trust, Mr. Senator, you will appreciate my
position, that the suggestion I made comes from one who is not
experienced in legislation or in legal matters. I look upon these
things from the standpoint of the analyst of bond values, and possibly
from the standpoint of the ordinary investor.
Senator B a r k le y . And you are not looking at it from the stand
point of the constitutional lawyer?
Doctor W in k ler . No; not at all. And I could not because I am
not familiar either with legislation or with constitutional law.
Senator C ouzens . I hope that is not true as to the Senator from
Kentucky.
Senator B ar k le y . Well, of course we all claim to be constitutional
lawyers.
Senator C ouzens . So long as we legislate in the matter of inter
state traffic in women and narcotics I think we can legislate in this
connection.
Senator B ark ley . I am not making the point that we can not
do it, but my question was prompted by the suggestion of the wit
ness that we copy some law of England, in regard to which I desired
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STOCK EXCHANGE PRACTICES
to call his attention that Parliament has supreme control over all
such matters, whereas there is no such condition in this country, for
there is a division of authority between a State and the Congress,
and whatever we do must be done under the authority we have as a
Federal Government.
Doctor W in k ler . Perhaps I might add that a beginning seems
to have been made already in this direction by a ruling issued the
other day by the New York Stock Exchange, whereby companies
whose securities are listed upon the exchange will have to submit
their books to an independent audit, which was as far as I know an
entirely voluntary step on the part of the exchange.
Mr. M arrin an . Doctor Winkler, what is your opinion as an expert
as to the value of the collateral at the time the bonds of Kreuger & Toll
were originally sold and at the present time if there had been no
substitutions? I might say that substantially that question was
asked of Mr. Durant on yesterday, and he felt incapable of giving us
an estimate. Can you help the committee in that situation?
Doctor W in k ler . The par value of the pledged collateral was in
excess of $60,000,000 at the time the debentures were sold to the
American public to the amount of $50,000,000.
Senator F letcher . Now how about the actual value?
Doctor W in k ler . Some of them had an actual value by reason of
being listed, so that it is relatively easy to determine the value of
those listed. Others did not have a listed market. But in the spring
of 1929 it was a very simple matter to obtain a dependable market
value for the unlisted securities merely because similar securities were
outstanding in the market. M y estimate is, which is based upon the
considerations I have just mentioned, that the market value, the
conservative market value of the pledged collateral at the time of the
issuance of the $50,000,000 of bonds, was at least equal to if not in
excess of the $50,000,000.
Senator C ouzens . Then at the time of the substition was there any
material difference?
Doctor W in k ler . Oh, yes.
M r. M arrinan . Senator Couzens, may I have the witness complete
an answer to the second part of my question?
Senator C ouzens . Yes.
Doctor W in k ler . If there had been no substitutions the value
to-day, computed similarly, would be at least twenty-four and onehalf million dollars.
Mr. M arrinan . Now, Doctor Winkler, what is the value of
the substituted collateral at the present time?
Doctor W in k ler . The value of the substituted collateral, very
little of which has a listed market anywhere, and taking into ac
count general-market conditions, is, according to my estimate, some
what in excess of nine and three-fourths million dollars. In other
words, equivalent to at least 20 cents on the dollar of the present out
standing amount of the secured debentures.
Senator C ouzens . Would the maturity of the collateral have any
bearing upon the value of the security, outside of the market value?
Doctor W in k ler . Not to my way of thinking, because maturity
of foreign government bonds is distinctly a misnomer, for such bonds
rarely mature at the maturity date.
STOCK EXCHANGE PRACTICES
1313
Senator C ouzens . Just how are they handled, then? Just how are
such securities awarded if they have no maturity date?
Doctor W in k ler . They have a maturity date, but in appraising
the value of a foreign-govemment bond I personally do not permit
myself to be influenced by the date of maturity because of my ex
perience in studying foreign-government bonds, which are rarely paid
off at maturity. I take into account the existing factors.
Senator C ouzens . But the fact is that they are paid off, because the
buyer has the right to get his money or to take a refunding bond,
has he not?
Doctor W in k ler . Yes.
Senator C ouzens . In what respect are securities of foreign govern
ments different from our own Federal Government securities?
Doctor W in lk e r . Technically speaking they are not.
Senator C ouzens . That is what I wanted to know.
Doctor W in k ler . But the credit standing of one government is
different from that of another government.
Senator C ouzens . Yes; but it is quite to be expected that a national
government, such as France, is sound, and yet because of some unusual
condition the sale price of the bond may go down, or of the security,
may go down, as is the case of our own Federal Government at times,
to 80 or 85. But that does not change the intrinsic value of the
security which the buyer intends to hold until it matures, does it?
Doctor W in k le r . No. But I thought I was to confine my atten
tion to the remaining bonds which to-day constitute the collateral
in this case.
Senator C ouzens . Yes. But I was just asking about the general
proposition. And my understanding is correct, is that right?
Doctor W in k le r . Absolutely correct.
Senator F letcher . Was any question ever raised about these sub
stituted securities being forged?
Doctor W in k ler . According to my information, which I have
obtained from those identified with the Kreuger & Toll bonds, the
securities which are to-day on deposit with the Swedish Bank are said
to be genuine in every respect.
The C hairman . The forgeries were in another corporation?
Doctor W in k ler . Yes, in another corporation.
Senator C ouzens . If this question embarrasses you, Doctor
Winkler, you do not need to answer it: From your observations in
this case do you believe that Lee, Higginson & Co. did their full
duty to their customers all throughout this transaction?
Doctor W in k ler . Personally I do not think so.
Senator C ouzens . Thank you very much for your answer.
Senator T ownsend . Doctor Winkler, would you mind giving the
committee your reason why you do not think so?
Doctor W in k le r . It seems to me that where substitutions are
permitted it is perhaps the duty of those who distribute the bonds
to the public to see to it that when substitutions are made the bonds
put in place of the withdrawn bonds are at least as sound intrinsically
as the bonds taken out. If I recall correctly, Lee, Higginson & Co.
have been floating securities for many years, and I doubt as to
whether they would have offered directly to the investing public
securities that were put in place of certain other bonds that the
Kreuger Co. took out. Therefore, I believe it was to some extent
1314
STOCK EXCHANGE PRACTICES
their duty to see to it that when good bonds are taken out at least
equal bonds are put in place of them.
Senator T ownsend . Have you any knowledge or do you believe
Lee, Higginson & Co. thought they were of equal value to the bonds
that were taken out?
Doctor W in k ler . I am afraid I could not answer that question,
Mr. Senator.
Senator F letcher . As I understand the situation, they do not
claim that they knew anything about it. They did not bother about
it. Even the trustee did not trouble himself about it very much, just
accepted a certificate from Kreuger & Toll. I understood Mr. Durant
to say on yesterday that Lee, Higginson & Co. did not know about
those substitutions, or if they did they did not investigate, or did not
consider it their duty to do so, and the trustee did not know about it,
and that trustee was the Lee, Higginson Trust Co.
M r. M arrin an . I think the record will show that the Lee, Higgin
son Trust Co. was advised.
Senator F letcher . They were advised, but—■
—
M r. M arrinan (continuing). But they claimed that that informa
tion was sequestered there and not communicated to anyone in the
affiliated banking house.
Senator C ouzens . Doctor Winkler, do you think it was proper to
have this exchange of securities at par value instead of at market
value?
Doctor W in k ler . In the spring of 1929 it may not have been un
usual. To-day it is very much so. Because in the spring of 1929 prac
tically all those bonds that were pledged, or said to have been pledged,
were well thought of. In the spring of 1929 there were many more
borrowers, or rather there were many more lenders than borrowers.
It was easier to lend money than to find a borrower. Therefore, the
difference in the spring of 1929 between par value and market value,
regardless of the intrinsic soundness of the bond, was practically the
same. To-day it is altogether different.
Senator C ouzens . So you do not think the fact that they used par
in this case was a premeditated scheme?
Doctor W in k ler . I should not think so.
Senator C ouzens . D o you not think there was some other respon
sibility of the part of Lee, Higginson & Co. in the matter outside of an
examination or consideration of the indenture and the securities de
posited with it?
Doctor W in k ler . I think that Lee, Higginson & Co. should have
made it their business to obtain information from time to time as to
substitutions of collateral, regardless of how serious or how inconse
quential such substitutions may have been.
Senator C ouzens . Outside of this particular transaction, isn’t it a
fact that they placed Mr. Durant on a number of corporations as their
representative?
Doctor W in k ler . I am not familiar with that.
The C hairman . Mr. Durant, testified on yesterday here before the
committee that he was a director in the Kreuger & Toll Co. for three
years but never attended a directors’ meeting.
Senator C ouzens . That was the point I was getting at. I under
stood that was the testimony, and I was asking Doctor Winkler if in
doing that they did not in fact lead their customers to believe that
STOCK EXCHANGE PRACTICES
1315
they were keeping in close contact with those corporations, by putting
Mr. Durant on their boards of directors, but perhaps I am beyond
what Doctor Winkler is testifying about. If I am he may say he
doesn’t care to go into that matter.
Doctor W in k ler . I am afraid I am compelled to say I don’t
know, Mr. Senator.
The C hairman . This matter of substitution of collateral at par
value isn’t the customary thing even at that time, was it? In other
words, it was not the custom in the market carried down to that
period, was it?
Doctor W in k ler . N o .
The C hairman . In other words, it was a new thing.
Doctor W in k ler . Whether it was new or not I could not testify.
The C hairman . It was not an old thing, then?
Doctor W in k ler . I should not think so.
The C hairman . No. Now you may proceed with your examina
tion, Mr. Marrinan.
M r. M arrin an . Doctor Winkler, you gave us our first information
regarding the comparative value of the pledged collateral, which I
might say I had previously been unable to ascertain. Do you care
to give us some information of a similar character with regard to the
comparative income from the originally pledged securities, and from
the finally substituted securities, without going into the matter of
splitting fractions, but just giving the results approximately?
Doctor W in k ler . All right. If there had been no substitutions
the income per annum to-day would amount to $1,681,500, equivalent
to a little more than $35 per bond instead of the stipulated $50.
The C hairman . What is the income now, after the substitution?
Doctor W in k le r . A s a result of the substitutions the income at
this moment is $628,350, or $13 per annum, approximately one-third
of the annual income which would have accrued to the debenture
holders if there had been no substitutions.
Mr. M a rrin an . Doctor Winkler, there is a curious provision in
the debenture, and I may not state it with technical precision, but
substantially it says that if the income requirements fall below the
120 per cent ratio yet the bonds are not to be regarded in default.
Is that a usual provision, and, if so, what does it mean?
Doctor W in k ler . It means exactly what it says, that if the income
falls below the stipulated ratio the bonds should not be regarded as
being in default, the belief being, I suppose, that income would come
from other sources. But it seems to me that a provision of this sort
is not—or rather I should say, a provision of this sort does not afford
all the protection that a buyer of bonds is perhaps entitled to.
The C hairman . Is that a usual provision in these indentures?
Doctor W in k ler . I could not say.
The C hairman . Have you ever known of any other case like it?
Doctor W in k ler . I have not.
The C hairman . All right. That answers it sufficiently for me.
Senator C ouzens . Is it usual that when collateral falls down, as it
did in this case, to require additional collateral in order to bring it up
to protect the securities?
Doctor W in k ler . If I understand the prospectus correctly, if there
is a deficiency as far as the income or the par value are concerned,
the company agrees to make up such deficiency, providing it has in
its possession bonds of the eligible type.
1316
STOCK EXCHANGE PRACTICES
Senator C ouzens . That is, with specific reference to this particular
indenture.
Doctor W in k ler . Correct.
Senator C ouzens . But I was asking if you know what the usual
practice is with respect to such a situation. I have seen these inden
tures where they required, in case the collateral fell below the amount
fixed at the time, that additional collateral should be deposited in
order to maintain the security. Do you know of any case such as
that?
Doctor W in k ler . No; I do not. My impression is that indentures
are rarely read before the bonds are bought, but are read after there
is default.
Senator C ouzens . We are quite well aware of that. [Laughter.]
The C h airman . Therefore, there is all the greater responsibility
upon the man writing the debenture, the trustee who administers it,
and so on, than there would be otherwise. The public really ought
to have their protection. The public are not usually suspicious of
the instrument and as a rule do not even read it. They rather see
who is connected with the undertaking, isn’t that it?
Doctor W in k ler . I should think so, Mr. Chairman.
The C hairman . All right.
M r. M arrin an . Doctor Winkler, have you examined the listing
application of the Kreuger & Toll Co., which was filed August 6,
1929, and approved August 14, of that year, for listing this issue on
the New York Stock Exchange?
Doctor W in k ler . I have.
M r. M arrin an . If the provisions of that agreement, contained in
the listing application, had been fully complied with the American
investor would have received more protection than he actually got,
isn’t that true?
Doctor W in k ler . M y impression is that if all the provisions con
tained in the stock exchange listing sheet had been carried out by
the company, the sheet which was used in applying for a listing of
these bonds, the investor would have had all the protection that he%
could possibly obtain. Because among the things the applicant for*
listing agreed to furnish to the exchange are the following:
To publish a statement of earnings annually.
To publish promptly to holders of bonds any action in respect to
interest on bonds.
To notify the stock exchange if a deposit of collateral is changed
or removed.
Mr. M arrin an . Whose job was it to see that that was done, or
was there anybody in the picture definitely charged with that
responsibility?
Doctor W in k ler . The company agreed to furnish this information
to the exchange.
Senator T ownsend . That is a requirement of the New York
Stock Exchange, is it not?
Doctor W in k le r . Oh, yes.
Mr. M arrin an . Doctor Winkler, my attention has been called to
the following statement, attributed to the Lee, Higginson Trust Co.,
in the Commercial and Financial Chronicle of New York under date
of March 26, 1932:
Substitutions have been made in the Kreuger & Toll secured debenture issue
in accordance with the terms of the indenture.
STOCK EXCHANGE PRACTICES
1317
And, furthermore:
Information as to the collateral has been currently available to debenture
holders throughout the life of the issue in the office of the trustee.
Do you agree that the substitutions were made in accordance with
the provisions of the indenture?
Doctor W in k ler . I should think so. But I should like to qualify
that answer to this effect. That although I have examined the
listing of the bonds pledged originally, as well as the bonds substi
tuted in place of the original collateral, it is difficult for me to tell
whether at the time the changes were made the provisions of the
indenture were carried out in full. On the whole it would seem that
they have been carried out literally. If you inquire as to the relative
merit of substituted bonds for withdrawn bonds, I would be able to
say that invariably an inferior bond was put in in place of a distinctly
good and sound investment.
Senator C otjzens. Is it practicable to sell such securities without
the power of substitution? I do not mean to sell them, but is it
practicable from a business standpoint to have it so that these
securities may not be substituted when such securities are sold?
Doctor W in k ler . It is very often done.
Senator C otjzens. Do you mean it is often done where no substi
tution is permissible?
Doctor W in k ler . Yes.
The C hairman . And where it is permitted it is with securities of
equal or greater value?
Doctor W in k ler . Yes, sir.
The C hairman . A moment ago you spoke of the company having
agreed to do certain things. One of the representatives of the press
has just said to me he did not know whether you meant by that
statement Lee, Higginson & Co. or Kreuger & Toll Co.
Doctor W in k le r . The application to the New York Stock Ex
change was signed by the Kreuger & Toll Co., by Donald Durant,
director. In other words, the Kreuger & Toll Co., or rather Donald
Durant for and on behalf of the Kreuger & Toll Co., agreed to furnish
this information.
The C hairman . So that it was the Kreuger & Toll Co. that had
agreed to furnish the information?
Doctor W in k le r . Yes, sir.
The C h airman . Through Donald Durant?
Doctor W in k ler . Yes, sir.
The C h airman . Yesterday he did not seem to know about the
Kreuger & Toll Co. Go ahead, Mr. Marrinan.
Mr. M a rrin an . At least he never attended a directors’ meeting.
The C hairman . No.
Mr. M arrin an . T o return to the second part of that quotation
from the Commercial and Financial Chronicle of New York:
Information as to the collateral has been currently available to debenture
holders throughout the life of the issue on the office of the trustee.
Do you think that information of such importance as the status of
the pledged collateral under the various substitutions, and its remain
ing merely on file in the office of the trustee without the trustee or the
bankers or the New York Stock Exchange or any of the institutions
involved, making some effort of their own, on their own initiation if
119852— 33— ft 4-------12
1318
STOCK EXCHANGE PEACTICES
the trustee did not undertake that responsibility, to apprise the
holders of the bonds of the status from time to time of the pledged
collateral, was sufficient?
Doctor W in k ler . I think in view of the important changes that
took place the trustee should, without any question, have notified
those who were invited to subscribe to those bonds originally, and
particularly since the information, as the trustee seems to have
admitted, was available at the offices of the trustee.
Mr. M arrin an . Doctor Winkler, from your knowledge— and if
this is an embarrassing question I wish you would so state and I believe
the chairman will consent to have you relieved of making an answer
to it—from your knowledge of practices in financial circles is it your
opinion that information available or made available to the trustee
of this issue, Lee, Higginson Trust Co., did as a matter of routine
reach the firm of Lee, Higginson & Co., and other members of the
syndicate which sold the Kreuger & Toll securities?
Doctor W in k ler . I could not possibly answer that question
because I do not know. As I understand the information was
available at the office of the Lee, Higginson Trust Co. Whether
they used it to their own advantage, whether they communicated the
information to any members of the syndicate that sold the bonds, I
really do not know.
Mr. M arrin an . They were a little less sound bankers if that
information were available and they did not know about it, isn’t that
true?
Doctor W in k le r . If they had got possession of the information,
the investor might possibly have excused it. But inasmuch as the
trustee, who acts as far as I can make out for the investor as against
the company, it might have been advisable to at least tell the public
of the changes that had taken place.
Mr. M arrin an . D o you think it a healthy arrangement, and I do
not propose to go into any legalistic phases, but is it a healthy set-up
wherein there is an interlocking directorate and quite an apparent
community of interest between the issuing company, the bankers
floating the issue, and the trustee; is it a healthy set-up from the stand
point of the investor, and especially in a situation such as we have here
where the investor quite apparently was kept in ignorance of the true
condition of this particular issue?
Doctor W in k ler . It is unhealthy only in so far as the trustee does
not acquaint the investor with information which he could use to
advantage.
Senator C ouzens . Well, right at that point: Assuming that this
substitution had been broadcast to all investors, just what effect
would it have had upon the securities in your opinion?
Doctor W in k le r . It depends upon the time at which such broad
cast might have been made.
Senator C ouzens . Well, at the time of the substitution.
Doctor W in k ler . If at the time when the substitutions were
made, it might have led very many holders of Kreuger & Toll deben
tures to dispose of their bonds. It might have led the banking houses
identified with the Kreuger & Toll financing to undertake a very
careful study of the Kreuger & Toll situation, and they might have
detected irregularities before they assumed the gigantic proportions
they did subsequently assume.
STOCK EXCHANGE PRACTICES
1319
Senator C ouzens . I assumed that that would be correct, in part
at least. But as to a person only who made it almost his exclusive
business of making investments. On the other hand, to the average
purchaser of these securities, knowledge of the substitutions would m
all probability have had little influence upon him; isn’t that so?
Doctor W in k ler . Perhaps so.
Senator C ouzens . In other words, he would not be much disturbed
so long as the trustee was satisfied.
Doctor W in k ler . Correct.
Senator C ouzens . I think the greater responsibility would be upon
the trustee.
Doctor W in k ler . Yes, sir.
Senator C ouzens . And if you and I were just casual investors in
these securities, we would have paid little or no attention to the
receipt of a notice that there had been a substitution such as this,
isn’t that correct?
Doctor W in k ler . I should think so.
Senator C ouzens . So after all much of this difficulty that occurs
is caused no doubt by the faith the investor has in the issuing house.
What is your answer to that?
Doctor W in k ler . Yes, sir.
The C hairman . Wouldn’t it be well to add to that the faith in fact
that the New York Stock Exchange has passed on the indenture and
approved it?
Doctor W in k ler . The information furnished to the stock exchange
is so comprehensive and so detailed so far as the information goes;
yes. I do not know whether it is physically possible for any institu
tion where thousands upon thousands of issues are listed, personally
to investigate the accuracy of every statement made.
The C hairman . That is not a response to my question, but you
perhaps did not understand it. The public had faith in the fact that
it is a listed stock; is that right?
Doctor W in k ler . To a considerable extent.
The C hairman . And it only becomes a listed stock because the
stock exchange has approved it.
Doctor W in k ler . Yes, sir.
The C hairman . The other point you raise is whether the stock
exchange is trying to do more business than they can attend to,
and I do not want to go into that.
Senator C ouzens . Is it practicable, Doctor Winkler, to require
some governmental agent to certify to the facts contained in a pros
pectus before it is allowed to be issued?
Doctor W in k ler . It would be almost an impossible task. I am
afraid I will have to go back to what I said awhile ago—an instru
mentality similar to the companies act in Great Britain, where those
who sign statements assume responsibility, which means that they
will not sign statements unless they feel that those statements are
accurate in every detail.
Senator C ouzens . Yes; but you have to do more than feel, some
times. You have to know and not just feel that these statements are
accurate.
Doctor W in k ler . If they know that their misstatements will be
punishable by law, and severely punishable by statute, they will take
pains to see to it that the statements are accurate in every detail.
1320
STOCK EXCHANGE PRACTICES
M r. M a rrin an . So that you think that that would be a better
governmental procedure?
Doctor W in k le r . It would seem to me so.
The C hairman . D o you have reference to the officers of the
exchange in that statement? To make them responsible for it?
Doctor W in k ler . N o. Those that issue statements on the basis
of which the public money is put up—that is, officers and directors of
corporations whose securities are traded in in the markets.
The C hairman . T o be effective that would have to be done by the
State of New York or the New York Stock Exchange, or the Federal
Government would have to find a way of reaching them, is that it,
Doctor?
Doctor W in k le r . Precisely.
Mr. M arrin an . Doctor Winkler, there has been frequent mention
of the withdrawal of the French bonds. On January 23, 1930,
Kreuger withdrew $13,416,000 in French bonds and substituted
therefor about $13,000,000 of Serbian 6% per cent and Hungarian land
reform 5}i per cent bonds. How did these Serbian and Hungarian
bonds compare in value as sound collateral, giving consideration to
their marketability, with the French bonds, which were withdrawn?
Doctor W in k le r . The French bonds that were withdrawn on
January 23,1930, constituted at the time of withdrawal fundamentally
secure investments enjoying ready marketability not only on the
Paris Stock Exchange, but everywhere.
Senator C ouzens . Of what value?
Doctor W in k ler . Of practically the par value. The market value
of the withdrawn bonds was practically equivalent to the par value.
On the other hand, early in 1930 conditions in Central Europe and in
the Balkans were distinctly unsatisfactory, and were growing worse
every day, so that the substituted Yugo-Slav and Hungarian bonds
not only did not have a market, but even if they had had a market
would have been appraised at very substantially below the par value.
Senator C ouzens . How much below?
Doctor W in k le r . I should say the very maximum at which those
bonds might have found a buyer would have been between 40 and
50 cents on the dollar. And I am erring on the liberal side.
Mr. M arrin an . Doctor Winkler, I have been told that Lee,
Higginson & Co. issued a circular some time in May, 1931, advertising
Kreuger & Toll participating debentures at a time after important
changes had taken place in this pledged collateral in the secured
debenture issue. If the bankers had the information which the
trustee possessed were they justified in those circumstances in rec
ommending either the secured debentures or the participating
debentures as of May, 1931?
Doctor W in k ler . If they were in the possession of the informa
tion-----M r. M arrin an . First, Doctor, are you familiar with such a Circular?
Doctor W in k ler . Are you sure you do not refer to a circular
dated January, 1932?
Mr. M arrin an . I was coming to that next. There was a series of
them. You may answer the question for the January circular if you
so desire.
Doctor W in k ler . In January, 1932, there was a circular issued by
Lee, Higginson & Co. recommending the purchase of an issue which
was junior to the secured debentures, as an undervalued security.
STOCK EXCHANGE PRACTICES
1321
Senator C ouzens . Describe what you mean by an undervalued
security.
Doctor W in k ler . I shall read from this circular:
Kreuger & Toll Co. American certificates are now selling at about 6 * * *.
Taking into consideration facts alone and not general apprehension unsupported
by facts, they represent, in our opinion, an interesting commitment from the
standpoint of price in relation to intrinsic value.
Senator C ouzens . And that is what you mean by an undervalued
security. Let me see that, will you please?
Mr. M arrinan . That circular contained a rather enthusiastic
indorsement by Ivar Kreuger himself, did it not?
Doctor W in k ler . I believe it did.
M r. M arrinan . And that was during the month when the firm of
Price, Waterhouse & Co. in behalf of the International Tel. & Tel.
and in the Ericsson Telephone deal was discovering certain irregu
larities which were of consequence and had considerable bearing upon
Kreuger’s methods of doing business, is that not true?
Doctor W in k ler . I gather that, Mr. Marrinan, from reports in
the newspapers and from the testimony yesterday.
M r. M arrinan . And yet at that time and at least with some im
portant people in the Street in a position to question Kreuger and his
methods, we have here a circular going forth to investors urging pur
chases of these participating debentures, is that not true?
Doctor W in k ler . Yes, Mr. Marrinan.
M r. M arrin an . As a sort of blanket question, which may be too
casual and inexact for one of your precision of thought to answer,
and if so I will restate it— is it true that Kreuger with all his swindling
deported himself better under the terms of the secured debenture
agreement than he was legally obligated to do had he exercised fully
the latitude given to him?
Doctor W in k ler . I should say so, Mr. Marrinan.
The C hairman . In other words, he was operating under an agree
ment-----Doctor W in k le r . In other words, Mr. Kreuger, instead of sub
stituting Yugo-Slav bonds for French bonds might have substituted
bonds distinctly inferior to Yugo-Slav, such as Bolivian internal
bonds or Paraguayan internal bonds.
The C hairman . Or most anything which could be called a bond.
Doctor W in k ler . Or most anything by the name of bond or de
benture, providing it was paying interest at the time of substitution.
The C hairman . Provided it had made one payment of interest?
Doctor W in k ler . At the time of substitution.
The C hairman . And that was the agreement that was approved
and that he was operating under?
Doctor W in k ler . It seems so, Mr. Chairman.
Senator C ouzens . Have any of the substituted bonds defaulted?
Doctor W in k ler . The Hungarian bonds, the Yugo-Slav bonds, and
the Ecuadorian bonds are in default.
Senator C ouzens . As to interest only?
Doctor W in k ler . A s to interest only. But I must qualify that to
a certain extent. Both Hungary and Yugoslavia are paying the
interest on these bonds in their native currencies at par of exchange,
depositing such payments with local institutions to the credit of for
1322
STOCK EXCHANGE PRACTICES
eign bondholders or creditors. But inasmuch as the current market
value of these currencies is substantially below the par value, the pay
ment, even if it were available, would be considerably below that which
is scheduled to be payable to the creditors.
Senator C ouzens . Well, does the bond itself specify what cur
rency?
Doctor W in k ler . Yes; the bond is a gold dollar bond.
Senator C ouzens . And so as to the difference between the depre
ciated currency and the gold dollar, to that extent they are in default;
is that it?
Doctor W in k ler . A s far as the creditor is concerned they are in
complete default, because the creditor can get nothing out of those
countries. He merely has a receipt, if he has that much, which shows
that money is being deposited to his credit, but he can not use such
deposited funds.
Senator C ouzens . All he can do if he wants to use it is to go over
there and spend it; is that right?
Doctor W in k ler . And obtain special permission-----Senator C ouzens . Yes.
Doctor W inkler (continuing). How and when he may use it
within the country.
The C hairman . There were a large number of substitutions from
the time bonds were issued clear down to Kreuger’s death, were there
not?
Doctor W in k ler . Yes; Mr. Chairman.
The C h airman . And each one substituted bonds of par value, but
of lower intrinsic value?
Doctor W in k le r . In practically every case. And also bonds that
had a market were taken out where bonds that had no market were
put in.
The C hairman . In other words, inferior bonds were substituted
right along up to his death. You spoke of certain South American
bonds that might have been used. I am wondering what might have
happened if he had lived another month. We might have had them,
eh?
Doctor W in k ler . This I could not answer, Mr. Chairman.
The C hairman . N o ; but there was no reason why they could not
have been put in?
Doctor W in k ler . N o. Provided they lived up to the provisions.
The C hairman . Provided they lived up to the specifications,
which were not hard.
Mr. M arrin an . Doctor Winkler, there was a mention here
yesterday of a certain delicacy in this situation by reason of negotia
tions proceeding between American creditors and these Swedish
companies and possibly the Swedish Government. I have no desire
to ask a question which in any manner might embarrass that situa
tion. With that in mind I struck from my list many questions
yesterday which I had intended to ask. This question may fall into
that category. If it does, please so indicate.
It has been stated that there has been a progressive siphoning of
the assets of the Kreuger enterprises into Sweden while their liabilities
were being dumped in America. Have you any knowledge bearing
upon this allegation?
Doctor W in k ler . My only answer to this question would be that
Kreuger & Toll securities, or rather “ insecurities,” were sold in the
STOCK EXCHANGE PRACTICES
1323
American market, whereas collateral pledged or scheduled to be
pledged was deposited in Sweden. In other words, we hold a note
evidencing indebtedness, whereas in Sweden the concrete assets are
on deposit.
I hope that answers your question, Mr. Marrinan.
Mr. M arrin an . That answers the question completely.
Senator C ouzens . May I ask, Doctor Winkler, if you read this
particular circular of Lee, Higginson & Co., dated January, 1932?
Doctor W in k ler . Yes, I have, Mr. Senator.
Senator C ouzens . With your familiarity with the British com
panies act would you consider this a circular in violation of that
act?
Doctor W in k ler . Very definitely so, Mr. Senator.
Senator C ouzens . Well, a careful reading of the circular shows a
very great evasiveness as to any promises or statement of fact, and
it seems to me a very shrewdly and dishonestly drawn statement,
because you are unable to pin any direct fact in the statement. And
I wondered how the companies act such as you have referred to
would catch a statement of this sort.
Doctor W in k ler . I am of the opinion, Mr. Senator, that the
British companies act, as far as I am familiar with the important
features of the act, would afford protection definitely in this case,
regardless of evasive statements, actual or alleged, contained in the
circular.
Senator C ouzens . In other words, you believe that if we had an
act over here such as the British companies act that the issuers of
this statement could have been punished under the act?
Doctor W in k ler . I am inclined to think so, Mr. Senator.
Senator C ouzens . Is this in the record?
The C hairman . N o .
Senator C ouzens . I would like to have it go in the record at this
point.
The C hairman . If there is no objection it will be so ordered. It
may be printed in the record at this point.
(The circular of Lee, Higginson & Co., dated January, 1932, headed
An Undervalued Security, is here printed in the record in full, as
follows:)
AN UNDERVALUED SECURITY
Kreuger & Toll Co. American certificates are now selling at about 6 on the
New York Stock Exchange. Taking into consideration facts alone and not
general apprehension unsupported by facts, they represent, in our opinion, an
interesting commitment from the standpoint of price in relation to intrinsic value.
In the inclosed circular are given an outline of the company’s business, its
investments, and figures taken from the balance sheet as of December 31, 1930.
These figures indicate the strong earning power and asset value available for the
certificates. Since their publication, and particularly in recent months, as we
all know, prices in general have fallen, and at the moment considerable uncer
tainty as to the future exists in the minds of the investing public. Clarification
of the general situation is difficult owing to the many factors involved, and the
many attempts to do so are difficult of interpretation so far as shedding light on
the future market values of securities is concerned. What can be relied upon,
however, is the fact that the world has emerged from all previous depressions and
the essentially sound enterprises have survived with a substantial recovery in
value of their security issues taking place as conditions improved.
At their present market price, the equity issues of Kreuger & Toll Co. are
selling for about $64,500,000 as compared with about $237,000,000 at the close
of 1930. This reflects the political and economic difficulties prevailing in Europe
1324
STOCK EXCHANGE PRACTICES
for an interest in Kreuger & Toll Co. represents ownership in a cross section o f
some of the most important European enterprises, including control of the world’s
largest match manufacturer, of its greatest iron ore properties, and of Sweden's
largest wood-pulp producer, besides a substantial interest in the second largest
concern in the communication field; the company is also creditor of many Euro
pean countries. Unless one lacks all faith in the future of the world, and in the
preservation of its economic structure, it seems obvious that these assets will not
continue to be valued as they are at the present time, values which not only
write off entirely the company’s holdings of Government bonds, totaling over
$100,000,000, but also write down its other available assets to about 30 per cent
of their book value.
In spite of prevailing anxiety over political and private government debts and
without denying that difficulties exist for any company engaged in international
trade, we believe that Kreuger & Toll American certificates are currently underpriced.
L e e , H ig g i n s o n & Co.
J a n u a r y , 1932.
M r. M arrin an . T o continue briefly Senator Couzens’s line of in
quiry with respect to the British companies act, is it not true, Doctor
Winkler, that directors of companies are held responsible under the
law for statements made in prospectuses or circulars?
Doctor W in k ler . Not only are they held responsible for statements
made, but they are held responsible for statements which they do
not make and which they should make.
Mr. M arrinan . Is it not also true that all underwriting fees and
commissions in connection with the flotation of various issues are as
a matter of law required to be included in balance sheets, and where
there is an omission, whether deliberate or accidental, there is a lia
bility for penalty? Isn’t that provision in the act?
Doctor W in k ler . I believe it is, Mr. Marrinan, if I remember the
provisions of the act correctly.
Mr. M arrin an . Can you state, because it rounds up in an im
pressive manner the entire situation within the British companies act,
as it is of interest to the committee, the story of the Lord Kylsant case,
which I believe is quite recent?
Doctor W in k le r . Yes, Mr. Marrinan. If the committee will per
mit me I shall read excerpts from an article contained in The Law
Times of November 14, 1931, relative to the alleged falsification of
prospectuses sponsored by Lord Kylsant, head of the Royal Mail
Steamship Co. I read in part:
The appellant—
That is Lord Kylsant-----Senator C otjzens. Do they punish Lords over there?
Doctor W in k ler . Twelve months’ imprisonment, Mr. Senator.
[Continuing reading:]
who had been the chairman of the Royal Mail Steamship Packet Co., was charged
that he, as a director of that company, published a prospectus, which he knew to
be false in a material particular, inviting subscriptions to a debenture issue, with
intent to induce persons to subscribe or advance money to the company. * * *
The prospectus, which was published in 1928, contained a statement of the capital
issued and fully paid, of the existing debenture stock, of the reserve fund, and
the insurance fund; and, after setting out the history of the company and stating
that the object of the issue was to provide additional capital * * * it set
out a table of the dividends paid for the year 1911 to the year 1927, inclusive,
those dividends varying from 5 up to 8 per cent. * * * The prospectus did
not state that for a number of years immediately preceding it the company had
sustained losses on its trading and investment income, after allowing for depre
ciation; or that the dividends for those years had ultimately been paid out of the
earnings of the war period.
STOCK EXCHANGE PEACTICES
1325
It is held, therefore, that a document could be false, where by a number of
statements a false impression was intentionally conveyed, although each state
ment taken by itself might be true, applied to a criminal as well as to a civil case,
and that the prospectus in the present case was accordingly false within the mean
ing of the section, because it put before intending investors, as materials upon
which they could exercise a judgment on the existing position of the company,
figures which apparently disclosed the existing position, but in fact concealed it.
M r. M arrin an . Doctor Winkler, where in this entire situation
was the interest of investors protected in a manner worthy of the
institutions involved?
Senator C ouzens . Before that is answered, Mr. Chairman, may I
have that document that Doctor Winkler just read from put in the
record fully?
The C hairman . H ow many pages is this, Doctor?
Doctor W in k ler . Well, there are only three pages, but it is the
only copy I have.
The C hairman . Will you furnish us a copy later?
Doctor W in k le r . Yes.
The C hairman . If there is no objection that may be furnished and
placed in the record at this point.
(The quotation from The Law Times of November 14, 1931, pre
sented by Doctor Winkler is here printed in the record in full as fol
lows :)
«.
COURT OF CRIMINAL APPEAL, R E X V. KYLSANT
Avory, Branson, and Humphreys, Judges. November 2, 3, and 4. Criminal
law— Fraud by director— Publication of fraudulent prospectus— No positive
false statement— False impression conveyed by number of statements— Conceal
ment of true position of company— Whether prospectus “ false in any material
particular” — Larceny act 1861 (24 and 25 Viet., ch. 96, sec. 84).
Appeal against conviction. The appellant, who had been the chairman of the
R. M. S. P. Co., was charged (inter alia) that he, as a director of that company,
published a prospectus, which he knew to be false in a material particular, invit
ing subscriptions to a debenture issue, with intent to induce persons to subscribe
or advance money to the company, contrary to section 84 of the larceny act 1861.
He was convicted on this charge at the central criminal court and was sentenced
by Wright, judge, to 12 months’ imprisonment in the second division. On other
counts, which charged him with publishing accounts which he knew to be false
in material particulars, he was acquitted. The prospectus, which was published
in 1928, contained a statement of the capital issued and fully paid, of the existing
debenture stock, of the reserve fund, and the insurance fund; and, after setting
out the history of the company and stating that the object of the issue was to
provide additional capital for a new freehold building and for the general purposes
of the company, it proceeded:
“ The interest on the present issue of debenture stock will amount to £100,000
per annum. Although this company, in common with other shipping companies,
has suffered from the depression in the shipping industry, the audited accounts
of the company show that during the past 10 years the average annual balance
available (including profits of the insurance fund), after providing for deprecia
tion and interest on existing debenture stocks, has been sufficient to pay the
interest on the present issue more than five times over. After providing for all
taxation, depreciation of the fleet, etc., adding to the reserves, and payment of
dividends on the preferred stocks the dividends on the ordinary stock during
the last 17 years have been as follow s:”
And then it set out a table of the dividends paid for the year 1911 to the year
1927, inclusive, those dividends, varying from 5 up to 8 per cent, and down,
on one occasion in 1926, to 4 per cent, but in 1927 again rising to 5 per cent.
The prospectus did not state that for a number of years immediately preceding
it the company had sustained losses on its trading and investment income after
allowing for depreciation, or that the dividends for those years had ultimately
been paid out of the earnings of the war period. It was conceded at the trial
that every statement that appeared in the prospectus was true, and it was con
tended on behalf of the appellant (inter alia) that there was no evidence that
1326
STOCK EXCHANGE PRACTICES
the appellant had published a prospectus which was false in any material
particular.
Held, that the principles laid down in Peek v. Gurney (L. Rep. 6 H. L. 377)
and Aaron’s Reefs Limited v. Twiss (74 L. T. Rep. 794, 1896, A. C. 273) that a
document could be false, where by a number of statements a false impression
was intentionally conveyed, although each statement taken by itself might be
true, applied to a criminal as well as to a civil case, and that the prospectus in
the present case was accordingly false within the meaning of the section because
it put before intending investors, as materials upon which they could exercise
a judgment on the existing position of the company, figures which apparently
disclosed the existing position, but in fact concealed it. Appeal dismissed.
(Counsel: For the appellant, Sir John Simon, K. C., J. E. Singleton, K. C.,
and Wilfrid Lewis, instructed by Holmes, Son and P ott; for the Crown, Sir
William Jowitt, K. C. (A.-G.), D. N. Pritt, K. C., and Eustace Fulton, instructed
by the director of public prosecutions.)
M r. M arrinan . Read the question that I put to Doctor Winkler.
(Thereupon the question was read by the reporter, as above re
corded, as follows:)
Doctor Winkler, where in this entire situation was the interest of investors
protected in a manner worthy of the institutions involved?
Doctor W in k ler . I do not believe I could answer this question
satisfactorily because the results more or less speak for themselves.
If a bond purchased for approximately 100 cents on the dollar declines
on the market to 12 cents oil the dollar as a result, to some extent, of
carelessness on the part of those whose duty it seems to have been to
look after the interests of investors, I should think that the investing
public did not receive adequate protection.
Mr. M arrin an . I s there anything additional, Doctor Winkler,
which you may voluntarily submit to the committee by way of help
fulness in dealing with the general problem which is here under con
sideration?
Doctor W in k le r . I should like to submit, Mr. Marrinan, if you
will permit, very briefly the chief provisions of the British companies
act and also of a German measure that is being proposed to-day as a
result of irregularities in connection with company statements and
which led to rather substantial losses on the part of investors. It is
very brief, and if the committee will permit me I should like to read
it, or just submit it.
Senator C ouzens . I suggest, Mr. Chairman, that he submit it in
the record. We will have to give it more consideration.
The C hairman . If there is no objection that may be done. Would
you outline it just briefly, Doctor Winkler, and then submit it for the
record?
Doctor W in k ler . For example, in Great Britain the revised com
panies act makes it compulsory for all British companies to keep
fuller and more current business records; to expand the scope of
information concerning conditions and operations made available to
the public, and at the same time provide safeguards against inaccura
cies and misrepresentations; to define more clearly the duty of
company directors and impose more severe penalties for their negli
gence or dishonest performance; and to safeguard further the original
issuance and subsequent distribution of securities among the investors.
Provision is also made for the protection of minority interests, the
revised act specifying methods whereby, under just provocation,
minority stockholders could invoke governmental aid, enforcing
special audits and examinations of the company’s affairs.
STOCK EXCHANGE PRACTICES
1327
(The statement presented by Doctor Winkler is here printed in full
in the record, as follows:)
From the information I have been able to gather on the basis of indentures
analyzed, I concluded that the investing public is afforded little, if any, protection,
either through the indenture or through circulars or prospectuses descriptive of
loans offered to them.
It seems to me that the only way to remedy this situation is to enact in this
country legislation similar to that enacted in foreign countries, notably Great
Britain and Germany, which would give investors much needed protection.
In Great Britain, for example, the board of trade in 1925 appointed a com
mittee of men prominent in financial and business life, who were charged with
studying the companies act and with making specific recommendations. In
May, 1926, the committee submitted to Parliament a report summarizing the
findings and containing recommendations. After due consideration, Parliament,
in May, 1929, enacted a revised companies act, entirely in accordance with the
suggestions submitted by the committee and contained in their report.
The revision of the act makes it compulsory for all British companies to keep
fuller and more current business records; to expand the scope of information con
cerning conditions and operations made available to the public, and at the same
time provide safeguards against inaccuracies and misrepresentations; to define
more clearly the duty of company directors and impose more severe penalties
for their negligence or dishonest performance; and to safeguard further the orig
inal issuance and subsequent distribution of securities among the investors.
Provision is also made for the protection of minoiity interests, the revised act
specifying methods whereby, under just provocation, minority stockholders
could invoke governmental aid, enforcing special audits and examinations of the
company’s affairs.
The provisions of the law were felt especially keenly when Lord Kylsant, head
of the Royal Mail, was sentenced to one year’s imprisonment for misrepresenta
tion of annual earning figures in a prospectus issued over his signature.
In Germany the Government, in September, 1931, prompted by the revela
tions in connection with the failure of a number of important corporations, pro
mulgated an emergency decree which amends and radically- transforms the
existing commercial code. The amendments prescribe in great detail the nature
of the records every limited-liability company must keep. Particular stress is
laid upon the annual balance sheet a*nd profit and loss account, for which very
comprehensive standardized forms are provided. It is also made compulsory
for all company figures and reports to be officially audited by independent certified
accountants, and as no such class of professional accountants existed at the time
in Germany, the amendments provide for their creation. Emphasis is also given
to much more frank and extensive publicity which must be accorded to company
reports. The duties of managers and directors are clearly defined, and heavy
penalties are established for their improper performance.
In view of the connection between banks and industrial companies, the amend
ments provide also for the setting up of a machinery for a system of governmental
banking control which would also directly affect the administration of ordinary
business companies.
It is, therefore, apparent that only through the enactment of legislation similar
to the above will we be able to give the American investing public protection.
Senator C ostigan . Doctor Winkler, has any legal question been
raised with respect to the ownership of the substituted collateral?
Doctor W in k ler . Yes, Mr. Senator.
Senator C ostigan . Will you state what the question is?
Doctor W in k le r . When I was invited immediately after the
Kreuger collapse to become a member of an independent protective
committee for Kreuger & Toll 5 per cent secured gold bonds I accepted
because I felt that the collateral, in spite of the substitutions, was
quite valuable, and that given time and improvement in general
world conditions the holders of the bonds stand a fairly good chance
of recouping their losses. I therefore tried to secure information as
to whether the collateral was actually on deposit with the Swedish
bank, and whether the collateral, if on deposit in Sweden, belongs
exclusively to the debenture holders, as it should on the basis of
1328
STOCK EXCHANGE PRACTICES
information originally furnished and which served as a basis for
subscription to the bonds. I was told by counsel that the question
of ownership is doubtful. In other words, the collateral which is on
deposit may after all be claimed by those except the ones who put
up their money.
The C hairman . Y ou have in your work examined a great many
of these agreements or indentures, have you not?
Doctor W in k ler . No, Mr. Chairman, I have not.
The C hairman . Y ou have not. Very well. That will be all.
Mr. M arrinan. Thank you very much, Doctor.
Is Mr. Altschul present?
The C hairman . I do not know how long we can continue. It
depends on what matters come up in the Senate. But the next
witness will be sworn and we will proceed.
You do solemnly swear that you will tell the truth, the whole truth
and nothing but the truth, regarding the matter now under investi
gation by the committee, so help you God?
Mr. A ltschul . I do, sir.
TESTIMONY OF FRANK ALTSCHUI, BANKER, NEW YORK CITY
(The witness was duly sworn, as above indicated, by the chairman
of the committee.)
Mr. M arrin an . Mr. Altschul, will you give to the reporter your
full name-and address?
Mr. A ltschul . Frank Altschul, 550 Park Avenue, New York
City.
Senator C ouzens . What is your occupation?
Mr. A ltschul . I am a banker, sir.
Senator C ouzens . Banker?
Mr. A ltschul . Yes.
Senator C ouzens . Well, what kind of a banker? Investment
banker, international banker, or domestic banker, or what?
Mr. A ltschul . International banker, sir.
Senator C ouzens . International banker. I am glad you hesitated
about saying that.
Mr. M arrin an . Mr. Altschul, you are a partner in a firm which is
a registered member of the exchange?
Mr. A ltschul . Yes, sir.
Mr. M ar rin an . You are a member of the governing committee of
the exchange?
Mr. A ltschul . Yes, sir.
Mr. M arrin an . Are you on any of its standing committees?
Mr. A ltschul . Yes, sir.
M r. M arrinan . Which ones are you on, or which one is the more
important?
Mr. A ltschul . I am on the committee on stock list, sir.
Mr. M arrin an . Am I correct in stating that you are the chairman
of the committee on stock list?
M r. A ltschul . Yes.
Mr. M a r rin an . Will you please state to the committee as briefly
as may be consistent with an understanding of the situation, just
what are the duties of the committee on stock list?
Mr. A ltschul . The primary duty of the committee on stock list
is to consider applications for the listing of securities on the New York
STOCK EXCHANGE PRACTICES
1329
Stock Exchange. In connection with the discharge of this primary
obligation they have gradually developed certain collateral functions
which have to do with the examination of papers prepared in connec
tion with listing applications, with the gradual development of require
ments looking to the obtaining of adequate and of constantly more
adequate information for the benefit of the investor. And beyond
that they have the general supervision of technical questions, such
as the character of engraving work on stock certificates and matters
with which I am sure this committee is not concerned.
For the convenience of the committee I have prepared an organiza
tion chart of the committee, in case you wish it, and also a short
r6sum6 of the flow of business through the office of the committee.
It may save your time if I will submit those documents for your
inspection, or in evidence.
Mr. M arrin an . May I request that these documents be accepted
for possible inclusion in the record, subject to their examination by
some one in behalf of the committee before they are finally incor
porated into the record.
Mr. A ltschul . They are limited purely to a technical disclosure of
the operations of the committee.
(Organization chart of the stock list committee of the New York
Stock Exchange and a resume of the flow of business through the
office of the committee on stock list were presented to the committee
by Mr. Altschul:)
D e s c r ip t io n o f t h e F l o w o f B u s in e s s T h r o u g h t h e O f f ic e of t h e
C o m m it t e e o n S t o c k L is t
i . l is t in g
a p p l ic a t io n s
Preliminary requests for listing are referred to the chief examiner, who, upon
receipt of sufficient papers, delegates the scrutiny of the application to one of
the examiners. The examiner consults with the company and assists in the
preparation of the printed draft application. He examines the papers, to see
that all the papers required by the committee are in order. Should any paper
required under the established requirements of the committee be missing, or
should there be any unusual features in the charter, by-laws, trust indenture,
deposit agreement, opinion of counsel, etc., reports the fact to the chief examiner.
The financial statements are submitted to another examiner, who specializes on
examinations of this character. Should any point appear to require expert
opinion, it is referred to either counsel for the exchange or the consulting account
ants for the exchange. The chief examiner then prepares a comment on the
salient features of the application, which is sent out to the committee with a
copy of the pending application prior to the meeting at which it is to be con
sidered. The committee may call upon representatives of the company to appear
before it at its meeting, to discuss any special features. Should the application
be passed, it is either recommended to the governing committee for action or
adopted by the committee on stock list itself, depending upon the powers granted
to the committee under the constitution.
II. ANNUAL AND IN TERIM REPORTS OF LISTED COMPANIES
The financial reports section of the office keeps a running file of dates of finan
cial reports of listed companies when due, and checks with the companies when
there is a delay. When the reports come in, they are scrutinized by this section,
and if any unusual features or accounting policies are reflected in the reports, the
matter is taken up with the executive assistant, and then with the company.
1330
STOCK EXCHANGE PRACTICES
III. GEN ERAL CORRESPONDENCE
Letters from the general public with respect to affairs of listed companies
which concern the committee on stock list are referred from different depart
ments of the exchange direct to the executive assistant. Depending upon the
nature of the correspondence, it is either handled direct or referred to the com ittee for consideration, and then answered by the executive assistant.
IV . REGISTRATION DEPA RTM EN T
All notices from transfer agents and requests from registrars for authority
to register additional amounts of listed stocks are directed to the secretary of the
committee on stock list, who, in turn, refers them to the registration depart
ment, where the records are kept. Authority for additional registration is granted
by letter prepared by this department and then sent to the secretary for approval
and release.
V . SPECIMENS OF SECURITIES
In connection with the listing of securities, it is required that specimens of the
actual certificates be submitted by approved bank note companies to the office
of the committee. The bank note and specimen department examines these
securities to see whether or not they conform to the standards of the committee
with respect to workmanship, character of engraving, and detailed regulations
as to language required by the committee. In case of any departure from the
general uniform practice, the specimen department takes the matter up with the
secretary and the executive assistant. In certain cases where important ques
tions of law or stock exchange procedure are concerned, the executive assistant
refers the matter to counsel for the exchange for guidance.
The above summary of the flow of business through the office of the com
mittee on stock list is merely an outline of the general procedure and does not
give any indication of the large part of the time of the office, particularly of the
executive assistant, which is devoted to conferences with corporate officials,
accountants, and lawyers in general and specific endeavor to obtain more fre
quent and more informative corporate reports from listed companies.
STOCK
EXCHANGE
1331
PEACTICES
1 Consult applicants for listing and report on pending applications.
2 Checks annual and interim reports to obtain conform ity with com m ittee’s policies with respect to accounting m ethods, etc.
3 Examine workmanship of bond and stock specimens; i. e., text, engraving, etc.
* Keep constant check of authorized listed securities with transfer agents and registrars—to prevent overissuance.
1332
STOCK EXCHANGE PRACTICES
Senator C otjzens. At that point may I ask if the fact that these
securities are listed on the New York Stock Exchange gives any
assurance to the investor of their intrinsic value?
Mr. A ltschul . N o, sir.
The C hairman . I think Mr. Whitney testified that there was no
examination made at the time of the listing. That they only passed
on the papers submitted and made no independent investigation of
the matter.
Mr. A ltschtjl. From the point of view of determining value, no,
sir.
The C hairman . Yes.
Senator C otjzens. Does a security in the past have to have had
any earning power before you list it?
Mr. A ltschul . Yes, sir. May I qualify that by saying that we
have to have evidence before us which leads us to believe that they
have earning power. In this particular case we were misled. I am
trying to answer your question, Senator.
Senator C otjzens. Yes, I understand; but a new undertaking
which was just coming on the market and securities for which were
being floated could not be listed on the exchange?
Mr. A ltschul . In general only in cases where it represented a
consolidation of other companies that had a record in the past where
the consolidated record was satisfactory.
Senator C ouzens . So a new enterprise outside of a consolidation,
a new manufacturing enterprise or merchandising enterprise could not
have its securities sold on the market until it had created a record for
itself?
Mr. A ltschul . That is correct, sir. Of course you understand
that from our point of view if an old enterprise which has been
privately owned is transformed into a corporate enterprise, making it
available for public listing, the record in private ownership would be
considered as satisfactory, if the record was satisfactory in itself.
Senator C ouzens . Would you list a security that was offered to
you where they had, say, for instance, a continuous record of three
or four years of losing money?
Mr. A ltschul . No, sir.
Senator C ouzens . Y ou would not?
Mr. A ltschul . No; that being the current record before us at the
time of listing; no, sir.
Senator C ouzens . Yes; well, if that record was not before you,
but it may have been a fact, would you have looked it up to see if it
was a fact?
Mr. A ltschul . Well, if we would have had the earning record, for
example, showing that there was a period of loss for 10 years, and
that then there was a period of 6 years of earnings afterwards, and the
company seemed to have substantial earnings, we would have to
consider the application on its merits.
Senator C ouzens . So as a matter of fact in the public mind it is a
valuable asset to have it listed on the New York Stock Exchange?
Mr. A ltschul . There is no question about that, sir.
Mr. M arrin an . In order that there may be a complete under
standing of Mr. AltschuTs position in this picture, may I state the
case, and then if I am in error, correct me. You serve as chairman
STOCK EXCHANGE PRACTICES
1333
of the committee on stock list, virtually a subcommittee of the
governing committee, is that not true?
Mr. A ltschul . Quite right; sir.
Mr. M arrin an . The committee on stock list has no broad author
ity to list or to remove; is that correct?
Mr. A ltschul . We have limited authority, sir. There are certain
instances in which we have authority to add to the list on our own
motion. But in general and with respect to new applications of
companies whose securities have not been listed on the exchange
before, all we have the right to do is to recommend to the governing
committee.
Mr. M arrin an . And the governing committee, is it fair to say, is
vested with the real authority in big situations?
Mr. A ltschul . Yes.
Mr. M arrin an . And that you do the technical examining work
and make recommendations?
Mr. A ltschul . And those recommendations in printed form are
in the hands of the governing committee prior to action.
Mr. M arrin an . Do you employ a force of technical examiners
in that committee?
Mr. A ltschul . Yes, sir; we do.
Mr. M arrin an . W hat are the duties of that staff?
Mr. A ltschul . We have a head examiner and a number of sub
ordinate examiners, and their duties are to examine the papers that
are submitted to us by applicant companies.
Mr. M arrin an . Will you set forth briefly the mechanics of a listing
operation, proceeding from your last statement?
Mr. A ltschul . Well, that is incorporated in this, and if you care
to make it a matter of record now I will just read you briefly.
M r. M arrin an . If you will, briefly.
Mr. A ltschul . Preliminary requests for listing are referred to the
chief examiner, who, upon receipt of sufficient papers, delegates the
scrutiny of the application to one of the examiners. The examiner
consults with the company and assists in the preparation of the printed
draft application. He examines the papers, to see that all the papers
required by the committee are in order. If this gets too long, I wish
you would interrupt me. Should any paper required under the es
tablished requirements of the committee be missing, or should there
be any unusual features in the charter, by-laws, trust indenture, de
posit agreement, opinion of counsel, and so forth, reports the fact to
the chief examiner. The financial statements are submitted to another
examiner, who specializes on examinations of this character. Should
any point appear to require expert opinion, it is referred to either
counsel for the exchange or the consulting accountants for the ex
change. The chief examiner then prepares a comment on the salient
features of the application, which is sent out to the committee with a
copy of the pending application prior to the meeting at which it is to
be considered. The committee may call upon representatives of the
company to appear before it at its meeting, to discuss any special
features. And, as a matter of fact, I might say there that in the case
of a new applicant it is customary to have an appearance.
Mr. M arrin an . Mr. Altschul, will you please speak not quite so
rapidly?
Mr. A ltschul . I am so sorry.
119852—33—PT 4------ 13
1334
STOCK EXCHANGE PRACTICES
M r. M arrin an . It makes it difficult for the reporter and also for
the gentlemen of the press.
M r. A ltschul . I am so sorry.
The C h airman . And for the Senators to follow you.
Mr. A ltschul . Should the application be passed-----Mr. M arrinan . That statement is prepared as of what date? I
mean it describes the situation as of to-day?
Mr. A ltschul . As of to-day; yes.
M r. M arrinan . Did it describe the situation as of the date when
this Kreuger & Toll application reached the exchange?
Mr. A ltschul . Yes, sir.
Mr. M arrin an . Substantially, I mean.
Mr. A ltschul . Yes, sir.
M r. M arrin an . In the application for the listing of the issue of
so-called 5 per cent secured debentures submitted to the exchange
under date of August 6, 1929, by Kreuger & Toll Co. and Donald
Durant, a director of the company, was this usual routine of examina
tion pursued?
Mr. A ltschul . Yes, sir.
Mr. M arrinan . Is it true that a copy of the indenture or debenture
agreement was submitted to the exchange in connection with the
application?
Mr. A ltschul . Yes, sir.
Mr. M arrin an . I ask that a copy of the application of Kreuger
& Toll Co. to list the 30-year 5 per cent secured sinking fund gold
debentures be printed in the record at this point.
The C hairman . Without objection that may be done.
(The application of Kreuger & Toll Co. to list on the New York
Stock Exchange is here printed in the record in full as follows:)
C
o m m it t e e
on
Stock
L is t , N
ew
Y
ork
S tock
E
xchange
Kreuger & Toll Co., (Aktiebolaget Kreuger & Toll), incorporated August 10,
1911, under the laws of the Kingdom of Sweden, 30-year 5 per cent secured
sinking fund gold debentures, due March 1, 1959 (with or without warrants for
the purchase of American certificates, representing the company’s participating
debentures, exercisable at any time on or prior to December 31, 1930, of the
redemption date of the secured debenture to which any such warrant is attached,
whichever is earlier).
Original listing:
Amount authorized under trust agreement___________________
Unlimited.
Total amount outstanding under trust agreement____________ $50, 000, 000
Total listing applied for_____________________________________
50, 000, 000
Authorized by resolution of board of directors of March 5, 1929. No other
authority required.
Capital securities
Amount
authorized
Authorized for
issuance
5 per cent secured sinking fund gold
Unlimited.
$50,000,000
debentures....................................... ......
Participating debentures.................... . . . Kr. 130,000,000 * Kr. 97,250,000
($34,840,000)
($26,063,000)
Ordinary shares, par value Kr. 100____ Kr. 65,000,000 Kr. 65,000.000
($17,420,000)
($17,420,000)
Previously
listed
(s)
i Kr. 16,000,000 ($4,288,000) authorized for issuance against exercise of warrants.
J 3,218,625 “ American certificates” representing participating debentures listed.
Outstanding
$50,000,000
Kr. 81,260,000
($21,775,000)
Kr. 65,000,000
($17,420,000)
STOCK EXCHANGE PRACTICES
1335
New Y ork , N. Y ., August 6, 1929.
Referring to its previous application A-8204, dated October 4, 1928, Kreuger
& Toll Co. (Aktiebolaget Kreuger & Toll) hereby makes application for the
listing on the New York Stock Exchange of $50,000,000 principal amount of
its 30-year 5 per cent secured sinking fund gold debentures, due March 1, 1959,
included in numbers M - l to M-70000 for $1,000 each and D - l to D-100000
for $500 each, on official notice of issuance in exchange for listed and outstand
ing interim receipts.
AUTHORITY FOR AND PURPOSE OF ISSUE OF SECURED DEBENTURES
The issuance of the $50,000,000 principal amount of secured debentures to
which this application relates is made by authority of a resolution of the board of
directors, passed on March 5, 1929.
Proceeds of this issue and-of Kr. 16,250,000 participating debentures simulta
neously offered to existing holders of participating debentures and ordinary shares,
have been or will be applied toward the acquisition from Swedish Match Co. and/or
International Match Corporation of securities having an aggregate par value of
approximately $78,000,000.
Kreuger & Toll Co. is the largest stockholder in Swedish Match Co. which with
its subsidiaries (including International Match Corporation, more than 99 per
cent of the oustanding common stock of which it owns) is the largest match
manufacturing and distributing organization in the world and has at various
times cooperated financially with that company and International Match Corpo
ration. In obtaining government concessions for the right to manufacture and
sell matches in various countries, large amounts of securities are frequently ac
quired by Swedish Match Co. and International Match Corporation in return for
advances made to the governments from which concessions are obtained. These
operations have in recent years become increasingly important and, as the business
of Swedish Match Co. and International Match Corporation is essentially indus
trial in character, it has been deemed advisable in general to transfer to Kreuger
& Toll Co. the handling of such securities.
DESCRIPTION OF SECURED DEBENTURES
The secured debentures are the direct obligations of the company and are issued
pursuant to a certain debenture agreement, dated March 1, 1929 (hereinafter
called the agreement) made between Aktiebolaget Kreuger & Toll (therein and
herein called Kreuger & Toll Co., or the company), Lee, Higginson Trust Co.,
as trustee (therein and herein called the trustee), and Lee, Higginson & Co., as
fiscal agent (therein and herein called the fiscal agent), under which agreement
Skandinaviska Kreditaktiebolaget, of Stockholm, has been appointed, and is
acting as, depositary for certain purposes hereinafter more fully set forth. The
aggregate principal amount of secured debentures which may be issued thereunder
is unlimited. This issue of secured debentures (hereinafter called the debentures)
is for an aggregate principal amount of $50,000,000, is dated March 1, 1929,
will mature March 1, 1959, and bears interest at the rate of 5 per cent per annum,
payable semiannually March 1 and September 1. Principal and interest are
payable in time of war as well as in time of peace, without regard for the nation
ality or residence of the holders, free of any present or future Swedish taxes on
debentures held by others than residents of Sweden, in United States gold coin
of the standard of weight and fineness existing March 1, 1929, at the offices of
Lee, Higginson & Co., fiscal agent, in New York, Boston, or Chicago, or at the
option of the holder in sterling at a fixed rate of £205 per $1,000 at the offices of
Higginson & Co., London; or at the option of the holder in like United States
gold coin or in the national currency of the place of presentation at the buying
rate of exchange for banker’s sight drafts for dollars on New York current at the
date of presentation and surrender of debentures or coupons, as the case may be,
at the office of any paying agent appointed in Stockholm, Sweden; Amsterdam,
Holland; and Basle, Switzerland.
The definitive debentures are in coupon form in denominations of $1,000 and
$500 and are interchangeable. Upon any exchange of debentures, the company,
at its option, may require the payment of a sum sufficient to reimburse it for any
stamp tax or other governmental charge, and for any other expense connected
therewith, and also of a further sum, not exceeding $2 for each new debenture
issued.
The agreement permits the issuance of additional debentures upon the fore
going terms and further provides for the issuance of additional series of debentures,
1336
STOCK EXCHANGE PRACTICES
each series to be distinctly designated, and to be in such amounts with such
maturity, rate of interest, redemption, conversion, and other provisions not in
consistent with the provisions of the agreement as the company shall determine
at the time of the creation of any such series.
REDEM PTION AND SINKING FUND
The debentures are redeemable in whole or in part at any time at 105 per cent
of principal amount and accrued interest, on 30 days’ notice given by publication
in daily newspapers printed in the English language published and of general
circulation in the Borough of Manhattan, city and State of New York, and the
cities of Boston, Mass., and Chicago, 111. In case less than all of the outstanding
debentures are called for redemption the serial numbers of those so called will
be determined by lot by the trustee, and such serial numbers will be stated in the
above-mentioned notice of redemption. The agreement provides for a sinking
fund for the semiannual retirement on March 1 and September 1 in each year,
beginning September I, 1929, of debentures of this issue through the purchase
at public or private sale of debentures at prices not to exceed the above redemp
tion price and, if not so obtainable, by redemption by lot. The company has
covenanted in the agreement that the amounts to be paid by it for the account
of this sinking fund will be sufficient to retire the entire issue of debentures
covered by this application by the date of their maturity, namely, March 1,
1959.
For further details of the sinking-fund provisions reference is made to Exhibit
A hereto annexed.
SECURITY
These debentures are the direct obligation of the company. As security for
the debentures covered by this application the company has delivered to the
trustee and/or the depositary, and has transferred and pledged to the trustee the
following securities:
Par value or
equivalent
Kingdom of the Serbs, Croats, and Slovenes 6/ per cent dollar bonds,
due 1958_______________________________________________________ $7, 000, 000
6, 000, 000
Republic of Latvia 6 per cent dollar bonds, due 1964______ :_______
Republic of Poland 7 per cent dollar bonds, due 1945______________ 5, 100, 000
Republic of Ecuador 8 per cent dollar bonds, due 1953____________
1, 973, 275
Mortgage Bank of Ecuador 7 per cent dollar bonds, due 1949 (guar
anteed by the Republic of Ecuador) _ _________ _________________
1, 000, 000
Republic of Greece
per cent bonds, due 1954, £979,902, equivlent to __________________ _______________________________________ 4,768,693
Kingdom of Rumania 4 per cent bonds, due 1968, £380,690, equivle n tto _________ ________________________________________________ 1,852,628
Republic of France 3 per cent and 4 per cent rentes, 344,000,000
francs, equivalent to_____________________ ______________________ 13, 477, 576
Kingdom of Rumania 7 per cent dollar bonds, due 1959___________
2, 000, 000
Belgian National Railways Co. participating preferred stock (6 per
cent dividend guaranteed by Belgian Government), 16,000,000
belgas,equivalent to ________________________________________ _
2, 224, 640
Prussian Mortgage Bank 8 per cent bonds, due 1959, 12,000,000
reichsmarks, equivalent to ______________________________________ 2, 858, 400
Hungarian land reform mortgage 5% per cent dollar bonds, due 1979_ 12, 000, 000
Total par value____________________________________________ 60, 255, 212
As more particularly set forth in the agreement the total par value of such
securities is equivalent to not less than 120 per cent of the $50,000,000 par value
debentures now to be issued, and the annual income from such securities (at
rates of interest and guaranteed dividends currently payable thereon) is equiv
alent to not less than 120 per cent of the $2,500,000 annual requirement for in
terest on the secured debentures.
Debentures will at all times be secured by deposit with the trustee and/or
depositary of cash or securities of the following character:
(a) Bonds or notes issued or guaranteed by any sovereign state, or political
division thereof including any municipality, having authority to issue or guarantee
bonds or notes and having a population in excess of 300,000.
(b) Bonds or notes issued or guaranteed by any mortgage banking institution
or society (in which the company may but need not have an interest) and secured
STOCK EXCHANGE PRACTICES
1337
by mortgage 011 agricultural or city property or entitled by special law to priority
on such property.
(c) Shares in railroads or other companies a minimum dividend on which is
guaranteed by any sovereign state.
COVENANTS AND FUTURE ISSUES
The company has agreed, as more fully described in the agreement, that in the
event the ratio of par value (as defined in the agreement) of pledged securities to
principal amount of outstanding debentures and/or the ratio of annual income
from pledged securities to the annual requirement for interest on outstanding
debentures, are at any time less than 120 per cent, it will deposit additional
securities of the required character in order to restore said 120 per cent ratio,
but the company is not required to make any such deposit except out of securities
then owned or thereafter to be acquired by it or by a subsidiary. So long as no
default is made in the payment of interest and/or sinking fund on the debentures,
however, failure of the company to maintain the foregoing ratios shall not in
itself constitute default under the agreement.
The agreement permits the issuance of additional debentures, in unlimited
amount, of this series or of one or more additional series, provided that upon
such issuance such ratios obtain. The agreement permits the withdrawal of
pledged securities provided that such withdrawal does not impair the above
ratios, and permits the substitution of securities of the required character for
securities pledged provided the above ratios (or the ratios existing prior to such
substitution if, prior to such substitution, the ratios were less than 120 per cent)
are not impaired. These provisions are, however, subject to the condition that
any part of the pledged securities may be withdrawn upon substitution of cash
in an amount equivalent to that proportion of the principal amount of outstanding
debentures which the par value of securities withdrawn bears to the total par
value of securities pledged at the time of such withdrawal.
The company has convenanted in the agreement that no consolidation or
merger shall be on such terms as to impair the lien or security of the agreement,
and that any corporation formed by any such consolidation or merger shall, as
a part of the consolidation or merger, expressly assume the due and punctual
payment of the principal of, and premium, if any, and interest on, all secured
debentures, and shall further assume the observance of all covenants and condi
tions of this agreement. The company has also covenanted that as a condition
of any sale of its property as an entity or substantially as an entity the corpora
tion to which the property shall be sold shall, as a part of the purchase price,
assume all such payments and the observance and performance of all such cov
enants and conditions.
So long as no default exists under the agreement and so long as the required
ratio of principal and of income above mentioned remains unimpaired, the com
pany is entitled to receive all dividends and interest on any property deposited
as security for the debentures and shall likewise be entitled to any rights or con
version privileges until such default accrues, except that the company is not
entitled to any dividends payable in the course of the dissolution, liquidation or
winding up of any corporation whose securities form a part of such property nor
any stock dividends thereon.
PURCHASE W ARRAN TS FOR AMERICAN CERTIFICATES REPRESENTING PARTICIPATIN G
DEBENTURES
Each debenture of this issue carries a nondetachable warrant for the purchase
at any time on or prior to December 31, 1930, or the redemption date of the
secured debenture to which it is attached, which ever is earlier, of 16 or 8 Ameri
can certificates (according as the debenture is of the denomination of $1,000
or $500) representing participating debentures of the company upon presentation
of the secured debenture with warrant attached at an office of the fiscal agent
and upon payment of $45 per American certificate. These warrants are issued
and are exercisable pursuant to a warrant agreement dated March 1, 1929, made
between Aktiebolaget Kreuger & Toll; Lee, Higginson & Co., as warrant agent;
and Lee, Higginson Trust Co., and all holders of warrants issued and to be issued
thereunder. This warrant agreement contains appropriate provisions for a de
crease in the warrant price per American certificate payable by the holders of
the warrants in case the company shall issue any participating debentures over
and above the Kr. 97,250,000 par value thereof now outstanding or reserved for
issuance under the warrants for less than $45 per Kr. 20 par value of such par
1338
STOCK EXCHANGE PRACTICES
ticipating debentures. Unexercised warrants will be void after December 31,
1930, or the redemption date of the debenture to which they are attached, which
ever is earlier. The company has authorized and reserved Kr. 16,000,000 par
ticipating debentures to be issued and deposited under the deposit agreement
hereinafter referred to against the issuance of the corresponding amount of
American certificates as warrants are exercised. (See the company’s previous
application A-8204, dated October 4, 1928.)
DESCRIPTION OF AM ERICAN CERTIFICATES AND PA R T IC IP A T IN G DEBEN TU RES
American certificates representing participating debentures are issued b y Lee,
Higginson Trust Co. of Boston, as depositary, under a deposit agreement dated
September 1, 1928, in the proportion of one American certificate for each Kr. 20
par value of participating debentures deposited. For a further description of the
American certificates and the deposit agreement reference is made to the com
pany’s previous application A-8204 covering the issue of the American certificates.
FISCAL AGENT, DEPOSITARY AND PA YIN G AGENTS
Lee, Higginson & Co. has been appointed under the agreement to act as fiscal
agent of the company for the paying of principal and interest and sinking fund
and to facilitate generally the operation of the agreement with regard to sinking
fund, redemption, and similar matters.
Skandinaviska Kreditaktiebolaget, a banking corporation organized under the
laws of the Kingdom of Sweden with one of its .principal offices in Stockholm, is
the depositary referred to in this application. The agreement provides that any
property deposited with the depositary as security for the debentures shall be
deemed to be held by the trustee for the purposes of the issue.
The agreement provides that the company may appoint paying agents in
Stockholm, Sweden; Amsterdam, Holland; or Basle, Switzerland, upon the written
consent and approval of Lee, Higginson & Co., the fiscal agent. The office of
each such paying agent is designated under the agreement as an agency of the
company where debentures and coupons may be presented for payment and where
notices, presentations, and demands in respect to debentures and coupons may be
served.
DEFAULTS
The agreement provides in Article X thereof that in case:
(1) Default shall be made in the payment of any instalment of interest on any
debenture when and as such installment of interest becomes due and payable and
such default shall continue for 60 days.
(2) Default shall be made in the payment of any of the amounts payable by
the company for account of the sinking fund when and as any such amount shall
become due and payable and such default shall continue for 60 days.
(3) Default shall be made in the payment of the principal and/or premium
of any debenture when the same shall become due and payable either upon
maturity or by call for redemption or by declaration on default under the agree
ment or otherwise.
(4) Default shall be made in the observance or performance of any other cove
nants of the company contained in the debentures and such default shall con
tinue for 60 days after written notice by the trustee, which may give such notice
in its discretion and which shall give such notice on the written request of the
holders of 25 per cent in principal amount of the debentures at the time out
standing.
(5) The company shall be adjudicated bankrupt or become insolvent or a
receiver shall be appointed of the property of the company and shall not be dis
charged within 60 days after appointment.
(6) The company shall file a voluntary petition in bankruptcy or shall make a
general assignment for the benefit of creditors or shall take any action for or any
order or direction or vote shall be made or had for its dissolution, liquidation or
winding up.
Then and in every such case the trustee upon notice to the company may in its
discretion or upon request in writing signed by the holders of 25 per cent in
principal amount of the debentures then outstanding shall declare the principal
of all the debentures, if not already due, to be forthwith due and payable and
upon any such declaration the secured debentures shall become due and payable
immediately. The foregoing provision, however, is subject to the condition
that if at any time after the principal of the debentures shall be so declared due
1339
STOCK EXCHANGE PRACTICES
and payable and before any sale of the property deposited as security therefor shall
have been made, all arrears of interest upon all the debentures with interest on
overdue installments of interest at the rate of 6 per cent per annum, together
with reasonable charges, expenses, liabilities and advances under this agreement
of the trustee, its agents and attorneys and all other sums which might have
become due and payable by the company hereunder, other than the principal of
any of the debentures which shall not have matured by their terms, shall either
be paid by the company or collected out of the income, issued and profits of the
deposited property and all other dividends under the debentures or any of them
or under the agreement shall have been made good to the satisfaction of the
trustee—
Then and in that case the holders of a majority in principal amount of the
debentures then outstanding by written notice to the company and to the trustee
may waive the default and its consequences; but no waiver shall extend to or
change any subsequent default or impair any right consequent thereon.
The agreement further provides that if one or more of the foregoing events of
default shall happen the trustee may, subject to the terms of the agreement, sell
the deposited property or may proceed to protect and enforce its rights and the
rights of the holders of debentures by a suit or suits in equity or at law.
HISTORY AND BUSINESS
Kreuger & Toll Co. (Aktiebolaget Kreuger & Toll), incorporated August 10’
1911, under the laws of the Kingdom of Sweden is an organizing, managing, and
financing company. Under its charter it may, among other things, acquire and
hold securities of any kind (but is prohibited from trading in securities.).
For a further and more detailed outline of the history and business of the com
pany and of the companies, stocks of which are held by the company, reference
is made to the previous application of the company A-8204, dated October 4,
1928. Kreuger & Toll Co. controls, through stock ownership, Swedish American
Investment Corporation and N. V. Financieele Maatschappij Kreuger & Toll
and also has substantial stock interests in Swedish Match Co. and Grangesberg
Co., and balance sheets of these four companies, as of December 31, 1928, are
appended (see Exhibit B).
CAPITALIZATION AND DIVIDENDS
Capitalization of Kreuger & Toll Co. consists of:
Authorized
5 per cent secured sinking fund gold debentures, due Mar. 1,1959 (ad
ditional debentures issuable under provisions of debenture agree
m ent)____________________ _________ ________________ _______________
Participating debentures (reserved for exercise of warrants Kr. 16,000,000) ................. ................... - ............................................................................
Share capital Kr. 100 par value:
A shares, 1 vote per share__ __________________________ __________
Outstanding
$50,000,000
$50,000,000
Kr. 130,000,000
Kr. 81,250,000
Kr. 10,000,000
Kr. 55,000,000
Kr. 10,000,000
Kr. 55,000,000
The A and B shares are alike in all respects save as to voting power. On May
15, 1928, B shares to the amount of Kr. 15,000,000 were issued as a stock divi
dend, thus increasing the share capital to the present amount of Kr. 65,000,000.
A shares of the company are listed on the Stockholm Stock Exchange, B shares
on the London, Stockholm, Paris, Amsterdam, Zurich, Geneva, Basle, Berne,
and Lausanne Stock Exchanges.
The participating debentures and the secured debentures covered by this ap
plication constitute the only funded debt of the company.
Following is a record of the capitalization of and dividends paid by the com
pany since its organization:
1340
STOCK EXCHANGE PEACTICES
Share capital
Year ended Dec. 31—
1912. ................................................ .........
1913-.........................................................
1914..................... ............................... —
1915____________________ ____________
1916................... —
.............. ...............
1917............................................. ..............
1918...........— ............ - .......... .................
1919........................................... ...............
1920.............. .............................................
1921......................................... ..................
1922________________________________
1923.................................................. .........
1924...........................................................
1926............................................................
1926-................................................ .........
1927............................................................
1928............................................................
Kroner
1, 000,000
1, 000,000
1, 000,000
2, 000,000
2, 000,000
3,000,000
6, 000,000
16,000,000
16,000,000
20, 000,000
28,000,000
28,000,000
28,000,000
28,000,000
28,000,000
28,000,000
i 50,000,000
65,000,000
Reserve fund
(as of end of
year)
Kroner
40,000
100,000
500,000
500,000
1, 000,000
4,000,000
21, 000,000
21, 000,000
29,000,000
40,200,000
40,200,000
40,200,000
40,200,000
40,200,000
40,200,000
133,700,000
133,700,000
Dividends
paid (on
stock out
Profit reg
standing
Per cent
ulating
paid
and partic
fund
ipating in
dividends
for year)
K roner
50,666
200,000
250,000
450,000
500,000
1,500,000
3,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
Kroner
40,000
120,000
120,000
240,000
250,000
450,000
1, 200,000
2,700,000
4,000,000
5,000,000
5,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
7,000,000
16,250,000
4
12
12
12
12^
15
20
22
25
25
25
25
25
25
25
25
25
25
1 220,000 shares issued in 1927, not entitled to dividends prior to Jan. 1,1928.
FIN AN CIAL STATEMENTS
1. Comparative combined income and surplus account Kreuger & Toll Co.
and principal subsidiaries for 1927 and 1928.
2. Comparative consolidated balance sheet Kreuger & Toll Co. and principal
subsidiaries, December 31, 1927, and December 31, 1928.
3. Income account Kreuger & Toll Co. past six years.
4. Comparative surplus account Kreuger & Toll Co. for years ended December
31, 1927, and December 31, 1928.
5. Kreuger & Toll Co. balance sheet December 31, 1927.
6. Kreuger & Toll Co. balance sheet December 31, 1928.
1341
STOCK EXCHANGE PRACTICES
Kreuger & Toll Co. and principal subsidiary companies— N. V. Financieele Maatschappij Kreuger & Toll and Swedish American Investment Corporation for the
two years ended, December 31, 1928
1. C O M P A R A T IV E C O M B IN E D IN C O M E A N D SU R P L U S A C C O U N T
Year ended—
Dec. 31,1927
Dec. 31,1928
Incom e: Interest and dividends received and income from various sources
Deduct: General expenses........... ........... . ..................................... ........................
$12,702,613.29 $21,877,918.37
851,930. 28
298,007. 51
12,409,6C5.78
21,025,988.09
475,000.00
4,355,000.00
275,000.00
D educt:
Interest on participating debentures_________________________________ -
Balance to surplus................. .......................... ....... ..................... ...................... .
A dd:
Surplus at beginning of year....... ............ .......................................................
Profit- regulating fund transferred. ___________________________________
Deduct:
Cash dividends paid—
Kreuger & Toll C o............. ..................... ...................................................
Swedish American Investment Corporation (less intercompany
Stock dividend Kreucer & Toll C o............. ............. .....................................
Sundry surplus charges not.......... ............ ............ .........................................
Writing ofl deferred charges............... .................... .....................................
Intercompany dividend paid b y subsidiary in 1927 and received b y
1 Credit.
475,000.00
4,630,000.00
11,934,605.78
16,395,988.09
9,643,996.97
17,783,532.51
1,072,000.00
21, 578,602.75
35,251,520. 60
1,876,000.00
1.876.000.00
1,275,680. 25
1,010,659.00
4.020.000.00
25,498. 26
175,891.73
527,675.19
442,000.00
i 442,000.00
3,795,070. 24
6,992,334.19
17, 783, ->32. 51
28, 259,186.41
1342
STOCK EXCHANGE PRACTICES
Kreuger & Toll Co. and principal subsidiary companies, N. V. Finandeele Maatschappij Kreuger & Toll and Swedish American Investment Corporation, at
dates os below
2. C O M P A R A T IV E C O N S O L ID A T E D B A L A N C E S H E E T
Dec. 31,1927
D ec. 31, 1928
ASSETS
Investments:
Industrial stocks—
Swedish M atch C o......... .......... ..... ............ ..................................... ..... $28,871,020.92
Grangesberg C o______ _____ ___________ ________________________ 17,553,800.00
724,216.40
Real-estate stocks—
6,427,980.00
Real-estate interests in other European countries.................. ......... 12,800,000.00
11,665,747.28
Notes secured b y real-estate mortgages.....................................................
3,474,000.00
Foreign government bonds.................... ......................................................
4,199,494.90
Other stocks and bonds.......... ............................................................ .......
4,514,967.76
Accounts receivable__________________ ___________ ______________________
C a s h and h a n k in g appn iin t
......
. . . . . .
4,194,941. 38
Special deposit for*retirement of preferred stock of Swedish American In
vestment Corporation____ ____ __________ ____________________________
.27
Furniture and fixtures.......... ............ .............. - .......... ............ ...........................
527,675.19
$28,922,043.84
17,553,800.00
10,280, 703.83
6,427,980.00
13,591,943. 22
15,231,961.68
3,474,000.00
21,071,743.77
4,784,102.70
20,703,584.51
15,387,532.10
94,007.50
.27
94,953,844.10
157,523,403.42
8,467,670.60
481,240.99
17,211,308.55
284,114.55
17.420.000.00
17.420.000.00
76,887,793.91
LIABILITIES
Sundry creditors (including accrued interest on debentures)...... .......... .....
13,400,000.00
35.831.600.00
1,072,000.00
Participating preferred stock (Swedish American Investment Corpora
tion )................. .............................................................................. ....................
Profit and loss surplus____ _________ _________ ____________ - ...............
17.917.800.00
17,783,532.51
41,000.00
28,259,186.41
94,953,844.10
157,523,403.42
N o t e . — Balance sheet at Dec. 31,1927, has been adjusted to give effect to acquisition of all outstanding
com m on shares of above-named subsidiary companies.
Kreuger & Toll Co. {parent company)
3. IN C O M E A C C O U N T F O R Y E A R S E N D E D D E C E M B E R 31
Profit on
sundry trans
actions i
192 3
1924
1925
1926
1927
1928
Interest and
dividends re
ceived
Total income
General ex
penses
Net profit
Dividends
paid for
year
Kr. 1,982,579.95 Kr. 6,850,964.67 Kr. 8,833,544.62 Kr. 145,598.83 Kr. 8,687,945.79 Kr. 7,000,000.00
11,757,438.52
4,876,820,02
12,170,285.02
7.000.000.00
412,846.50
7,293,465.00
12,059,840.42
5,018,677.89
13,049,411.79
989,571.37
7.000.000.00
8,030,733.90
14,892,692.05
641,452. 53
7.000.000.00
15,534,144.58
9,883,269.75
5,650,874.83
925,150.15
18,737,795.50
7.000.000.00
9,431,957.25
10,230,988.40
19,662,945.65
19,853,869.69
22,866,839.83 3,012,970.14
9,719,962.33
13,146,877.50
16,250,000.00
In dollars, at par of exchange (Krona equals $0,268)
1923
1924
1925
1926
192 7
1928
$531,331.43
1,954,648.62
2,152,236.69
2,648,716.29
2,527,764.54
2,604,949.90
$1,836,058.53
1,306,987.76
1,345,005.67
1,514,434.46
2,741,904.89
3,523,363.17
$2,367,389.96
3,261,636.38
3,497,242.36
4,163,150. 75
5,269,669.43
6,128,313.07
$39,020.49
110,642.86
265,205.12
171,909.28
247,940.24
807,475.99
$2,328,369.47
3,150,993. 52
3,232,037.24
3,991,241.47
5,021,729.19
5,320,837.08
$1,876,000.00
1.876.000.00
1.876.000.00
1.876.000.00
1.876.000.00
4.355.000.00
1 Consists, principally, of profit from participation in financial syndicates or on real estate transactions.
1343
STOCK EXCHANGE PRACTICES
Kreuger & Toll Co. (parent company)— Continued
4. C O M P A R A T IV E SU R PLU S A C C O U N T F O R Y E A R S E N D E D D E C E M B E R 31
[Dollars at par of exchange, 1 kr. equals $0,268]
1927
N et profit for year..............................
Profit transferred from previous
year-------------------------------------------Transferred from profit regulating
• fun d................... ...............................
Kr. 18,737,795.50
D ividend paid.....................................
Transferred to capital account (dis
tributed in form of bonus shares).
Profit carried forward........................
1928
$5,021, 729.19 Kr. 19,853,869.69
20,800,019.28
5,574,405.17
4,000,000.00
1,072,000.00
43,537,814.78
7,000,000.00
11,668,134.36
1.876.000.00
15,000,000.00
4.020.000.00
21, 537,814.78
5,772,134. 36
$5,320,837.07
21, 537,814. 78
5, 772,134. 37
41,391,684.47
16,250,000.00
11,092,971.44
4,355,000.00
25,141,684. 47
6, 737,971. 44
5. Balance sheet for December 31, 1927
Kroner
United States
dollars
Cash and banking account....................................................................
B ond s.............................................. ....................... ....................... ...........
Furniture, fittings, and fixtu res.......... ...................................... .........
11,728,955. 71
3,792,513.60
1.00
$3,143,360.13
1,016,393.64
.27
Shares at cost:
272.000 shares in Swedish American Investment Corporation.
970 shares in N . V . Financieele Maatschappij Kreuger & Toll.
320.000 shares in Svenska Tfindsticks Aktiebolaget.......... .........
155.000 shares in Trafikaktiebolaget Grangesberg-Oxelosund..
30.000.shares in Skandinaviska Kreditaktiebolaget....................
4.000_shares in Stockholms Intecknings Garanti A ktiebolag...
10,023 ordinary shares in Hammarsforsens Kraftaktiebolag___
17.000 preferred shares in Hammarsforsens Kraftaktiebolag___
101,620,000.00
1.455.000.00
61,377,690.00
43,000,000.00
6. 000. 000.00
2, 000, 000.00
1,002,300.00
1,700,000.00
27,234,160.00
389.940.00
16,449,220.92
11, 524,000.00
1,608,000.00
536,000.00
268,616.40
455.600.00
Sundry debtors.
218,154,990.00
13,900,632.78
58,465,537.32
3,725,369. 59
247,577,093.09
66,350,660.95
10, 000, 000.00
40,000,000.00
2,680,000.00
10,720,000. 00
50,000,000.00
133,700,000.00
4,000,000.00
20,339,278.31
39, 537,814.78
13,400,000.00
35,831,600.00
1,072,000.00
5,450,926. 59
10,596,134. 36
247, 577,093.09
66, 350,660.95
ASSETS
LIABILITIES
Share capital:
Series A shares........... ................... ............
Series B shares._______________________
Reserve fund_________
Profit regulation fund..
Sundry creditors______
Profit and loss account.
1344
STOCK EXCHANGE PRACTICES
6. Balance sheet for December SI, 1928
Kroner
United States
dollars
ASSETS
Cash and banking account...........................................................................
B onds....... .........................................................................................................
Furniture, fittings, and fixtures...................................................................
35,109,342.91
93,265,591.67
1.00
$9,409,303.90
24,995,178.57
.27
Shares at cost:
272.000 shares in Swedish American Investment Corporation___
9,970 shares in ’N . V . Financieele Maatschappij Kreuger & Toll
320.000 shares in Svenska TSndsticks Aktiebolaget...................
166.000 shares of Traflk&ktiebolaget Grftngesberg-Oxeldsund____
30.000.shares in Skandinaviska Kreditaktiebolaget.........................
6.000_shares of Stockholms Intecknings Oaranti Aktiebolag_____
10,023 ordinary shares in Hammarsforsens Kraftaktiebolag..........
17.000 preferred shares in Hammarsforsens Kraftaktiebolag..........
101,620,000.00
14.955.000.00
61,377,690.00
43.000.000.00
6, 000, 000.00
3.600.000.00
1,002,300.00
1.700.000.00
27,234,160.00
4,007,940.00
16,449,220.92
11,524,000.00
1,608,000.00
964.800.00
268,616.40
455.600.00
Sundry debtors..................... .............. ........................................... ................
233,254,990.00
1,654,107. 57
62,512,337.32
443,300.83
363,284,033.15
97,360,120.89
Share capital:
Series A shares_________________________
Series B shares____________ _____________
10, 000, 000.00
55,000,000.00
2,680,000.00
14,740, (XX). 00
Participating debentures___________________
Reserve fund________________________ ______
Sundry creditors___________________________
Profit and loss account...... .......... : ___________
65.000.000.00
65.000.000.00
133,700,000.00
58,192,348.68
41,391,684.47
17.420.000.00
17.420.000.00
35,831,600.00
15, 595,549.45
11,092,971.44
363,284,033.15
97,360,120.89
LIABILITIES
At par of exchange 1 K r .= $0,268.
AGREEMENTS
Subject to the company’s previous application A-8204 covering the American
certificates representing its participating debentures, Kreuger & Toll Co. agrees
with the New York Stock Exchange as follows:
Not to dispose of an integral asset or its stock interest in any constituent, sub
sidiary, owned or controlled company, or allow any of said constituent, subsidiary,
owned or controlled companies to dispose of an integral asset or stock interest
in other companies unless for retirement and cancellation, without notice to the
stock exchange.
To publish statement of earnings annually.
To publish once in each year and submit to the stockholders, at least 15 days
in advance of the annual meeting of the company a statement of its financial con
dition and income account, and balance sheet of all important constituent, sub
sidiary, owned or controlled companies, similar to the policy of the company
heretofore in effect.
To maintain, in accordance with the rules of the stock exchange, a transfer
office or agency in the borough of Manhattan, city of New York, where all listed
securities shall be directly transferable, and the principal of all listed securities
with interest or dividends thereon shall be payable; also a registry office in the
borough of Manhattan, city of New York, other than its transfer office or agency
in said city, where all listed securities shall be registered.
To notify the stock exchange 30 days in advance of the effective date of any
change in the authorized amounts of listed securities.
Not to make any change in listed securities, of a transfer agency or of a registrar
of its stock, or of a trustee of its bonds or other securities, without the approval
of the committee on stock list, and not to select as a trustee an officer or director
of the company.
T o notify the stock exchange in the event of the issuance or creation in any form
or manner of any rights to subscribe to, or to be allotted, its securities, or of any
other rights or benefits pertaining to ownership in its securities, so as to afford
the holders of its securities a proper period within which to record their interests,
and that all rights to subscribe or to receive allotments and all other such rights
and benefits shall be transferable; and shall be transferable, payable and deliver
able in the borough of Manhattan, city of New York.
STOCK EXCHANGE PRACTICES
1345
To make application to the stock exchange for the listing of additional amounts
of listed securities prior to the issuance thereof.
To publish promptly to holders of bonds and stocks any action in respect to
interest on bonds, dividends on shares, or allotment of rights for subscription to
securities, notices thereof to be sent to the stock exchange, and to give to the stock
exchange at least 10 days’ notice in advance of the closing of the transfer books
or extensions, or the taking of a record of holders for any purpose.
To notify the stock exchange if deposited collateral is changed or removed,
excepting for incidental items which will be reported annually.
To have on hand at all times a sufficient supply of certificates to meet the
demands for transfer.
GENERAL
The fiscal year of the company ends December 31.
The annual meeting of the shareholders is held in Stockholm before the end of
May in each year.
The articles of association provide that the board of directors shall consist of
at least 3 and not more than 15 members. The present directors are Sven
Liibeck, chairman; C. Juhlin Dannfelt, vice chairman; Ernst Kreuger; Ivar
Kreuger; Paul Toll; Oscar Rydbeck; Donald Durant; Erik Sjostrom, vice presi
dent; Nils Ahlstrom, president.
The principal office of Kreuger Toll Co. is located in Stockholm, Sweden.
The principal and interest of the debentures covered by this application are
payable at the offices of Lee, Higginson* & Co., in New York, Boston or Chicago,
or at the offices of Higginson & Co., London, or at the offices of any paying
agent appointed in Stockholm, Sweden; Amsterdam, Holland; and Basle,
Switzerland.
All conversions of kronor to dollars used herein have been made at par of
exchange (1 kronor equals $0,268).
Warrants for the purchase of American certificates representing the company’s
articipating debentures are exercisable at the offices of Lee, Higginson & Co. in
Tew York, Boston, and Chicago, or at the offices of any subwarrant agents, not
later than December 31, 1930, or the redemption dates of the respective deben
tures which they accompany, whichever is earlier.
K r e u g e r & T o l l Co.,
By D o n a l d D u r a n t ,
This committee recommends that the above-mentioned $50,000,000 30-year
5 per cent secured sinking fund gold debentures, due March 1, 1959, included in
Nos. M -l to M-70000, for $1,000 each, and D -l to D-100000, for $500 each
(and coupon debentures of one denomination may be exchanged for coupon
debentures of another denomination), be admitted to the list on official notice
of issuance in exchange for outstanding interim receipts, in accordance with the
terms of this application.
&
S
Director.
R o b e r t G ib s o n ,
Chairman.
Adopted by the governing committee August 14, 1929.
A sh bel G r e e n ,
Secretary.
EXHIBITS
These exhibits constitute an essential part of the application. The statements
of fact contained in them are made on the authority of the applicant corporation
in the same manner as those in the body of the application.
E x h ib it A
The following provisions are quoted from the debenture agreement between
Aktiebolaget Kreuger & Toll (Kreuger Toll Co.), Lee, Higginson Trust Co., as
trustee; and Lee, Higginson
Co., as fiscal agent, dated March 1, 1929, and
referred to in the body of the application:
&
&
.—Sinking fund
A r t i c l e IV
1. As and for a sinking fund for the retirement of the first series deben
tures, the company covenants and agrees that it will from time to time pay to
the fiscal agent, at the office of the fiscal agent in the Borough of Manhattan,
city and State of New York, the amounts in this Article IV Hereinafter stated,
that is to say:
(1)
Semiannually on March 1 and September 1 in each year, beginning on
September 1, 1929, an amount equivalent to not less than three-quarters of 1
per cent of the principal amount of first series debentures originally issued,
whether or not then outstanding, unless retired in accordance with the provi
S e c tio n
1346
STOCK EXCHANGE PRACTICES
sions of Article V of this agreement, plus an amount equal to six months’ interest
at the rate of 5 per cent per annum on (1) the principal amount of all first series
debentures theretofore retired by operation of the sinking fund and (2) the
unexpended cash balance, if any, then in the sinking fund; said payments to
be made either in cash or in first series debentures taken at their principal
amount.
(2) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount of accrued interest and the amount of any premium
paid by the fiscal agent on any first series debentures purchased by the fiscal
agent for the sinking fund as hereinafter provided.
(3) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount required for the payment of interest and premium
on any first series debentures called for redemption in accordance with the
provisions of this Article IV of this agreement.
(4) From time to time, upon the written request of the fiscal agent as herein
after provided, the amount, if any, required under the provisions of section 5
of this Article IV as and for a sinking fund in respect of first series debentures
in addition to the $50,000,000 principal amount thereof initially issued.
The company covenants and agrees that the amounts to be paid by it for the
account of the sinking fund as in this Article IV provided will be sufficient to
retire the entire issue of $50,000,000 principal amount of first series debentures
initially issued by the date of the maturity of the first series debentures, namely,
March 1, 1959.
Sec . 5. If at any time or from time to time the company shall issue and the
trustee shall authenticate and deliver any first series debentures in addition to
the $50,000,000 principal amount initially issued, the payments to be made by
the company to the fiscal agent under the provisions of section 1 of this Article
IV shall be augmented by an amount to be determined by the fiscal agent and
in its opinion sufficient to retire on or before the maturity of such first series
debentures the entire additional amount so issued by the company.
S e c . 6. If at any time or from time to time the company shall issue and the
trustee shall authenticate and deliver under any agreement supplemental to this
agreement any secured debentures of a series other than the first series, the
company covenants that such supplemental agreement shall contain provisions
requiring the company to pay to the fiscal agent as and for a sinking fund amounts
to be determined by the fiscal agent and in its opinion sufficient to retire on or
before maturity the entire principal amount of the series issued or to be issued
under such supplemental agreement.
E x h ib it B
Balance sheets as of December 31, 1928, of the following companies are pre
sented herewith:
1. N. V. Financieele Maatschappij Kreuger & Toll.
2. Swedish American Investment Corporation.
3. Swedish Match Co.
4. Grangesberg Co.
1. N. V. Financieele Maatschappij Kreuger & Toll, balance sheet for December 31,
1928
Florins
United States
dollars (at par
of exchange)
1 F I.=$0,402
FI. 12,798,730.45
90,724,340.50
20,314,713.47
32,750,668.82
$5,145,080.64
36,471,184.88
8,166,514,82
13,165,768.86
156,588,453.21
62,948,558.20
ASSETS
Syndicate participations.............................................. ..................... ........ .........
LIABITITIES
Special reserve fu n d .................... ...................................................... ...............
Profit remaining from 1927.......... .......... ............................................................
Profit for 1928............... .......... ....................................... ................................... .
10, 000, 000.00
4,020,000.00
104,509,835. fiO 42,012,953.91
9,130,385.32
3,670,414.90
8,835,618. 72
3,551,918. 72
24,112,613.60
9,693,270.67
156,588,453.24
62, 948, 558. 20
1347
STOCK EXCHANGE PRACTICES
2. Swedish American Investment Corporation, balance sheet for December 31, 1928
ASSETS
Shares in industrial companies______________ __________ - ..........................................................$13,374,819.66
6,427,980.00
Shares in real estate companies............... ................... ................... ........ ........ ..................................
Shares in banks..........................- ________________________ . __________ - .................................. .
9,128,027.11
Mortgage loans__________ . . . _________________________________ ______________ ___________
3,474,000.00
Bank and cash account......................................... .......... .......... ............................................. ..........
Accounts receivable............... .............................................................................................................
32,404,826.77
1,075,657.56
987,312.21
34.467.796.54
LIABILITIES
Accounts payable........................ ....................................................... .................................................
Reserve for Federal income taxes............................................... .......................................................
Share capital:
Preferred stock__________________________________ ________ ___________ _
$41,000.00
30,217,000.00
Comm on stock___________________________ _______________ __________ _
--------------------Surplus:
Balance Jan. 1, 1928........................................................................................... 3,635,479.43
Net profit for the year ended Dec. 31,1928....... .................... $3,149,880.34
Less: Deferred charges written off......... ............ ............ ........
527,675.19
--------------------- 2,622,205.15
4,656.41
284,114.55
30,258,000.00
6,257,684. 58
Deduct:
Preferred dividends____________ ___________ _____________
Comm on dividends...... .......... .......... .............................. ..........
874,159.00
1,462,500.00
--------------------- 2,336,659.00
Balance Dec. 31,1928_____ __________________ ____ _______________________ ___________
3,921,025.58
34.467.796.54
3. Swedish Match Co. balance sheet as of December 31, 1928
In kronor
Kr. 30,959,697.22
Cash in hand and at banks.
99,666,992.03
Bonds.
Sundry debtors___ _______ ____________ _______ ____ ____ ______
55,441,202.34
Stock of matches.................................... ................................... .............
2,499,678.58
Foreign investments______________________ _____________________
117,851,211.96
Shares:
5,994 ordinary shares in Jonkopings <fc Vulcans Tandstieksfabricks
Aktiebolag_______ ________ _________________________ ________
34,964,976.10
2 preference shares in Jonkopings & Vulcans Tandsticksfabriks
Aktiebolag.................... ......................................................................
2 000.00
152*496 ordinary shares in Aktiebolaget Forenade Svenska
35,075,000.00
TSndsticksfabriker.......................................... ................... ...............
27,500 preference shares in Aktiebolaget Forenade Svenska Tftnd6,325, 000.00
sticksfabriker............ ..................................................... ......... ..........
163,436, 222.04
1,000,000 ordinary shares in International M atch Corporation___
33,853, 232.81
1,856,250 ordinary shares in British M atch Corporation (L td .).
3.600, 000.00
199,998 in Trumm er & Co., Successors (L td .)______ __________
5,750, 000.00
50,000 in Compania Chilena de Fosforos........................................
569, 237.51
752 in Fabrica Nacional de Fosforos, Comp. A n o n im a .............
100, 000.00
996 in Swedish-Chinese Export & Import Co. A . B ___________
5,915, 000.00
845 in Katrinefors A ktiebolag........................................ .................
4.600, 000.00
18,496 in Aktiebolaget Ofverums Bruk............................................
600, 000.00
5.996 in Aktiebolaget Skogsegendomar............................................
1,350, 000.00
1,346 in A lb y N ya Kloratfabriks Aktiebolag........................ .........
200, 000.00
1.996 in Elektrolytiska Aktiebolaget T rollM ttan .........................
400, 000.00
3.996 in Aktiebolaget Siefvert & Fornander...................................
50, 000.00
96 in Aktiebolaget Lowenadler & C o .............................. ...............
120, 000.00
1,196 in Svenska Tandsticksbolagets Forsaljningsaktiebolag___
400, 000.00
3.996 in Fastighetsaktiebolaget Vastra Tr&dgardsgatan 15......... .
,
In dollars
$8,297,198.85
26,710,753.86
14,858,242.23
669,913.86
31,584,124.82
9,370,613.59
536.00
9.400.100.00
1.695.100.00
43,800,907.50
9,072,666.39
964.800.00
1,541,000.00
152,555.65
26,800.00
1.585.220.00
1.232.800.00
160.800.00
361.800.00
53.600.00
107.200.00
13.400.00
32.160.00
107.200.00
297,310,668.46
1.00
79,679, 259.13
.27
603,729,451.59
161, 799,493.02
90,000,000.00
180,000,000.00
24,120,000.00
48, 240,000.00
270.000.000.00
25,683,000.00
52,400,988.18
55,645,463. 41
72.360.000.00
53.600.000. 00
6,883,044.00
14,043,464. 83
14,912, 984.19
603, 729,451. 59
161, 799,493. 02
Office furniture.
LIABILITIES
Share capital:
A shares___________________________
B shares____ ______________________
Reserve fund------ --------------------------------Debenture loan____ ___________________
Sundry creditors_______________________
Profit and loss account........... .................
. .
200 000 000.00
1348
STOCK EXCHANGE PRACTICES
4- Grangesberg Co. balance sheet as of December 81, 1928
In kronor
In dollars at par
of exchange
(1 krone=$0,268)
ASSETS
Investments in mining and affiliated com panies..................................
Bonds............ .................................................... ............. .................... .........
Steam and motor ships............................................................ . ..................
Bailway and rolling s to c k ..........................................................................
Mines and mining rights acquired from Stora Kopparbergs Bergslags
a . b ................................................................................... .............. : .........
Plants at Grangesberg........................................... .......... .......................
M ines at Strassa.......... ............ .............................................................. .
Buildings and plants at Strassa............ ............. ...................................
Sundry inventories and supplies_________ ________ _______________
Ore on hand_______ _______ _______ _______ _______________________
D ue from affiliated com p an ies...-------- ------------------------------------- ---- Building loa n s......... .......................................... ................... ........ .............
Sundry rights in connection with the agreement with the Govern
ment of 1927_____ _______ _____ ______________ ___________________
D ue from b an k s.......................................... ..................... ............ ...............
Accounts receivable for ore............................................. ..........................
Miscellaneous receivables................. ............... ...... ...................................
C a s h ........................ ................. ....................... ............. ................. ............
LIABILITIES
Share capital.................................
Reserve iund......... .......................
Pension fund—............. .........—
Ship insurance fu n d ..................
Fire insurance fund reserve______________ ___
Reserve for taxes, expenses, and contingencies.
Reserve for renewals—railway_________ ______
B onds.
D ue to affiliated com panies._____________ ____ ____________________
D ue Stora Kopparbergs Bergskgs A . B ____ __________ ____________
D ue to the Government according to the agreement of 1927____ ____
D uo to banks_________ _______ ________________ ___________________
Reserve for repayment of royalty according to the agreement with
the Government of 1927.......................... - ...................................... ........
Miscellaneous liabilities............................................... .............................
Unpaid coupons_________ ____________ ____ __________ ____________
Surplus_____ ____________________________ ____ ____________________
132,004,436.00
40,000.00
32,607,748.81
11,001,958.39
, ,
20 000 000.00
35,377,188.85
10,720.00
8.738.876.69
2,948,524.85
5,236,997.90
8.895.600.00
2.836.077.00
2, 572,861.78
4,323,920.48
73,175,226.17
1,628,636.26
5,360,000.00
1,403, 515.43
2,384,020.80
760,068.63
689,526.96
1.158.810.69
19, 610,960.61
436,474. 52
13,227,820. 56
1,432,080.04
3,107,198.12
5,481, 264. 70
23,724. 57
3,545,055.91
383, 797.45
832,729.10
1,468,978.94
6,353.18
317,595, 550.81
85,115,607.61
119,000, 000.00
46.000, 000.00
418, 192.48
2, 201, 324.20
263, 429.74
3,500, 000.00
396, 465.00
53,154, 477.01
16,288, 132. 50
13,227, 820. 56
27, 644, 549.17
31,892, 000.00
12,328, 000.00
112, 075.58
589, 901.29
70, 599.19
938, 000.00
106, 252.62
14,245, 399.84
4,365, 219. 51
5,360, 000.00
3,545, 055. 91
7,408, 739.18
956,856.62
2,013,311.84
159,383.17
12,371,808. 52
256,437. 57
539,567. 55
42,714.69
3,315,644. 68
317,595, 550.81
85,115,607.61
20. 000, 000.00
M r. M arrin an . Was there any special consideration given to the
wide latitude permitted Kreuger & Toll Co. to substitute or change
pledged collateral in the terms of this indenture?
Mr. A ltschul . Yes, sir.
Mr. M arrin an . What was the nature of the consideration given
to that?
Mr. A ltschul . D o you prefer to have me rely on my memory for
that? I have put down and have before me here a few notes on this
subject which may make the matter clearer.
Mr. M a rrin an . Talk from your notes, Mr. Altschul.
Mr. A ltschul . In connection with the listing of the so-called
secured sinking fund debentures the question has come up as to
the degree of scrutiny to which the indenture was subjected by the
committee, and in particular the degree of scrutiny to which the socalled substitution clauses were subjected. These clauses were con
sidered by the committee. Their intent appeared to us to be that
at all times outstanding debentures should be covered by securities
described in the indenture in detail and referred to as eligible securi
ties, to the extent of 120 per cent in par value of the par value of out
standing debentures and by securities producing currently an in
come equivalent to 120 per cent of the interest charge on the outstand
ing debentures.
STOCK EXCHANGE PRACTICES
1349
The reason why par value was used as the basis for the determina
tion of the amounts of eligible securities to be lodged with the trustee
was explained to the committee as having its origin in the unusual
circumstances of Ivar Kreuger’s business. We were told that Kreuger
was in the habit of making great loans, in many instances to govern
ments. These were evidenced by issues of government securities,
where frequently the issue was supported by the specific pledge of the
match monopolies for which he was negotiating, and where the issue
in its entirety was held by Kreuger. As a result it was pointed out
that there was often no market price for these issues on the basis of
which a calculation of the value of the collateral could reasonably be
based.
It was pointed out that as the securities in question had to be cur
rently paying income to the extent of 120 per cent of the interest
carried by the outstanding debentures, the provision as to par value
possibly lost some of its significance. Beyond this, there was the
general feeling at that time—and one now has to go back to that time
—that the credit of Kreuger & Toll stood so high that its debentures
might well have been eligible for listing on the stock exchange without
any collateral security whatever, and that, accordingly, in so far as
collateral security was being offered, a certain degree of flexibility
should be allowed to the borrowing corporation in order that its
alleged constructive effort of financing country after country should
not be needlessly hampered.
The C hairman . May I ask you there: You heard the testimony
yesterday in which it was stated that over $100,000,000 had disap
peared to Kreuger?
Mr. A ltschul . Yes.
The C hairman . The investigation so shows. I am wondering how
he could spend $100,000,000 in the different stock exchanges of the
world without you people being next to his habits.
Mr. A ltschul . I can not answer that question, Senator. We had
no knowledge of what he was doing.
The only thing I would like to add in connection with this sub
stitution provision, if I may, is that according to our custom the
stock exchange gets an undertaking that any changes in collateral
are to be promptly notified to us.
Mr. M arrin an . That was to be my next line of inquiry. The
listing agreement contains this language on the point of reporting
changes in pledged collateral:
To notify the stock exchange after deposited collateral is changed or removed
except for incidental items, which will be reported annually.
Was this form of provision in this particular the standard form as
of that date, August 6, 1929? I mean by standard form the custo
mary or usual form, and not a special form employed for inclusion in
this particular agreement.
Mr. A ltschul . My recollection is that it was, but I will have to
answer your question by asking Mr. Haskell.
Mr. M arrin an . Mr. Haskell, won’t you pull up close to Mr.
Altschul so that he can refer without inconvenience.
Mr. A ltschul . Thank you very much. Apparently there was no
standard form for this kind of substitution provision. Occasionally
there were issues listed where there was a substitution clause, and in
issues where there was a substitution clause, a clause in its general
119852— 33—
pt
4-------14
1350
STOCK EXCHANGE PEACTICES
wording similar to this and like in intent was inserted to provide that
the debtor corporation should advise the stock exchange of changes
in its collateral.
The C hairman . But this indenture did not so provide for any
notification of the stock exchange?
Mr. A ltschul . We are talking now, sir, of the agreement between
the borrowing company and the stock exchange. The borrowing
company agreed to notify, and only after Kreuger’s death did we
find that they had constantly and regularly violated their agreement.
Mr. M a rrin an . I want to bring this up in orderly fashion. Am I
correct in the information I have that under date of April 1, 1930, the
language of this provision approved by your committee for use in
applications to list was modified to read as follows:
T o notify the exchange of the change or removal to a substantial extent o f
collateral deposited under any of its mortgage or trust indentures under which
listed securities are outstanding.
Was such action taken by the exchange?
Mr. A ltschul . Yes, sir.
Mr. M arrin an . This is a matter of establishing an orderly record
on this, and I may say here that I would like to have at an appro
priate place included in the record copy of a letter which is the basis
for these questions, written under signature of Mr. J. M . B. Hoxsey,
executive assistant to the committee on stock list, and addressed to
William A. Gray, who at that time was counsel to this committee.
Substantially all the information is in here, except that it is not in
such order as to be as understandable as I hope to make it by the
series of questions that I am now asking.
I would like to have this letter placed in the record at this point.
Mr. A ltschul . May I just look at one word in the letter, because
I am not sure-----Mr. M a rrin an . Yes. Those pencil notes as to dates represent
assurances given to me during my investigation in New York by
your Mr. Haskell.
Mr. A ltschul . Yes. Well, I was looking for the word “ immedi
ately,” because that was one of the things that we caught.
(The letter from J. M. B. Hoxsey, executive assistant, committee
on stock list, New York Stock Exchange, to Mr. William A. Gray,
dated May 31, 1932, is here printed in the record in full as follows:)
N
ew
Y
ork
Stock
E
xchange
,
May, 31, 1932.
Mr.
A. G r a y ,
New York City.
D e a r S i r : In accordance with the telephone request of Mr. Meehan, I hereby
advise you that the text of the standard form of agreement to be entered into by
applicants for listing securities immediately prior to the recent change was as
follows:
“ To notify the stock exchange of the change or removal to a substantial extent,
of collateral deposited under any of its mortgage or trust indentures under which
listed securities are outstanding.”
The text of a similar agreement now in force and embodying the recent change is
as follows:
“ To notify the stock exchange immediately of any change or removal of
collateral deposited under any of its mortgage or trust indentures under which
listed securities are outstanding.”
This agreement has been modified from time to time in the past, and the text
of the corresponding agreement entered into by Kreuger & Toll was as follows:
W
il l ia m
STOCK EXCHANGE PRACTICES
1351
“ To notify the stock exchange if deposited collateral is changed or removed,
excepting for incidental items which will be reported annually.”
I inclose with this copy of cable dated March 21, 1932, signed Kreutoll. The
stamp upon this cable shows that it was delivered to this office at 1.03 p. m. on
March 21.
A question arose in our minds as to the accuracy of the exceedingly small
holdings of German Government international 5% per cent 1965 bonds, and of the
fact that they appear to be payable in kroner.
We asked the cable company to confirm the latter part of the telegram, and
inclose copy of official advice with such confirmation, which was received on
March 22, 1932.
The information was given to the press upon the same day. We have received
no advice from the company of any further changes.
We note, however, that in an application dated May 2, 1932, for listing cer
tificates of deposit for Kreuger & Toll 5 per cent sinking fund gold debentures,
there is listed in addition to the securities named in the attached cablegram,
150,000 French francs in cash, which sum was not mentioned in the cable.
Yours very truly,
J. M. B. H o x s e y ,
Executive Assistant.
Mr. M a r r in a n . D o you regard that second, that 19 3 0 modification
of this provision to report, a strengthening of the regulation, or was
it just merely an amendment without much significance?
Mr. A ltschul . It was a strengthening of the regulation.
Mr. M arrin an . In what way, Mr. Altschul?
Mr. A ltschul . In that it provided for the immediate notification.
M r. M arrinan . N o ; we have not gotten that far.
Mr. A ltschul . I beg your pardon. Which is the one that you are
referring to?
Mr. M a rrin a n . I am talking now about the April 1, 19 3 0 . I am
trying to clear that situation up.
Mr. A lt s c h u l. Oh, yes. I think the April 1, 19 30 , as far as I
read it now, was largely in the direction of clarification.
Mr. M a rrin an . Am I correct when I state that more recently—I
am not advised, Mr. Haskell, as to the date, save that it followed
the Kreuger disclosures—the language of this provision was further
modified to read as follows:
To notify the stock exchange immediately of any change or removal of collateral
deposited under any of its mortgage or trust indentures under which listed
securities are outstanding.
That is correct?
Mr. A ltschul . That is correct.
M r. M arrin an . The inclusion of the word “ immediately”
strengthens the provision as here modified, does it not?
Mr. A ltschul . Yes, sir.
Mr. M arrinan . Did the Kreuger & Toll experience have any
influence upon the decision or action of your committee to approve
this modification?
Mr. A ltschul . It did so.
Mr. M arrinatst. Did the agreements, Mr. Altschul, entered into
by Kreuger & Toll with the New York Stock Exchange as conditions
precedent to the approval of listing place responsibility upon Kreuger
& Toll Co. or upon the American trustee, Lee, Higginson Trust Co.,
or upon both to report substitution of collateral?
Mr. A ltschul . It placed the responsibility on Kreuger & Toll, sir.
Mr. M arrin an . Do you think it sound practice to depend upon a
foreign company to make such reports, especially where there exists
an American trustee?
1352
STOCK EXCHANGE PKACTICES
Mr. A ltschul. No. We have learned from experience, sir, that
that should be corrected, and it is in the process of being corrected
now. Do you care to have me explain in what manner?
M r. M arrin an . Yes; make the statement. You are anticipating
some of my questions, but I will be very glad to have you proceed
and make a complete statement.
Mr. A ltschul . This is the first experience that we have ever had
on this magnificent scale of violation of an agreement to notify the
stock exchange as to a change in deposit, and naturally it gave us
great concern, and we had to think about it a lot, and we are now at
work on the preparation of an agreement, which requires a good deal
of study and thought, which we would like to have entered into by
trustees, a direct agreement between the trustee and the exchange
that they will notify us of these changes. And since the Kreuger &
Toll episode we have taken steps to satisfy ourselves that in the other
rare cases where there are substitutions of collateral possible, that
we have been notified and the public has been notified.
M r. M arrinan . Speak louder. I did not catch the last.
Mr. A ltschul . Since the Kreuger & Toll episode we have taken
up with trustees acting under deposit agreements the question of
whether we have been advised of changes that have taken place here
tofore, and in those rare instances where we find through inadvertence
minor changes of which we had not been heretofore advised we se
cured such advice, and the information has been made available to
the public. To correct the record. We have taken that up with the
companies in each case where there was an American company that
had an obligation to advise us of changes of collateral—we have
checked with them to make sure that our records up to date are correct.
Mr. M arrin an . That was the purpose of my next question. It
has been developed in the record that at least 33 changes or substitu
tions of collateral occurred between July 1, 1929, and April 1, 1932.
When did the stock exchange first secure knowledge of any substitu
tions of collateral?
Mr. A ltschul . Our first knowledge—the first advice that we had
of any substitution of collateral was contained in the telegram from
Kreuger & Toll received by us after the death of Ivar Kreuger. I
will give you the date of it later.
Mr. M arrin an . Am I correct in stating that this information
came upon inquiry initiated by the stock exchange from Kreuger &
Toll Co. in Stockholm and that you received a cable under date of
March 21, 1932?
Mr. A ltschul . No, sir. That is in error. We received the cable
out of the clear sky. It was not in response to an inquiry of ours.
Mr. M arrin an . May I insert in the record at this point a copy of
that cable, which I will ask Mr. Altschul to identify as to its accuracy.
The C hairman . If there is no objection it will be so ordered.
(Cablegram from Kreutoll to New York Stock Exchange is here
printed in the record in full, as follows:)
C
o m m e r c ia l
C
ables,
Stockholm, March 21, 1932.
N
ew
Y
ork
Stock E
xchange,
New York:
The obligation in the listing application No. A8865 to notify you if deposited
collateral for our 5 per cent secured debentures is changed or removed has for
some unaccountable reason not been recorded in our office and therefore we regret
1353
STOCK EXCHANGE PRACTICES
that no notification in that respect has so far been sent to you. The present
collateral consists of the following securities: Dollar 922.529.51 Ecuador Mort
gage Bank 7 per cent, 1949; dollar 1.879.289.94 Republic of Ecuador 8 per cent,
1953; dollar 22.000.000 Kingdom of the Serbs Croats and Slovenes 6% per cent,
1958; dollar 6.000.000 Republic of Latvia 6 per cent, 1964; dollar 23.848,753.65
Hungarian Cooperative Society Establishes for the Financial Liquidation of Land
Reform 5% per cent, 1979; Francs 74.900.000 Caisse Autonome des Monoples
du Royaume de Roumanie 7% per cent, 1971; Kroner 55.000 German Govern
ment International 5% per cent, 1965; pounds 380.690 Rumanian Govern
ment Consolidation 4 per cent, 1968.
K
reutoll.
Mr. M arrin an . Mr. Altschul, did the New York Stock Exchange
receive any official information prior to the date of the Kreutoll signed
cable regarding the substituted collateral from the American trustee,
Lee, Higginson Trust Co., of Boston?
Mr. A ltschul . No such information came to the committee on
stock list, sir. I can not speak for any other committees on the
exchange, but I do not believe so.
Mr. M arrin an . Were you present yesterday when I called atten
tion to the difficulty of reconciling certain figures in dollars at par
value as between the alleged total of pledged collateral on deposit
originally as reported by Lee, Higginson, the same total as it appears
in your application to list, and the record which we were furnished
which gave a chronological history of all deposits and withdrawals
and a total giving the position of the pledge after each change or
substitution?
Mr. A ltschul. Yes, sir.
M r. M a rrin an . The point I sought to raise yesterday was not one
of arithmetic, but one of emphasizing the apparent laxity which seems
to have characterized this operation. Have you had an opportunity
to try and check that situation out, and was I fair, in so far as you are
qualified to answer, in stating that there was an apparent laxity in
that situation?
Mr. A ltschul . We have no information before us, Mr. Marrinan,
beyond the list of the collateral that was certified to us at the time
of the listing application and the list of the collateral as substituted
covered by this cable of yours. The intermediate steps we only heard
of through what we heard here yesterday, and we know nothing more
about it than that.
M r. M arrin an . Did the question of the moral responsibility of
Kreuger & Toll Co. or their fiscal agents, Lee, Higginson & Co., arise
in considering these various provisions of the debenture agreement
which accompanied the application to list?
Mr. A ltschul . Yes, sir; without any question.
M r. M arrin an . In what way and to what effect? That is not a
tricky question.
Mr. A ltschul . No; I understand. The reason of my difficulty in
answering that is because I would like to bring one other phase into
it. The standing and reputation of Kreuger & Toll and of the bankers
of Kreuger & Toll affected the stock list committee in two respects.
First of all, in connection with the deposit agreements, and secondly
in connection with the presentation of figures.
To clear that up, if I may, I would like to go back two years. In
1927, when the stock exchange became impressed with the increasing
tendency of European domestic securities to come to this market, we
appointed a special committee to go abroad and study this situation
1354
STOCK EXCHANGE PRACTICES
on the spot in order that they might report to us and help us to de
termine what steps, if any, we should take in regard to these foreign
securities, and with a view to continuing our efforts to reasonably
protect the American investors.
The report of these representatives, approved by the governing
committee of the New York Stock Exchange in 1927, was issued in a
pamphlet entitled “ The Listing of Foreign Internal Securities on the
New York Stock Exchange,” a copy of which I can present to the
committee if you wish. In the light of this report we drew up and
promulgated a circular covering the provisions for the listing of
foreign internal securities on the New York Stock Exchange.
In section 7 of this report will be found a summary of the findings
of the committee in the matter of foreign accounting practices, and
the listing committee in determining its policy had before it evidence
of the fact that in the case of most foreign companies, other than
English, independent audits were practically unknown. On this ac
count and having in mind the desirability of bringing to whatever
extent possible under the supervision of the stock exchange securities
which were flowing in to the American market at that time anyway,
and in very considerable volume, the committee decided not to make
the submission of independent audits a requirement for fisting, but in
connection with applications before it, to take into account the general
background of the enterprise and the standing of those associated with
it, both in its management and as bankers and sponsors in the Ameri
can market.
It was because of these conclusions reached and because of this
policy adopted that no audit was required.
At that time the committee had before it what it thought to be
ample evidence in regard to the standing of Kreuger & Toll, and par
ticularly of its guiding spirit, Ivar Kreuger. It seems necessary in
the light of events to recall the atmosphere of that time.
Mr. M arrin an . May I interrupt to ask whether you had first-hand
knowledge of the Kreuger situation, or whether you were in a consider
able measure dependent on Lee, Higginson & Co., as intermediaries,
to get information?
Mr. A ltschul . We had first-hand knowledge of the standing and
reputation of Ivar Kreuger as we thought it to be.
M r. M arrin an . Proceed, please.
Mr. A ltschul . And at that time he had a reputation that was
quite above suspicion. He was regarded as one of the great con
structive forces of postwar Europe, and his exploits in helping to
reestablish the credit of Governments through loans made in con
nection with match monopolies had opened to him the doors of the
leading chancelleries of Europe, and as a matter of fact, we knew
that he could enter into almost any chancellery in the world and
negotiate these vast deals on a magnificent scale. In fact, it was in
November, 1927, within a year of the time of the issue of these
obligations—I think it was a matter of public knowledge that he
had bought $75,000,000 of bonds of the Government of the French
Republic, and negotiated this extraordinary deal regarding the match
monopoly of that country.
The C hairman . N ow , it develops that his business never earned a
dividend such as he paid to the stockholders.
Mr. A ltschul . Quite right.
STOCK EXCHANGE PEACTICES
1355
The C hairman . That he was embezzling all the time, running
behind all the time, and that the joint value of his companies ought
to be nearly 3,000,000,000 kroners, and it is about 27 or 28 per cent
of that to-day; is that, it?
Mr. A ltschul . No question about that, sir. It develops that he
is the greatest swindler of all time.
Mr. M a r rin an . Did you conclude?
Mr. A ltschul . Yes. I thank you very much.
The C hairman . One thing more. When you came to go into the
value of his property you had no statement as to that except one
furnished to you by Mr. Kreuger, did you? It was on that you
approved it?
Mr. A ltschul. We had no audited statement. I do not know
whether this will help you at all. To go back—I was looking over
the records at that time, and when we went over the Kreuger state
ments we found that there was an engaging frankness about them
that went far beyond what foreign companies were in the habit of
employing.
Mr. M a rrin an . An actual frankness or a seeming frankness?
Mr. A ltschul . A seeming frankness. They gave us so much more
information than most European companies gave us.
The Chairm an. But it turned out to be incorrect?
Mr. A ltschul . It turned out to be incorrect.
Mr. M a rrin an . Mr. Altschul, was the opinion of counsel for the
stock exchange requested on any of the various points which may
have been specially considered by your examining force?
Mr. A ltschul. Y ou are talking now about the indenture, I suppose?
Mr. M a rrin a n . Yes; the indenture.
Mr. A ltschul . No, sir; we never had occasion to consult counsel
about the indenture. The special features of the indenture which
have been discussed so much here were brought to the attention of
the committee, they were discussed, and they were considered in the
light of the representations that were made to us about the extraor
dinary character of his business which required this unusual degree
of flexibility, and his credit was so above suspicion that we looked
upon the security as just a little added velvet. We felt that it was
not really necessary at all.
M r. M arrin an . Then in the light of experience and perhaps what
you have heard around the table in the last day and a half, do you
think it would be wise in the future to consult counsel about such
extraordinary debentures as this one?
Mr. A ltschul . I think that it is our general practice when there
are provisions that seem to us so extraordinary as to warrant consult
ing counsel, to do so. And I think that if we see provisions in an
indenture that suggest to us the need of consulting counsel we will
continue to do so. The trouble about this thing is that it did not
seem to us from a legal point of view to be so extraordinary as to
require special legal advice.
Mr. M a rrin a n . Is it customary, Mr. Altschul, to have such great
latitude for substitution provided in an indenture?
Mr. A lt s c h u l. This was in my experience quite a unique docu
ment.
The Chairm an. May I ask: Never one like it before that you
know of, was there?
Mr. A ltschul . No, sir.
1356
STOCK EXCHANGE PEACTICES
The Chairm an. No American was accorded the privilege that you
gave to the European in that case?
Mr. A ltschul . No American as far as I know has ever applied for
that treatment.
Mr. M a r r in a n . The point I wish to make is that if you encoun
tered another one of these unique documents you are likely to scruti
nize it a little bit more carefully in all particulars than was the case
in this instance?
Mr. A lt s c h u l. We have learned a great deal from this experience,
sir.
Mr. M a r r in a n . Is it fair to say, Mr. Altschul, that the New York
Stock Exchange, in so far as we have thus far proceeded, relied sub
stantially upon the good repute of the firm of Lee, Higginson & Co.,
the principal house of issue and a member of the exchange?
Mr. A lt s c h u l. Will you be good enough to repeat the question?
Mr. M arrin an . I will ask the reporter to read it. (The last
question was thereupon read by the reporter as above recorded.)
Mr. A lt s c h u l. I am not sure that I understand the question, but
as I understand it I would say no, sir. I think we relied upon the
reputation of Kreuger & Toll and on the documents that were sub
mitted to us primarily, and then beyond that took into account the
fact that they were submitted by sponsors of high standing.
The C hairman . When you say that you have reference both to the
banking house and the firm of attorneys?
Mr. A ltschul . I was trying to differentiate between the two. Our
primary concern was with the papers that were presented to us and
the standing of the debtor corporation as we thought we knew it.
The C hairman . But you went further.
Mr. A ltschul . And beyond that we took into account, as I say,
the fact that the sponsors were considered of high standing.
The C hairman . When you say “ sponsors,” you are talking about
the banking house and the firm of attorneys?
Mr. A ltschul . I am talking about the banking house. The firm
of attorneys did not concern us one way or another.
Mr. M arrin an . I have noticed in the press that the New York
Stock Exchange has approved a new regulation with respect to new
applications for listing. Will you explain to the committee as
briefly as is consistent with an understanding what these new regula
tions provide? Please do not go into the matter fully. Just give
us the high points.
Mr. A lt s c h u l. Without going into the matter fully I would say
this, that the custom of demanding audits'—you are talking about the
audits?
M r. M arrin an . Audits; yes.
Mr. A ltschul . The custom of demanding audits is rather a new
one, and really up until about 1924 or 1925 or 1926 it was hardly
grounded American practice, and the stock exchange has tried to
keep a little ahead of American practice and to lead it to a certain
extent, but the fact is that up to 1924 or 1925 or 1926 the practice of
auditing accounts was not very general.
In 1926 we began to inquire into that thing, and our first step was
to try and exert our influence in the direction of getting audits from
companies, and at that time it was not an independent outside auditor
that was always required. Since then we have been developing our
STOCK EXCHANGE PRACTICES
1357
policy and we have been using our influence more and more in the
direction of getting independent, outside auditors’ reports. Some
times we meet hurdles that we are not able to take.
And largely as the result of our experience with this thing, this
episode of Kreuger & Toll, we finally concluded that we might as well
go the whole hog and make it an absolutely essential requirement for
listing after July 1 of the coming year.
Ever since April of the year 1932 we have had it a rule of the com
mittee not to list any securities of a corporation unless the corporation
would enter into an agreement to have its reports, its subsequent
statements, audited. The reason we did that was that we did not
want to slap on a new rule that would get into the way of perfectly
legitimate enterprises when the companies had not had the time to
have their audits made. They might have been going on unaudited
for years. But we did make the requirement that subsequent state
ments should be audited, and as Mr. Whitney pointed out in his
announcement in regard to that matter, since that rule was adopted
in April there have been no exceptions. I think possibly in the case
of one railroad company-----M r. M arrin an . When does the rule become effective?
Mr. A ltschul . That rule I am talking about was a rule of the com
mittee effective since last April, but that was the rule which called
for an agreement to have subsequent independent audits. Now the
new rule is the rule that says that securities can not be listed unless
the application is itself accompanied with current audit.
Mr. M arrin an . And that is not only an audit of the company if
it is a holding company, but also includes supporting audits of sub
sidiaries, which becomes effective as of July 1 for all new applications?
Mr. A ltschul . Yes, sir.
M r. M a rrin a n . Are you giving consideration to the application of
that rule to listed securities?
Mr. A ltschul . We make a constant effort in connection with listed
securities to get them to agree to the rule. I do not know whether
you have the figures here, Mr. Haskell, of the degree of our success.
But we have a very large percentage of listed companies that now do
present audited statements, and our constant endeavor is to increase
the number. It is a preponderating percentage to-day. I mean it is
not 10 or 20 or 30 per cent. It is in the neighborhood of-----Mr. H askell . Seventy-five or eighty.
Mr. A ltschul . Seventy-five or eighty per cent.
Mr. M arrin an . Will you make that last statement clear, Mr.
Altschul; that percentage statement that Mr. Haskell supplied?
Mr. A ltschul . Yes. The percentage of companies listed to-day
that do have independent audits is in the neighborhood of 75 to 80
per cent, and may be higher, but it is a preponderating percentage.
M r. M arrin an . Of your complete list?
Mr. A ltschul . Of our complete list, with the exception, as Mr.
Haskell pointed out, of certain leased companies where the position
is a special one and it is not required.
M r. M arrin an . Is there any security on the exchange which by
any stretch of the imagination through foreign subsidiaries, and so
forth, might present such a situation as we have of Kreuger & Toll?
Mr. A ltschul. That is a difficult question for me to answer.
Mr. M a rrin a n . Have you been looking for such a proposition?
1358
STOCK EXCHANGE PRACTICES
Mr. A lt s c h u l. Oh, we are constantly on the lookout for these
things, and a terrible experience like the Kreuger & Toll wakes us
all up. But I know of no such situation to-day.
Mr. M a r r in a n . Is your committee, Mr. Atlschul, giving con
sideration to the extention of this new regulation within a practicable
date to the entire list as a requirement?
Mr. A lt s c h u l. There is a certain degree of difficulty involved.
Mr. M a r r in a n . Are you considering it, Mr. Altschul?
Mr. A lt s c h u l. Yes.
Mr. M a rrin a n . I wish to develop that through questions.
Mr. A lt s c h u l. All right, I will answer them as to that.
M r. M arrin an . In so far as you are able to speak yourself— I
realize that while you are an influential member of the exchange,
that you are not empowered to determine broad matters of policy—
in so far as you are able to speak for yourself would you favor or do
you favor such a program?— That is, a ruling which would require
independent audits backed by audits, o f course, of subsidiaries, and
making only such few exceptions as might be necessary?
Mr. A lt s c h u l. Speaking personally I think it would be highly
desirable if all companies that seek to enlist the capital of investors
in their enterprise should be required to have full and complete
independent audited reports. Does that answer your question?
Mr. M a rrin a n . Yes, sir.
The Chairman. The confidence of investors has been considerably
shaken by a number of things that have happened, and you feel it
will be necessary to meet the situation a little better in the future?
That is the idea?
Mr. A lt s c h u l. No question about that, sir.
Now may I at this point develop along another line which I do not
think has come to your attention by way of illustrating the activities
of the exchange in these matters. We have been laying so much
emphasis in recent years on the obtaining of independent audited
statements that we have begun to wonder whether an independent
audited statement, which may mean so much and may mean so little,
would not in itself become ultimately a matter that would involve
further deception of the public. We have been having, therefore, a
series of meetings and conferences with accountants with a view to
seeing whether as long as the public is going to be asked to place so
much reliance on the statements of independent auditors, if we can not
get some agreements in cooperation with the accountants in regard
to some of the general governing principles of accounting and in re
gard to accountmg practice.
An auditor’s certificate—and I am not speaking as an auditor now,
or qualified to speak as an auditor—but an auditor’s certificate may
be perfectly true as representing the condition of the books, but
there are so many different kinds of ways in which the books them
selves can be kept, that unless you have got some standardized
practice that goes beyond the mere certificate, the chances of deceit
are still inherent in the situation. And as I said, the stock exchange
was very anxious to see that the maximum good was obtained for the
investor.
I have here a preliminary report which I should like to submit for
your investigation, showing what we have done up to date.
Mr. M a r r in a n . May I request, Mr. Chairman, that this document
entitled “ Value and Limitations of Corporate Accounts and General
1359
STOCK EXCHANGE PRACTICES
Principles for Preparation of Reports to Stockholders’5 be accepted
for possible inclusion in the record, and subject to examination by
some one for the committee before it is so accepted?
The C h a ir m a n . If there is no objection that suggestion of Mr.
Marrinan will prevail.
(A pamphlet headed “ Value and Limitations of Corporate Accounts
«,nd General Principles for Preparation of Reports to Stockholders.
Report of Committee of American Institute of Accountants on Coop
eration with Stock Exchanges ” was presented to the committee by
Mr. Altschul.)
V
alue
and
L im
it a t io n s
for
P
of
C
orporate
r e p a r a t io n s
of
R
A
ccounts
eports
to
and G en era l P
Sto ckh olders
r in c ip l e s
(Report of committee of American Institute of Accountants in cooperation
with stock exchanges)
A
m e r ic a n
I n s t it u t e
of
A
ccountants
( I n c .) ,
September 22, 1982.
T
he
C
o m m it t e e
on
S t o c k L is t ,
New York Stock Exchange, New York, N. Y.
D e a r S i r s : In accordance with suggestions made by your executive assistant,
this committee has given careful consideration to the subject of the general line
-of development of the activities of the exchange in relation to annual reports of
•corporations.
It believes that there are two major tasks to be accomplished— one is to educate
the public in regard to the significance of accounts, their value, and their unavoid
able limitations, and the other is to make the accounts published by corporations
more informative and authoritative.
The nature of a balance sheet or an income account is quite generally misunder
stood, even by writers on financial and accounting subjects. Prof. William Z.
Ripley has spoken of a balance sheet as an instantaneous photograph of the con
dition of a company on a given date. Such language is apt to prove doubly mis
leading to the average investor—-first, because of the implication that the balance
sheet is wholly photographic in nature, whereas it is largely historical; and,
secondly, because of the suggestion that it is possible to achieve something ap
proaching photographic accuracy in a balance sheet which, in fact, is necessarily
the reflections of opinions subject to a (possibly wide) margin of error.
Writers of textbooks on accounting speak of the purpose of the balance sheet
as being to reflect the values of the assets and the liabilities on a particular date.
They explain the fact that in many balance sheets certain assets are stated at
figures which are obviously far above or far below true values by saying that the
amounts at which such assets are stated represent “ conventional” valuations.
Such statements seem to involve a misconception of the nature of a balance
sheet.
In an earlier age, when capital assets were inconsiderable and business units in
general smaller and less complex than they are to-day, it was possible to. value
assets with comparative ease and accuracy and to measure the progress made
from year to year by annual valuations. With the growing mechanization of
industry, and with corporate organizations becoming constantly larger, more
completely integrated and more complex, this has become increasingly imprac
ticable. From an accounting standpoint, the distinguishing characteristic of
business to-day is the extent to which expenditures are made in one period with
the definite purpose and expectation that they shall be the means of producing
profits in the future; and how such expenditures shall be dealt with in accounts is
the central problem of financial accounting. How much of a given expenditure
of the current or a past year shall be carried forward as an asset can not possibly
be determined by an exercise of judgment in the nature of a valuation. The task
of appraisal would be too vast, and the variations in appraisal from year to year
due to changes in price levels or changes in the mental attitude of the appraisers
would in many cases be so great as to reduce all other elements in the computa
tions of the results of operations to relative insignificance.
Carrying the thought one stage further; it is apparent that the real value of the
assets of any large business is dependent mainly on the earning capacity of the
enterprise. This fact is fairly generally recognized by intelligent investors as
1360
STOCK EXCHANGE PRACTICES
regards capital assets such as plant and machinery, but it is not equally generally
recognized that it is true, though to a lesser extent, in respect to such assets as
inventories and trade accounts receivable. Those, however, who have had expeperience in liquidations and reorganizations realize that in many industries it
becomes impossible to realize inventories or accounts receivable at more than a
fraction of their going-concern value, once the business has ceased to be a going
concern. To attempt to arrive at the value of the assets of a business annually
by an estimation of the earning capacity of the enterprise would be an impossible
and unprofitable task. Any consideration of the accounts of a large business en
terprise of to-day must start from the premise that an annual valuation of the
assets is neither practical nor desirable.
Some method, however, has to be found by which the proportion of a given
expenditure to be charged against the operations in a year, and the proportion
to be carried forward, may be determined; otherwise, it would be wholly impossible
to present an annual income account. Out of this necessity has grown up a body
of conventions, based partly on theoretical and partly on practical considerations,
which form the basis for the determination of income and the preparation of
balance sheets to-day. And while there is a fairly general agreement on certain
broad principles to be followed in the formulation of conventional methods of
accounting, there remains room for differences in the application of those princi
ples which affect the results reached in a very important degree.
This may be made clearer by one or two illustrations. It is a generally accepted
principle that plant value should be charged against gross profits over the useful
life of the plant. But there is no agreement on the method of distribution. The
straight-line method of providing for depreciation which is most commonly
employed by industrial companies, the retirement reserve method used by
utilities, the sinking fund method, the combined maintenance and depreciation
method, and others, are supported by respectable argument and by usage, and
the charges against a particular year may vary a hundred per cent or more accord
ing as one or the other permissible method is employed.
Again, the most commonly accepted method of stating inventories is at cost
or market, whichever is lower; but within this rule widely different results may
be derived, according to the detailed methods of its application. For instance, at
times like the present, cost of finished goods may be deemed to be the actual cost
as increased by subnormal operation, or a normal cost computed on the basis of
a normal scale of operations. It may or may not include interest during the period
of production, or various kinds of overhead expenses. Market value may be
either gross or net after deducting direct selling expenses. The choice between
cost or market may be made in respect of each separate item or of classes of items,
or of the inventory as a whole. Frequently, whether a profit or a loss for the year
is shown depends on the precise way in which the rule is applied. And since the
conventions which are to be observed must, to possess value, be based on a com
bination of theoretical and practical considerations, there are few if any, which
can fairly be claimed to be so inherently superior in merit to possible alternatives
that they alone should be regarded as acceptable.
Most investors realize to-day that balance sheets and income accounts are
largely the reflection of individual judgments and that their value is therefore to
a large extent dependent on the competence and honesty of the persons exercising
the necessary judgment. The importance of method, and particularly of con
sistency of method from year to year is by no means equally understood.
In considering ways of improving the existing situation two alternatives sug
gest themselves. The first is the selection by competent authority out of the
body of acceptable methods in vogue to-day of detailed sets of rules which would
become binding on all corporations of a given class. This procedure has been
applied broadly to the railroads and other regulated utilities, though even such
classifications as, for instance, that prescribed by the Interstate Commerce
Commission allow some choice of method to corporations governed thereby.
The arguments against any attempt to apply this alternative to industrial cor
porations generally are, however, overwhelming.
The more practicable alternative would be to leave every corporation free to
choose its own methods of accounting within the very broad limits to which
reference has been made, but require disclosure of the methods employed and
consistency in their application from year to year. It is significant that Congress
in the Federal income tax law has definitely adopted this alternative, every act
since that of 1918 having contained a provision that the net income shall be com
puted “ in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer” unless such method does not clearly reflect
STOCK EXCHANGE PEACTICES
1361
income. In its regulations the Internal Revenue Bureau has said, “ the law
contemplates that each taxpayer shall adopt such forms and systems of account
ing as are in his judgment best suited to his purpose.” (Reg. 45, art. 24.)
The greatest value of classifications such as those imposed on regulated utilities
lies in the disclosure of method and consistency of method which they tend to
produce.
Within quite wide limits, it is relatively unimportant to the investor what
precise rules or conventions are adopted by a corporation in reporting its earnings
if he knows what method is being followed, and is assured that it is followed con
sistently from year to year. Reverting to the illustrations already used, the
investor would not need to be greatly concerned whether the straight-line or the
sinking-fund method of providing for depreciation were being employed by a
given corporation, provided he knew which method was being used and knew
that it was being applied in the same way every year. But if depreciation is
charged in one year on the straight-line basis applied to cost, and in another is
charged on a sinking-fund basis applied to a valuation less than cost, the investor
may be grossly deceived unless the change is brought to his notice. For this
reason, the requirement of the exchange that the depreciation policy of a com
pany applying for listing shall be stated in the application is valuable, and it
might well be amplified to include an undertaking to report to the exchange and
to stockholders any change of policy or any material change in the manner of
its application.
Again, it is not a matter of great importance to investors whether the cost or
market rule for stating inventories is applied to individual items or to the inven
tory as a whole, but it is very important to the investor that he should be advised
if the test is applied to individual items at the beginning of the year and to the
inventory as a whole at the close thereof.
It is probably fairly well recognized by intelligent investors to-day that the
earning capacity is the fact of crucial importance in the valuation of an industrial
enterprise, and that therefore the income account is usually far more important
than the balance sheet. In point of fact, the changes in the balance sheets from
year to year are usually more significant than the balance sheets themselves.
The development of accounting conventions has, consciously or unconsciously,
been, in the main, based on an acceptance of this proposition. As a rule, the
first objective has been to secure a proper charge or credit to the income account
for the year, and in general the presumption has been that once this is achieved
the residual amount of the expenditure or the receipt could properly find its
place in the balance sheet at the close of the period, the principal exception being
the rule calling for reduction of inventories to market value if that is below cost.
But if the income account is to be really valuable to the investor, it must be
presented in such a way as to constitute to the fullest possible extent an indica
tion of the earning capacity of the business during the period to which it relates.
This committee feels that the direction of the principal efforts of the exchange to
improve the accounting reports furnished by corporations to their stockholders
should be towards making the income account more and more valuable as an
indication of earning capacity.
The purpose of furnishing accounts to shareholders must be not only to afford
them information in regards to the results being achieved by those to whom
they have entrusted the management of the business, but to aid them in taking
appropriate action to give effect to the conclusions which they reach regarding
such accomplishments. In an earlier day, stockholders who were dissatisfied
with the results secured by the management could perhaps move effectively to
bring about a change of policy, or failing that, a change of management. With
the growth in magnitude of corporations and the present wide diffusion of stock
holdings, any such attempt is ordinarily impracticable because of the effort and
expenditure that it would entail. The only practical way in which an investor
can to-day give expression to his conclusions in regard to the management of a
corporation in which he is interested is by retaining, increasing, or disposing of his
investment, and accounts are mainly valuable to him in so far as they afford
guidance in determining which of these courses he shall pursue.
There is no need to revolutionize or even to change materially corporate
accounting, but there is room for great improvement in the presentation of the
conclusions to which accounts lead. The aim should be to satisfy (so far as is
possible and prudent) the investor’s need for knowledge, rather than the account
ant’s sense of form and respect for tradition, and to make very clear the basis on
which accounts are prepared. But even when all has been done that can be
done, the limitations on the significance of even the best of accounts must be
1362
STOCK EXCHANGE PRACTICES
recognized, and the shorter the period covered by them the more pronounced
usually are these limitations. Accounts are essentially continuous historical
records; and as is of true history in general, correct interpretations and sound
forecasts for the future can not be reached upon a hurried survey of temporary
conditions, but only by longer retrospect and a careful disinction between perma
nent tendencies and transitory influences. If the investor is unable or unwilling
to make or secure an adequate survey, it will be best for him not to rely on the
results of a superficial one.
To summarize, the principal objects which this committee think the exchanger
should keep constantly in mind and do its best gradually to achieve are:
1. To bring about a better recognition by the investing public of the fact that
the balance sheet of a large modern corporation does not and should not be ex
pected to represent an attempt to show present values of the assets and liabilitiesof the corporation.
2. To emphasize the fact that balance sheets are necessarily to a large extent,
historical and conventional in character, and to encourage the adoption of revised
forms of balance sheets which will disclose more clearly than at present on what
basis assets of various kinds are stated (e. g., cost, reproduction cost less deprecia
tion, estimated going concern value, cost or market whichever is lower, liquidating
value, etc.).
3. To emphasize the cardinal importance of the income account, such impor
tance being explained by the fact that the value of a business is dependent mainly
on its earning capacity; and to take the position that an annual income account
is unsatisfactory unless it is so framed as to constitute the best reflection reason
ably obtainable of the earning capacity of the business under the conditions
existing during the year to which it relates.
4. To make universal the acceptance by listed corporations of certain broad
principles of accounting which have won fairly general acceptance (see Exhibit I
attached), and within the limits of such broad principles to make no attempt to
restrict the right of corporations to select detailed methods of accounting deemed
by them to be best adapted to the requirements of their business; but—
(а) To ask each listed corporation to cause a statement of the methods of
accounting and reporting employed by it to be formulated in sufficient detail to
be a guide to its accounting department (see Exhibit II attached); to have such
statement adopted by its board so as to be binding on its accounting officers;
and to furnish such statement to the exchange and make it available to any
stockholder on request and upon payment, if desired, of a reasonable fee.
(б) To secure assurances that the methods so formulated will be followed con
sistently from year to year and that if any change is made in the principles or
any material change in the manner of application, the stockholders and the
exchange shall be advised when the first accounts are presented in which effect
is given to such change.
(c)
To endeavor to bring about a change in the form of audit certificate so
that the auditors would specifically report to the shareholders whether the
accounts as presented were properly prepared in accordance with the methods of
accounting regularly employed by the company, defined as already indicated. «|
This committee would be glad to discuss these suggestions with you at any
time, and to cooperate with the exchange in any action it may see fit to take along
the lines indicated.
Yours very truly,
G e o r g e O . M a y , Chairman.
E
x h ib it
I
It is suggested that in the first instance the broad principles to be laid down
as contemplated in paragraph 4 of the suggestions should be few in number. It
might be desirable to formulate a statement thereof only after consultation with a
small group of qualified persons, including corporate officials, lawyers, and
accountants. Presumably the list would include some if not all of the following:
1.
Unrealized profit should not be credited to income account of the corporation
either directly or indirectly, through the medium of charging against such unreal
ized profits amounts which would ordinarily fall to be charged against income
account. Profit is deemed to be realized when a sale in the ordinary course- of
business is effected, unless the circumstances are such that the collection of the
sale price is not reasonably assured. An exception to the general rule may be
made in respect of inventories in industries (such as the packing-house industry)
in which owing to the impossibility of determining costs it is a trade custom to
take inventories at net selling prices which may exceed cost.
STOCK EXCHANGE PRACTICES
1363
2. Capital surplus, however created, should not be used to relieve the income
account of the current or future years of charges which would otherwise fall to
be made thereagainst. This rule might be subject to the exception that where,
upon reorganization, a reorganized company would be relieved of charges which
would require to be made against income if the existing corporation were con
tinued, it might be regarded as permissible to accomplish the same result without
reorganization provided the facts were as fully revealed to and the action as
formally approved by the shareholders as in reorganization.
3. Earned surplus of a subsidiary company created prior to acquisition does
not form a part of the consolidated earned surplus of the parent company and
subsidiaries; nor can any dividend declared out of such surplus properly be
credited to the income account of the parent company.
4. While it is perhaps in some circumstances permissible to show stock.,of a
corporation held in its own treasury as an asset if adequately disclosed, the divi
dends on stock so held should not be treated as a credit to the income account of
the company.
5. Notes or accounts receivable due from officers, employees, or affiliated com
panies must be shown separately and not included under a general heading such
as notes receivable or accounts receivable.
The exchange would probably desire to add a rule regarding stock dividends.
E
x h ib it
II
The statement of the methods of accounting contemplated in paragraph 4a of
the suggestion would not be in the nature of the ordinary detailed classification
of accounts, nor would it deal with the machinery of bookkeeping. It should
constitute a clear statement of the principles governing the classification of
charges and credits as between (a) balance-sheet accounts, (&) income account,
and (c) surplus account, together with sufficient details of the manner in which
these principles are to be applied to enable an investor to judge of the degree of
conformity to standard usage and of conservatism of the reporting corporation.
Its content would vary according to the'circumstances of individual companies,
but some of the more important points which would be disclosed thereby would
be as follows:
THE GENERAL BASIS OF THE ACCOUNTS
Whether the accounts are consolidated, and if so, what rule governs the deter
mination of the companies to be included in consolidation; also, a statement as
to how profits and losses of subsidiary and controlled companies not consolidated
are dealt with in the accounts of the parent company.
THE BALANCE SHEET
(a) In respect of capital assets, the statement should show:
(1) What classes of items are charged to property, account (whether only new
property or also replacements and improvements).
(2) Whether any charges in addition to direct cost, either for overhead expense,
interest, or otherwise are made to property accounts.
(3) Upon what classes of property, on what basis, and at what rates provision
is made for, or in lieu of, depreciation.
(4) What classes of expenditures, if any, are charged against reserves for
depreciation so created.
(5) How the difference between depreciated value and realized or realizable
value is dealt with on the sale or abandonment of units of property.
(6) On what basis property purchased from subsidiary companies is charged
to property account (whether at cost to subsidiary or otherwise).
(b) In respect of inventories: The statement should show in fairly considerable
detail the basis of valuation of the inventory. The statement under this head
would be substantially a summary in general terms of the instructions issued by
the company to those charged with the duty of preparing the actual inventories.
It would not be sufficient to say that the inventory was taken on the basis of cost
or market, whichever is lower. The precise significance attached to these terms
should be disclosed, for the reasons set forth on page 3 of the letter.
The statement should include a specific description of the way in which any
intercompany profit on goods included in the inventory is dealt with. It should
show under this head, or in relation to income or surplus account, exactly how
reductions from cost to market value are treated in the accounts and how the
inventories so reduced are treated in the succeeding period. It is, for instance, a
1364
STOCK EXCHANGE PRACTICES
matter of first importance to investors if inventories have been reduced to cost
or market at the end of the year by a charge to surplus account, and the income
for the succeeding year determined on the basis of the reduced valuation of the
inventory thus arrived at. Obviously, under such a procedure the aggregate
income shown for a series of years is not the true income for the period.
(c) In respect of securities: The statement should set forth what rules govern
the classification of securities as marketable securities under the head of “ current
assets” and securities classified under some other head in the balance sheet. It
should set forth in detail how any of its own securities held by the reporting
corporation, or in the case of a consolidated statement any securities of any
company in the group held by that or any other member of the group are dealt
with in the balance sheet. (Stock of subsidiaries held by the parent will of course
be eliminated in consolidation.) The disclosure of the basis of valuation of
securities is covered in paragraph 2, page 6, of the recommendations contained in
the letter.
(d) Cash and receivables present few questions, though where sales are made
on the installment plan, or on any other deferred basis, their treatment should
be fully set forth, including a statement of the way in which provision is made
for future collection or other expenses relating to sales already made but not
liquidated, and to what extent deferred accounts are included in current assets.
(e) Deferred charges: The statement should set forth what classes of expendi
tures are in the company’s practice deferred and what procedure is followed in
regard to the gradual amortization thereof. (This question is of considerable
importance as substantial overstatements of income may occur through deferment
in unprosperous periods of expenses ordinarily chargeable against current opera
tions, possibly followed by writing off such charges in a later year against surplus
account.)
(J) Liability accounts: There is normally less latitude in regard to the treat
ment of liability accounts than in respect of assets. The statement should clearly
show how unliquidated liabilities, such as damage claims, unadjusted taxes, etc.,
are dealt with. The statement should disclose whether it is the practice of the
company to make a provision for onerous commitments or deal with such commit
ments in any way in the balance sheet.
(g) Reserves: A statement of the rules governing credits and charges to any
reserve account (including both those shown on the liability side and those
deducted from assets) should be given in detail. It is particularly important to
know whether losses, shrinkages, or expenses which would otherwise be chargeable
against income accounts are in any circumstances charges against contingent or
other reserves, and whether such reserves are built up partly or wholly otherwise
than by charges to income account.
THE INCOME ACCOUNT
An adequate statement in regard to the treatment of balance sheet items dis
closes by inference what charges and credits are made to income account or
surplus. The additional points required to be disclosed are the principles followed
in allocating charges and credits to income account and surplus account respec
tively, and the form of presentation of the income account. The form should be
such as to show separately (a) operating income; (b) depreciation and/or depletion
if not deducted in arriving at (a), in which case the amount of the deduction should
be shown; (c) income from companies controlled but not consolidated (indicating
the nature thereof); (d) other recurring income; (e) any extraordinary credits;
(J) charges for interest; (g) income taxes; and (h) any extraordinary charges.
The company’s proportionate share of the undistributed earnings or losses for
the year of companies controlled but not consolidated should be disclosed in a
note or otherwise on the face of the income account. Stock dividends if credited
to income should be shown separately with a statement of the basis upon which
the credit is computed.
Mr. M arrin an . Mr. Altschul, has the exchange in your opinion
sufficient power over companies already listed—some of them going
back many years—to enforce such a ruling requiring independent
audits on listed issues, if it desires to do so?
Mr. A ltschul . I am afraid I am going to answer that question in a
way that is quite unsatisfactory. I do not believe the exchange can
go more than a certain degree in advance of public opinion. If
STOCK EXCHANGE PRACTICES
1365
public opinion is clearly back of the exchange I think it can enforce
any requirement it desires to make. But when we are in the realm
of pioneering in respect to something that public opinion has not
yet become aroused about, sometimes we have to make haste slowly.
M r. M a rrin an . If you felt that as a matter of business integrity it
was necessary to take a lead in this situation, what instruments have
you within the exchange which may be used by way of persuasion or
coercion over the companies which have securities now listed to bring
them into line? What are your instruments?
Mr. A ltschul . Well, the instrument of persuasion is the stock list
committee itself, and particularly its executive assistant who is par
ticularly persuasive and tries to accomplish these purposes by diplo
matic means all the time. Other than persuasiveness, the only
instrument of coercion we have is the power to strike a stock from
the list.
The C h airman . When you speak of public opinion you also have
reference to the attitude of those who desire to list their stock and
their demands upon you, do you not?
Mr. A ltschul . I think, sir, we are very little influenced in our
policies or our judgments by the attitude of those who desire to list
their stock. The stock list committee is trying to perform a function
of usefulness from the point of view of protecting the investor in so
far as it can.
The C hairman . Well, the matter of listing is entirely between them
and you anyway. If they do not stand in your way, you can impose
whatever terms you want.
Mr. A ltschul . Yes, there is no question about that, and our terms
are more stringent all the time. Our latest ruling is a development
along those lines, sir. I did not understand your question.
Mr. M arrin an . Then the coercive influence that you may bring
to bear is the threat to strike from the list. Can that be done readily
with a security which has been on the list for a long time?
Mr. A ltschul . If you are speaking as a matter of the power of
the committee, with the approval of the governing committee, yes,
sir. If you are speaking as a practical matter, no, sir.
Mr. M arrin an . Will you explain the difficulty on the practical
side?
Mr. A ltschul . On the practical side the difficulty is that striking
from the list may involve a very considerable hardship on the very
large number of stockholders who prefer having their security on the
New York Stock Exchange to having a certain additional amount of
information.
Mr. M arrin an . Its position on the list also gives it a certain mar
ketability and added value which it might lose or doubtless would
lose if stricken from the list, and you have some responsibility to the
existing shareholders in that particular? Am I correct?
Mr. A ltschul . That is correct. We constantly have to weigh
these two considerations.
Mr. M arrin an . D o companies sometimes with knowledge of that
situation virtually put you up against the decision—do they put it
up to you to strike them from the list on the basis that they believe
that any consideration of the points to which we have just referred
will persuade you that you ought not to do it? In other words, do
they in effect defy you?
119852— 33—
PT
4-------15
1366
STOCK EXCHANGE PRACTICES
Mr. A ltschul . Well, without using just your words, in some cases
we have found that the background of the company attitude was the
feeling that we would be sacrificing the interest of investors so largely
by frivolously striking the stock from the list that we would probably
be unwilling in the last analysis to do that. Does that answer your
question clearly?
M r. M arrin an . And they take advantage of the situation to some
extent?
Mr. A ltschul . Well, I think when they are faced with a request
of ours they have that consideration in mind sometimes.
Mr. M arrin an . Do you think, Mr. Altschul, we have in these
circumstances a situation involving broad questions of public interest
in which the exchange itself at times may have some doubt about its
own power to act with justice to all the interests involved?
Mr. A ltschul . No, sir. My feeling is that we have been going
through a period of exploration, and we are going to be forced sooner
or later—and probably sooner rather than later—to take these steps
that we are very reluctant to take because of the interests of investors
in a particular situation, in order that the interests of investors
generally should be protected. Is that clear?
In other words, I think we are going to get to the point to do this
very thing that we have been reluctant to do. We have been nego
tiating, we have been talking, we have been discussing with the
companies from time to time and making a little progress here and
making a little progress there—in general, not progress in all cases
that we consider satisfactory.
The implication of striking from the list is so serious that it is a
last resort that we have wanted to avoid if it could be avoided.
But I think that the public is entitled to the information that we
have been seeking in their behalf, and I think when it comes to a
show-down we are going to have to exert our power unaffected by
the fact that in particular situations stockholders may suffer.
M r. M arrin an . That is the close of my examination.
The C hairman . I thank you very much.
Mr. A ltschul . I s that all, sir?
The C hairman . That will be all.
Mr. A ltschul . I will not be needed this afternoon?
The C hairman . While we would like to have you consider yourself
as being under subpoena, I do not know that we will need you; no.
We will recess at this time until 2.30 o’clock, meeting in this room.
We will then have as witnesses Gilmer Siler, partner in the stockbrokerage house of Eastman, Dillon & Co., and Allen L. Lindley,
chairman of committee on business conduct of the New York Stock
Exchange.
(Thereupon, at 12.45 p. m., a recess was taken until 2.30 o’clock
p. m. the same day, Thursday, January 12, 1933.)
AFTER RECESS
(The subcommittee met at 2.30 o’clock p. m. on the expiration of
the recess.)
The C hairman . The subcommittee will resume. Mr. Siler will
please come forward, hold up his right hand, and be sworn.
STOCK EXCHANGE PRACTICES
1367
You do solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth regarding the matter now under
investigation by this subcommittee, so help you God?
Mr. Sile r . I do.
TESTIMONY OF GILMER SILER, PARTNER OF EASTMAN, DILLON
& CO., NEW YORK CITY
(The witness was duly sworn by the chairman of the subcom
mittee.)
Mr. M arrin an . Mr. Siler, please give to the committee reporter
your full name and address.
Mr. Sil e r . Gilmer Siler, 120 Broadway, New York City.
Mr. M arrinan . You are a partner in the firm of Eastman, Dillon
& Co.; is that correct?
Mr. Sile r . Yes.
M r. M arrin an . Are you acquainted with the provisions of an
agreement between Ivar Kreuger and Eastman, Dillon & Co. nego
tiated under date of January 25, 1932, under the terms of which
Kreuger obtained a loan of $1,000,000 in cash from your house?
Mr. S ile r . Yes. I have read the agreement and know something
of it.
M r. M arrin an . Did you participate in the negotiation of this
agreement?
Mr. Sile r . No.
Mr. M ar r in a n . Is it correct that another partner in the firm, Mr.
Maurice H. Bent, did actually participate in the general preliminaries
which preceded that agreement?
Mr. S ile r . Yes.
Mr. M arrin an . I may say for the information of the members
of the subcommittee that Mr. Siler made this situation clear to me
in New York; that he informed me of the whereabouts of Mr. Bent,
who was at the time in Arizona; that he satisfied me that he could
be sufficiently helpful through his knowledge of this sitaution to
make unnecessary the subpoenaing of Mr. Bent from Arizona; and
so the matter was left in that fashion.
Now, Mr. Siler, have you knowledge of the extent of the stocktrading operations conducted by Ivar Kreuger?
Mr. Sil e r . What knowledge I have of them, Mr. Marrinan, has
come since his death. At the time when this contract was negotiated
we did not know of any operations that he had going on the Street
at all.
Mr. M arrin an . It was disclosed in court proceedings in the United
States District Court for the Southern District of New York, by a
man by the name of Anders Jordahl, that he represented Kreuger in
stock-trading operations, presumably on quite a large scale. Do
you know Mr. Jordahl?
Mr. S ile r . I have met him, yes.
Mr. M arrin an . Before you answer this question, Mr. Siler, let
me say this: The subcommittee has knowledge of and has located
certain witnesses who can be summoned. Those witnesses have a
comprehensive knowledge, we are advised, of the operations of Kreuger
in the stock market. It is our hope, in the interest of expediting this
inquiry, that we shall not have to go outside of those now here present
1368
STOCK EXCHANGE PRACTICES
for any additional facts. Now, for my question: The impression
appears to be abroad that in addition to being a great swindler Ivar
Kreuger was a great gambler and speculator in stocks. What is
your opinion from what you know personally and from what you
may have gathered from reliable sources in the Street about that
matter?
Mr. S ile r . Well, it developed after his death that he had either
sponsored or otherwise supported accounts in several houses besides
our own. That was a disclosure to us. We did not know it before.
Those houses, however, I do not remember now by name with the
possible exception of one, because we had no control, nor any interest
in fact in them, and the fact that they existed, that those accounts
existed, however did become known to us after Mr. Kreuger’s death.
Mr. M arrinan . It is a matter of common knowledge now, that Mr.
Kreuger did operate on quite a comprehensive scale during the period
immediately preceding his death, and probably for some time earlier,
is it not?
Mr. Sil e r . Well, certainly immediately preceding his death there
were several accounts that he must have been sponsoring.
M r. M arrinan . N ow, to return to this loan contract above men
tioned: In the interest of proceeding as rapidly as possible let me
describe this contract briefly as I understand it, and during my descrip
tion you may interrupt me if I make any misstatements. The idea
now is to bring out before the subcommittee the outstanding points
in the contract rapidly. This contract provided, first, for a loan of
$1,000,000 to Ivar Kreuger by Eastman, Dillon & Co. The loan was
for a period of three months from the date of January 25, 1932, at the
interest rate of 8 per cent-----Mr. Siler (interposing). If you would like an interruption at that
point, let me say that the question of the interest rate was fixed at
that figure by Mr. Kreuger’s wish. The actual fact, however, was
that the rate included a charge other than for interest.
M r. M arrin an . What was the other charge?
Mr. Sile r . I think it was based on a 6 per cent rate, with an addi
tional commission charge on it, that was a part of the charge for
making the loan to him.
Mr. M arrin an . At that time or on that day the going rate for
90-day money at banks was somewhere around 3% to 3% per cent,
was it not?
Mr. Sile r . We understood, however, Mr. Marrinan, at that time
that the going rate abroad for collateral loans of this character was
8 per cent.
Mr. M arrin an . Mr. Kreuger deposited as collateral for this loan
400,000 shares of Kreuger & Toll stock, valued at the market at that
time at $2,800,000. He agreed to maintain collateral of a minimum
value of $2,500,000 against this loan during its life, in the current
market value of the shares.
Mr. Sile r . That is right.
Mr. M arrin an . Additional provisions were included, wherein a
special trading account involving what some members of this sub
committee know as an account to peg the market, or as one might
say, to stabilize or support the market.
Mr. Sil e r . It was a marginal account.
STOCK EXCHANGE PEACTICES
1369
Mr. M arrin an . But that language is incorporated in the loan
agreement, that the trading account is to stabilize or support the
market.
Mr. S il e r . Well, it was not so much a matter of support as I
understood it, but the question of a stability of the market, to keep
it from rapid and erratic fluctuations. Mr. Kreuger thought there
could be a better market for his stock by having more interest in it,
and the stability phase of it was not to hold it at a price but to prevent
erratic movements in it.
Mr. M arrin an . I do not mean to question your honest belief in
what he thought, but from the character of his operations and the
scope of them, undisclosed to you at the time but now revealed, it is
not very safe to set one’s indorsement on just what Mr. Kreuger
thought about anything, is it?
Mr. Sil e r . I may have misstated my position in that. That was
our interpretation of it. Of course, I do not know what was in his
mind.
Mr. M arrin an . Arrangements were made for him to deposit
250,000 shares of Kreuger & Toll stock in this account immediately.
And there was curiously ill-defined arrangement as to whether or
not it was a really discretionary account, isn’t that true?
Mr. Sil e r . There was this arrangement with it: While he was in
town and available we were to consult him as to the conduct of it,
what he wished done. When, however, he was not available, and
his agent was not available, we reserved to ourselves and he gave us
the discretion to act in a way we felt was in the best interest of the
account. We had that discretion.
Mr. M arrin an . And his representative for such purposes was this
gentleman, Anders Jordahl.
Mr. Sil e r . That is right.
M r. M arrin an . There was no provision in the agreement as to
just what the legal status should be in event Kreuger died, was there?
Mr. Sil e r . I do not think there was any understanding or pro
vision for his death.
Mr. M arrin an . Did that not lead to an awkward situation later on?
Mr. Sil e r . It led to a complication in the loan account, yes.
M r. M arrin an . The firm of Eastman, Dillon & Co. was further
guaranteed a minimum operation in this account of 1,500,000 shares
per year, is that correct?
Mr. Sile r . That is correct.
M r. M arrin an . M a y I ask right there what benefit would East
man, Dillon & Co. derive from such a provision?
Mr. Sil e r . Well, we would have the commissions in the account.
Mr. M arrin an . There are many other interesting provisions.
Among them may be mentioned that Eastman, Dillon & Co. received
options on 1,250,000 shares of stock at prices ranging from $6 to $11
a share and extending over a period of one year, is that correct?
Mr. S ile r . I think it is. The aggregate amount I really do not
know, but there were options.
Mr. M errinan . Did you exercise your right in those options?
Mr. Sile r . No; we did not.
Mr. M arrin an . Arrangements were made to keep an adequate
supply of Kreuger & Toll stock in New York to support activity in
the account. What about that?
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STOCK EXCHANGE PRACTICES
Mr. S i l e r . The provisions in the agreement to keep available an
additional amount of stock from our standpoint was to have additional
collateral available if it were needed.
Mr. M a r r i n a n . It was not so stated in the agreement, however.
Mr. S i l e r . Well, it was very distinctly understood between
Kreuger and ourselves that that was what it was for. And it was at
that point that we first had a falling down from him on the agreement.
M r . M a r r i n a n . Eastman, Dillon & Co. were given the exclusive
right to lend Kreuger’s stock, presumably for short-selling purposes,
in the United States market, the entire country, in so far as Kreuger
could control that situation?
Mr. S i l e r . Y e s .
Mr. M a r r i n a n . Isn’t that a rather extraordinary provision?
Mr. S i l e r . I should not think so. If borrowers of the stock—
other accounts who wished to sell it short—had available an un
limited supply of it with which to make deliveries, we would not
have the same effectiveness in the carrying out of Mr. Kreuger’s
wishes as we would have if the stock could be borrowed there, was
already there to use, and with restrictions in other places.
Mr. M a r r i n a n . It was, in other words, a very important facility
to Eastman, Dillon & Co. to, shall we say, manipulate that stock in
such a manner as Mr. Kreuger desired to have it manipulated?
Mr. S i l e r . Well, I do not feel that way, sir. It was very likely a
provision that was put in to make it possible for us to lend the stock
if the stock was loaned. But Mr. Kreuger did not bind himself to
make that a condition that was open to us only. As I recall it in the
contract he just said he would if he could.
M r . M a r r i n a n . It gave you, nevertheless, very considerable in
fluence over any movements toward the short position in that stock.
Mr. S i l e r . As a matter of fact the stock was available in amounts
from other people in a way that made that of no effect.
Mr. M a r r i n a n . It was widely distributed, in other words, before
this provision went into effect.
M r . S i l e r . Oh, y e s .
M r . M a r r i n a n . And finally it was provided that Eastman, Dillon
& Co. will presumably, through Ivar Kreuger, or I. K., arrange a
friendly working agreement with Lee, Higginson & Co. in this matter,
as far as it may be necessary to our mutual interests. Was that
friendly agreement arranged?
Mr. S i l e r . Well, I think that some of our partners went over to
see them about it. I think the intent of that was this: That Mr.
Kreuger did not want the fact that he was negotiating with us to
offend Lee, Higginson & Co., and in order to have their approval of
it, that they might know of it, I think that was the reason that was
put in there.
M r . M a r r i n a n . They had knowledge of this contract?
Mr. S i l e r . Yes. Well, I do not know as to the details or the
actual terms of the agreement. As to that I can not be sure because
I did not go over there to see them. But the fact that Mr. Kreuger
was negotiating with us for a loan, they did know about it.
Mr. M a r r i n a n . I asked Mr. Durant yesterday if he had knowledge
of any house in New York which at any time had to liquidate some
400,000 shares of Kreuger & Toll stock, and he denied any such
knowledge.
STOCK EXCHANGE PRACTICES
1371
Mr. S i l e r . I question very much whether he knew that we had
400,000 shares of this stock. Of that I do not know, however.
Mr. M a r r i n a n . Do you know, Mr. Siler, whether there were any
similar contracts covering periods prior to this negotiated between
Kreuger and Eastman, Dillon & Co.?
Mr. S i l e r . As far as I know there were none.
Mr. M a r r i n a n . Have you knowledge or a belief that similar con
tracts were negotiated between Kreuger and other members of the
New York Stock Exchange?
Mr. S i l e r . I d o n o t k n o w o f t h e m i f t h e y e x is te d .
Mr. M a r r i n a n . Well, this contract was in fact put into effect,
isn't that true?
Mr. S i l e r . Oh, y e s .
Mr. M a r r i n a n . And the trading account was set up?
Mr. S i l e r . It w a s o p e n e d .
M r . M a r r i n a n . A n d th e m illio n d o lla r s w a s d e liv e r e d a n d y o u
g o t 4 0 0 ,0 0 0 sh a res o f lo n g s t o c k , is th a t tr u e ?
Mr. S i l e i ^ Yes, in the loan account, and collateral was delivered
for the other as you outlined.
Mr. M a r r i n a n . May I, Mr. Chairman, introduce into the record
at this time, with request that it be merely noted and returned to me
because I wish to use it, a copy of this rather unusual contract?
The C h a i r m a n . And also you desire it to be printed in our record?
Mr. M a r r i n a n . Yes, sir.
The C h a i r m a n . It is so ordered.
(The contract referred to above is here made a part of the record,
as follows:)
This agreement made and entered into this 25th day of January, 1932, by and
between Eastman, Dillon & Co., 120 Broadway, New York, N. Y., hereinafter
referred to as E. D. & Co., and Ivar Kreuger, president of the Kreuger & Toll Co.,
Stockholm, Sweden, hereinafter referred to as I. K.
AMOUNT OF CREDITS
E. D. & Co. agree to loan I. K. $1,000,000 for a period of three months from
the date of the signing of this contract with interest at the rate of 8 per cent per
annum. Coincident with receiving this loan I. K. agrees to deposit with E. D.
& Co. as collateral security for the loan 400,000 shares of K. & T. participating
debenture stock with a present market value of about $2,800,000 (based on $7 a
share). I. K. agrees to always keep with E. D. & Co. during the life of this loan
a minimum of $2,500,000 in current market value of these shares. I. K. will
deliver these shares to E. D. & Co. in negotiable form made out in the name of
E. D. & Co., or their nominees, and they will be in the regular form of New York
Stock Exchange listed shares eligible for transactions on the New York Stock
Exchange.
I. K. will coincidentally open an active market stabilizing and trading account
with E. D. & Co., the first step of which will be the deposit by I. K. with E. D.
& Co. of an additional 250,000 shares of the same K. & T. participating debenture
shares. This will be a regular New York Stock Exchange debit balance account
and E. D. & Co. will have the right to trade in this account for the account of I. K.
for a guaranteed minimum of 1,500,000 shares per year. It is understood that
E. D. & Co. will follow the instructions of I. K. or his representative in this
trading account at all times, but in matters arising for quick decision marketwise,
when in E. D. & Co. ’s judgment there is not time to consult by cable or telephone,
E. D. & Co., have the right to use their best market judgment and make the
decision. It being further understood that E. D. & Co. are to have the right to
ask I. K. to take up the amount of the debit balance in the trading account upon
demand as is the regular practice governing these open accounts.
E. D. & Co. agree that this account (which will be hereafter always referred
to as the trading account) may have a debit balance as large at $1,000,000. If
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STOCK EXCHANGE PRACTICES
E, D. & Co. choose to do so and to the extent that I. K. approves, E. D. & Co.
may expand this debit balance beyond $1,000,000, in which case the guaranteed
minimum number of shares traded will increase prorata with any expansion of
the debit balance beyond $1,000,000.
I. K. agrees at all times to keep as collateral with E. D. & Co. a minimum daily
market value in K. &. T. participating debenture shares equivalent to two and
one-half times the amount of the debit balance.
E. D. & Co. will charge I. K. its usual monthly debit balance interest rate on
similar accounts for the first $250,000 of the average monthly debit balance in
this trading account. On the remainder of the debit balance I. K. agrees to pay
interest at the rate of 8 per cent per annum.
E. D. & Co., while unwilling at this time to definitely agree to any extension
of the above-mentioned time loan, have assured I. K. that they will extend this
loan for an additional three months if in E. D. & Co.’s opinion they can safely
do so when the present three months’ period expires.
OPTIONS
In consideration of this agreement I. K. gives to E. D. & Co. the following
options exercisable in whole or in part on shares of K. & T. participating debenture
stock, viz: 250,000 shares, at $6 per share; 250,000 shares, at $7 per share;
250,000 shares, at $8 per share; 200,000 shares, a t.$9 per share; 200,000 shares,
at $10 per share; 100,000 shares, at $11 per share.
•
These options will all be for a minimum period of 12 months from the date of
the signing of this agreement, but I. K. agrees that E. D. & Co. be given an
extension of these options intending E. D. & Co. to have the fullest speculative
benefits from them during the first 12 months of the resumption of normal business
between Germany, France, England, and the United States, resulting from these
countries having reached an agreement (or agreements) producing this resump
tion. This agreement is worded in this way because both I. K. and E. D. & Co.
find it impossible to measure accurately in weeks, months, or years the amount of
time which must elapse before these normal business conditions are resumed
between these countries. To prevent any difference of opinion as to when
normal business has been resumed between these countries, it is agreed that the
determining factor will be the first quarterly officially published statements
showing export and import business for these 4 countries to be at least as
large as the average similar figures for the 5-year period ending 1928 (December
31), measured by dollars in the respective foreign exchanges current at the date
of the last of these 4 published quarterly statements, and all options will be
extended for 12 months after such date.
It is understood and agreed that the unused buying power in the trading account
shall only be decreased below $500,000 with E. D. & Co.’s consent.
It is clearly understood that in spite of the long duration of the given options,
the work of E. D. & Co. to improve the market will commence immediately and
that the work done in K R T stock by E. D. & Co. will be commensurate with the
importance of these options. It is also understood that E. D. & Co. will endeavor
to associate with themselves in their work other important financial houses in
order to make their activity more powerful.
Twelve months from the date of the signing of this agreement I. K. agrees to
buy back from E. D. & Co. on demand all or any part of 600,000 shares of the
above options at the rate of $1 per option share in cash, payable in dollars in
New York. It is agreed if this transaction takes place it in no way affects the
remaining options.
COLLATERAL SUBSTITUTION
I. K. agrees with E. D. & Co. that they have the right to request him to deliver
and I. K. will deliver to them 100,000 shares of International Telephone & Tele
graph common stock (listed on the New York Stock Exchange and selling at the
present time in the neighborhood of $10 a share) and E. D. & Co. will turn back
to him K. & T. participating debenture shares of an equivalent market value.
E. D. & Co. agrees not to call I. K. for delivery of the above stock unless E. D.
& Co. considers it absolutely necessary. E. D. & Co. have the right to request
delivery to them of this block of I. T. & T. stock at any time after March 15
as long as any part of the above-mentioned $1,000,000 time loan (or any extension
thereof) or any part of the above-mentioned $1,000,000 debit balance (or any
extension thereof) may be outstanding.
STOCK EXCHANGE PRACTICES
1373
GENERAL
Failure of I. K. to comply on demand with any one or all of the above requests
of E. D. & Co. will in their discretion immediately mature all of I. K .’s out
standing obligations to E. D. & Co. Any default hereunder by I. K. shall in no
wise affect rights, options, and privileges accorded to E. D. & Co. herein.
OPERATION OF TRADING ACCOUNT
I. K. agrees to give E. D. & Co. discretionary power to operate the abovementioned trading account for him and to abide by their judgment as to the
amount of shares to be traded in in this account, it being fully understood between
I. K. and E. D. & Co. that the latter are going to endeavor to build up and broaden
the market in these K. & T. shares over a period of 12 months (which period
may be extended by agreement). During these trading operations it is clearly
understood that the above-mentioned 1,500,000 shares of guaranteed annual
minimum trading, in no way limits E. D. & Co. as to the amount of the shares
they may trade in for I. K .’s account on any day or series of days during this
period— that matter being, by mutual consent, impossible to intelligently measure
at this time and both sides visualize that there may be days when E. D. & Co.
will trade in as much as 50,000 or 75,000 shares of this stock, and, on the other
hand, there may be a day or days when the trading will be less than 1,000 shares
per day or practically nothing— this will all depend upon E. D. & Co.’s sole
market judgment under the discretionary trading power which I . K. gives them
in this agreement.
While E. D. & Co. are to have discretion in handling this account, they, of
course, will keep in as close touch as possible with I. K. and his representative in
New York, keeping them both as fully informed as possible on the activities of
the account.
E. D. & Co. will render complete statements to I. K. and his New York rep
resentative at regular intervals with the object of keeping them as fully informed
as possible at all times on these trading-account activities.
ADDITIONAL SHARES AVAILABLE IN N EW YORK
E. D. & Co. realizes there will be a time or times when it may be quickly neces
sary to ask for additional deliveries of very substantial amounts of stock for either
marketing purposes, loaning against short account to prevent runaway markets,
or sudden chances to exercise large amounts of options requiring specific deliv
eries. For these and also for possible collateral reasons I. K. agrees to keep a sub
stantial amount of shares in New York of these K. & T. participating debenture
shares readily available for transfer to E. D. & Co.
For collateral, loaning, and optional purposes I. K. agrees to keep 300,000
K. & T. participating debenture shares in New York City in the hands of his agent,
or nominee, readily and exclusively available, for transfer to E. D. & Co. upon
instruction from I. K.
1. K. agrees that E. D. & Co. will, as far as I. K. can arrange, be the only loan
ing agent in his shares of this debenture stock in the United States of America.
E. D. & Co. will, presumably through I. K., arrange a friendly working agree
ment with Lee, Higginson & Co. in this matter as far as it may be necessary and to
our mutual interests.
(Signed)--------------------- .
Mr. M arrin an . Mr. Siler, have you records available which will
enable you to follow through with me on the operation of this Kreuger
account during the month of March of 1932?
Mr. Sil e r . I think I have; yes.
Mr. M a rrin an . I have a statement of that account, Mr. Siler, as of
March 21. I will have to depend largely on work sheets. You
doubtless have additional records.
Mr. Sil e r . I have it tabulated only by way of accounts, but I have
figures that will give you what you want, I think.
Mr. M arrin an . I might say that this is a report of an investigation
conducted by the New York Stock Exchange of that account as of
1374
STOCK EXCHANGE PRACTICES
March 21, 1932, and although I will introduce this in the record later
as a complete document, I am using it now to paint the picture as of
that date, and to break the situation down into its various component
parts, in an effort to trace this thing through as simply as it is possible
for us to do it.
Now, there are two groups of accounts in this statement as of
March 21, 1932. One is designated as the Ivar Kreuger group, and
the other as the Eastman, Dillon & Co. group.
These accounts are numbered accounts on your books, which do
not disclose the identity of the persons operating them. Your
No. 100 account was really the account of Mr. Anders Jordahl, the
special trading agent of Ivar Kreuger. Your No. 110 account was
in the name of W. E. Wheeler.
Mr. S il e r . That is correct.
Mr. M arrin an . W. E. Wheeler is a fictitious person.
Mr. Sile r . I believe not.
M r. M arrin an . D o you know the man?
Mr. S ile r . N o . But I believe he is not a fictitious person.
Mr. M a rrin an . He was an agent of Kreuger’s?
Mr. Sil e r . I understood an employee in the office of Mr. Jordahl.
Mr. M arrinan . And the No. 120 account was the account of
Kreuger himself.
Mr. S ile r . The loan account.
M r. M arrin an . And these were three accounts in the so-called
Kreuger group in your office?
Mr. S il e r . Yes, sir.
Mr. M arrin an . On the other side of the picture were the accounts
operated by your own concern?
Mr. Sil e r . That is right.
Mr. M arrinan . Those were also numbered accounts, to conceal
the identity of the different accounts in bookkeeping transactions
and otherwise; is not that correct?
Mr. S il e r . Well, they were numbered accounts but it is a very
customary thing. Mr. Kreuger had asked us to be as careful as possible
about disclosure of the fact that he was operating. It would be per
fectly natural I think if you look at it from his standpoint, if it were
a matter of brokerage knowledge and rumor that he was, for instance,
buying or selling the stock himself, if it were known that he was
doing so, it might have had an influence that was beyond its real
meaning. That aroused no unusual comment, nor would I think, the
fact that there were numbers on the accounts.
M r. M arrin an . It is a common practice, then?
Mr. Sil e r . Oh, yes.
Mr. M a rrin an . And you followed it for the substantial reason
that Kreuger was connected with it?
Mr. S il e r . We followed it because he asked us to do so.
Mr. M arrin an . I mean your own accounts.
Mr. Sil e r . That was followed through as a part of the same thing.
Mr. M arrin an . Your No. I l l account, in your firm account, was
the account of one of your affiliated organizations, the Edison Secur
ities Corporation; is that true?
Mr. S ile r . Yes.
M r. M arrin an . What is the Edison Securities Corporation?
Mr. S ile r . The Edison Securities Corporation is a wholly owned
company—I mean owned by Eastman, Dillon & Co.
STOCK EXCHANGE PEACTICES
1375
Mr. M arrin an . And its charter permits it to do what especially?
Mr. Sile r . I am not familiar exactly with the charter provisions,
but we are an underwriting house, and we would, through that com
pany, sometimes take underwriting commitments in securities, or
anything of that type.
Mr. M a r r i n a n . And also, I assume, it is used as a facility in stock
trading.
Mr. Sile r . There have been stock commitments in it, yes, sir.
Mr. M arrinan . Your account No. 112 is in fact the Liberty Hold
ing Corporation, another wholly owned subsidiary of Eastman, Dillon
& Co.; is that right?
Mr. S ile r . Correct.
Mr. M arrinan . And in much the same category as the other
company?
Mr. Sile r . That is true.
Mr. M arrinan . The account here in the Eastman, Dillon group,
No. 115, is a separate account of the Edison Securities Corporation,
is that it?
Mr. S ile r . Yes.
Mr. M arrinan . Well, now, as of March 21, and this report was
rendered on March 22, 1932, to the business conduct committee of
the New York Stock Exchange, for the position of these two accounts
as of March 21. It shows that you had closed out some four or five
days after Kreuger’s death the 100 and 110 accounts, and established
credits of some $10,289 in 100 account and $209,162 in the other
account.
Mr. Sile r . My figures are a little different from those figures.
Mr. M arrin an . Well, we must not get into an elaborate accounting
discussion.
Mr. Sile r . N o need.
M r. M arrin an . This is apparent, and I can and will later have it
identified, as a report prepared by the accounting division of the
New York Stock Exchange.
Mr. Sile r . Yes.
Mr. M arrinan . Made to the business conduct committee of that
exchange?
Mr. Sile r . Yes.
M r. M arrinan . It therefore bears some stamp of accuracy and
reality. This shows that in the Kreuger group as of that date you
were in the red, or it shows a deficit net of $380,549, and on the
other side of the picture you show where you had sold in both your
No. I l l and 112 accounts and taken a short position, having credits
totaling $434,353, in the two accounts, with a total short position of
$211,600, and the whole thing washes out to an equity on that side
of the picture amounting to $221,433, all built upon your expectation
that you could cover your short position at not more than one. This
is figured at one on both sides of the account.
Mr. Sil e r . Yes, sir.
Mr. M a rrin an . That indicates that you were in the red net there
$159,116, barring a change in the market radically different from your
estimate of one.
Mr. Sile r . Yes; those figures as of that date can be very easily
verified, and I am sure that they approximate the situation as you
have read them, what they were, if you have them from the exchange.
But I have not them compiled as of that date.
1376
STOCK EXCHANGE PEACTICES
Mr. M arrin an . Y ou have not them as of that date?
M r. S ile r . N o .
Mr. M arrin an . If I could establish this as a report prepared by the
New York Stock Exchange you are willing to accept it as an authentic
statement of the accounts?
Mr. S il e r . Yes, sir.
Mr. M a rrin an . N ow , Mr. Siler, let us follow through what hap
pened, briefly, in these various accounts without going into too much
detail. I wish to show the committee a very considerable short
operation here, and also show you one of these so-called trading
accounts so operated in this instance. You closed out that 100 account
and the 110 account in the regular way by selling.
Mr. S ile r . Yes.
Mr. M arrin an . First as of March 16, and the second as of
March 17.
Mr. S ile r . That is right. The collateral was all sold out in both
accounts by the 17th.
Mr. M arrin an . Y ou started operation, the details of which we
will go into later, about the 19th of March, which continued on until
the 7th and 8th of April, during which time you liquidated your short
position and closed out your holdings of Kreuger 400,000 shares
which you had gotten originally as collateral in connection with the
million-dollar loan, is that correct?
Mr. Sil e r . Yes. That operation was completed, I think, on the
7th of April.
Mr. M arrin an . N ow, gentlemen of the subcommittee, if you will
bear with me for one moment. I have not had time to get this data
into a question and answer basis. I am working here from the work
sheets. Now, Mr. Siler, I have the No. I l l account before me.
What was that account?
Mr. Sile r . The No. I l l account was one of ours in the name of
Edison Securities Corporation, which was-----Mr. M arrinan (interposing). I have examined the photostatic
copies of your stock record books of that account. I find that as of
February 1 that account was short some 3,400 shares, that you went
short in that account with substantial regularity day after day until
on March 9 you were 30,400 shares short in that account, is that
correct?
Mr. Sil e r . That is substantially correct, yes.
Mr. M arrinan . Why, Mr. Siler, were you going short in Kreuger
stock at that time?
Mr. Sile r . With Mr. Kreuger’s approval we started to sell stock
short in that account a short while after making the loan to him.
The chief reason for it was this: We had a substantial amount of one
stock as collateral for the loan, and it was in protection of us that we
began as a hedge to sell stock short, in order to protect that big
position in a single issue.
Mr. M arrin an . That is a proper explanation of your action up to
the date of Kreuger’s death.
Mr. Sile r . Yes.
Mr. M arrinan . N ow , on the 18th of March you bought 14,400
shares of Kreuger stock in that account, giving you a net short
position as of that date of 16,000 shares.
Mr. S iler . Yes.
STOCK EXCHANGE PRACTICES
1377
Mr. M arrin an . Then you reversed the process again. I mean,
that you went heavily short. On the 21st your short position was
108,800 shares of that account, and on the 23d it hit its peak of
188,100 shares in the account, is that correct?
Mr. Sile r . I have not, without making the calculation, the
ability to verify just those exact amounts on those dates. But the
question that you bring up of beginning again of selling short brings
in the point that you raised before of the complication in connection
with the loan. The margin accounts were of course now liquidated,
as of this date. We were in this position: That we had a loan of a
million dollars to .this man, with collateral in our possession, but not
able to liquidate the collateral until we had properly notified and
called for additional collateral from the legal representative of his
estate. We could not serve that notice until a legal representative
of the estate was appointed. As soon as one was appointed we
served notice, of course, by cable, and had a reply. In the meantime,
however, the general market was weak. It was of course true that
the market in this stock was weak. And we were forced to a decision
to action for our own protection as to whether or not we should wait
until this notice could be served, or at our own account and risk go
short of this stock in the attempt to preserve ourselves from such a
heavy loss if the stock went down to nothing and the market dis
appeared. But that was why the decision was made.
Mr. M arrin an . To follow through on that No. I l l account, one
of your own firm accounts: You liquidated that out from the high
short position of 188,100 shares as of March 23 until you finally closed
it out by covering completely your short position on April 7.
Mr. Sile r . Yes, sir.
Mr. M arrinan . A s a brokerage house, Mr. Siler, did your concern
do any Kreuger business for clients?
Mr. Sil e r . Yes, but in very small amounts. We did not have any
substantial accounts in it. But if a customer of ours asked us to sell
the stock we would accept and execute the order.
M r. M a rrin an . Did this operation have any effect upon the in
terests of your clients in Kreuger stock?
Mr. S il e r . I think not.
Mr. M arrin an . Was consideration given to that point in formu
lating your program to relieve yourselves or to retrieve yourselves
from a rather awkward position?
Mr. Sile r . Well, I think what we did had no bearing at all on the
market for the stock.
Mr. M arrin an . Let us go into No. 112 account. That No. 112
account was another one of your private numbered accounts, of the
Liberty Holding Corporation, and was relatively inactive until after
Kreuger’s death. Am I correct in that?
Mr. Sil e r . Yes; that is substantially right.
Mr. M arrin an . On March 14, two days after Kreuger died, you had
a short position in that account of 600 shares, and you immediately
went short to a total of 103,000 shares on the 21st, which is increased
to 115,000 shares on the 22d. And here again you hit the high point
on March 23 of 187,000 shares short, after which that account was
liquidated and closed out as of April 7 ,1 believe, through the complete
covering of your short position.
Mr. Sil e r . That is substantially correct. The fact that there were
two accounts was a matter of convenience only in posting the records..
1378
STOCK EXCHANGE PEACTICES
It was a part of the operation that I have just outlined to you in
protection of ourselves.
M r . M a r r i n a n . It was a matter of mechanics within your own
office.
Mr. S i l e r . That is right; the fact that there were two accounts.
Mr. M a r r i n a n . This 120 Kreuger account you also began to
liquidate as of the 24th of March.
Mr. S i l e r . As of the 23d of March.
Mr. M a r r i n a n . The 23d of March.
Mr. S i l e r . Yes, sir.
M r . M a r r i n a n . I w ill a c c e p t y o u r fig u r e . You a lso c lo s e d t h a t
o u t c o m p le t e ly as o f th e 7 t h o f A p r il.
Mr. S i l e r . I think that is so. It was
within a day or two of the
7th, certainly.
Mr. M a r r i n a n . N o w , I have one question which has arisen *and
which is unanswered. I really do not know whether it is worth asking,
but please get your records for the date of March 17, your stock
records.
Mr. S i l e r . I will refer to Mr. Brown, who has them.
Mr. M a r r i n a n . I will state the case while Mr. Brown is getting
the records.
Mr. S i l e r . All right.
Mr. M a r r i n a n . Y ou have in the box on that date 14,800 shares of
Kreuger. You have in the vault 369,000 shares of Kreuger. You
have a total in both box and vault of 383,800 shares. Now, on that
date in the 111 account you were short 30,400 shares, and in the 112
account you were short 600 shares, making a total of 31,000 shares
in those two accounts. The difference between the 400,000 shares
and the 369,000 shares in your vault is 31,000 shares.
The report to the committee on business conduct of the New York
Stock Exchange as of March 22, and referring to this period, has this
to say:
It appears that the No. I l l and the No. 112 accounts were short approxi
mately 31,000 shares of Kreuger & Toll Co. stock between the 11th and the 17th
which was not borrowed in the Street.
Now, where did you borrow the 31,000 shares?
Mr. S i l e r . Well, of those particular dates I can not be sure.
Our general practice was to borrow for our own short position in the
open market, and at that time, or later anyway, a premium was on
the stock. But we had permission from Mr. Kreuger to use the stock
which had been placed with us as collateral, and it would have been
possible for stock in our possession, in our customer’s account, to have
been used in making deliveries for part of that time. The point
that I am trying to make here is to the question as to the substantial
thing: We were attempting and did borrow in the open market sub
sequent to Kreuger’s death, but we had the privilege in agreement
with him to use the collateral.
M r . M a r r i n a n . When did you establish your right to do what you
wished to do with these 400,000 shares? I mean authority from the
estate of Kreuger?
Mr. S i l e r . We served notice on them on the 19th of March, and
made demand that they supply us additional collateral or the loan
would have to be matured. And we notified them that if that were
not done by the 23d at noon we would start in to liquidate. We had
STOCK EXCHANGE PRACTICES
1379
an acknowledgment of that notice, and they were not able, however,
to supply and so stated.
Mr. M a r r i n a n . The reason I asked the question is that it appears
on the face of things here that you did in fact mingle those two groups
of accounts as of March 17, and that you did withdraw from the long
stock or the loan stock of Kreuger’s in your vault 31,000 shares.
Mr. S i l e r . That might have been possible.
Mr. M a r r i n a n . Would that have been a violation of your under
standing?
Mr. S i l e r . Do you mean with Mr. Kreuger?
M r . M a r r i n a n . Yes.
Mr. S i l e r . I think not.
Mr. M a r r i n a n . Then why did you have to wait until the 23d or
24th to get authority to go ahead?
Mr. S i l e r . That was on the question of liquidation, of selling the
account out. That was very different.
Mr. M a r r i n a n . Y ou had ample authority, then, to dip into that
400,000 shares in the matter of borrowing from that account?
Mr. S i l e r . So long as it was not sold out; yes.
Mr. M a r r i n a n . Is there any significance in the fact that you had
never done that before up to this time, and you immediately closed
it out and went right back into the account and stayed there until
you actually began to liquidate that account out?
Mr. S i l e r . I do not attribute any significance to it. As a matter
of fact, I think while the 100 account had collateral in it that there
may have been borrowed some from it.
M r . M a r r i n a n . No; th e s e t w o a c c o u n t s are o u t a t th is tim e .
Mr. S i l e r . That is what I say. So that if the stock was borrowed
from the accounts there was nowhere else to take it but from the 120,
in which we had equal authority as with the 100 and 110.
Mr. M a r r i n a n . Mr. Siler, how did you go about liquidating your
position as of March 18 or 19 in these various accounts?
Mr. S i l e r . On March 19 we were building up our short position,
and we had to wait until March 23 to start liquidating the collateral
in account 120, the loan account. We had to wait until the 23d
for that.
Mr. M a r r i n a n . Y ou started rather elaborate operations in the
market in this stock, didn’t you?
Mr. S i l e r . No.
Mr. M a r r i n a n . Y ou do not call an elaborate operation where
something like a million shares moves back and forth over a short
period?
Mr. S i l e r . Well, I would not say that. Here it was our object,
and we were approaching it-----M r . M a r r i n a n (interposing). One moment now.
Mr. S i l e r . All right.
M r . M a r r i n a n . Have you answered my other question?
Mr. S i l e r . Well, we had no way to know what the period would be.
Mr. M a r r i n a n . But you now know that it proceeded between the
t9th of March and the 7th of April.
Mr. S i l e r . Yes.
M r . M a r r i n a n . And you can express an opinion as to whether or
not you would regard that as a somewhat elaborate operation.
Mr. S i l e r . Why, yes; that is a sizable amount of stock in that
period; yes.
1380
STOCK EXCHANGE PRACTICES
M r. M arrin an . Y ou wrote a letter to Kreuger under date of
February 10, asking for additional authority under this loan agree
ment. What doubts had arisen as to your ability to do all the things
that you wanted to do under the terms of the agreement?
Mr. Sile r . What did that letter cover? I just forget.
Mr. M arrin an . This letter on the letterhead of Eastman, Dillon
& Co. is dated February 10, 1932, and is addressed to Mr. Ivar
Kreuger, care of Kreuger & Toll, 41 Broad Street, New York Cit.y,
and is as follows:
In relation to the time loan and trading account, referred to in our arrangement
dated January 25, 1932, our understanding is that nothing in that arrangement
prevents and we are permitted, irrespective of positions taken in the trading
account either in your name or your nominees during its continuation or exten
sion, to maintain, be interested in and operate accounts, either long or short, in
K R T stock for our own benefit or in connection with others, and for any purposes
in connection with these accounts may borrow stock from the trading and time
loan accounts.
If you approve, kindly sign your name after the word “ approved” below.
Mr. Sil e r . That was simply an agreement that had been made
verbally before that, and the signing of this was made when Mr.
Kreuger was next back in town. The object was-----M r. M arrinan (interposing). Did he ever reply to that?
Mr. Sil e r . He signed it.
Mr. M arrin an . As of what date?
Mr. Sil e r . I think February 10 is the date. We sent it over to
him when he got back to town.
Mr. M arrin an . Mr. Chairman, I should like to submit that letter
and have it printed in full in the record.
The C hairman . It is ordered that the letter be printed in full in
the record.
& Co.,
New York, February 10, 1932.
E a s t m a n , D il l o n
M r. I v a r K r e u g e r ,
Care of Kreuger & Toll, New York City.
In relation to the time loan and trading account referred
to in our arrangement dated January 25, 1932, our understanding is that nothing
in that arrangement prevents, and we are permitted, irrespective of positions
taken in the trading account either in your name or your nominees during its
continuation or extension, to maintain, be interested in, and operate accounts,
either long or short, in K R T stock for our own benefit or in connection with others,
and for any purposes in connection with these accounts may borrow stock from
the trading and time-loan accounts.
If you approve, kindly sign your name after the word “ approved” below.
Yours very truly,
Approved:
-------------------- -.
D ear M r. K reug er:
Mr. M arrin an . Mr. Siler, through what houses did you conduct
these operations between the 19th of March, 1932, and the 7th of April
of the same year?
Mr. Sil e r . Well, now, there is a little mixing of times there. From
the 19th up to the 23d the loan account was doing nothing. I mean
by that that there was no liquidation in the loan account. So that
what we were doing for our own account was done variously through
our own brokers or through outside brokers. We have never at
tempted to have all of our orders executed by our own floor members.
M r. M a rrin an . W hat outside brokers?
STOCK EXCHANGE PRACTICES
1381
Mr. Sil e r . We had as I recall it Mr. Weiley of Proctor, Cook &
Co., and the records would show, but I am not just sure who were
acting for us from the 19th on up to the 23d when we started liquidat
ing the loan account. Then from that point on the accounts were
taken by Mr. Bliss of Gilchrist & Bliss, for the liquidation of the 120
account and for the covering of our short position.
Mr. M arrin an . He did not participate in the operations prior to
March 23?
Mr. Sile r . Yes. We gave him some orders, I think, for our own
account on the 19th, or at least I think so.
Mr. M arrin an . Mr. Bliss is a member of the firm of Gilchrist &
Bliss, am I correct?
Mr. Sile r . Yes.
Mr. M arrin an . Were Lee, Higginson & Co. acquainted with the
nature of this operation?
Mr. S ile r . Not that I know of.
M r. M arrin an . But you have no definite knowledge of that?
Mr. Sile r . No, sir.
Mr. M arrinan . H ow were your orders for the operation com
municated to. Gilchrist & Bliss?
Mr. Sile r . They were given to Mr. Bliss.
M r. M arrinan . In writing?
Mr. Sil e r . N o.
Mr. M arrin an . How?
Mr. S iler . We had Mr. Bliss come down to see us, I think it was
on the 23d, and told him that as the market would permit we wished
to sell the collateral, an amount of stock which was 400,000 shares,
and that we wished to buy to cover a position, and the amount at that
time was 375,000 shares.
M r. M arrin an . Did you personally give the order?
Mr. Sil e r . N o. I did not happen to be in the room at the time
that Mr. Bliss was given the order. But I talked with Mr. Bliss
every day throughout the time it was being executed.
Mr. M arrinan . He got additional verbal instructions from day to
day?
Mr. Sile r . N o. He had instructions from us to proceed as the
market would permit. He was liquidating an account, and to such
buyers as were coming into the open market he could sell, and from
such sellers as came into the open market he could buy for our ac
count, and he had to proceed along with these two parts of his order
as the market permitted. Some days he was able to sell more; some
days he was able to buy more.
Mr. M arrinan . Without confusing the situation by mentioning
the details of these accounts, substantially the transaction at that
time was this, as I understand it: You had to liquidate your short
position which had become very heavy and you had borrowed, actually
borrowed stock to make deliveries on your short position?
Mr. Sile r . For the most part; yes, sir.
Mr. M arrin an . You had not taken it out of stock under your
control in the box or in the vault?
Mr. Sil e r . Well, I don’t know positively that such a thing did not
occur, but in the main we were borrowing in the open market suffi
cient stock to cover, make deliveries on, the short position, which was,
of course, then decreasing all the time.
119852— 33— pt 4------- 16
1382
STOCK EXCHANGE PRACTICES
M r. M arrin an . Then you had to sell 400,000 shares of Kreuger
stock which you held long and you had to buy 375,000, or whatever
the figure may have been, shares to cover your short position?
Mr. Sile r . That is correct.
M r. M arrinan . And it was for that purpose that these orders were
issued to Gilchrist, Bliss, and others?
Mr. Sil e r . Gilchrist, Bliss only.
M r. M arrin an . Gilchrist, Bliss only?
M r. S ile r . Yes.
Mr. M arrin an . I s it true that the order given to Mr. Bliss of
Gilchrist, Bliss instructed him to sell or/and buy 500,000 shares, that
meaning a million shares in all, without any additional instructions,
or was he instructed to sell and buy a million shares in his discretion
and at the same time stabilize the market?
Mr. S ile r . No, sir; he was not given such instructions.
Mr. M arrinan . What were his instructions?
Mr. S ile r . His instructions were as the market permitted to liqui
date 400,000 shares and as the market permitted to buy 375,000
shares.
Mr. M arrin an . Y ou had 400,000 shares of this stock right in your
control with authority from the estate of Kreuger to do about as you
would with it, and you had to cover your short position. Why
didn’t you use the Kreuger stock?
Mr. Sil e r . We might have been subject to some criticism from the
estate if we had used the entire amount of it. They might have
claimed that we would not have been able, had we not been using it,
they might have claimed that we would not have been able to cover
our short position and to make deliveries against a short sale. So that
I am sure that at no time was any substantial amount of the stock
borrowed from the account. We recognized that we had no way at all
to know that we would not be subject to an attack from the estate if
we did not proceed in a very circumspect manner in the liquidation of
the account. We did not know how much there was to be recovered
or anything.
Mr. M arrin an . Mr. Siler, I find that the firm of Gilchrist, Bliss
during this period when you were selling out the Kreuger long stock
and buying back to cover your short position, sold 560,500 shares of
Kreuger stock and bought back 375,100 shares. Is that substantially
correct?
Mr. Sil e r . I haven’t any way to know about that, sir. I can only
tell you what they did for us.
Mr. M arrin an . I have in my possession and will submit for the
record a copy of a commission bill rendered to Eastman Dillon Co. by
Gilchrist, Bliss & Co., showing figures which go to make that total.
May I submit it for the record?
The C hairman . It will be printed in the record, without objection.
(The commission bill presented by Mr. Marrinan is as follows:)
1383
STOCK EXCHANGE PEACTICES
fCommission bill rendered to Eastman Dillon Co. by Gilchrist, Bliss & Co. of New
York, March 31, 1932
Bought
Date
Mar. 19
_
____ _
Sold
23,600
59,400
5, 700
71, 300
M ar. 23___
39,100
100
11,400
Mar. 24 _ _
15, 700
1,000
Description
K R T _ ...........
........do...............
........do...............
____ do...........
____ do________
27,300
48, 300
15, 700 ____ do...............
1,000
Mar. 26___
Mar. 28
M ar. 30
24, 600
1,900
31,900
8, 900
700
........do............... ____ do________
""‘ 19,"666"
9,800 . . . . d o ..............
31,900
____ d o ............ ........d o...............
" " '56,"OOO" ____ d o...............
11,500
31,300 ........do...............
25,400
3,800
____ do._............ ____ d o________
18,100"
3, 300
M ar. 3 1 .. -
36,400
100
........do............... ........do_.............
____ d o ..............
21,900
M ar. 31
(A cross face of photostat in large
1,000
100
(cancele 1 $1,100)
m
m
m
1
m
m
1
Ws
1
m
1
lVs
l
%
Vs
1
M
y%
1
a
%
Vi
%
%
u
Vs
%
%
3/f
y%
z/\
$413.00
1,039.50
99.75
1, 247. 75
488. 75
1.25
142. 50
341.25
603.75
196. 25
12.50
196. 25
12. 50
123.00
9.50
398.75
95.00
49.00
398. 75
44.50
3.50
250.00
57.50
156.50
127.00
19.00
90.50
16.50
182.00
.50
109.50
6,926.00
5. 50
6,920. 50
........d o ...............
33,100
11,800
29,300
6, 700
30,400
10,300 ........d o ......... .
600
9,900
9,400
2, 700
64,400
70,600
700
6,800
M
X
%
%
%
%
%
Vi
Vi
%
Vi
Vi
Vi
Vi
165.50
59.00
146. 50
33.50
152.00
51.50
3.00
49. 50
47.00
13. 50
322.00
353.00
34.00
1,430.00
Mr. Sile r . This point, Mr. Marrinan, may arise: That commission
bill may refer to dates other than from the time he started his covering
of the 375,000 shares and the liquidation of the loan, that is, from the
23d on. He did something for us, some commission business before
that time.
Mr. M arrin an . I think the way it is set up it will not confuse the
point I wish to make.
In these operations of Gilchrist-Bliss which I have before me there
was bought on the 24th of March two blocks, one of 15,700 shares at
1% and one of 1,000 shares at 1. On the same date the firm of Gilchrist-Bliss, or Mr. Bliss who you say handled this transaction, sold
2 blocks. And no others; these are the only ones that appear as of
that date. He sold 15,700 shares at 1% and he sold 1,000 shares at 1.
Is this a washing transaction?
M r. M arrin an . Not necessarily. That is not an answer. I know
that it is not necessarily.
1384
STOCK EXCHANGE PRACTICES
Mr. Sile r . Yes?
Mr. M arrin an . But was this particular operation a wash?
Mr. Sile r . I believe not.
Mr. M arrin an . It is pretty hard to prove it, isn’t it?
Mr. Sil e r . No, no. I think our records will prove that it is not.
I have never had any reason to examine that.
M r. M a rrin an . W hat do you think your records will show that
will prove that it is not a wash?
Mr. Sile r . That the names that the brokers, that is, with whom he
had these transactions, are different brokers on his selling and on his
buying.
Mr. M arrin an . And you would have to- trace that back all the
way to the point of origin on both sides and see that they never met—
is that the story?
Mr. Sil e r . Well, I don’t know really how far it would have to be
traced. Of course, if, in the execution of those orders in the buying
and the selling, the same broker had been the executing broker on
both sides, our examination of the record will disclose that right away.
Mr. M arrin an . Throughout this operation with Mr. Bliss did you
give any consideration to the interest of investors, or were you prin
cipally interested in getting out of a difficult situation in so far as
your firm was concerned?
Mr. Sil e r . Well, I will tell you, Mr. Marrinan: By this time the
price of the stock was at such a level that we had very little to give
us much consideration for other holders of the stock. It was down
to a half a dollar a share and there was not very much that could be
done either constructively or otherwise to change it.
Mr. M arrin an . What was your net after all commissions, interest,
and so forth, on the transaction of this Kreuger loan contract?
Mr. Sil e r . We have a claim against the estate of about $504,000.
M r. M arrin an . On this contract?
Mr. Sil e r . No.
Mr. M arrin an . I mean wholly on this contract.
Mr. Sil e r . The contract involved both the loan and the trading.
M r. M a rrin an . I mean on both.
Mr. Sile r . It is a claim against the estate of about $504,000.
Mr. M arrin an . Notwithstanding all the dexterity and skill which
was used in the liquidation of these accounts?
Mr. Sil e r . No. No. I am giving you the figure now simply on
the claim against the estate. What we did had no bearing at all on
that fact.
M r. M arrin an . This is the 120?
Mr. Sile r . 120, 100, and 110, the Kreuger accounts.
Mr. M arrin an . The two former ones closed out to a credit as of
March 16 and 17?
Mr. Sile r . Yes.
M r. M arrin an . So that the thing was substantially---- Mr. S iler (interposing). Would otherwise have been larger if that
had not been the case. Those were the Kreuger accounts. Now
what we did had no bearing whatever on the amount of the claim.
Mr. M arrin an . Why did you select the firm of Gilchrist-Bliss to
do this particular job?
Mr. Sil e r . He was a qualified broker. We know him.
M r. M arrin an . Who, Gilchrist?
STOCK EXCHANGE PRACTICES
1385
Mr. S ile r . Frank Bliss.
Mr. M arrin an . Bliss?
Mr. S il e r ; Bliss; yes.
Mr. M arrin an . Would you regard his operation as an especially
skillful operation?
Mr. Sil e r . He is a good broker; yes. We particularly wanted to
have the transaction gone ahead with with what expedition it could be
given, for this reason: In our notice to the representative of the estate
we had said that we would liquidate on and after the 23d as speedily
as practicable the collateral, and it was incumbent on us to do that.
The market might have gone down, as it did later to an eighth, and
we would not have got the benefit of prices that existed earlier.
Mr. M arrin an . Then you saved yourself considerably by this
operation?
Mr. Sil e r . Oh, Eastman, Dillon & Co.?
M r. M arrin an . Yes.
Mr. Sile r . We were better off for having made the decision to do
what we did; yes.
Mr. M arrin an . When was the transaction first reviewed by the
business conduct committee of the New York Stock Exchange?
Mr. S ile r . As I remember it, immediately after Mr. Kreuger’s
death. So far as I know, the examination by the accountants of the
exchange, the investigation of the position of the accounts and all,
came immediately after his death.
Mr. M arrin an . They did that on their own initiative?
Mr. Sil e r . Oh, yes.
Mr. M a rrin an . Was the contract, so far as you know, passed as
being fully in compliance with all the laws of the exchange?
Mr. S ile r . So far as I know ; oh, yes.
M r. M arrin an . N o official action or comment upon it, then?
Mr. Sil e r . I have heard none.
M r. M arrin an . M r. Chairman, we have here a very extraordinary
contract which discloses the existence of practices which we found
great difficulty in discovering a few months ago. We have a brokerage
house virtually conducting a banking transaction. We have a trad
ing account of proportions set up to influence the market in this secur
ity. Whether it was to peg it or to give it support is not clear, but
that comes within my understanding of manipulation. We have
options given to this firm amounting to over a million shares. We
have the firm given, in so far as it was possible for Kreuger to give
it, the exclusive right to lend all stock of this character in the entire
United States, and we have a virtual instruction that in order that
Kreuger may keep himself straight with the Lee, Higginson people,
Gilchrist-Bliss shall acquaint the Lee, Higginson Co. with the opera
tion and operate to the mutual benefit of all concerned.
Mr. Siler . Please, Mr. Marrinan, may I interrupt just there?
I don't want you to get from anything that I have said that GilchristBliss was in any way obligated to Lee, Higginson & Co. In your
statement to the chairman you mentioned Gilchrist-Bliss in connec
tion with Lee, Higginson.
M r. M a rrin an . I beg your pardon. That should have been
Eastman, Dillon. Thank you, sir.
Mr. Siler has no knowledge of whether Lee, Higginson & Co.
knew of these specifics of the operation and tradings. Mr. Durant
1386
STOCK EXCHANGE PRACTICES
yesterday denied any knowledge of it. It includes transactions which
I may say I am satisfied technically are not washes, but it is exceed
ingly difficult to prove it. It looks to me like a complete bundle of
many things in which this committee is interested, and for which it
has sought without much success in the way of concrete evidence up
to this time. Mr. Siler, I thank you for your frankness.
The C hairman . The general result of short selling is not to stimu
late the market, is it?
Mr. Sil e r . I did not understand you.
The C hairman . The general effect of short selling is not a stimu
lating effect on the market, is it?
Mr. Sile r . I think it has a cushioning effect.
The C hairman . Yes; keep it from dropping further sometimes?
Mr. Sile r . Yes, sir.
The C hairman . But nevertheless part of the downward trend?
Mr. Sile r . Well, it may be.
The C hairman . When you sell short you sell lower?
Mr. Sile r . Well, the rules of the exchange do not permit now the*
depressing of stock on short sales.
The C hairman . But the result of short selling is depressing, never
theless?
Mr. Sil e r . It might be.
The C hairman . Yes. You have testified that the short sellinghere that you did was with the consent of Mr. Kreuger.
Mr. Sile r . That is true; yes.
The C hairman . And if the owners of these shares had known that*
Mr. Kreuger was selling short, it would have had a very bad effect
on the market, wouldn’t it?
Mr. Sile r . I should think it would, but there is no part of therecord that he did.
The C hairman . But they would have scrambled to unload,,
wouldn’t they?
Mr. S ile r . I don’t know that, no, sir.
The C hairman . Isn’t that the result; when the boss begins to selli
his property short the partners begin to unload?
Mr. Sil e r . It might have happened, but it might be that he was*
wanting to accumulate buying power again. Those things are verjr
variously interpreted.
The C hairman . But the purpose of letting him operate under a
number instead of his own name was to keep the information from,
the public as to who the owner was?
Mr. S ile r . Chiefly through brokerage channels, Senator.
The C hairman . But it had the effect of keeping it from the public;:
that was the purpose of it?
Mr. S il e r . Yes, that is true.
The C hairman . And to conceal the actual position of Mr. Kreuger,,
that it was numbered instead of in his name?
Mr. Sil e r . Yes.
The C hairman . All right. That is all.
The next witness is Mr. Lindley.
(Mr. Allen L. Lindley stepped forward and raised his right hand.)5
The C hairman . Y ou do solemnly swear that you will tell the truth,,
the whole truth, and nothing but the truth regarding the matter now
under investigation by the committee, so help you God?
Mr. L in dley . I do.
STOCK EXCHANGE PRACTICES
1387
TESTIMONY OF ALLEN L. LINDLEY, VICE PRESIDENT NEW YORK
STOCK EXCHANGE AND CHAIRMAN OF COMMITTEE ON BUSI
NESS CONDUCT, NEW YORK STOCK EXCHANGE, ENGLEWOOD,
N. J.
(The witness was duly sworn by the Chairman as above indicated.)
Mr. M arrinan . Mr. Lindley, you are vice president of the New
York Stock Exchange?
Mr. L in dley . Yes, sir.
Mr. M arrinan . And a member of its board of governors?
Mr. L indley . Yes, sir.
Mr. M arrinan . And chairman of its committee on business con
duct?
Mr. L in dley . Yes, sir.
Mr. M arrin an . Would you please explain briefly for the record
the work of the committee on business conduct?
Mr. L in dley . We have, in the first place, to supervise the financial
standing of our houses. Secondly, the ethics of our members in deal
ing with the public. And thirdly, to supervise the trading on the
New York Stock Exchange.
Mr. M arrinan . Three members of the New York Stock Exchange,
Mr. Lindley, were involved in the flotation of these secured debentures
of Kreuger & Toll Co.
Mr. L indley . Yes, sir.
M r. M arrin an . Is that, in the light of what we know now, a matter
of interest to the committee on business conduct of the Exchange?
Mr. L indley . It depends on what you mean by floating. If you
mean that they are trading and making an artificial market, yes.
Mr. M arrinan . Then you would not be interested in their activities
as houses of issue?
Mr. L in dley . Oh, yes, we would. That is, the trading. Not as
to the security value, no, not the business conduct.
Mr. M arrinan . Would you be interested in the steps taken or
the steps which were not taken by Lee, Higginson & Co. to safeguard
investors in the matter of the indenture or any contingent angles
which have been thus far developed before the committee?
Mr. L in dley . That would not come under the jurisdiction of the
business conduct committee.
Mr. M arriman. Have you any agency in the stock exchange that
would properly handle such factors?
Mr. L indley . In this case the stock list would; yes.
Mr. M arrinan . I wish to make it a matter of record here that
Mr. Lindley extended cooperation to this committee freely; that he,
at my request, in behalf of the committee, sent accountants into the
books of Lee, Higginson & Co. of New York and in Boston and
assured me at the conclusion of that examination—if I am not
accurate, correct me— that in so far as such a rather comprehensive
investigation disclosed, Lee, Higginson & Co. did not profit by any
stock market operations either immediately prior to or immediately
after the death of Ivar Kreuger.
Is that correct, sir?
Mr. L in dley . That is correct. Lee, Higginson & Co. had the same
number of shares 011 the 23d of April that they had on February 12.
1388
STOCK EXCHANGE PRACTICES
Mr. M a r r in a n . Did you find in the course of that examination,
Mr. Lindley, that Lee, Higginson & Co. bought in behalf of clients
a number of shares on the morning of March 12?
Mr. L in d le y . Yes, sir.
Mr. M arrin an . Will you state what was the total number of
shares?
Mr. L in d ley . Approximately 15,000 shares.
M r. M a r r in a n . That was-----Mr. L indley (interposing). May I interject?
When you say Lee,
Higginson—that is for the account of customers on orders, not for
the account of the firm.
M r. M a r r in a n . I understand that.
Mr. L indley . And again, when I speak of Lee, Higginson I speak
of all the partners in that firm, because we group the partners and
their holdings with the firm and its holdings.
Mr. M arrin an . Then you want the record to show that your
examination shows that not only did not Lee, Higginson & Co. but
each and every individual partner did not profit in any manner
immediately prior to or after the death of Kreuger through stockmarket operations?
Mr. L in dley . Thank you. I do.
Mr. M arrin an . Y ou do say that Lee, Higginson in behalf of
customers and not for their own account bought 15,000 shares in the
market on the morning of March 12, 1932?
Mr. L in d le y . Yes, sir.
Mr. M arrin an . That was the day of Mr. Kreuger’s death?
Mr. L in d le y . Yes, sir.
Mr. M arrin an . And was after the—no: wait a moment. Was
that before or after 10 o’clock in the morning?
Mr. L in d ley . It must have been after 10.
M r. M a rrin an . Have you any way of ascertaining with some defi
niteness or have you ascertained whether those orders were scattered
over the entire buying time or whether they were grouped early and
immediately following the opening?
Mr. L indley . We would have no way of ascertaining that except
through some of the partners of Lee, Higginson, and they told us
that they canceled their buying orders on learning of Mr. Kreuger’s
death.
The C hairman . What do you mean—the buying when they knew
about it?
Mr. L in d le y . Yes, sir.
The C hairman . Was the market weak at that time? Had it gone
down a good deal from the peak at that time?
Mr. L indley . Senator, I am sorry; I was playing golf that day.
The C hairman . No, I mean as compared over a long period.
Mr. L in dley . It had been weak for a period before that; yes, sir.
The C hairman . In other words, the market had been down for
some time.
Mr. M a rrin an . Have you formulated any opinion, Mr. Lindley,
regarding the extent of Kreuger’s speculations?
Mr. L in dley . I would say a decided one.
The C hairman . A decided one?
Mr. L indley . I think he was a gigantic speculator, one of the
largest I ever heard of.
STOCK EXCHANGE PEACTICES
1389
The Chairm an. Covering a long period of years?
Mr. L in d le y . That I do not know.
Mr. M a r r in a n . When did you first realize that, Mr. lindley?
Mr. L in d le y . After his death.
M r. M arrin an . He successfully concealed that, then, from the
business-conduct committee o f the stock exchange as well as from
his banks?
Mr. L in d le y . Well, that is a rather difficult question. We knew
that he had several accounts. In fact, we on his death went into
several houses to make sure that they had ample capital to withstand
any loss, if that answers your question.
M r. M a r r in a n . I think it does.
The Chairm an. In other words, the officials of the stock exchange
knew prior to his death that he operated in several accounts?
Mr. L in d le y . Yes, sir.
Mr. M a r r in a n . When did you come to realize that Kreuger
personally was, through his dominance over this general Kreuger
& Toll set-up, really in fact, if not legally so, the whole show?
Mr. L in d le y . Y ou mean ran it?
Mr. M a r r in a n . Yes, Kreuger.
Mr. L in d le y . Not until after his death.
Mr. M a r r in a n . Isn’t that extraordinary? I don’t mean to
impute-----Mr. L in d le y . No.
Mr. M a r r in a n . Impute anything to you, but isn’t it extraordinary
that a man operating as you now know he operated through houses
on the New York Stock Exchange and in many other ways, was not
detected in the scope of his operations and the character of them?
Mr. L in d le y . I do not think his greater speculations perhaps took
place with members of the Stock Exchange. They were pretty
much all over the world. Those we did not know of until afterwards.
M r. M a r r in a n . Is it true that the charter under which Kreuger
& Toll Co. operated prohibits the company itself from trading in
stocks?
Mr. L in d le y . I have never read it.
Mr. M a r r in a n . The listing application filed with your com
mittee-----Mr. L in d le y . Pardon me; I have read the listing application, but
the charter I have not read.
M r. M a r r in a n . Your listing application in the sections devoted
to the history and business—“ Under its charter it may, among other
things, acquire and hold securities of any kind, but is prohibit**! from
trading in securities.”
There is a rather fine point there. I assume that technically and
legally Kreuger & Toll Co. did not trade in securities, but in practice
and since we know now that Kreuger was in fact Kreuger & Toll Co.,
the entire spirit of that charter and its provisions were defeated pretty
generally; is that not true?
Mr. L in d le y . I could not answer that. I do not know.
The Chairm an. I am not sure I get Mr. Marrinan’s point. Is it
the point that when they made a listing application they admitted they
had no right to trade in these stocks?
Mr. M a r r in a n . Any stocks.
The Chairm an. Yes; and the application was nevertheless approved
by the officials of the Stock Exchange; is that right?
1390
STOCK EXCHANGE PRACTICES
M r. M arrin an . Yes, sir.
The Chairm an. G o ahead.
Mr. M arrin an . Did you have that provision, Mr. Lindley, called
to your attention, with respect to Kreuger & Toll Co., of the limita
tion imposed upon it with respect to trading in stocks?
Mr. L in dley . I thought they could do it, because they did buy
bonds of certain countries and sold other bonds. That was generally
known—or they had that right.
The C h airman . Let me ask one question here: Is it a fact that
there are some applications coming in that sometimes it is difficult
to go into the details carefully of each one of them, in the rush of
business?
Mr. L in d ley . Senator, I am not on that committee. They work
very hard, and I am not competent to answer that question.
The C hairman . In other words, you make no defense that the rush
of business or the lack of time explains their failure to stop certain
things?
Mr. L in d ley . That has never been a satisfactory explanation for
any enterprise.
Mr. M arrin an . Mr. Lindley, it is a curious provision. I well
understand how you state that you can not quite straighten it out.
You say that they can acquire and hold but they can not trade.
Mr. L indley . I have never been able to find out the difference
between investment and speculation, unless an investor must always
hold securities that he has once bought.
Mr. M arrin an . Mr. Lindley, is the firm of Eastman, Dillon & Co.
a member of the New York Stock Exchange?
Mr. L i n d l e y . Yes, sir.
Mr. M arrin an . And also the firm of Gilchrist, Bliss & Co.?
Mr. L in dley . Yes, sir.
M r. M a rrin an . Y ou are, of course, familiar with the terms of this
loan agreement between Kreuger and Eastman, Dillon & Co.?
Mr. L indley . Yes, sir.
Mr. M a r r in a n . I s that a common form of contracts?
Mr. L in dley . It is unusual.
Mr. M arrinan . Would you call it essentially a loan agreement or
a brokerage agreement?
Mr. L in dley . I have never known a loan agreement like it. I have
never known a brokerage agreement like it. It apparently did not
give, as a loan should, the power to sell the collateral against the
money borrowed.
Mr. M arrin an . This first came to your attention when, Mr.
Lindley?
Mr. L in dley . I would say around the 15th or 16th of March.
Mr. M arrinan . Was Eastman, Dillon & Co. obligated under your
rules in any way to make a report which would have disclosed that
contract prior to that time?
Mr. L indley . No, sir.
Mr. M arrinan . Did you discover it on your own initiative and
through your own facilities?
Mr. L indley (turning to an associate). Do you remember whether
we discovered it or they brought it to our attention?
Mr. D assau . D on ’t recall.
Mr. L indley . I don’t recall.
1391
STOCK EXCHANGE PRACTICES
Mr. M a rrin an . Mr. Lindley, you as far as I can see did in fact-----Mr. L indley (interposing). We went into their office.
M r. M arrin an . W ent into their office?
Mr. L indley . Yes, sir.
Mr. M arrinan . We have here a report, to which I have referred
several times in the examination of Mr. Siler, to your committee,
signed by Mr. Harriman of your accounting department, as of March
22
.
Mr. L indley . Yes.
Mr. M arrinan . May I have this inserted in the record?
The C hairman . Without objection it will be inserted in the
record.
(The report presented by Mr. Marrinan is as follows:)
A
D
c c o u n t in g
epartm ent,
March 22, 1932.
C
o m m it t e e
B
on
u s in e s s
C
onduct,
New York Stock Exchange.
The records of Messrs. Eastman, Dillon & Co. show positions in
Kreuger & Toll Co. stock as at March 21, 1932, as follows:
G
entlem en
:
Balance
Debit
Credit
Security values
Short
Long
IV A R K R E U G E R G R O U P
.............
Account N o. 100 (A . Jordahl) _ _
.
.........
A ccount No. 110......................................
(W . E . Wheeler)
A ccount N o. 120 (Ivar K reuger)...
.
............................... $1,000,000
Long 400,000 Kreuger & T oll........ .................................................
T o t a l . ........................... .......... ........................................ .......
Less............................................................................
. ...
1,000,000
219,451
N et debit balance....................................................................
Long 400,000 Kreuger & Toll, a t $ l ................................................
780,549
400,000
Deficit....................................
E A S T M A N , DILLON *
.
.
.
. . . ___
$10,289
209,162
$400,000
219,451
400,000
380,549
CO. G RO U P
A ccount N o. I l l (Edison Securities Corporation)......................
•Short 108,600 Kreuger & T oll...........................................................
A ccount N o. 112 (Liberty Holding C orp ora tion ).....................
Short 103,000 Kreuger & T o ll.............. . . ................... ...................
A ccount N o. 115 (Edison Securities C orporation)....................
L ong 200 Kreuger & T oll_________________ . . . .
T otal........................................ ................... .............................
Less........................... .
.
302,691
$108,600
131,662
103,000
1,520
200
1,520
434,353
1,520
N et credit balance _______________ ____ ____ __________
Short 211,400 Kreuger & Toll, at $1_____ _____________________
432,833
211,400
E qu ity........................................ ......... .........................................
221,433
211,600
200
At March 21, 1932, the records show that the firm was borrowing 170,100 shares
and failing to deliver 37,000 shares of Kreuger & Toll Co. stock. It appears tha^
the Nos. I l l and 112 accounts were short approximately 31,000 shares of Kreuger
& Toll Co. stock between March 11 and March 17, which was not borrowed in
the “ Street” .
From information furnished by Mr. G. Siler, an agreement was executed be
tween Mr. I. Kreuger and Eastman, Dillon & Co. whereby the latter loaned Mr.
I. Kreuger $1,000,000, secured by 400,000 shares of Kreuger & Toll Co. stock.
In addition to the above, 250,000 shares of Kreuger & Toll Co. were deposited
in the accounts of Messrs. A. Jordahl and W. E. Wheeler, stated to be represent
atives of Mr. I. Kreuger for trading purposes, in which Messrs. Eastman, Dillon
& Co. have discretionary power. An option was given to Messrs. Eastman,
1392
STOCK EXCHANGE PRACTICES
Dillon & Co. by Mr. I. Kreuger on 1,250,000 shares of Kreuger & Toll Co. stock
at prices ranging from $6 to $11 per share. Copies of agreements in connection
with these matters are submitted herewith.
Respectfully submitted.
B. J. H a r b i m a n .
Mr. MA rrin an . Mr. Lindley, what do you think of that loan agree
ment from the standpoint of the business-conduct committee of the
exchange? Is it a healthy proposition?
Mr. L in dley . If they had had the one clause that they could have
sold out the stock; yes. That was the one thing lacking.
Mr. M arrinan . This committee is very much interested in study
ing the question of controlling, if certain contingencies arise, the
great ‘ expansion of speculative credit. The devices thus far ad
vanced have been largely devices through the banking structure,
through banking laws, and through the possible use of the Federal
reserve rediscount rate.
Would it not be possible, if this sort of thing were general, to defeat
any regulation of that kind in some considerable measure? In other
words, if brokerage houses undertook, as this firm appears to have
undertaken here, what is essentially, at least in its inception, a bank
ing transaction, would it not under existing conditions be difficult for
Congress, if it wished to do so, to reach that sort of a situation in a
regulatory way through any banking laws or through action of the
Federal Reserve Board?
Mr. L in dley . Well, it is very difficult for me to understand what
our banking houses can do and what our brokerage houses should not
do, if that is what you mean.
Mr. M arrin an . Have you got any views on that, Mr. Lindley,
that would enlighten us here? It is a difficult and confusing problem.
If you have any views which you would like to volunteer I am sure
the committee will be glad to have them.
Mr. L indley . I really have not, Mr. Marrinan.
Mr. M arrinan . There was no violation of the rules of the exchange
in this Eastman, Dillon transaction?
Mr. L in d le y . No, sir.
Mr. M arrinan . It did not come in any manner under your rules
appertaining to money loans?
Mr. L in d le y . N o, sir.
M r. M arrinan . What is the essence of that money loan rule?
Mr. L indley . Well, a firm can loan their own money. That is all
I know.
M r. M a rrin an . What is the rule in there for?
Mr. L indley . Just what rule is it that you have reference to?
Mr. M arrinan . I refer to your rule, chapter 7, section 9, page 101,
of your constitution.
Mr. L indley . I think you are referring to loans at a materially
different rate.
Is that the one?
M r. M arrin an . That is it.
Mr. L indley . Well, if a firm wanted to obtain business by making
a low rate of interest, they could get that business in competition
without charging a just and equitable rate. That is why we put
it in the constitution.
The C hairman . For brokerage?
Mr. L in d ley . Right.
STOCK EXCHANGE PRACTICES
1393
Mr. M a r r in a n . D o you think that this sort of thing, or a situation
such as we have presented in this loan agreement, might conceivably
develop into an impairment of the solvency of Eastman, Dillon &
Co. and other brokerage houses that might go into that sort of
thing?
Mr. L in d ley . No, sir.
M r. M a r r in a n . Why not?
Mr. L in d le y . Because you can not loan money unless you have it.
Mr. M a r r in a n . You mean if their credit is good enough so that
they can stand any kind of a loss that might occur?
Mr. L in d le y . It is not a question of credit, sir. We brokers have
to put up $125 for every $100 we get.
Mr. M a r r i n a n . What did Eastman, Dillon get for their million
dollars?
Mr. L in d le y . Four hundred thousand shares of stock.
M r. M a r r in a n . Well, are they not in some measure dependent
upon the market condition of that stock to liquidate themselves out
of that position?
Mr. L in d le y . N o. T hey have ample capital to do it.
Mr. M a r r in a n . Well, tnat is another story. I suppose that if
you confine it to the single transaction they are dependent in some
degree upon the market value of that stock to pull out of it, are they
not?
Mr. L in d le y . No, sir.
M r. M a r r in a n . Why not?
Mr. L in d le y . Because they had the million dollars and they were
able to finance all their other commitments and had ample capital
to do it.
Mr. M a r r in a n . D o you think it is sound practice to permit any
one brokerage house to have the privilege of lending all the stock of
a single issue within the confines of the United States, keeping in
mind, of course, the fact that that would have been a very difficult
provision to take advantage of by reason of the large distribution of
stock before this agreement went into effect—but is it a healthy thing
to have that sort of a provision in the contract?
Mr. L in d le y . I would say we must have a free and open market
in the loan crowd as we do in the stock market. We pay no attention
to the rate of the premium that it might go to, but we demand that
we shall have stock in the loan crowd just the same way as a free and
open market any other way.
Mr. M a r r in a n . And this would tend to rather circumscribe that
principle, would it not?
Mr. L in d le y . I would not think so, no.
Mr. M a r r in a n . In the light of all developments and plenty of hind
sight, is it fair to say the entire Kreuger set-up was in the nature of
a blind pool?
Mr. L in d le y . D o you mean Kreuger himself?
Mr. M a r r in a n . No; the entire set-up, Mr. Lindley.
Mr. L in d le y . Well, are you talking about the Eastman, Dillon, or
what?
Mr. M a r r in a n . I am talking about Kreuger & Toll Co. and all its
subsidiaries.
Mr. L in d le y . That is a pretty hard question. I thought it was
an investment.
1394
STOCK EXCHANGE PRACTICES
The Chairm an. D o you think so now?
Mr. L indley . I do not. Much to my regret I still have some, and
so has Mrs. Lindley. But I bought it as an investment.
Mr. M arrin an . Reference has been made, Mr. Lindley, to certain
foreign liquidation which seems to have preceded Kreuger’s death
in some degree, and to have, of course, followed it. Some of that
liquidation would have been difficult, if not impossible, without use
of the facilities of the New York Stock Exchange. What, if any,
safeguards are set up within your organization to prevent foreign
interests from influencing the American market in times of crisis or
in such extraordinary situations as developed through Kreuger’s
death?
Mr. L in dley . None. It is impossible, in my opinion.
Mr. M arrinan. I s it possible then for foreign interests to conduct
a raid against an American issue?
Mr. L in d le y . N o, sir.
Mr. M arrinan . Why not?
Mr. L in d le y . So far as I know we have not had any raiding. But
if the Stock Exchange in New York is closed and securities are listed
on the London or the Paris Bourse, or wherever they are, the American
investor or speculator would have the opportunity of selling those*
securities over there, the same way as our California markets areopen three hours after the New York markets.
The C hairman . Were these securities listed in London?
Mr. L in dley . I do not think so.
The C hairman . The British law is stricter in some respects than
ours, or are the rules of the Exchange stricter?
Mr. L in dley . I do not know for what reason. That I do not
know.
The C hairman . But he did not get in there, did he?
Mr. L in d le y . N o, sir.
The C hairman . They just let him in to New York. I thank you.
N e w Y o rk Sto c k E x c h a n g e ,
January BO, 1933..
Hon. P e t e r N o r b e c k ,
Chairman Committee on Banking and Currency,
United States Senate,
Senate Office Building,
Washington, D. C.
D e a r S e n a t o r N o r b e c k : In my testimony before the Committee on Banking
and Currency I was asked whether Kreuger & Toll securities had been listed on
the London Stock Exchange. In answer to this question, I stated that these
securities had not been listed (see stenographic minutes 2859-2860). Upon my
return to New York I had the matter looked up and now find I was entirely
mistaken. The secured debentures, as well as the participating debentures and
the class B common stock of Kreuger & Toll Co., were listed and dealt in on the
London Stock Exchange.
In order that my mistake may be corrected, I request that this letter be made
a part of the record of the investigation.
Very truly yours,
A. L . L i n d l e y , Chairman.
Mr. M a rrin an . Mr. Lindley, as chairman of the committee on
business conduct you in the course of routine obtain a great deal o f
information of market value, do you not?
i
STOCK EXCHANGE PEACTICES
1395
Mr. L in d le y . D o you mean market value? Very little.
Mr. M arrin an . What is that, sir?
Mr. L in d ley . Very little so far as market value goes. The size
of the market, the condition of the market, yes. That is the duty of
business conduct, to be aware of it. But when we talk of values, I
have lost all sense since 1929.
The C hairman . Was not our sense of values in 1929 worse than
any other time?
Mr. L indley . I do not know.
Mr. M a rrin an . I have been informed, Mr. Lindley, that you
have, in order to be more circumspect than Caesar’s wife, set up all
kinds of safeguards to see to it that you never would be in a position
of appearing to have the edge on anyone in the matter of information.
Is that true?
Mr. L in dley . Do you mean I, personally?
Mr. M arrinan. Yes, sir.
Mr. L in dley . Yes.
Mr. M ar rin an . As chairman of the business conduct committee?
Mr. L in dley . Yes.
Mr. M arrin an . Do you think, Mr. Lindley, that a specialist with
all the information he has in his book ought to be permitted to trade
on his own account?
Mr. L in d ley . I think it is most essential at times. Otherwise, you
can not stabilize the market. These wild fluctuations are what I
object to.
The C hairman . By stabilizing you mean from going too low?
Mr. L indley . No, sir.
The C hairman . Just from going too high?
Mr. L indley . Both.
The C hairman . Oh, well, I was wondering why you said no. I was
going to get to that. You mean both are necessary?
Mr. L indley . Yes, sir; absolutely.
Mr. M arrin an . Mr. Lindley, will you not explain just what is
meant by stabilizing the market?
Mr. L indley . Supposing a piece of good news comes out, and, let
us say, it comes out before 10 o’clock. People from all over the
country and abroad wish to buy securities, or a security. There will
be thousands of buying orders with practically no selling orders.
There the traders or the specialists, or style them whatever you
want, might supply stock at a reasonable price or a lower price and
not always make money.
Mr. M arrin an . Y ou are reasonably well familiar with the problem
before this committee, are you not, sir?
Mr. L indley . Well, I have been studying it for 30 years so far as
speculation goes.
Mr. M arrin an . Have you got any suggestions that you care to
offer in line with what has been developed in the examination, or
otherwise, that you think might be helpful?
Mr. L in dley . No, sir. I think that—well, I know that we are
doing the best at the time—we are studying it, and we keep on
studying it. It is evolution. Thirty years has made a big difference,
my life, in the practices on the stock exchange.
Mr. M arrin an . I have concluded, Mr. Chairman.
1396
STOCK EXCHANGE PRACTICES
The Chairm an. You spoke of the necessity of stabilizing, from
neither too high nor too low. What do you consider the proper
basis of value of stocks on the market?
Mr. L in dley . The proper value?
The Chairm an. The basis for value.
Mr. L in d le y . Supply and demand.
The Chairm an. Not earning power?
Mr. L indley . It was not in 1929 and it is not now.
The C hairman . Well, that is exactly the point I am trying to get
at, whether you look up 1929 as the ideal condition.
Mr. L in d le y . No, sir; any more than I do 1932 as the ideal con
dition.
The C hairman . But you feel that the trading in the stock is
what determines the value?
Mr. L in d le y . No, sir.
The C hairman . Supply and demand, you said?
Mr. L in d le y . Yes, sir.
The Chairm an. I s that not reflected by the trading?
Mr. L in d le y . Not necessarily.
The C hairman . H ow else would supply or demand be reflected
except by the buying and selling?
Mr. L in d le y . Where I wish to buy stock for one individual, I do
not call that supply and demand.
The Chairm an. But ordinarily the market determines the supply
and the demand?
Mr. L in d le y . Yes, sir.
The C hairman . And you do not think the earning power of the
stock itself is the important factor in value?
Mr. L in d le y . Well, that is a very difficult question to answer.
The Chairm an. Does it not really get down to that in the long run?
Mr. L in d le y . I do not think so; no, sir. I think that because
some of our large corporations and railroads are not earning money
now is no reason-----The C hairman . N o; but they have got 50 years of earnings perhaps
back of them, of course.
Mr. L in dley . That does not make any difference. If you are
running a factory, and it has been running for 50 years, and all the
windows are out and the machinery is not in order, you can not
make any money out of that.
The Chairm an. No; exactly so. The previous earnings might be
considered a little like they are in the railroad stock.
Mr. L in d le y . That is not anything that is going to help me.
The C hairman . No; exactly so. Therefore, I say, in the long run
it gets down to whether it earns anything or not, does it not?
Mr. L in d le y . It should, primarily; yes, in the long run.
The Chairm an. Yes. That is the point exactly. Instead of the
trading. I thank you very much.
Mr. L in d le y . Thank you, sir.
The Chairm an. This practically concludes the investigation of the
Kreuger & Toll matter, at least as far as hearings are concerned.
(Thereupon, at 4.45 p. m., Thursday, January 12, 1933, the hearing
was adjourned subject to the call of the chairman.)
X
@FedFRASER