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STOCK EXCHANGE PRACTICES

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGRESS
FIRST SESSION
ON

S. Res. 84
A RESOLUTION TO TH O R O U G H LY IN V E ST IG A T E PRACTICES
OF

STO CK

EXCHANGES

W IT H

RESPECT

TO TH E

B U Y IN G A N D SELLING A N D TH E B O R R O W IN G
AND

L E N D IN G

OF LISTED SECURITIES

T H E VALUES OF SUCH SECURITIES
A N D TH E EFFECTS OF SUCH
PRACTICES

PART 3
JUNE 4, 10, 11, 14, 16, 17, 18, A N D 23, 1932

Printed for the use of the Committee on Banking and Currency

119852




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1932

COMMITTEE ON BANKING AND CURRENCY
PETER NORBECK, South Dakota, Chairman
SMITH W. BROOKHART, Iowa.
DUNCAN U. FLETCHER, Florida.
PHILLIPS LEE GOLDSBOROUGH, Maryland. CARTER GLASS, Virginia.
ROBERT F. WAGNER, New York.
JOHN G. TOWNSEND, J r., Delaware.
FREDERIC C. WALCOTT, Connecticut.
ALBEN W. BARKLEY, Kentucky.
JOIIN J. BLAINE, Wisconsin.
ROBERT J. BULKLEY, Ohio.
CAMERON MORRISON, North Carolina.
ROBERT D. CAREY, Wyoming.
TnOMAS P. GORT2, Oklahoma.
JAMES E. WATSON, Indiana.
EDWARD P. COSTIGAN, Colorado.
JAMES COUZENS, Michigan.
CORDELL HULL, Tennessee.
FREDERICK STEIWER, Oregon.
J u l i a n W. Bl< j n t , Clerk
I I o h a c e R. J a c k s o n Axxistunt Clerk
11




C O N T E N T S
testimony of—_________________________________________________________ *•*«
Auchincloss, James C. (coimnittoo on library, New York Stock Ex­
change), (letters o f)__________________________________________
1122
1073
Bestr Walter (employee of M. J. Meelian Co.)_____________________
Boyd, J. Cookinan, attorney, Baltimore, Mil______________________
803
Brookhart, Hon. S. W., a Senator from Iowa, statement of_________
1122
000
Continental Shares______________________________________________
Daley, William It., New York____________________________________
954
Eberstadt, Ferdinand, Huntington. Long Island, X. Y______________
002
Ellsworth, Bradford, New Hart ford. Conn.------------------------------------ 1052
Fayne, Janies A., New York (member of the firm of llornblower
& Weeks)-------------------------------------------------------------------------------SOS
Fox Films—Fox Theaters_______________________________________
070
Fox Theaters (publicity)_______________________________________
1099
Galligan, William .!., Westfield, X. J_____________________________
KHMi
Resumed___________________________________________________
1017
Gray. William A., committee counsel (relative to William Fox*----895
Further statement of, relative to Fox corporations____________
070
Gugle, George L., Columbus, Ohio________________________________
027
Gushee, Miss A. J., Denver, Colo__________________________________ 3124
Higgins, P. J., Scarsdale, X. Y. (partner linn of AI. .1. Meehan C o.)- 1071
Horuaday, Dr. F. A., Washington, D. C______________________ 1013,1121
Hoyt, Richard F., New York (representing Hayden, Stone & Co.)— 1032
Morgan, William J., Milwaukee, Wis. (statement o f ) ______________
815
Norbeck, Hon. Peter, chairman of the committee (.statement regard­
ing Continental Shares)______________________________________
873
Iteass. Benjamin, New York, attorney for William Fox—
Statement of--------------------------------------------------------------------- 893,9tV4
Testimony of------------------------------------------------------------------------ 1012
875
Ripley, William Z., statement of (Harvard University.!____________
Rule (now) of New York Stock Exchange________________________
901
Roberts, Aliss Grace Vain B., Highland, X. Y______________________
1127
Ryan, John D., Butte, Mont. (chairman of the board. Anaconda
Copper Mining Co.)-----------------------------------------------------------------701
Stevens, Byam K.. Cedarliurst, Ixmg Island, N. Y_________________
1001
Stirn> Ernest W., Milwaukee, Wis-------------------------------------------------822
Stock, D. (assistant committee counsel)—
Statement relative to Fox publicity___________________________
1000
Testimony of, relative to Continental Shares_________________
000
Watson, Geo. K., Philadelphia, Pa. (certified public accountant!------




in

1077




STOCK EXCHANGE PRACTICES
SATURDAY, JTJNE 4, 1932

C om m ittee

U n ited S tates S en ate ,
B a n k in g a n d C urrency ,

on

Washington, D. G.
The committee met at 10 o’clock a. m., pursuant to adjournment,
in ro o m 301, Senate Office Building, Senator Peter Norbeck presid­
ing.

Present: Senators Norbeck (chairman), Goldsborough, Town­
send, Walcott, and Couzens.
Present also: William A. Gray, Esq., counsel to the committee.
The C h a ir m a n . The committee will come to order. Who is the
first witness?
Mr. G r a y . Mr. Ryan.
T h e C h a ir m a n . Mr. Ryan.
TESTIMONY OF JOHN D. RYAN, CHAIRMAN OF THE BOARD OF THE
ANACONDA COPPER MINING CO., BUTTE, MONT.
The C h a ir m a n . You may 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 commitee. So
lelp you God.
M r. R y a n . I do.
’ Mr. G r a y . Will you give your full name, Mr. Ryan ?
Mr. R y a n . John D. Ryan.
M r. G r a y . And your residence.
Mr. R y a n . Butte, Mont.
Mr. G r a y . And you are associated with the Anaconda Copper Co. ?
Mr. R y a n . I am chairman of the board of the Anaconda Copper
Mining Co.
Mr. G r a y . And the board, of course, is the controlling and manag­
ing factor of the corporation?
M r . R y a n . Yes, sir.
Mr. G r a y . Are you connected also with the National City Bank?
Mr. R y a n . I am a director of the National City Bank.
Mr. G r a y . Have you any association with the National City Co.?
Mr. R y a n . None.
M r . G r a y . None whatever?
M r. R y a n . N o, sir.
Mr. G r a y . The Anaconda Copper Co., without going into a long

history, unless you desire to do it, absorbed the Andes Copper Co.




791

79 2

STOCK EXCHANGE PRACTICES

and the Chile Copper Co. and the Greene-Cananea Copper Co., did
it not?
Mr. R y a n . Yes, sir.
M r. G r a y . A n y explan ation you want to make, o f cou rse, w e will
be glad to have it, but I ju st wanted to get th a t fact.
Mr. R y a n . I will just say that the Anaconda Co. had ownerships

in all of those companies prior to the time that we are now talking
about, as I take it.
Mr. G r a y . That is, prior to 1928 and 1929?
Mr. R y a n . Prior to 1928 and 1929.
Senator T o w n s e n d . The majority ownership?
Mr. R y a n . Just a moment.
Senator T ownsend . All right.
Mr. R y a n . It owned, for 25 years, about a 12 per cent interest in
the Greene-Cananea Copper Co. It owned, since about 1922, a 80
per cent interest in the Chile Copper Co. It owned, at one t im e , all
of the Andes Copper Mining Co., but issued an issue of con vertible
bonds to equip the property of the Andes Co., and those bonds, b ein g
a convertible right, took 50 per cent of the outstanding stock, when
converted.
At the time that we are coming to, in 1928, the Andes bonds were
still outstanding, to the amount of $40,000,000.
The Anaconda Co. owned 50 per cent of the Chile, and 12 p e r cent
of the Greene-Cananea Cos. And subsequent to December, 192&-following December, 1928, the Anaconda Co. offered its shares in
exchange for the outstanding shares of the Chile Copper Co., a n d
on July 1, it offered its shares for the outstanding shares o f t h e
Greene-Cananea Co. and the Andes Copper Mining Co.
Mr. G r a y . Might we stop, Mr. Ryan, and get the dates? The
conversion of Ananconda for Chile Copper stock became effective
when?
Mr. R y a n . It became effective in January, and was closed—-that
offer of exchange was closed, I mean originally, April 30.
Mr. G r ay . It was January 23 that it became effective, was it n o t?
Mr. R y a n . I think it was.
Mr. G r a y . January 23, 1929. It originally was to be c lo s e d oo
April 30,1929.
Mr. R y a n . Yes, sir.
M r. G r a y . N ow , the tim e was extended.
Mr. R y a n . From time to time.
M r. G r a y . U n til w hen?
Mr. R y a n . Still out—I don’t know that it has been closed now .
Mr. G r a y . All right.
Mr. R y a n . The Anaconda Co. has acquired a total of about 9 8 ^

per cent of the Chile stock.
Mr. G r a y . Now, the Greene-Cananea, the right of exchange be*
came effective on July 1,1929, did it not?
Mr. R y a n . I th in k so.
Mr. G r ay . And that was closed on October 1, 1929, was it not?
Mr. R y a n . Yes, sir.
Mr. G r a y . The rate of exchange on Chile Copper was what?
Mr. R y a n . Seventy-three one hundredths of a share of Anaconda
for a share of Chile Copper.




STOCK EXCHANGES PRACTICES

793

M r . G r ay . And the rate of exchange on Greene-Cananea was
what?
M r. R y a n . One and one-half shares of Anaconda for one share o f

Greene-Cananea.
The C h a ir m a n . Those properties are located where *
Mr. R y a n . The Chile Copper Co. is located in Chile, as its name
indicates. And the Andes Copper Co. is located in Chile. The
Greene-Cananea Copper Co. is located in Mexico.
The C h a ir m a n . What part of Mexico ?
Mr. R y a n . In the northern part, 40 miles from the Arizona
border.
Mr. G r a y . I did not get the dates of the Andes. "When did that
conversion become effective?
M r. R y a n . July to October, the same dates as the Greene-Cananea.
M r. G r a y . And the rate of conversion there was what ?
Mr. R y a n . Forty-five one-hundredths of a share of Anaconda for
a share of Andes.
M r. G r a y . And so that we may get the complete picture, during
that time, also, in the summer o f 1929, the funded debt of the
Anaconda Co., as represented by certain bonds, was converted into
stock, was it not?
Mr. R y a n . The funded debt of the Anaconda Co. and the sub­
sidiaries, except the Chile, which had a bonded debt out which we
could not retire, was refunded; the money to refund the outstanding
debt was secured by the offer of two shares of new stock of Anaeonda for five shares outstanding. In other words, a 40 per cent
additional issue of Anaconda at $55 a share.
Mr. G r a y . T o express that just a little differently, Mr. Ryan:
Every stockholder of the Anaconda Co. was given the right for
every five shares o f stock that he owned to buy two shares of new
stock from the Anaconda Co. at $55 a share?
M r. R y a n . At $55 a share.
M r. G r a y . That is correct?
Mr. R y a n . That is correct. That provided most of the money
required in money. There were $50,000,000 of Anaconda debentures
convertible into stock at varying prices, running from 53 to 65, is
My recollection, that were converted during that period. First,
there were $105,000,000 of bonds in the Anaconda—straight bonds;
$50,000,000 of Anaconda debentures, convertible, at from 53 up to
65; $40,000,000 of Andes convertible, and were converted into Andes
stock; and $16,000,000 of Anaconda bonds that had been out—that
matured on December 28.
Mr. G r a y . 1929?
M r. R y a n . 1929. That is $211,000,000 of the funded debt of Ana­
conda was retired by the issue of its stock or its subsidiary, Andes
stock, d u rin g the period from December, 1928, until December, 1929.
Mr. G ray . The effect of those transactions, though there was not
a merger of the corporate body, was to have the stockholders of
Chile, Greene-Cananea, and Andes, all hold stock of Anaconda.
Mr. R y a n . Hold stock o f Anaconda.
Mr. G r a y . And put Anaconda—the Anaconda Co., I suppose, kept
alive the stock of those companies?
M r. R y a n . Yes, sir.



794

STOCK EXCHANGE PRACTICES

Mr. G r a y . And it put Anaconda in a position where it retired all
of its debts, except $40,000,000 of Chile, which could not be con­
verted?
Mr. R y a n . In addition to that amount, there was a small amount

of Butte & Anaconda Railway, one of our subsidiaries.
Mr. G r a y . All right.
Mr. R y a n . A total of $47,000,000 we could not refund.
Mr. G r a y . N ow , I direct your attention to a corporation k n o w n
as the United Metals Selling Co. What is that company?
Mr. R y a n . The United Metals Selling Co. is a company wholly
owned by the Anaconda Copper Co. It sells all of the metals o f the
company. It does virtually all of the banking business for the sub­
sidiary companies of the Anaconda, with the exception o f Chile and
Greene-Cananea, for which it has never done that ousiness; and it is
intermediary between the operating companies and the banks and
the market.
Mr. G ra y . In other words, it is a corporation w h o lly o w n e d by
the Anaconda, which sells its product ana does its fin a n cin g ; is th at
correct ? I want to get it in a brief way.
M r. R y a n . I w ou ld n ot say i t does its financing.
Mr. G r a y . Through which it does its financing.
Mr. R y a n . An intermediary in the financing.
Mr. G r a y . N ow , the United Metals Selling Co. did, in th e ye a r
1929, engage very heavily in the buying and selling o f these c o p p e r
stocks on the market, did it not ?
Mr. R y a n . I f you will let me here just explain w h a t th e o p e ra ­
tions were, I think it would, perhaps^ save a good many questions.
Mr. G r a y . I haven’t any objection, if you will.
Mr. R y a n . And a good deal of tim e.
Mr. G r a y . Y ou understand from our talk w h a t I w an t to develop.
Mr. R y a n . Exactly, Mr. Gray.
Mr. G r a y . I want to show what the transactions o f the United
Metals Selling Co. were in the Anaconda Copper Co. and these other
affiliated stocks during the year 1929.
Mr. R y a n . In the year 1929 the offer of the exchange of Anaconda
for Chile stock was made. There was an outstanding interest in
Chile of 2,200,000 shares that were worth at that time in the market
about $125,000,000. That interest was owned in large—I would not
say a large part—but perhaps a quarter o f it by members o f the
Guggenheim family. There were others with a considerable interest,
but they were the largest. And the general public. It was desirable
that the Chile and Anaconda stocks should be brought together rea­
sonably in the market so that at the time when the negotiations
were finally closed for the exchange on the ratio agreed upon, it
would not find Chile stock so high that no Chile shareholder would
exchange, or it would not find Anaconda so high that the Ana­
conda shareholder would feel that his interest had suffered in the
trade. That exchange went on from January 23, I think I would
say, Mr. Gray, until April 30. There was a good deal o f difficulty
in getting the large proportion of the Chile stock. We wanted it all.
And after the terms of exchange were published, the market opera­
tions conducted by the United Metals Selling Co., as a pure agent
for the Anaconda Co., were in considerable volume in order to seep
the stocks of the two companies relatively at the levels o f the basis



STOCK EXCHANGE PRACTICES

79 5

of exchange; and stock was bought and stock was sold to carry out
that plan.
Mr. Ghat. Let me put that in another way, Mr. Ryan. The
United Metals Selling Co., a wholly owned Anaconda Co. proposi­
tion, kept buying and selling stocks of those companies in the market
in order that the price might be maintained at a position where, in
your opinion, or m the opinion of the board of Anaconda Co., the
conversions could be made at the price agreed upon without any dif­
ficulty ensuing as a result of fluctuations in the market; is that
right?
Mr. R yan . Those ratios of exchange were all fixed on engineering
data; they were arrived at without any consideration of the stockmarket values of the stocks of those companies. Having arrived at
those bases of exchange by engineering data and by negotiation with
the principal owners of those stocks of those companies, the bal­
ancing o f the prices one with the other to save the defeat of the
exchanges, it was carried on by the United Metals Selling Co. as an
agency for the Anaconda; yes.
Mr. G bay . And by balancing the price, you mean they went out
and kept buying and selling in order to keep the prices what they
wanted them to be at this time?
Mr. R y a n . The price was between those two companies at this
time.
Mr. G bay . I understand.
Mr. R y a n . Not to depress Anaconda, but to balance the prices
between the Anaconda and these other companies, to bring about the
exchange.
Mir. G bay . And if the price of one or the other of those stocks
went up a little higher than you thought it should, or went down
a little lower than you thought it should, the United Metals Selling
Co. continued its operations in order to bring that stock back to where
you thought it ought to be?
Mr. R y a n . I do not say it continued. I f there was any disparity
between those two companies—let us say Chile and Anaconda—when
that exchange was under way, which would seem likely to defeat
the object and prevent the exchange, stock was bought or sold
accordingly.
Mr. G b a y . By the way, let me ask you: You were the one that
handled those propositions and gave all the orders, were you not ?
Mr. R y a n . I think so. I mean the board of directors of the com­
panies, the Anaconda Co. and the United Metals Selling Co. (and
the United Metals Selling Co. board) authorized the purchase and
sale o f stocks and authorized, in some cases, the giving of options;
but the* business was carried out through me and under my direction.
M r. G b a y . And your position with the United Metals Selling Co.
was what?
M r R y a n . President of the company.
Mr. G bay . President of the company ?
Mr. R y a n . Yes, sir.
M r. G b a y . And so, perhaps, you could enlighten the committee as
to just what you would do if the price was getting away from you;
how you would maintain it.
M r. R y a n . I don’t know just what I would do.
M r. G b a y . Tell us what you did do.



796

STOCK EXCHANGE PRACTICES

Mr. R y a n . It would depend on the circumstances. I f w© were in
a weak market and one of those stocks was especially weak, I might
do one thing; and if we were in another market, perhaps I would
do another. But to sit here and tell you what I would do in the
balancing of stocks over a period of months in such a market as we
had in 1929 would be foolish, and I would not attempt it.
Mr. G r a y . Now, let us see. When the stock would go down you
would buy all that was offered, wouldn’t you ?
Mr. R y a n . N o.
Mr. G r a y . Wouldn’t you have to do that in order to keep the
price up ?
Mr. R y a n . Mr. Gray, if any corporation or a n y group attempted
to buy all the stocks when stocks might go down in that perioa the
result would be very disastrous. I do not think I would be foolish
enough to do that.
Mr. G r a y . Well, whatever you did do you succeeded in maintain­
ing an equilibrium?
Mr. R y a n . I do not know how far we succeeded; but the object of
the whole business that was done in that operation was to bring
about an exchange of the stocks of those other companies—let us
speak of Chile now—that was the earliest one. The best we can say
is that the-----Mr. G r a y (interposing). You were successful?
Mr. R y a n (continuing). That 98 ^ per cent of the Chile stock is
now in the Anaconda Co. as a result of that offer and exchange.
Mr. G r a y . Yes. Now, do you know, expressed in figures or Ana­
conda stock, how much Anaconda stock—how much o f all those
stocks, expressed in figures of Anaconda, so that we will not have to
bother with all these others—how much United Metals Selling Co.
had in the beginning o f 1929.
Mr. R y a n . 1 h ad it. I have m ade a statem ent for you.
Mr. G r a y . Y ou did. Let me ask y ou —I do not want to testify—
was it 29,412 shares ?
Mr. R y a n . I think it was. I do not want to testify to those figures.
I f you have got that statement I gave jrou I will be glad to testify
from that. I do not want you to be asking me <mestions and saying
one thing when I could refer to the statement. I can not remember
those figures.
Mr. Gray. Now, Mr. Ryan, you did not give me figures as to the
United Selling Co. I will ask you this, in order to point you to the
last matter: Whether it is not a fact that you owned—the United
Metals Selling Co. owned—approximately 29,000 shares at the be*
ginning of the year, and in all these transactions in buying and sell­
ing during the year you had accumulated 200,000 shares of those
Anaconda stocks.
Mr. R y a n . N o .
Mr. G ray . That is correct, isn’t it?
Mr. R y a n . N o. I have a memorandum furnished me b y the
United Metals Selling Co. some time ago.
Mr. G r a y . Tell us what it shows.
Mr. R y a n . It shows that at the end of 1928 the United Metals
Selling Co. owned 42,062 shares of Anaconda.
Mr^ GRAY. All right.
Mr. R y a n . N ow , th is w as prepared, I th ink, b e fo r e th e o n e I fu r­
nished you.



STOCK EXCHANGE PRACTICES

79 7

M r. G r a y . T h e one y ou furn ish ed m e was y o u r o w n personal stock ­
holdings, and I am n ot g oin g to ask y o u about them .
Mr. B y a n . You say at the end-----Mr. G r a y (interposing). You had 200,000 and some.
Mr. B y a n . 202,840 shares.
Mr. G r a y . That is correct, is it?
Mr. R y a n . Yes, sir.
M r. G r a y . A ll righ t.

Mr. B yan. Now during that period of December, 1928, to Decem­
ber, 1929, the United Metals Selling Co. acquired in the market
172,100 shares of Chile, for which it received 125,633 shares of
Anaconda.
M r. G r a y . W e ll, all o f those th ings are reflected, are th ey n ot,
in the oth er figure ?
M r. B y a n . W ait a minute. T h is is exa ctly in answer to yo u r
question.
Mr. G r a y . All right. Go ahead.
Mr. B y a n . It acquired in the market 73,700 shares of Greene-

Cananea, for which it received in exchange 100,550 shares of Ana­
conda. It received in exchange of Chile and Greene-Cananea to­
gether, during the year 1929, 236,183 shares of Anaconda.
We had 40,000 shares at the beginning of the year. We had 202,000 shares at the end of the year, "so you will see that almost exactly
the shares acquired during the year were the shares acquired for
the exchange of Chile and Greene-Cananea.
Mr. G r a y . S o far as the result was concerned; but in the mean­
time you were buying and selling stocks ?
M r. B y a n . Yes, sir.
Mr. G r a y . And as a result, the United Metals Selling Co. made
how much money ?
Mr. B y a n . I do not know.
Mr. G r a y . Your books show a figure of $1,300,000.
M r. B y a n . H ow m uch?

Mr. G r a y . A little over $1,000,000.
Mr. B y a n . I do not recall.
Mr. G r a y . And in the usual course, your books also show— I am
not questioning the right to do so----Mr. B y a n (interposing). I will say this, Mr. Gray: That the
United Metals Selling Co. made no money on those transactions.
There were no profits on those transactions I have just testified
about.
Mr. G r a y . Mr. Byan, do not your books show a credit of over
$1,000,000, which was transferred to the Anaconda Co.?
M r. B y a n . It did the business for the Anaconda Co., so if there
was any p ro fit it turned it over.
Mr. G r a y . All right.
Mr. B y a n . The United Metals Selling Co. did a great deal of
other business. This was not its business. It was just doing some
work f o r Anaconda, to bring about the transfer of the shares that
the A n a c o n d a wanted.
Mr. G r a y . N ow , in the course of the United Metals Selling Co.’s
campaign, such as you have now outlined, they gave an option, did
they not, to Block, Maloney & Co. ?
Mr. B y a n . Yes, sir.



79 8

STOCK EXCHANGE PRACTICES

Mr. G ray . That option was for 70,000 shares; is that correct?
Mr. R y a n . Yes, sir.
Mr. G r ay . And that option was for the delivery of that stock,
17,500 shares on the 1st day of February, 1929, at 122^4; 17,500
shares on the 6th day of February, 1929, at 125; 17,500 shares on the
13th day o f February, 1929, at 127*4; an(l 17>500 shares on the 14th
day of February, 1929, at $130 a share; is that correct?
Mr. R y a n . I do not know about the dates. I have not the dates.
But 70,000 shares was placed under option to Block, Maloney & Co.,
and were taken up in early February-:----Mr. G r a y (interposing). 1929?
Mr. R y a n . At the same time, if you don’t mind-----Mr. G r a y (interposing). I don’t mind.
Mr. R y a n . It will, perhaps, save time.
Mr. G r a y . Go ahead.
Mr. R y a n . An option of 50,000 shares of Chile Copper Co. that
was held in the joint account of myself, Mr. Guggenneim, and the
National City Co.
Mr. G r a y . We will come around to that again. No objection to
your mentioning it now.
Mr. R y a n . An option on 50,000 share® of Chile Copper Co. was
given, making 120,000 shares, on identically the same terms, and
identically the same delivery. That was 50,000 shares of Anaconda,
converted from Chile.
Mr. G r a y . I was g o in g to ask y ou that.
Now, though the minutes of the United Metals Selling Co. show
that that option was given on the 14th day of February, but the
last day that part of it was exercised-----Mr. R y a n (interposing). Mr. Gray, if you will pardon me, the
minute of the United Metals Selling Co. is a minute ratifying and
approving-----Mr. G r a y (interposing). I was just straightening that out for you,
if you will let me finish my question.
Mr. R y a n . The option was given by the officers of the company,
and they exercised it, and it just happened at a meeting date, ana
the minute that you speak of on the 14th was a ratification, and not
the option.
Mr. G r a y . In other words, let me express it in another way: You,
acting for the United Metals Selling Co., had given to Block, Ma­
loney & Co., this option, which had been exercised at the prices and
at the times named, and that was ratified in the minute ?
Mr. R y a n . Yes, sir.
Mr. G r a y . N o matter; it was on the 14th o f February?
Mr. R y a n . Yes.
Mr. G r a y . At the very same time that you were doing that, you
were handling the operation in which you, the National City Co.,
Mr. Guggenheim, Mr. Kelley, and Mr. Thornton were interested and
you gave an option to Block Maloney out of the stock in the account
for 50,000 more shares of Anaconda at the same price ?
Mr. R y a n . Yes.
Mr. G r a y . S o that the committee may understand it, the Mr
Kelley whom I have named is the president of the Anaconda Copper
Co., is he not?
Mr. R y a n . Yes.



STOCK EXCHANGE PRACTICES

799

Mr. G b ay . Mr. Guggenheim, whom I have named, was an officer
of the Chile Copper Co. ?
Mr. R y a n . N o ; he was a large stockholder. He was not an officer
of the company.
M r . G b a y . And Mr. Thornton, whom I have named, was con­
nected with the Greene-Cananea Copper Co., was he not ?
Mr. R y a n . Yes.
Mr. G b a y . In what capacity?
Mr. R y a n . As president.
Mr. G b ay. Therefore there was a joint account in which the
National City and you four gentlemen were interested in these vari­
ous stocks at that same time, that is, around February 1
Mr. R y a n . Not in the various stocks; only in the Chile stock.
Mr. G b a y . Well, I will come to the other one in a few moments.
Did you know, Mr. Ryan, that every share of stock that was included
in those two options, the 70,000 one from the United Metal Selling
Co. account and the 50,000 one from the joint account of yourself
and the others named, went right through Block, Maloney & Co. and
into the Anaconda pool that was then being operated by W. E.
Hutton Co. ?
Mr. R y a n . I did not; but I want to say to you, because yesterday
in talking about the pool you said that my name did not appear in
the pool—I want to say to you that I had no interest in either one of
those pools, had no possible interest in it; that I did not know that
the stock was going into the pool or any pool, and it was simply a
transaction with Block, Maloney & Co., because they came to me and
asked for an option and thought they could sell that much stock, and
we had taken in so much stock on the exchange that we were desirous
of selling, and gave them the option accordingly. I had no interest
personally at the time of beginning or at the time the pools were
operating or at any other time, in either one of the two pools that
have been called Anaconda pools and have been mentioned in this
testimony.
Mr. G b a y . I will say to the chairman and the committee that I will
prove the tracing of this stock after I am through with Mr. Ryan.
Carrying along the operations of the United Metal Selling Co.,
you continued to buy ana sell that stock between August and October
of 1929, did you not?
Mr. Ry a n . Yes. At that time the Andes and Greene exchanges
were pending and the operations kept on in July and August and, to
a small extent, in September, because the exchanges were nearly
complete by the first of September, and were carried on in this same
way as the earlier operations in Chile to keep the market balanced as
between those three stocks.
Mr. G r a y . I ask you, Mr. Ryan, whether the operation of the
United Metal Selling Co. during those months that I nave mentioned
was not carried on also for the purpose of aiding the National City
Co. in maintaining a market for the stock it was then putting out?
Mr. R y a n . The United Metal Selling Co. had no part in maintain­
ing the market for the National City Co. I did not know anything
about it during the months of July and August. From the 11th of
July until the 4th of September I was not in New York. We were
not doing anything and had not done anything in connection with




gOO

STOCK EXCHANGE PRACTICES

the National City distribution, or purchase or whatever it was except
to give them an option on 100,000 shares of stock on the 1st o f July
that was exercised on the 26th of August—a hundred thousand
shares of Anaconda stock.
..
Mr. G r a y . Prior to that time you know that on December 1 7,1928,
from the records the United Metal Selling Corporation bought from
the National City Co. 25,000 shares of Andes Copper for the sum of
$1,125,000, and on January 14,1929, nearly a month later, the United
Metal Selling Co. sold that same quantity of stock for exactly that
same price back to the National City Co. "What did that transaction
represent?
Mr. R yan . I really do not know, Mr. Gray. I can not recall what
that transaction was or anything about it. There was a joint account
between the Anaconda Co. itseli and the National City in Andes at
one time. Whether that was the time or not I don’t know. As a
matter of fact, I did not know about that item before I left New
York, and I have no recollection of it now. I do not know what it is.
But----- Mr. G r a y . Did you know that the National City and the Ana­
conda were operating in Andes in a joint account on the market?
Mr. R y a n . N o . I will tell you about that.
(After referring to memoranda.) Yes; it was just about that
time, in December.
Mr. G r a y . It was just about that time they were operating in the
market ?
Mr. R y a n . N o . Here is what happened. At December 31, 1928,
the conversion privilege—the Andes bonds were called for con­
version, the Andes bonds of $40,000,000 which had been outstand­
ing were called for conversion, and the period ended on December
28. O f course, we were anxious and the National City Co. were
anxious, because they placed the Andes bonds for us, that the
bonds should be converted instead of being taken up and paid
off in cash as we would have to pay, and it was a very desirable
thing that the bonds should be converted. So the Anaconda Co.
and the National City Co. operated in Andes stock to stabilize it
and bring about the conversion for a period beginning December
13, 1928, and until the close of the year. 151,000 shares o f stock
were accumulated, of which 127,000 were transferred to the City
Co. and offered to the public, and 23,100 shares were sold after the
conversion period was over, with a total profit to the account of
$335,042.43.
Mr. G r a y . In what name was that account carried, and what
brokerage house?
Mr. R y a n . I do not know.
M r. G ra y . Y o u condu cted that operation to o , d id y o u not?
Mr. R y a n . N o, sir; I d id not conduct that operation.
Mr. G r a y . Let us see i f we understand that clearly-----M r. R y a n . I f you w ill let me finish that.
M r. G r a y . G o ahead.
Mr. R y a n . The total profit on the account was $335,042.43, of

which $167,000 was paid by the National City Co. to the Anaconda
Co., and the same amount was retained by the National City Co.
M r. G r a y . I want to know why in that transaction while you
were proffering that stock on the market, that is, the National City



STOCK EXCHANGE PRACTICES

801

Mid the Anaconda Co., why there were 25,000 shares of that stock
on a certain date transferred from the National City Co. to the
United Metal Selling Co., and then within a month later—a month
less three days—transferred back again at exactly the same price.
Mr. R y a n . I can not say anything, Mr. Gray, except that they
delivered that, thinking that the United Metal Selling Co. was
handling that account, as it handled the business generally with
the company, and when we ascertained that it had been delivered
and it should have been delivered to the Anaconda Co., if at all,
it was returned on that account. The United Metal Selling Co.
did not handle that. The Anaconda Co. handled it itself.
Mr. G ray . Let me direct your attention to the fact that on Decem­
ber IT, 1928, when the 25,000 shares of Andes went from the National
City to the united Metal Selling Co., the market price was 45 and it
was transferred at 45, and that on January 14,1929, when the United
Metal Selling Co. sold it back to the National City Co. at 45, the
market price was 48 to 50 a share on that date.
Mr. R y a n . The United Metal Selling Co. did not sell it back.
They simply returned it because a mistake had been made in de­
livering it.
Mr. G r a y . That was a mistake ?
Mr. R y a n . Yes; and there was no sale at all. There was no pur­
chase or sale.
Mr. G r a y . What was your one-two-three account with Hornblower
& Weeks ?
Mr. R y a n . A personal account; no other interest in it.
Mr. G r a y . On February 21, 1929—and this is the only one I am
going to ask you about your personal account—you bought through
Hornblower & Weeks from the National City Co. for your one-twothree account 20,000 shares of Andes Copper at a price of $50 a share,
while the market on that day was $58 to $60. How do you explain
that transaction?
Mr. R y a n . I do not recall it at all. I have no doubt that is what
it was, but I say I do not recall it. I had no idea of my personal
transactions coming up.
Mr. G r a y . I did not intend to ask you about it, except this one
transaction.
Mr. R y a n . I am willing that you should, but I would have to take
time to prepare for it. But that undoubtedly was a delivery against
a previous transaction. I did not buy it on that day. It was a
delivery on that day. I have no doubt that is what it was.
Mr. G r a y . Let me now direct your attention to what you call your
Chile Copper Co. account. That joint account was first carried
with Hornblower & Weeks, was it not?
Mr. R y a n . No. I think purchases were made through Horn­
blower & Weeks, and when a round block of stock, for instance, fif­
teen or twenty thousand shares, was required, it was turned over to
the National City Co. and they took it up and carried it.
Mr. G r a y . We may save a little time. I have in front of me the
account as it appears on the books of the National City Co. I will
give you these figures and I want to have you tell me whether they
are correct. Have you a copy of that ?
Mr. R y a n . No; t have not a copy, but I have my own figures and
I may be able to check it.



802

STOCK EXCHANGE PRACTICES

M r. G ra y . On January 15, 1929, the National City Co., on this
account in which all you gentlemen were interested, received from
Hayden & Stone 7,500 shares of Chile; on the 16th, from. Hornblower
& Weeks, 20,000 shares of Chile; on the 17th, from Hornblower &
Weeks, 5,000 shares of Chile; on the 18th, from Hornblower &
Weeks, 30,000 shares of Chile; on the 21st, from Block, Maloney &
Co., 11,900 shares of Chile; on the 22d, from Block, Maloney & Co.,
13,700 shares; on the 22d, from Dewey Bacon & Co., 4,900 shares; and
on the 22d, from Hornblower & Weeks, 15,000 shares—making
108,000 shares of Chile. Is that approximately correct?
Mr. R y a n . I do not know as to the amounts from the different
brokerage houses, but my statement as furnished me shows that from
January 14 to the 22 there was accumulated 111,100 shares o f Chile
exchanged on February 4 for 81,103 shares o f Anaconda.
M r. G ray . What date was that exchanged?
Mr. R y a n . On February 4.
Mr. G r a y . On February 4. Now. the conversion privilege came
into effect on January 23, did it nots
Mr. R y a n . I think it did.
Mr. G ray . And your last delivery o f that stock into the National
City was on January 22, was it not?
Mr. R y a n . Yes.
Mr. G r a y . It is a fact, is it not, that with the knowledge in your
possession that on January 23, 1929, the Anaconda Co. was airing
effective an agreement for the conversion of Chile Copper stock,
you, Mr. Kelly, Mr. Guggenheim, and the National City Co. started
to accumulate Chile Copper stock?
Mr. R y a n . At the time we started to accumulate and did accumu­
late the Chile stock the ratio of exchange had not been agreed upon.
Mr. G r a y . Y ou knew it was going to be converted?
Mr. R y a n . We expected it, and that was the reason for opening
this account. We expected that a ratio would be agreed upon, and
that before it had been agreed upon and made public, the stocks
of these two companies had to be brought together, as I explained
it previously, reasonably together, to avoid the crash that might
occur if one of them was out of line with the other.
Mr. G ra y . Yes; but what you did, having a knowledge o f some­
thing that the public never learned until January 23, was to start
to accumulate this stock right up to the last minute on January 22
and accumulated it and among the three of you made a net profit
of a million and a quarter, did you not?
Mr. R y a n . I made a loss, a very serious loss, myself, on the trans­
action.
Mr. G ray . On this one transaction ?
Mr. R y a n . Yes. I exchanged it for Anaconda and took the Ana­
conda over and I have got it yet.
Mr. G r a y . Y ou m ean you have a loss as o f to -d a y ?
Mr. R y a n . What I say is as of to-day.
Mr. G ray . S o d o all tne rest o f us.
Mr R y a n . I know .
Mr. G r ay . I should not have used the word “ us,” because I haven’t
any.
xu- r*
,c t11 not say
on a certain day if I had done
this and done that I would have made a profit. The fact of the



STOCK EXCHANGE PRACTICES

803

matter is that I exchanged it for Anaconda and took tlie Anaconda
and I have got it to-day. I made a very serious loss on it.
Mr. G ra y . When the division was made between these people that
were in this little syndicate, you happened to take your stock and
Mr. Guggenheim took cash, did he not?
Mr. K y a n . He sold his stock; yes.
Mr. G ra y . And Mr. Guggenheim's cash was $404,400.86, was it
not?
Mr. R y a n . I think it was.
Mr. G ra y . And he had a one-third interest ?
Mr. R y a n . He had a on e-third interest.
Mr. G ra y . And the oth er tw o-th ird s, th erefore, added to that,
gives you a result o f som ewhere close to a m illion and a quarter
profit the day you m ade that d iv is io n ; is that righ t ?
Mr. R y a n . I f w e were all sm art enough to sell it at the highest
price we w ou ld all have m ade a lo t o f m oney.
Mr. G ra y . Y o u were sm art enough to g o out and accum ulate it r
but not smart enough to get rid o f it b efore the m arket d rop p ed ?
Mr. R y a n . Exactly. You are perfectly right.
Mr. G r a y . Let us see how that was disposed of. How much stock
did you convert—Chile into Anaconda?
Mr. R y a n . I gave you that figure a minute ago—81,103 shares.
Mr. G r a y . And o f that the group sold 50,000 shares to Block,.
Maloney & C o.?
Mr. R y a n . Yes.
Mr. G ra y . And the rest of it was divided either b y cash or stock
between you. That is correct, is it not ?
Mr. R y a n . Thirty thousand was divided.
Mr. G ra y . Let us take the Greene-Cananea matter. That was
operated and the stock accumulated through Hornblower & Weeks.
That is correct, is it not?
Mr. R y a n . I do not know that it was all through Hornblower &
Weeks.
Mr. Gray. We have no record of the National City Co. that any
of it came from anywhere but Hornblower & Weeks. And that
account was 55, was it not?
Mr. R y a n . I believe it was.
Mr. G r a y . Did you know that when the National City Co. oper­
ated in Cananea a little later, through another account, it happened
to be known as Greene Cananea No. 55 ?
M r. R y a n . N o, s ir ; I d id n ot k n ow that.
Mr. G r a y . A s a m atter o f fa ct, that stock was accum ulated------The C h a irm a n . They both had the same number?
Mr. G r a y . Y es.

That stock was accumulated in this manner—if it is correct, please
tell me, and if it is incorrect, please advise me—that on the 14th of
December, 1928, Hornblower & Weeks delivered to the National
City on this account 15,000 shares. On the 19th day of February,
1929,15,000 more; and on the 13tli of March, 1929, 25,000 more. Is
not that correct?
Mr. R y a n . I have no m em orandum o f it.
Mr. G r a y . What does your total show—55,000 shares?
Mr. R y a n . N o; the total shows 75,000 shares.
119852—32—pt 3------2



804

STOCK EXCHANGE PRACTICES

Mr. G r a y . Y ou are correct. As a matter of fact, there were 25,000
shares that came out of this 55 account and went to the National
City prior to this time, that is, to the National City Bank, not the
National City Co., on a loan of $3,500,000; is that not correct?
Mr. R y a n . Yes; I think it is.
Mr. G r a y . The 55 that I have mentioned, plus that 25, would
make 80; and then, as a matter of fact, in order to adjust your
accounts back at Hornblower & Weeks and National City Co., this
little syndicate returned 5,000 to Hornblower & Weeks, leaving you
in a net position of 75,000 shares ?
Mr. R y a n . X do not remember what the operation was, b u t it was
a net position of 75,000 shares.
Mr. G r a y . What you then did was to divide that stock u p; is not
that correct?
Mr. R y a n . Yes.
Mr. G r a y . In the Greene Cananea the same gentlemen were inter­
ested as were interested in the Chile Copper, including the National
City and excluding Mr. Guggenheim; is not that correct?
Mr. R y a n . Yes. But, Mr. Gray, I would like to call your atten­
tion to the fact that the transaction in Greene Cananea was in De­
cember, 1928.
Mr. G r a y . Down to March, 1929. I have given you the dates.
Mr. R y a n . Yes; but it was a practically idle account. There was
no exchange of Greene contemplated at that time, and there was no
exchange o f Greene authorized for Anaconda until July 1,1929.
Mr. G r a y . I believe the record shows that.
Mr. R y a n . At that time this account was open. The Greene
Cananea mines had just developed and opened up a very rich ore
body, had demonstrated the value of it, which was very much in
excess of what it had been before, but had not reached a point where
it was desirable to take it over into Anaconda because the ore body
had not been developed; but this account was more than six months
old before any exchange into Greene Cananea had taken place.
Mr. G r ay . A little less than four months before your last trans­
action, and all this information that you are now giving us you gen­
tlemen had, and you thought that Greene Cananea Copper was too
cheap, so you would have to make a little money-----Mr. R y a n . Everybody had the information. The world had it.
It was a sensational ore body, and everybody knew as much about it
as we did.
Mr. G r a y . I am sorry I didn’t know about it.
M r. R y a n . I am sorry, too.
Mr. G ray . The net profit of that syndicate from that transaction
was $2,909,978.15, was it not?
Mr. R y a n . There was no profit to the members of the syndicate
that were associated with me or to mvself, because we kept the stock
We did not sell it; we kept it and turned it into Anaconda when the
exchange was over in July, and we still have the Anaconda.
M r. G r a y . D o you kn ow w hether o r not as o f the date o f d istrib u ­
tion the account reflects a profit o f that am ount ?
Mr. R y a n . I do not know. I did not sell any stock, and I h a v e no

means of knowing on the date of distribution. ‘
M r. G r a y . From these two accounts, Greene Cananea------■
Mr. K elley (to Mr. Ryan). Insist on having a chance to answer.




STOCK EXCHANGE PRACTICES

805

Mr. G ray . I am giving him a chance.
Mr. R y a n . N o ; you are not.
Mr. G ray . What is it you want to answer?
M r. R y a n . G o ahead.
Mr. G r ay . I probably operate a little fast.

This is Saturday, you

know.
M r. K elley . Y ou are rid in g him.
Mr. G r a y . I let Mr. Kelley sit there, Mr. Chairman, because of the

fact that if there was any information he had that Mr. Ryan did not
have, I would be glad to have him communicate it.
Senator G oldsborough. What was that remark, Mr. Kelley I
Mr. K elley . I said that Mr. Gray was trying to ride the witness
for the benefit of the gallery.
Senator G oldsborough. I think those things better go into the
record.
Mr. G ray . From these two accounts, Green Cananea and Chile
Copper Co., the National City took their interest in stock; that is
right, is it not?
M r. R y a n . I think so.
Mr. G r a y . In the distribution?
Mr. R y a n . I think so.
Mr. G r a y . Did you know that the records o f the National City Co.
show that?
Mr. R y a n . No; I did not.
Mr. G r a y . Did you know that in the account books of the National
City, the one headed Greene Cananea is a joint account, Greene
Cananea, and it does not indicate who it belongs to at all?
Mr. R y a n . No ; I did not know that.
Mr. G r a y . Did you know that the only thing that appears 011 the
top of the account of Chile Copper is “ Chile Copper Joint Account,”
and there is nothing on the books to indicate who that sto -k belongs
to?
Mr. R y a n . No; I don’t know that. I have no means of knowing
anything about the accounts of the National City Co.
The C h a ir m a n . I just want to say to this gentleman who intro­
duced himself here and found fault with the wav that you are
questioning, Mr. Gray, that, first, there are no galleries here, and
second, it is not his turn to butt in. He will be called as a witness
later.
Mr. G r a y . I am not going to call him, Mr. Chairman; I do not
need him.
Senator G old sb orou g h . He is only permitted to sit there, Mr.
Chairman, through courtesy, and he has no right to attempt to
prompt the witness, anyhow. I am quite sure Mr. Ryan is able
to take care of himself.
The C h a ir m a n . I suggest that you put him on the stand and ask
him some questions.
Mr. K elley . I will be very glad to answer them, Mr. Chairman.
The C h a ir m a n . Unless the counsel for the committee thinks it
entirely unnecessary, you will certainly be given a chance to tell
about this great company o f yours.
Mr. G r a y . I think that is all from Mr. Ryan. I f Mr. Ryan wants
to make any statement I will be very glad to have him make it.




806

STOCK EXCHANGE PRACTICES

The C h a ir m a n . I want to ask a few questions of Mr. Ryan before
he leaves, partly for my own information.
The total stock outstanding of Anaconda is what?
Mr. R y a n . About 9,000,000 shares.
The C h a ir m a n . Was that the amount outstanding when it hit the
peak in prices?
Mr. R y a n . Yes. The exchanges were all made by October, 1929,
and that was about the time of the peak in prices.
The C h a ir m a n . That peak was around $175 a share?
Mr. R y a n . I do not know what the peak was, but I think it was
small in February, 1929. These exchanges were not all made at that
time. But subsequent to that time, subsequent to the time o f the
peak, there was an offer of two shares of new stock of Anaconda
for every five shares outstanding at $55. That automatically re­
duced the price of Anaconda in the market. Let us say, for instance,
that Anaconda was selling at $120 a share and they offered two new
shares at $40. For every five shares of Anaconda at $120 you got
five shares of Anaconda and two shares at $55, which would make—
what would that be, Mr. Kelley?
Mr. K elley . I have n ot been fo llo w in g you .
Mr. R y a n . The rights at the price then prevailing were worth
about $30 a share; so that automatically reduced the price o f the
stock.
The C h a ir m a n . But that has no bearing on the fact that the
total issue had a selling value of around $175 ?
Mr. R y a n . No, sir. In somebody’s testimony yesterday, or in
Mr. Gray’s question, that point was overlooked, that the rights came
off at that time.
The C h a ir m a n . But the total selling value of Anaconda stock was
9,000,000 times 175?
Mr. R y a n . What is that? No, no. There were only 3,800,000
outstanding. These exchanges were not made at that time.
The C h a ir m a n . So it was 3,800,000 times the peak of the market?
Mr. R y a n . Something like that.
The C h a ir m a n . What percentage of your stock is held by the
public ?
Mr. R y a n . There are over 100,000 shareholders o f Anaconda, so
the average is about 90 shares per person. So we say it is all held
by the public. I can say, I suppose, though, that as far as I learn
from the records, I am the largest holder of Anaconda stock and have
been all during this period that we are talking about. I still am the
largest holder of the stock.
The C h a ir m a n . At the peak you owned what percentage durin**
the period of 1929? About what percentage of the company*
°
Mr. R y a n . I do not know. I have not figured it up in percentage.
The C h a ir m a n . A very small percent %
Mr. R y a n . Yes, naturally; but still the largest individual holding
m the company.
6
The C h a ir m a n . When did the sharp rise in the copper market take
P18.C6 f

SnT* 5 |
yan* ^ r*
we are gating into things that-----The C h a ir m a n . Oh, well, we don’t need a long discussion. I iust
want to get a few facts.
JUS)l




STOCK EXCHANGE PRACTICES

807

Mr. R y a n . I just want to give you a little history about that, be­
cause just a straight answer to that question-----The C h a ir m a n . Y ou can answer it. I sim p ly asked y o u w hat
time the sharp advance in cop p er to o k place.
Mr. R y a n . D o you mind if I give you some figures here? They
are very brief.
The C h a ir m a n . No; but the attorney said it took you an hour to
explain it to him. We haven’t an hour this morning. We want to
take what answers we can get in a much shorter time than that.
Mr. R y a n . The average price of copper by 5-year periods since
the formation of the Anaconda Co. in 1895 was 15.555 cents per
pound. That is the average for 35 years by 5-year periods. In
1928, early in 1928,1 think, the price was about at that average. In
October of 1928 the Export Association of which the Anaconda Co.
is a member warned the buyers when copper went above 16 cents a
pound that they were putting up the market on themselves and doing
everybody harm. That warning was repeated a month or so later.
The C h a ir m a n . That warning was done how and by whom and
when?
Mr. R y a n . By the Copper Exporters (Inc.), an association formed
under the Webb-Pomerene Act, of which all of the copper producers
are members. They handle all the foreign sales of practically all
the American producers.
The C h a ir m a n . American copper, then, was sold in a foreign land
by one concern ?
Mr. R y a n . Yes.
The C h a ir m a n . And that one concern indicated that they thought
the price was getting too high ?
Mir. R y a n . Issued a public warning, published in every financial
paper in the world, that there was plenty of copper and there was no
need of buyers being panicky; that at 16 cents a pound enough cop­
per would be brought out to take care of the needs. But despite
that fact the price got out of control and went as high as 24 cents
a pound, at which time the Anaconda Co. had sold six months’ pro­
duction, six months ahead, and three months of that production was
still in the ground and we had sold it in trying to stop the price
from advancing to the high level.
The C h a ir m a n . What was the result of the increase in other
lands? There were other copper properties opened up in other
places, were there not?
Mr. R y a n . I would not say as the result of the advance in price
at that time. These developments in other countries had been going
on for several years, and they would have taken place anyhow,
whether the price went as high as it did or not.
The C h a ir m a n . What is the cost of producing copper in other
countries as compared with the cost of the Anaconda?
Mr. R y a n . I don’t think you can state a comparative cost.
The C h a ir m a n . I s it h igh er o r low er?
Mr. R y a n . Anaconda has mines in other countries as well as in
the United States.
The C h a ir m a n . I mean the Anaconda properties in the United
States.
. . .
Mr. R y a n . The cost o f the Anaconda properties in other countries
is lower than it is in its mines in the United States.



80 8

STOCK EXCHANGE PRACTICES

The C h a ir m a n . What would be the approximate cost of produc­
ing copper in the Anaconda properties in the United States, per
pound ?
Mr. R y a n . I have not the costs before me, Senator. I d id n o t exect to testify as to the costs and those th ings, and I have n o t the

Egures here b efore me.

The C h a ir m a n . But it is much lower in foreign lands?
Mr. R y a n . It is lower; yes. Anaconda produces about half its
copper in the United States; I mean on the basis of normal produc­
tion.
The C h a i r m a n . In your Montana properties, how does the produc­
tion compare with that at normal times?
M r. R y a n . T h e p rod u ction in all o f ou r p rop erties, w herever situ­
ated, ju st now is 20 per cent o f the norm al.
The C h a ir m a n . The properties are operating on a 20 p e r cent

basis?
Mr. R y a n . On a 20 per cent basis; yes.
Mr. G r a y . There is one other question, Mr. Ryan. In the m atter
of buying and selling on these various accounts did you issue the
orders or did you give to your brokers any discretion ?
M r. R y a n . I d o n ot k n ow w hat I d id abou t that. I can not recall
and g o back w hether I gave discretion or w hether I d id not. I issued
orders over the telephone, bu t I can n ot recall at this tim e just what
k in d o f orders were issued.
Mr. G ray . In other words, you may have fixed prices sometimes,

and at other times you may have permitted the broker to use his
discretion?
M r. R y a n . I can n ot s a y ; I can not recall that.
M r. G ray . That is all I want to ask.
(Witness excused.)
TESTIMONY OF JAMES A. FAYNE, MEMBER OF THE FIRM OF
HORNBLOWER & WEEKS, NEW YORK, N. Y.
(The witness was duly sworn bv the chairman.)
Mr. G r ay . W ill you give your full name, Mr. Fayne, please?
Mr. F a y n e . James A. Fayne.
M r. G ray . W h ere d o you reside, please?
Mr. F a y n e . Rye, Westchester County, N. Y.
Mr. G r a y . Y ou are a member of the brokerage firm of Hornblower

& Weeks?
Mr. F a y n e . Yes.
Mr. G r a y . And that firm is a member o f the New York Stock
Exchange?
Mr. F a y n e . Yes.
Mr. G ray . It is a fact that a great many of the transactions in
which Mr. Ryan was interested, either for himself or himself and the
National City and others, were handled through your firm. Is that
right ?
M r. F a y n e . I on ly know h is ow n transactions. A ll of th e tran s­
actions were considered to be his.
Mr. G ray . That is to say, you yourself as a member o f the firm of

Hornblower & Weeks did not know there was anyone else interested
in the accounts that he was buying and selling in s



STOCK EXCHANGE PRACTICES

809

Mr. F a y n e . No; we simply knew him to be accountable and re­
sponsible for the accounts.
M r. G ray . Y ou have had an account that was known as the Greene
account, with your company. I am speaking now of the year 1929,
in the spring. Do you recall that account ?
Mr. F a yn e . Well, not from personal recollection. I do because
your examiner, Mr. Benton, refreshed my memory on it two days
ago.
Mr. G ray . That was Mr. Ryan’s account?
Mr. F a y n e . I considered they were all Mr. Ryan’s accounts.
Mr. G r ay . Y ou had an account that was known as the Greene
No. 55?
Mr. F a y n e . Yes, sir.
Mr. G r ay . Both of those accounts dealt in copper stocks alone;
is not that true?
Mr. F a y n e . Oh, yes; always in copper stocks alone.
Mr. G r a y . I direct your attention to the fact that on March 20,
1929, there were certain transactions that took place in the account
that was known as Greene 55. I am showing you a photostatic copy
of the transcript of this account taken from the books of Hornblower
& Weeks. As a matter of fact, it is not true that the order in which
the items appear on the books is the order in which the transactions
took place, is it?
Mr. F a y n e . It is seldom true. It may be.
Mr. G r a y . In other words, it may be that an order that is entered
first on that date may have been nearly the last transaction; is not
that true?
Mr. F a y n e . Yes. It depends upon when the tickets come into the
office.
M r. G r a y . A s a m atter o f fa c t, d o y o u recall th e range o f the
stock o n that d ay?
Mr. F a y n e . May I say I have refreshed my memory through Mr.

Benton?
Mr. G r a y . I am very glad that you have. What was the range?
Mr. F a y n e . From about 188 to about 196.
Mr. G r a y . Please keep your voice up. From about 188 to about
196?
Mr. F a y n e . Yes, sir.
M r. G r a y . A s a m atter o f fa ct, b efore 2 o ’clo ck on th at d ay, that
is, betw een the op enin g o f the exchange at 10 o ’clo ck in th e m orn in g
and 2 o ’clo ck in the a ftern oon, there w ere no excessively large trans­
actions in that account, were there ?
M r. F a y n e . N o, sir. I th ink the largest was 800 shares.
Mr. G r a y . And during those hours between 10 and 2 o’clock that
account had stock bought for its account and stock sold for its

count, did it not?
Mr. F a y n e . Yes, sir.
Mr. G r a y . Very active, was it not?
M r. F a y n e . N o ; it was a very active d a y in the m arket.

Mr. G r a y . Speaking generally about this account all tlie way
through-----Mr. F a y n e . It was very active, not exceptionally active.




S10

STOCK EXCHANGE PRACTICES

M r. G ray . T a k in g, f o r instance, the nineteenth, ju st as an illus­
tration— this [in d ica tin g ] is the sold side, is it n ot?
Mr. F a y n e . Yes.
Mr. G r a y . There were sold 400 shares, 1,100 shares, 2,100 shares,

1,600, 600, 2,300 1,200, 500,1,000, 500, 400—that is correct, is it not!
Mr. F a y n e . Yes.
Mr. G r ay . And on the same day there were bought 100, 500, 300,
500, 600, and so forth ?
Mr. F a y n e . Yes.
Mr. G r a y . And on the 19th, as a matter of fact, the range of the
market was such that the opening was low and the prices rose steadily
throughout the day until the close of the market ?
Mr. F a y n e . Was it lower than the previous close?
Mr. G r a y . I can not answer you that question, whether it was
lower than the previous close; but, as a matter of fact, the market
through the day steadily rose ?
Mr. F a y n e . Yes; that is correct.
Mr. G r a y . And the sales range from 200,100,2,500, 2,400,500, 500,
1,100, 500, 300,100, 500—down to the point that I have read; that is
correct, is it not?
Mr. F a y n e . Yes.
Mr. G r a y . Also there appear tw o items, one sale o f 10,000 a n d one
•of 25,000.
I will finish, Mr. Chairman, in about two minutes on this matter.
That represents what—a sale of stock out of that account?
Mr. F a y n e . Yes, sir.
M r. G r a y . A sale o f 35,000 shares, does it n o t?
Mr. F a y n e . That is right.
Mr. G r a y . I direct your attention to the fact that on the same d a y
in this other account of Mr. Ryan’s appears the purchase of 35,000
shares—does it not ?
Mr. F a y n e . Yes, sir.
Mr. G ray . A n d at the same price ?
Mr. F a y n e . Yes, sir.
Mr. G r a y . An unusually large quantity, was it not?
Mr. F a y n e . Exceptionally large.
Mr. G r a y . Yes.
Mr. F a y n e . Extraordinary.
Mr. G r a y . And just at present, Mr. Fayne, I do not want you to
stop, for an explanation, but I will give you an opportunity to main*
it. That resulted from your giving one broker an order to sell 35,000
shares and another broker to buy 35,000 shares, did it not?
Mr. F a y n e . No, sir.
Mr. G r a y . All right; we will leave it for a moment. As a result
o f that transaction, that stock jumped from 192 to 196 that afternoon
and you stepped in and sold at tnese advanced prices a very large
quantity of stock, did you not?
6
Mr. 1F'a y n e . Yes, sir.
G r a y . Do you mean to tell me that that buying and selling at
192 was not a pure wash sale which had the effect of putting the
market up some four or five points thereafter?
Mr. F a y n e . Precisely.
Mr. G ray . It was not?




STOCK EXCHANGE PRACTICES

811

Mr. F a y n e . Precisely; I mean to say precisely it was not a wash
sale.
Mr. G r a y . All right; you can make any explanation you want
about it.
Mr. F a y n e . Now?
Mr. G r a y . Yes; certainly.
Mr. F a y n e . The purchase order was entered in a purely routine
way. An order was given to a member of the stock exchange to buy
at 1921^ or better all the Greene-Cananea that was offered
immediately.
Mr. G ray . That was called an immediate unlimited order ?
Mr. F a y n e . It was called immediate.
Mr. G r a y . And an unlimited order?
Mr. F a y n e . It is not unlimited, Mr. Gray. It would be unlimited
as to an amount, but not as to time.
Mr. G r a y . G o ahead.
Mr. F a y n e . He misinterpreted that as a G. T. C. order.
Mr. G r a y . That is good till cancelled order?
Mr. F a y n e . That is a good till cancelled order.
Mr. G r a y . Yes.
Mr. F a y n e . In the ordinary procedure it would take in that par­
ticular stock on that day not more than three minutes and probably
with a good execution two and a half minutes to get a report back
to our office, back to me. No report came, and after the lapse of three
minutes, assuming that nothing extraordinary had occurred and that
a normal transaction had taken place, that we had bought maybe six
or eight hundred shares, but certainly not more than a thousand
shares, I gave another broker an order to sell all the stock he could at
192 or better.
Mr. G r a y . Let us stop right there. Irrespective of what else you
did, you gave one broker an order to buy all the stock he could at
192^ or whatever it is or better, and another broker an order to sell
all the stock he could at that same price?
Mr. F a y n e . Not at the same time.
M r. G r a y . But in three minutes of each other?
Mr. F a y n e . There is a half point limit difference.
Mr. G r a y . A half a point limit difference, all right; but within
three minutes of each other?
Mr. F a y n e . Yes, sir.
Mr. G r a y . And the largest sale on that day was something like 800
shares, and this order was 35,000 or all he could buy or sell ?
Mr. F a y n e . And so had every other order entered th a t day, all
that h e could buy or sell.
Mr. G r a y . Y ou had discretion in this m atter, d id y o u n o t?
Mr. F a y n e . Absolute discretion, especially when Mr. Ryan was not
available.
.
Mr. G r a y . In other w ords, i t perm itted you to g o in and b u y aU
the A iia co n d a stock you w anted to and sell all y o u w anted to , in your

discretion ?
Mr. F a y n e . I had absolute discretion; yes.
,
Mr. G r a y . Or Greene-Cananea in this case. But as a matter ox
feet, that was also true with respect to Chile and Anaconda, was
it not)




£12

STOCK EXCHANGE PBACTICES

M r. F a y n e . Yes, sir; with respect to numerous other stocks.
M r. G b ay . Y o u k ept y ou r m arket rig h t w here you w an ted it ?
M r. F a y n e . It stabilized the market. That was my jo b .
Mr. G r ay . That can be done that way, can it not, very easily ?
Mr. F a y n e . Stabilize it.
Mr. G ray . Stabilize it, you kept putting it down and putting it up

and keeping it down and keeping it up whenever you wanted—it
is an easy thing to do when you know how.
Mr. F a y n e . No.
# .
Mr. G ray . Well, we have had a lot of traders that tell us that it is.
Mr. F a y n e . I know; I have read a lot of testimony to that effect,
but I do not think it is correct.
Mr. G ray . What happened? Here you have two orders outstand­
ing with two brokers. What happened?
M r , F a y n e . The brokers who had the sell order came to us on the
phone and said, “ We have sold over 10,000 shares. Is it all right?
We said, “ N o; cancel the order immediately.”
We immediately got in touch with our broker and told him what
happened, and then and there for the first time found that he had
misinterpreted our order, as you say, as unlimited, so far as the
amount was concerned and time, and stood there bidding for stock;
the sell broker got in there and filled bis bids.
Mr. G ray . With the result that one of your brokers that you had
an order to sell with sold 35,000 shares to the broker that you gave
an order to buy ?
Mr. F a y n e . But neither broker had any idea that I intended-----Mr. G ray (interposing). I don’t care whether he had any idea
or not.
Mr. F a y n e . With that result.
Mr. G ray . That is what happened. When it happened what did
you do thereafter? That twenty-five or thirty-five thousand shares
went to this Greene 25 account-----Senator G oldsborough. Fifty-five account.
Mr. G r ay . Fifty-five account. With these 25’s and 35’s and 55’s,
I have to keep my tongue wagging to keep them straight.
Then what was the next step that was done with it as far as these
accounts are concerned?
M r. P a y n e . Y ou m ean w hat d id I d o o r w h at h ap p en ed in the
accounts?
Mr. G ray . What happened in the accounts?
Mr. F a y n e . I do not handle the accounts. I did not handle the

entry o f the transactions.
M r. G ray . Let us see what happened in that account.
Mr. F a y n e . May I tell you what I did ?
Mr. G r ay . Yes ; you tell us what you d id .
Mr. F a y n e . I immediately tried to get in touch with Mr. Byan
and found he was not in the office. By this time every broker on the
floor had noticed the extraordinarily large transactions on the tape.
Mr. G ray . A lot o f traders got fooled and stepped in, didn’t they?
Mr. F a y n e . Floor traders are always attracted to a stock by an
unusual volume on the tape, and this was a very unusual volume.
Immediately word came to me from the floor that all sorts of stock
was wanted and it had gone from 192 or 192y2, and I then took it



STOCK EXCHANGE PRACTICES

813

upon myself, without being able to get in touch with Mr. Ryan, to
immediately keep that stock from going through the roof by selling
all the stock I could upon my own authority.
Mr. G ray . Whether it was done to keep it from going through the
roof or not, it went to 196 and something, did it not ?
Mr. F a y n e . Yes.
Mr. G ray . And you disposed of it at the advanced price, a great
deal of the stocks that were in this account; that is correct, is it not ?
Mr. F a y n e . All that they would take from me on a scale up.
Mr. G r a y . Do you know how much stock you sold on either or
both of these accounts after that transaction of 35,000 shares ?
Mr. F a y n e . No. Mr. Benton showed me the other day that 2,700
shares was sold the next day. Therefore, I assume everything else
must have been sold the first day.
Mr. G r a y . In other words, you cleaned the account out ?
Mr. F a y n e . That is what the record shows. I have no present
recollection. You have those records.
Mr. G r a y . How much did you have in it to clean out?
Mr. F a y n e . That I do not recall. I knew, of course, because I
always had in front of me a memorandum furnished by my book­
keepers every morning.
Mr. G r a y . Did you know that the books of these two accounts
showed that as of the same date, the entry being made the next date
because deliveries are not made until the next date,‘that that 35,000
shares was switched back again to the other account that sold it ?
Mr. F a y n e . I must have known it, because-----Mr. G r a y (interposing). It did happen, didn’t it ?
Mr. F a y n e . Yes; it did happen.
Mr. G r a y . S o whether it was a mistake or not and whether it was
intentional or not, Mr. Fayne—and I am not discussing that part of
it; I want to show what was done and what can be done in a situation
of this kind—the fact is that at 2 o’clock in the afternoon one broker
got an order to buy at a price 35,000 or an unlimited quantity of
shares, and at a point within a half a point of that another broker
got an order to sell 35,000 or an unlimited quantity; that as a result
of that transaction going through people were attracted to the stock,
the stock, notwithstanding the fact that you say you were trying to
keep it down, jumped four and a fraction points, thus giving you
the opportunity to dispose of all of the stock belonging to Mr. Ryan
and his friends at an advanced figure and you got rid of all of it
that day except 2,700 shares, which you disposed of the next morn­
ing ? That is the situation.
Mr. F a y n e . I f you will let me say “ compelling ” me to get rid of
it, I will agree with you.
Mr. G r a y . Let you say what?
Mr. F a y n e . Compelling; not enabling. I had to get rid of it to
try to stabilize the market, Mr. Gray. You remember GreeneCananea was a volatile stock. It went up because there was a very
small number of shares outstanding. It went up, for instance, on
the previous transactions from its opening under 188 to 192 on normal
transactions.
Mr. G r a y . Well, of course, if you were endeavoring to keep the
price o f the stock stable and stop it from going through the roof, as



814

STOCK EXCHANGE PRACTICES

you said, no matter what your motive was, whether it was that or
the taking of the profit, what you did do was to get the profit?
Mr. F a y n e . Yes; but I had no idea that m y principal w a s goin g
to close the account. In fact, I think it was closed because o f this
transaction.
Mr. G r a y . Y ou did that as a part of your discretion, did you not?
Mr. F a y n e . Yes; but I mean that did not necessarily close the
account. It was the result of the trading that went on.
Mr. G r a y . O f course, you could; but you did not.
Now, another question: This transaction carried with it, of neces­
sity, brokers’ charges and commissions, did it not?
Mr. F a y n e . Yes, sir.
Mr. G r a y . In other words, it carried through with it an expense.
Do you know what it amounted to ?
Mr. F a y n e . Just on the volume and the stated commission it must
have been around seventeen to eighteen thousand dollars.
Mr. G r a y . Yes.
M r. F a y n e . Commissions and taxes.
M r. G r a y . N ow , y o u say th a t i t was you r m istake?

Mr. F a y n e . No; I do not. I beg your pardon. I say it w as the
floor broker’s mistake to whom I gave the order.
Mr. G ray . The floor broker was acting for you?
Mr. F a y n e . That is right.
Mr. G r a y . Arid in the ordinary handling of stock exchange m at­
ters, if a mistake of that kind would happen the brokerage house
who were exercising the discretion and whose agents on the floor
made the mistake, would stand the loss, would they not?
Mr. F a y n e . Yes, sir.
Mr. G r a y . In th is instance you r books sh ow th at it w as ch a rged
against one of these accounts. I f this was n o t done d eliberately in
con nection w ith these tw o accounts and it was a m istake, w h y d id n ’t
H orn b low er & Weeks stand that expense ?
Mr. F a y n e . Because our principal would not permit us to .
Mr. G r a y . Would not permit you to?
Mr. F a y n e . I went to Mr. Ryan after 3 o’clock and told him it

was because of the mistake of the broker which had the order. Mr.
Ryan would not do it. He is that kind o f a customer.
M r. G r a y . A n d he w ou ld n ot let y ou stand f o r it?
M r. F a y n e . N o, sir.
Mr. G r a y . I submit this to the committee because, whether i t was

a real transaction, done intentionally? or whether it was a miHtnlrftn
transaction done as Mr. Fayne says, it shows what can be done and
what results follow when they are permitted to handle transactions
this way.
The C h a ir m a n . In other words, it had the effect of a wash sale.
Mr. G r a y . It is a plain wash sale on the record.
Mr. F a y n e . Yes; it had the effects of it, but it was not a wash sale.
Mr. G r a y . Mr. Chairman, that is all I have to-day.
The C h a ir m a n . The committee will recess until the call o f the
chairman. Thank you, Mr. Fayne.
(Whereupon, at 11.30 o’clock a. m., the committee adjourned,
to meet again upon the call of the chairman.)




STOCK EXCHANGE PRACTICES
FRIDAY, JUNE 10, 1932

C om m itte e

U nited S tates S e n a te ,
B a n k in g and C urren cy ,

on

Washington, D. G.
The committee met at 2.30 o’clock p. m., pursuant to call, in the
hearing room of the Committee on Interstate Commerce, the Capitol,
Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Townsend,
Walcott, Blaine, Watson, Couzens, Fletcher, and Gore.
Present also: Hon. William J. Morgan, former attorney general
of the State of Wisconsin.
The C h a ir m a n . The committee "will come to order. This meet­
ing was called to hear Mr. Ernest W. Stirn, of Chicago. He is un­
like any other witness who has been here; he is not an unwilling
witness. He is here to help the committee get started on what seems
to be an important matter. He and his attorney have done a lot
of work on this. This is one of the cases that come to us very com­
plete without expense of investigation on the part of the committee.
He is appeariiig with Mr. William J. Morgan, former attorney
general of the State of Wisconsin, and I was thinking that, to ex­
pedite the matter, we might first have a statement by Mr. Morgan
touching the high spots of the case as to what they expect to prove;
and if there are no objections on the part of the committee, we will
let Mr. Morgan take charge of the case, due to the fact that the com­
mittee has not its own counsel here, and subject, of course, to such
limitations as the committee may from time to time impose. I f
there is no objection, we will proceed that way.
Senator T ownsend . With the thought, of course, of throwing some
light on the matter?
The C h a ir m a n . Yes; it is a stock-market matter.
Senator B l a in e . From the standpoint of the man who got
^ E E e C h a ir m a n . From the stan d poin t o f a m an w h o to o k advice
and lost m oney.
Senator F letcher . In other words, based on experience.
Senator B l a in e . Based on experience.
The C h a ir m a n . Mr. Morgan, w ill you open up with a brief state­

ment of what you expect to prove ?
STATEMENT OF HON. WILLIAM J. MORGAN, FORMER ATTORNEY
GENERAL OF THE STATE OF WISCONSIN
Mr. M organ . Mr. Chairman and gentlemen of the committee, I
am not the man who got gypped and lost the money, as my father
told me when I was a little boy never to play at the other fellow’s
game.



815

816

STOCK EXCHANGE PRACTICES

The case that Mr. Stirn, who is an analyst connected with the
University of Chicago, graduate department, has made a special
study of, is the short selling of Radio-Keith-Orpheum Corporation
stock, coincident with a plan that had been devised in the minds
of the officers and directors of that corporation to reorganize it,
and the net result of which was that the Radio Corporation of
America acquired the Radio-Keith-Orpheum Corporation for the
sum of $11,500,000, although the assets of Radio-Keith-Orpheum
Corporation then, on their own statement, showed $127,000,000, of
which $67,000,000 were clear assets above their liabilities. In other
words, they got a right in the Radio-Keith-Orpheum Corporation
worth $67,000,000 for $11,500,000.
Now, at the time that we are concerned with Radio-Keith-Orpheum
wras a Maryland corporation with an authorized capital o f four and
one-half million shares of stock, of which 4,000,000 were class A
stock, and 500,000, held by the Radio Corporation of America, were
class B shares, both nonpar value stock.
The dates are very significant. On the 22d of October, 1931,
there was begun upon Radio-Keith-Orpheum stock a concerted, con­
sistent short selling drive.
Senator C ouzens . By whom?
Mr. M organ . The specialist who handled that stock on the New
York Stock Exchange was Mr. Meehan; Mr. Michael J. Meehan.
Senator T ow nsend . Mr. Chairman, without any wrong implica­
tion, I wish to say that all our other witnesses have been put under
oath.
The C h a ir m a n . We are going to put the witness under oath; and
if the committee thinks proper I will put the attorney under oath.
He is only telling what he expects to prove.
Senator T o w n s e n d . I think anything that is put on the record
should go on under oath.
Senator B l a in e . Mr. Morgan is not stating facts, but w h a t he
expects the witness to testify to.
Senator T ow nsend . That is going on the record.
Senator B l a in e . Mr. Morgan will not object to being sworn.
Mr. M organ . As an attorney, you understand, I derived these facts
and figures that I took from the papers of Mr. Hiram S. Brown,
who is president of Radio-Keith-Orpheum Corporation.
Senator F letcher . It is unusual to put an attorney under oath
wlio is making a statement of what he expects to prove.
Senator T ow nsend . I do not press the matter.
Mr. M organ . I do not object to being sworn.
The C h a ir m a n . Y ou may proceed, then. As I understand, then,
you are willing to be sworn, although you consider it an unusual
procedure?
M r. M organ . Oh, certainly. I am not testifying. I am here to
tell you what M r. Stirn is going to testify to.
The C h a ir m a n . Just a bird’s-eye view of the testimony?
M r. M organ . Yes; just to give you an idea so that you can follow
his testimony. I only want to be helpful to the committee.
On November 5, 1931, a meeting of the officers and directors of
Radio-Keith-Orpheum Corporation was held. Now, at that time
under the laws of Maryland, and under the charter of this corpora­




817

STOCK EXCHANGE PRACTICES

tion, it had no specific power to decrease its capital stock. Never­
theless. at that meeting, according to a letter sent to its stockholders
on ^November 10,1931, by Hiram S. Brown, president of the RadioKeith-Orpheum Corporation, he stated that Radio-Keith-Orpheum
Corporation finds itself faced with an emergency which requires
prompt action by stockholders if a receivership is to be avoided, and
stated that the directors had approved and recommended to the stock­
holders an amendment of the charter in the following particulars:
1. The number of shares of class A stock outstanding will be
reduced to one-fourth of the amount now outstanding, so that each
stockholder will hold one-fourth of the number of shares now held,
and there will be outstanding (excluding treasury shares) approxi­
mately 580,000 shares.
2. All stock, issued and unissued, will be reclassified into common
stock, the class B stock being surrendered as hereinafter stated.
3. $11,600,000, principal amount, of 10-year 6 per cent debentures,
and 1,740,000 shares o f common stock will be offered for subscrip­
tion to stockholders at an aggregate price of $11,600,000 plus accrued
interest on the debentures. Each present holder of one share of
class A stock will be entitled to purchase, for $5 plus accrued interest
on the debentures, $5 principal and amount of debentures and threefourths share of common stock.
Senator F letcher . You are going to put that into the record , I
take it, that whole letter?
Mr. M organ . Yes. I am reading from the letter.
The C h a ir m a n . Y ou m ay read the w h ole letter into the record ,
or just read part o f it and have it all p rin ted, i f y o u like.
Mr. M organ . Shall I g o back and give his reasons ?
The C h a ir m a n . The whole point is, we are trying to determine

whether this should go into the record, and whether you shall read
it into the record, or offer it for the record. The usual practice is
that you read a part of it, if you wish, and comment upon it, and
then offer it after that.
Mr. M organ . I have read a part.
The C h a ir m a n . Y ou may read it and comment on it and then
offer it. It may go in.
(The letter of Nov. 10, 1931, is printed in the record in full as
follows:)
R a d io - K e i t h -O r p h e u m

C o r p o r a t io n ,

New York, N. Y., N ovem ber 10, 1931.
To the Stockholders:
Radio-Keith-Orpheum Corporation finds itself faced with an emergency which
requires prompt action by stockholders i f a receivership is to be avoided. This
emergency results, in large measure, from the abnormal financial and credit
situation, w hich prevents the raising o f funds through usual means.
Last M ay it appeared that the corporation would require, in addition to
available funds, $6,000,000 to finance the 1931-32 production program s o f its
two picture producing subsidiaries. The management, with the assistance o f
toembers o f the executive committee, endeavored to procure the money by bank
loans, but only $1,700,000 was obtained. The corporation w as obliged, there­
fore, to raise additional funds otherwise and a loan netting the corporation
$5,670,000 (w ith the requirement that the above bank loans o f $1,700,000 be
repaid im mediately from the proceeds thereof) was effected as o f July 1,
1931, through the sale o f $6,000,000 o f secured gold notes o f the corporation,
Payable $3,000,000 during the first six months o f 1932 and the remaining
$3,000,000 July 1, 1933. The corporation w as required to pledge or hold avail­




818

STOCK EXCHANGE PRACTICES

able for pledge under the indenture securing such loan substantially all o f .its
free assets and is therefore without property now available as collateral.
At the time the above loan was made a detailed budget of estimated income
and disbursements of the corporation and its subsidiaries for the 12 months
commencing May 1, 1931, was prepared. The estimate of receipts in this
budget was considered by the management to be conservative. T h e budget
indicated a surplus of receipts over disbursements to an extent sufficient to
enable the corporation to meet the maturities under the above loan an d have
sufficient funds for carrying on operations. At the end of each month up to
September 1, the cash balance on hand exceeded the estimated cash balance as
set forth in the budget, but during the latter part of August and throughout
September and October, there was an unexpected and unprecedented decline in
gross receipts reflecting the effect of adverse developments in the financial
and business situation. Estimates of income of the corporation, revised in
view of the decline in receipts during recent weeks, indicated that the corpora­
tion must procure at least $4,000,000 to meet requirements to and including
January 1, 1982, $1,000,000 of which was required early in November and
must also provide additional funds to take care of certain estimated future
requirements, including maturing debt.
During October the management was engaged in constant negotiations to
procure the required amount, but due to the unfavorable financial situation the
corporation was unable to raise funds for its requirements. It is clear that
unless these funds can be provided, receivership is inevitable, with the conse­
quent disorganization and injury to business of the corporation, which would
be disastrous for stockholders. Accordingly, to cover the immediate require­
ments and the estimated future requirements above referred to, the following
plan has been devised and is submitted to stockholders:
1. The number of shares of Class A stock outstanding, will be reduced to
one-fourth of the amount now outstanding, so that each stockholder will hold
one-fourth of the number of shares now held, and there will be outstanding
(excluding treasury shares) approximately 580,000 shares.
2. All stock, issued and unissued, will be reclassified into common stock, the
Class B stock being surrendered as hereinafter stated.
3. Eleven million six hundred thousand dollars, principal amount, of 1 0 - y e a r
6 per cent debentures and 1,740,000 shares of common stock will be offered for
subscription to stockholders at an aggregate price of $11,600,000 plus- accrued
interest on the debentures. Each present holder of one share o f Class A stock
will be entitled to purchase, for $5 plus accrued interest on the debentures, $5
principal amount of debentures and three-fourths share of common stock.
4. Of the purchase price of these securities, 50 per cent will be payable at
the time of subscription, and the remainder (with interest at the rate of 6
per cent per annum) in one or more installments, when called, on 30 days’
notice, or earlier at the option of the purchasers.
5. Purchasers will receive an appropriate transferable certificate entitling
them (if full payment has been made) to receive, after three years, or eaiiier
at the option of the corporation, debentures, and certificates for common stock.
In the meantime, holders of certificates will be entitled to vote on the common
stock represented by certificates, and to receive interest paid on the debentures
and any dividends declared on the common stock.
If this plan is carried out, the result will be that a stockholder who exercises
his subscription rights will own (for each share of Class A stock now owned)
(a) one-quarter share of common stock and (b) a certificate representing $5
principal amount of debentures and three-quarters of a share o f common stock.
A stockholder who transfers his subscription rights or fails to exercise them will
own one-quarter share of common stock for each share of Class A stock now
owned.
Badio Corporation of America, which owned or controls all outstanding Glass
B stock and a substantial amount of Class A stock, has agreed in order to assist
the corporation, (a) to purchase, on the same terms, such of the debentures and
common stock offered to stockholders as are not subscribed for by stockholders
or their assignees, (b) to surrender for cancellation 500,000 shares o f Class B
stock (which is convertible into 500,000 shares of Class A stock when earnings
per share have been certain specified amounts), and (c) to waive its rights (in
respect of the Class B stock) to purchase any of the new securities. In addi­
tion, Radio Corporation of America has advanced to the corporation, at 6 per
coat interest, $1,000,000 to meet immediate requirements, and has agreed to




819

STOCK EXCHANGE PRACTICES

advance an additional $1,000,000 if required before the plan can be carried out.
No compensation is to be paid to Radio Corporation of America for its under­
writing or for its advances except that 125,000 shares of common stock are to be
delivered to Radio Corporation of America upon the surrender of the 500,000
shares of Class B stock. Radio Corporation of America is not underwriting the
payment of deferred instalments of the purchase price by subscribing stock­
holders. The holders of the $6,000,000 of Secured Gold Notes above mentioned
have agreed, if the plan is carried out, to extend their notes so that $100,000
will mature on the first of each month in 1932, $200,000 on the first of each
month in 1933, $300,000 on the first of each month (to and including June) in
1034, and $600,000 on July 1, 1934.
Substantial economies have been and are being effected, and the management
believes that, unless gross receipts decline to a point below anything which even
under present conditions can reasonably be anticipated, this financing should
enable the corporation to go through the period of depression, and place it in a
Position to take advantage of better conditions.
The board of directors has approved the plan, subject to the necessary action
of stockholders, and has called a meeting of stockholders for December 10, 1931.
There are attached hereto (a) a formal notice of such meeting, (b) a more
detailed statement of the offer to stockholders and of the terms of the new
debentures, and (c) comparative consolidated balance sheets as of January 1,
1929, and September 30, 1931, and consolidated profit and loss statements for
1929, 1930, and the nine months ended September 30, 1931. A proxy to be exe­
cuted by stockholders who do not expect to attend the meeting is inclosed.
A stockholder who votes in favor of the amendments does not obligate himself
to exercise his subscription rights. Since the affirmative vote of holders of
two-thirds of the Class A stock is required, and since the plan must be carried
out before January ! , 1932, stockholders who do not expect to attend the meeting
are urged, for the protection of their investment, to execute and mail proxies
Promptly, whether or not they desire to exercise their subscription rights.
By order of the board of directors,
H ir a m S. B b o w n , President.
Sadio-Keith-Orpheum corporation and subsidiary companies—Comparative con­
solidated 'balance sheets as of September SO, 19S1, and January I, 1929 ( the
approximate date of organization of the corporation.)
Sept. 30, 1031

Cash............................................................................................

Notes and accounts receivable.......................................................
Inventories and scenarios— ............................................ . ...........
Capital assets...................................................................................
Investments in and advances to affiliated and other companies.
Other investments and deposits and other assets_____________

Deferred charges......................................................................
T o ta l.

Jan.

1, 1929

$2,017,118.42
1,707,277.60
14,061,783.92
93,682,362.82
4,877,235.31
3,938,816.87
7,140,396.20

$1,589,546.39
974,635.87
2,916,864.04
56,035,481.61
5,467,722.19
2,376,935.15
2,036,514.11

127,414,981.14

71,397,699.36

10,632,069.64
357,281. 80
6,087,306.88
39,679,684.17
3,715,183. 50

5,153,061. 33
859, 581.18
I,339,000.00
22,116,370.00
6, 365, 781.97
2,172.61
II,920,900.00
20,301,461.00
3, 339, 368.27

L IA BILITIES

Notes and accounts payable, and debentures (current)..................

Deposits payable.................... - ......... ........... .....................................
Notes payable and debentures (deferred).............................. .........
Funded d e b t...................... - ..................... ......................................
Reserves for rehabilitation of properties, taxes and contingencies.
fnter&t of minority stockholders in subsidiary company..................
Preferred stocks of subsidiary companies.............. ..........................
Capital stock..........................................................- ............... - ..........................
initial surplus.....................................................................................
Earned surplus...................................................................................
T o ta l.

119652— 32— p t 3------- 3




10,289,200.00
46,943,769.84
4,654,670. 26
5,055,815.05
127,414,981.14

71,397,699.36

820

STOCK EXCHANGE PRACTICES

Radio-KeitJirOrpheum corporation and subsidiary companies consolidated state­
ment of prolit and loss for period January 1, 1929 to September 30, 19S1
Year 1930

9 months
ended Sept.
30, 1931

Income................................................................ $61,696,860.78
46,080,872.66
Less expenses...................................................

$71,357,831.0(2
62,474,603.85

$61,253,815.45
56,523,124.98

$184,308,507.25
165,078,601.49

5,615,988.12

8,883,227.17

4,730,690.47

19,229,905.76

Depreciation of capital assets and
amortization of leaseholds------------

2,438,683.81

3,343,069.21

2,938,537.13

8,720,290.15

Add other income...........................................

3,177,304.81
1,564,858.72

5,540,157.96
1,618,433.36

1,792,153.34
1,087,81L «3

10,509,615.61
4,221,104.01

4,742,163.03

7,158,591.32

2,829,965.27

14,730,719.62

66,108.23
1,843,586.65
98,909.56

2,357,520.14
52,861.02

1,988,398-59
316,471.04

66,106.23
6,189,505.38
428,241.62

1,968,604.44
^ 773,558.59

2.410.381.16
4.748.210.16

2,304,869.63
525,095.64

6,683,855.23
8,046,864.89

Year 1929

T otal

^ ^ in v e stm e n ts and advances written
Interest and d isco u n t.........................
Sundry other deductions............. .......

Less:
Provision for Federal income taxes.
N et profit before dividends................
Less:
Dividends paid to public on pre­
ferred stocks of subsidiary comN et profits available for dividends
on class A s to c k ..-------------------—

250,000.00

575,000.00

63,000.00

888,000.00.

2,523,658.59

4,173,210.16

462,005.64

7,158,864.39.

853,994.34

787,581.75

461,473.25

"2,103,049.34

1,609,664.25

3,385,628.41

622.39

5,055,815.05

Mr. M org a n (continuing). Then follows this statement o f Presi­
dent Brown, in this letter, of the agreement:
Radio Corporation of America, which owns or controls all outstanding riaas
B stock and a substantial amount of class A stock, has agreed, in order to
assist the corporation, (a) to purchase, on the same terms, such of the deben­
tures and common stock offered to stockholders as are not subscribed for by
stockholders or their assignees, (6) to surrender for cancellation 500,000
shares of class B stock (which is convertible into 500,000 shares o f rlasg A
stock when earnings per share have been certain specified amounts), and (c)
to waive its rights (in respect of class B stock) to purchase any o f the new
securities. In addition, Radio Corporation of America has advanced to the
corporation, at 6 per cent interest, $1,000,000 to meet immediate requirements,
and has agreed to advance an additional $1,000,000 if required before the
plan can be carried out. No compensation is to be paid to Radio Corporation
of America for its underwriting or for its advances except that 125,000 shares
of common stock are to be delivered to Radio Corporation of America upon
the surrender of the 500,000 shares of class B stock.

That was the plan agreed upon at that meeting o f November 5r
1931. I suggest that no one could have had knowledge o f what was
intended, except the members of the corporation, prior to that
meeting.
On November 10 this letter of President Brown’s, from which I
have been quoting, was sent to the stockholders, and a concerted
short selling drive on the Radio-Keith-Orpheum stock was prac­
tically completed November 12.
Now that is the subject of our inquiry, of which Mr. Stirn will
testify.




STOCK EXCHANGE PRACTICES

821

The C h a i r m a n . D o you understand fr o m that th at those people
Were selling to someone else, or selling to them selves in that sale?
M r . M organ . The net result of this short selling campaign and
these amendments to the charter which were adopted contrary to
law, was that the Radio Corporation of America acquired the as­
sets of Radio-Keith-Orpheum Corporation for $11,500,000, the assets
being worth $67,000,000.
The C h a i r m a n . Were there people that were in both groups?
M r . M organ . Oh, sure.
The C h a i r m a n . Did they sell to themselves, in other words?
M r . M organ . The Radio Corporation of America held 500,000
shares, and they had directors in both corporations. I am not able
to say how many of the directors served on both corporations.
There may have been some that were not on both; they were the
same interests.
Senator B l a in e . The Radio Corporation of America obtained this
interest by paying the assessment of $5?
Mr. M organ . Precisely so.
Senator B l a i n e . They did not call it an assessment; they called
it debentures.
Mr. M or g an . All of the stockholders of whom I have personal
knowledge—and there are many in Wisconsin—did not meet this
assessment. Stripping it of technical language, the term here is that
it amounted to an assessment of nonassessible stock of $5 a share.
The C h a i r m a n . From the understanding we have, indirectly it
was an assessment on the stock.
M r . M or g an . Yes; they tried to beat the devil around the bush and
called it debentures. And those that did not pay the $5 a share had
three-fourths of their stock confiscated. That was purchased by the
Radio Corporation of America.

T he C h a i r m a n . D o you p rop ose to p rove now th at this short sell­
ing was really b y the people themselves that were in con trol o f the
property, and it was driven d ow n f o r the p u rp ose o f sellin g to
themselves ?

Mr. M or g an . Mr. Chairman, the drop in Radio-Keith-Orpheum
stock is the greatest that occurred in any stock listed on the New
York Stock Exchange that is not now in receivership. I know of
none so great.
The C h a i r m a n . You speak of short selling or bear raiding. Was
that at a time that would help to bring about these results that
seemed to have been desired ?
Mr. M o r g an . That seems to be the plan, and we will be glad if you
will subpoena those in control of this corporation so that we may
have them testify to this committee; and we will be glad to follow
it through the clearing house and the respective brokerage houses
who sold the stock and who made the profits.
Senator F l e t c h e r . The result of this operation was to squeeze out
all but a few stockholders ?
Mr. M o r g an . Yes, sir.
Senator F l e t c h e r . And those stockholders were squeezed out?
Mr. M or g an . It was the most drastic squceze-out that I have ever
investigated or made a study of.
The C h a i r m a n . The witness may be sworn.



STOCK EXCHANGE PRACTICES

822

TESTIMONY OF ERNEST W. STIRN, MILWAUKEE, WIS.
The C h a i r m a n . Y ou do solem n ly sw ear th at th e eviden ce you are
about to g iv e on th is m atter w ill be th e tru th , the w h ole t r u t h , and
n oth in g bu t the tru th , so help you God?
Mr. S t ir n . I do.
The C h a i r m a n . N o w , you have your testimony that you intend to
give in writing, haven’t you ?
Mr. S ttrn . Have it in writing; yes.
The C h a i r m a n . And you prefer to read it now, do you ?
Mr. S t ir n . Well, I would like to read a good deal of it and the
rest put in the record.
The C h a i r m a n . Yes; all right. Just make it clear here so we will
know which is which, so the reporter gets the divisions. O f course,
Senators have a right to interrupt you, you understand, and ask
questions; and I suggest that they do not interrupt until you get far
enough along so we know what it is about.
Senator F l e t c h e r . Let us begin with your name and residence and
occupation.
M r. S t ir n . T o identify myself, my name is Mr. Ernest W . Stirn,
research graduate student working for a doctorate in the history
department, University of Chicago.
Mr. M or g an . Mr. Stirn, have you had in mind in making this re­
search a publication as a result?
Mr. S t i r n . The University of Chicago may publish this later on,
as I understand, or for that matter, some other publications, as they
see fit.
Now, Radio-Keith-Orpheum Corporation is one of four corpora­
tions controlled by interlocking directorates; that is, directorates
having blocks of shares in all four of these corporations. These four
corporations are the Radio Corporation o f America, General Elec­
tric Corporation, the Radio-Keith-Orpheum Corporation, and the
Westingnouse Electric & Manufacturing Co.
I shall attempt to show the volume of sales in 1930 in this group
of corporations compared in terms of ratio sales to the number of
shares outstanding, to the total number of sales of all stocks, and to
the number of shares listed on the New York Stock Exchange in
terms of per cent.
’
One, Radio Corporation: The number of shares outstanding in
numbers of Radio Corporation in 1930 was, gentlemen, 13,130000
The volume of sales in Radio Corporation in the year 1930 amounted
to 37,038,190.
General Electric Corporation, with a number of 28,845,000 shares
outstanding: Out of this number, 21,865,000 were actually sold* that
is, actual certificates disposed of.
’
Radio-Keith-Orpheum Corporation, with a number o f shares out­
standing amounting to 2,377,315. Out of this number 18 397908
were sold. In other words, nearly ten times as many; there were* ten
times as many sales as there were stocks existing.
Westinghouse Electric & Manufacturing Co., with 2,586,00C shares
outstanding. Out of this number 10,592,975 were actually Isold




STOCK EXCHANGE PRACTICES

823

The total number of shares outstanding in this group were 46,939,566 shares.
The volume of sales of this group of four corporations amounted
to 88,896,663 shares.
Now, the total number of sales in 1930 on the New York Stock
Exchange amounted to 810,038,161. The number of listed shares
on the New York Stock Exchange amounted to 1,296,794,480.
The ratio of the number of shares to total volume o f all sales
amounted to 191 per cent, which is a tremendous percentage. The
ratio of volume of sales to total sales is 10 per cent. That is, this
group of corporations contributed practically 10 per cent of all sales
on the New York Stock Exchange, which is a colossal figure.
The ratio of volume of sales to the number of shares existing;
that is, out of 1,296,000,000 shares this group of corporations con­
tributed 0.07 per cent, which is also a figure incomparable in history.
Senator F letcher . That was during what time?
Mr. S tern. In the year 1930.
Now the next point, which was perhaps the most outstanding point
in this investigation so far as my figures are concerned, is this, that
the deflation of the price of Radio-Keith, that is, the drop from its
high price to its low, is perhaps the worst case on record in history
since the year 1630.
Two other companies, I may say in passing, who are now in re­
ceivership, have exceeded the depreciation in the price of RadioKeith-Orpheum Corporation.
The C h a ir m a n . Let us have their names.
Mr. S t ir n . First is Insull Utilities Investment Corporation (Inc.),
listed on the Chicago Stock Exchange. This corporation is under
the investigation o f the Swedish Government-----Senator B l a in e . N o.
Mr. S t ir n . I beg your pardon. This corporation is under the
investigation of the Wisconsin Public Utilities Commission at Mad­
ison, Wis., under the chairmanship of Theodore Kronshage. I f
we analyze this depreciation in terms of per cent, it is found the
depreciation from the high of $90 per share, that is without war­
rants, to a low of I214 cents a share, amounted to 72,000 per cent.
Senator F letcher . What corporation is that now ?
Mr. S t ir n . That is Insull Utilities Investment Corporation.
The C h a ir m a n . That is one. What is the other one?
Mr. S t ir n . The other one is Kreuger & Toll, which depreciated
from a high of 46% to a low of 14 in April, 1932.
Mr. M organ . Also in receivership ?
Mr. S t e r n . Also in receivership. This corporation is under in­
vestigation of the Swedish Government, and also I understand to be
investigated by Samuel Untermeyer, of New York city.
Mr. M organ . There is no other corporation that is not in receiver­
ship that has had as great a drop as this ?
Mr. S t ir n . Absolutely not, that I know of.
Mr. M organ . That is in all time, and not just for the recent
period ?
Mr. S t ib n . That is for all time. These are all-time figures since
the beginning of the Amsterdam Stock Exchange in 1630.




82 4

STOCK EXCHANGE PRACTICES

The percentage of depreciation in Kreuger & Toll amounted to
18,400 per cent.
I have not investigated the short-selling campaign of either of
these two issues, therefore I can make no comment upon them, but
in the instance of Radio-Keith, with a high of 50 on April 2 4 , 1980,
and a low of %, or T5 cents a share, in December, 1931-----Senator B l a in e (interposing). What time in December?
Mr. S t i r n . I can not say offhand. It is either December 28 or
December 29. You have the figure there, I believe, of class A stock.
That is before it was taken off the list of the New York Stock Ex­
change. Then it was quoted over the counter practically for
nothing.
Senator B l a i n e . D o you know what it was on November 5 when
Mr. Brown, one of the directors, voted to reorganize ?
Mr. S t ir n . Yes.
Senator B l a i n e . Are you coming to that ?
Mr. S t ir n . Yes; I will come to that, because the significant thing
is to show historical events before November 5, because these pre­
vious events forecast what happened on the New York Stock Ex­
change.
Now, the depreciation, therefore, in the Radio-Keith-Orpheum
clf»ss A stock amounts to 15,000 per cent. That is upon the basis of
a June low 1932 of $1.50 for the new common shares, which makes
the old class A shares worth 37i/ 2 cents.
The C h a i r m a n . And they hit a high at what price ?
Mr. S t ir n . Of $50, and I can show the invoices from brokers’
accounts where many, many people have paid that and sold out
after the short-selling campaign at 75 cents.
Senator F l e t c h e r . H o w had it been in 1929?
Mr. S t ir n . The corporation, I may say, Senator, was organized
in October, 1928, and just in a few weeks—it was organized first on
a when-issued, W I basis, on the New York Curb, and then was put
on the New York Stock Exchange, I believe, in December, 1928. I
can show by these charts that immediately upon the inception of
this company the same rigging operations began, in the number of
total sales and the great swings in the price of the stock for the week.
Senator F l e t c h e r . It never has been higher than 50?
Mr. S t ir n . Yes. In 1929 the stock rose to 5iy2 or 51%.
Senator F l e t c h e r . Most of these stocks began to drop in October,
1929?
Mr. S t ir n . Yes.
Senator F l e tc h e r . Y ou do not know what their experience was
then?
Mr. S t ir n . Radio-Keith at that time went to $12 a share that is
from 51% to $12.
’
’
Senator F l e tc h e r . I see.
Mr. S t ir n . And then it rose again from $12 to $50, which in point
of appreciation in percentage has not been excelled on the New York
Stock Exchange, and I am trying to show that it has been unexcelled
in point of depreciation and appreciation, with a few exceptions.
Senator F l e t c h e r . In other words, it has been manipulated ?
Mr. S t ir n . I f you want to call it such; yes.




STOCK EXCHANGE PRACTICES

825

The C h a ir m a n . Have you any other term for it ?
Mr. S tern. Rigging.
The C h a ir m a n . Proceed.
Mr. S tirn . As invented by John Law on the London Stock Ex­
change way back in 1734, which caused such a scandal at that time
that the House o f Commons inaugurated or passed a law prohibiting
short selling from 1734 to 1868, nearly a hundred and fifty years,
just on account of that one rigging operation John Law managed,
just as M. J. Meehan managed Radio-Keith.
Senator W

atson .

W h a t happened?

Mr. S t ir n . Pardon me?
Senator W atson . What happened after they suspended it? I
thought you said they passed a law compelling them to stop short
selling. Then what happened to the stock exchange ?
Mr. S t ir n . Why, there could not be any short selling.
Senator W atson . What happened to the stocks, the values?
M r. S t ir n . That was the famous South Sea Co.
Senator W atson . I am not talking about that. What happened?
The C h a ir m a n . What was the effect of the cessation of short sell­
ing on the stock market on values of shares? That is what the
Senator means, isn’t it ?
Senator W atson . Why, certainly.
Mr. S t ir n . I can answer that referring you to-----The C h a ir m a n . Briefly, Mr. Stirn, just answer the question.
Mr. S t ir n . It stabilized prices, and they went upward.
The C h a i r m a n . That is right; it took a good while to get that
simple answer. Go ahead.
Mr. S t ir n . The conclusion is that any stock showing such in­
tensive short sales, as I shall develop later, the inference is that short
positions were maintained for a long period of time on the stoclr
of the Radio-Keith-Orpheum Corporation. I f the directors of
officials of this company indulged in such a practice, a short position
held since the spring of 1930 from the high of $50 per share would
yield the handsome profit of 15000 per cent.
Now, of course, you recall history in the Middle Ages or the socalled Dark Ages, a yield of 12y2 per cent was penalized by the
state by the loss of one hand, a yield of 25 per cent by the loss of two
hands-----Senator B lain e . Y ou do not advocate that punishment now,
though ?
Mr. S t ir n . Fifty per cent punishable by death. Going back
farther in history-----M r. M organ (interposing). So we are becoming more tolerant,
Senator.
Mr. S t ir n . To answer your question, Senator, under a constitu­
tional monarchy as obtained in Great Britain—I, of course, refer to
the Lord Kylsant case where a man who operated a stock rigging
operation in a mercantile marine corporation now is sentenced to
spend a year in a common ordinary jail in London.
The famous Stutz Motors case in 1920, where the stock fell from
$700 to $20. And the Piggly Wiggly corner o f 1923, where the stock
fell from $124 to $82, which does not equal the price depreciation
of Radio-Keith.



826

STOCK EXCHANGE PRACTICES

The Northern Pacific Railroad case, which stock on May 9, 1901,
fell, after Harriman’s open market operations, from $l,OOiO a share
to approximately $167, a deflation not equalling that o f RadioKeith, and the depreciation of the Northern Pacific Railway at that
time was one of the causes of the panic of 1901.
The Hudson Railroad case in 1866, which fell, from 180 to 112
under the operation of Vanderbilt, does not in point o f depreciation
equal that,of Radio-Keith.
The Praire du Chien corner, Senator, that is in 1865. In point
of depreciation it does not equal that of Radio-Keith.
The Morris Canal corner of 1835 in point of depreciation does
not equal that of Radio-Keith.
The South Sea Co. corner, managed by John Law, who invented
rigging, on the London Stock Exchange, in 1734 fell from 5,000
pounds sterling to 1,200 pounds sterling, the effect of which was a
ban on short selling on the statute books of Great Britain from
1734 to 1868, does not equal in point of depreciation that o f RadioKeith.
Senator C ouzens . I have not seen the short selling in this case.
Are you coming to that ?
Mr. S t ir n . I am going to develop that later. What I am trying to
point out, Senator, is the depreciation and comparisons.
Mr. M organ . And why he chose this to make a study of, Senator.
Senator C ouzens . I do not know what that has got to do with the
operation in the Radio-Keith-Orpheum.
Mr. S t ir n . Well, Radio-Keith-Orpheum—you may say, “ Why
pick on Radio-Keith-Orpheum ? ” The answer would be it is the
most outstanding case in history.
Senator C ouzens . I am not asking you why you picked on that.
I am asking you to show where the short selling occurred.
Mr. S t ir n . I want to develop that later.
Senator C ouzens . I don’t want to sit and listen to 30 or 40 years
of history to find out how the short selling happened on the New
York Stock Exchange in this case.
Mr. S t ir n . I think the case I have developed is so important that
you can not prove this except by such a broad analysis. •
Mr. M organ. Proceed as rapidly as possible, M r. Stirn, on the
actual figures of short selling. You might refer back to some of
this later. Accommodate your time to the Senators’.
Mr. S t ir n . True enough. Before I develop that further, though,
Mr. Morgan, I should like to point out the 1930 monthly high and
low prices of the hundred most active stocks on the New York
Stock Exchange, together with the volume of sales per month and
per year, the average number of sales per year, the number o f shares
listed on the exchange, and the rate of commission on shares, illus­
trating the profits accruing from this source of income on the
exchange.
M r. M organ. Have you made a tabulation o f that)
Mr. S tie n . I have made that, and if the chairman suggests I
shall incorporate that in the record and not nroceed with that.
5
The C h airm a n . Without objection it is so ordered.
(The tabulation presented by Mr. Stirn is here printed in the
record in full, facing this page.)



1930 monthly high and low prices of 100 most active New York Stock Exchange stocks together with volume of sales per ynonth and per year, the average number of sales per year, the number o f
shares listed on the exchange or the number o f shares outstanding or not pertaining to the number authorized, and the rate of commission on shares illustrating the profits accruing from this
source of income on the exchange
Volume of sales per month— 1980

I S h a re s o u t-

Stock

S alpsD
er year
v ea r^
' 193Q
s t a ncommon
d ‘ n g in
bales
per
i

Radio Corporation.....................
General Electric.......... ..............
United States Steel....................
United Corporation...................
General Motors........................
R K O , Class A ...........................
Warner Bros..............................
Vanadium...................................
International Nickel...............
Standard Oil of New Jersey.
F ox Film A ................................
Am erican C an_______________
United Aircraft & Transportation.

Grigsby Grunow______ _______
New York_______________
Chicago................................
Electric Power & Ligbt________
Westinghouse.......................................

International Telephone...........
Columbia Qraphophone..............
American Telephone................ .
Case, J. I.....................................
Kreuger & Toll............................
Auburn.....................................
Insull Utilities Invest. (Inc.).......
New York curb.....................
Middle West UtOities.................
Chicago.................................
New York curb.....................

37.058.890
35,852,176
21.865.890
20,521,930
21,550,804
19,930,119
20,416, 488
18,365,812
19,550,425
18,588,225
18,897,908
16,182,408
16,835,730
14,534,625
14.459.125
13,809,093
13,333,078
13.489.975
13,566,150
12,951,595
19,260,695
12,763,725
12,089,500
11,093,230
11,015,038
11,007,336
4,888,955
4,211,650
10.719.125
10,783,800
10.592.975
10,370,375
8,473,326
8,070,310
7,940,930
7,923,940
5,923,524
5,520,068
4.033.125
4,018,075
2,458,700 j
4,514,400

1929 sales

sto c k

January

February

April

i 2,368,000
J 711,400

3,103,100
1,801,700

| 3,609,200
J 2,106,100
} 1,993,900

5.913.600

4.644, 500

2,760,700

2.168.900

2,178,900

1,907,500

2,139,400

" 2,‘ 253,"566" } 1,333,300

IS, ISO, 690
36,661,200
7,108," 065
8,703,000
19,202,000
"I*I56"56o’
12,332,515

14,259,076
1,117,900

43,500,000
2,377,315

30,443,100
1,395,666"

3,769,025

6,574,000
4,189,200

1,366,100

378,367

1,947,700

144,100

14,584,025

14,366,600

951,800

25,418,968
14,240,600

303,500

2,425,660

3,259,"366

~"4,’ 191," 180
2,473," 998
13,870,600

837,400

5,815,800

538,866"

2,082,190
1,"997,'897'

1,876,838

1, 541,300

403,300

36,200,000

454,800

S, 586, $15
6,782,200

531.900

9,991,100

655.900

18,032,900

749,900

5,208,900

137,700

194,471

300,600

116,100

6,958,333

6,335,460

442,900

6,642,232
2,566,920
17,973,023

J

184,492
1,512,800
2,875,105
957,395
7,345,183

March

283,800

37,100

3,041, 526

3,020,880

144,700

13,447,900

519,145
3,533,605
153,090
>2,149,287

1 When issued.

>446,550

816,100

} 2,256, 200
*839,"060" | 1,254,800
2,108,500
3,210,800
639.200
312,200
1.495.300
625,700
} 1,264,550
440,700
} 784,300
"i,"305,"966"
} 724,500
816,200
}
834,100
*496,"eoo'
j
333,600
"252,"§66' I
269,900
1.221.300
447,700
} 775,300
723,800
964,200
764,600
} 892,400
889,400
} 332,900
480,900
63,000
186.200
430,200
289,000
} 89,700
68,700
145,300
220,750
}
25,850
2995,350
145,000

M ay

June

August

September

October

3,713,500 j 2,726,100

2,458,400

2.488.900

2.119.000

1,584,050

2,598,280 | 1,475,700

886.700

1.503.900

2,820,600

1.545.200

1,425,750

1,707,700

1.883.600 | 1,018,600

1.109.100

1,664,776

2.503.000

432.800

1,494840

3,190, 500

1.361.300

3.239.200

854.100

1,120,000

1.350.600

1.092.200

1,171,010

2,302,900

1.829.300

1.656.200 i 1.489.300

1,100,200

1,703,500

1.791.300

1.295.200

1,230,120

3.001.200

2.009.200

1.541.200

1.353.300

1.166.100

1,329,100

1.671.900

1,024,900

596,708

1.320.000 | 1.579.600

1.971.200

1,100,600

1,830,600

1,337,700

1,117,100

739,700

836,530

715.600 | 1.029.200

1,912,900

2,360,200

2,378,900

1,769,400

1.337.900

743.200

1,260,425

1,400,000

i November

December

1,123,820

830.800

1.364.600

525.100

890.000

1,742,200

1,709,618

1.135.200

1,011,560

2,537,100 ' 2,122,400

1.621.400

1,411,500

844,800

743.000

833,200

646.300

798,700

1.051.200 !

2.013.500 :

839,500

577.200

347,600

478,500

640.700

960,400

873.300

101,495

681,200 ;

687.700

979,000

839.700

910.600

1,253,800

1.753.000

1,216,000

1,290,400

1.638.200 | 1.293.900

903.200

789,000

994.600

1,196,600

1.065.600

587.800

676,638

1.084.800
889,150 ,

635,300
591,950

682.500
630,350

377.100
372,970

249.700
159,750

519,900
390.100

150,809
131,950

89.300
52,420

109,846
72,310

1.682.500

1.449.600

1.521.400

862,200

471,300

857.100

871,100

536.600

406,200

810.600

797.600

816,700

626.700

513.100

876,300

1.854.300

1,079,925

974,150

1.400.800

883.700

716.500

313.300

317.100

372.200

539,154

436,375

705,481

2.032.600

738.600

763.500

317,500

269.200

361.200

327,700

262.600

319,340

724,300

367.900

507,400

613,900

371.200

294.700

607.500

494,475

587,193

225,200

384.900

256,100

327.300

536.000

427.100

545.000

343.300

607,075

1.014.000

416.800

387,800

104.800

120.100

319,400

273.500

260.200

445,300

63,400

78,600

88,200

129.800

88,200

187.000

132.000

154,600

432,600

156,350

111,375

223,450

217,150

195,900

212,800

398,350

414,530

434,450

630,850

846.800

914.200

375,353

194,450

283,450

671,150

565,000

495,480

98,700

99, 400

86,500

38,300

26,300

43,800

56,000

77,700

777,295

JNew.

January to July, 1930 monthly high and low prices o f

July

3 Certificates.

24 most active stocks listed on the New

York Stock Exchange; the monthly and total volume of sales in 1930; volume of sales in 1929; and
the number of shares outstanding in 1930

[The corporations in italics indicate an interlocking directorate]

Number of
shares out­
standing in
1930

Stock

Sales in 1929

Sales in 1930

Radio corporation................................ .......................
General electric___________ _________ ____________
United States Steel.................... ......... .....................
United Corporation........... .....................................
General Motors......... _ . ............................ ......... ..
R adio-K eith-O rpheum C orp ora tion ...................

$36,661,200
7,108,065
19,202,000
14,259,070
30,443,100
6,574,000

$37,038,890
t l , 865,890
21,550,804
20,416,488
19,550,425
» 18,897,908

IS, ISO, 690
18,845,936
8,703,000
12,332,515
43,500,000
«, 377, S15

Warner Bros...............................................................
V a n ad iu m ........................... ........... ...........................
International Nickel—. ................ .......... ...............
Standard Oil of New Jersey_____ ______ _______
Fox Film ............................ .........................................
American Can.................... ........................................
United Aircraft & Transportation......................
Grigsby-Grunow.................................. ............. .......
Electric Power <fc Light.............. .................... .......
W estinghouse Electric.......................... .....................
International Telephone........................................
Columbia Graphaphone___ ________ __________
American Telephone C o . . . .................... .......... ..
Case, J. I. threshing machinery_______________
Kreuger & T oll............ ............................. ............ .
Auburn Automobile............ .................................

4,189,200
1,947,700
14,366,600
14,240,600
4,191,180
13,870,600
5,815,800
1,541,300
6,200,000
6,782,200
9,991,100
18,092,900
5,208,900
300,600
6,335,460
283,800

16,835,730
14,534,625
13,808,093
13,489,975
12,951,595
12,763,725
11,093,230
11,007,336
10,719,125
10,69t, 975
8,473,326
7,940,930
5,923,524
4,033,125
2,458, 700
1,512,800

3,769,025
378,367
14,584,025
25,418,968
2,425,660
2,473,996
2,082,190
1,997,897
1,876,838
2,686,Si5
6,642,232
2,566,920
17,973,023
194,471
6,958,333
184,496

3,020,880
3,533.605

2,875,105
7,345,183

January

February

March

April

May

June

July

August

September

October

November

December

1 2,368,000
1 711,400
2,178,900
1,100,500
1,117,900
1,395,000
1,366,100
144,100
951,800
303,500
3,259,300
837,400
538,800
403,300
454,800
531,900
655,900
749,900
137,700
116,100
442,900
37,100

3,103,100
1,801,700
1,907,500
2,253,000
816,100
839,000
3,216,800
312,200
625,700
440,700
1,305,900
816,200
496,600
252,800
447,700
723,800
964,200
889,400
480,900
63,000
289,000
68,700

3,609,200
2,106,100
1,993,900
1,333,300
2,250,200
254,800
2,108,500
638,200
1,495,300
1,264,550
784,300
724,500
834,100
333,600
221,300
775,300
764,600
892,400
332,900
186,200
430,200
89,700

5,913,600
2,760,700
2,139,400
3,190,500
2,302,900
i s , 001, m
1,320,000
715,600
1,051,200
2,537,100
2,013,500
681,200
1,638,200
1,084,800
1 ,6S2,500
810,600
1, M 0,800
2,032,600
724,300
225,200
1,014,000
63,400

4,644,500
2,168,900
1,707,700
1,361,300
1,829,300
2,009,200
1,579,600
1,029,200
830,800
2,122,400
839,500
687,700
1,293,900
1,635,300
1,449,600
797,600
883,700
738,600
367,900
384,900
416,800
78,600

3,713,500
2,598,280
1,883,600
3,239,200
1,656,200
1,541,200
1,971,200
1,912,900
1,364,600
1,621,400
577,200
979,000
903,200
682,500
1,521,400
816,700
716,500
763,500
507,400
256,100
387,800
88,200

2,726,100
1,475,700
1,018,600
1.400,000
1,489,300
1,353,300
1,100,600
2,360,200
525,100
1,411,500
347,600
939,700
789,000
377,100
862, M0
626,700
313,300
317,100
613,900
327,300
104,800
129,800

2,458,400
886,700
1,109,100
854,100
1,100,200
1,166,100
1,830,600
2,378,900
890,000
844,800
478,500
910,600
994,600
249,700
471,300
513,100
317,100
269,200
371,200
536,000
120,100
88,200

2,488,900
1,503,900
1,664,776
1,120,000
1,703,500
1,329,100
1,337,700
1,769.400
1,742,200
743,000
640,700
1,253,800
1,196,600
519,900
857,100
876,300
372,200
361,200
294,700
427,100
319,400
187,000

2,119,000
2,820,600
2,503,000
1,350,600
1,791,300
1,671,900
1,117,100
1,337,900
1,709,618
833,200
980,400
1,753,000
1,065,600
150,809
871,100
1,854,300
539,154
327,700
607,500
545,000
273,500
132,000

1,584,050
1,545,200
432,800
1,092,200
1,295,200
1,024,900
739,700
743,200
1,135,200
646,300
873,300
1,216,000
587,800
89,300
536,600
1,079,925
436,375
262,600
494,475
343,300
260,200 |
154,600 |
i

1,123,820
1,425,750
1,490,840
1,171,010
1,230,120
566,706
836,530
1,260,425
1,011,560
798,700
101,495
1,290,400
676,638
109,846
408,200
974,150
705,481
319,340
587,193
607,075
445,300
432,600

144,700
446,550

145,300
995,350

220,750
25,850

156,350
630,850

111,375
846,800

223,450
914,200

217,150
375,353

195,900
194,450

212,800
283,450

398,350
671,150

414,530 |
565,777 !
i

434,450
495,480

OJf T H E CHICAGO STOCK E XC H AN GE

Insull Utilities Investment (Inc.).........................
M iddle West Utilities..............................................

3,041,526
13,447,900

1 W . i. new.
* The total volume of sales of Radio-Keith-Orpheum stock in 1930 compared to the number of shares outstanding presents the startling fact that 16,020,593 shares were sold over and above the number of shares listed.
the exchange aie an indication of artificial manipulation.
Digitized for
• It FRASER
wil be observed that in April, 1930, the volume of sales exceeded the capital structure in the number of shares outstanding by 623,885 shares.



1 1 08 52— 32— pt 3.

Such operations on.

(F ace p. 8 2 6 .)

1930 m onthly high and low prices o f £ 4 most active stocks — A7. Y. Stock Exchange
January

High

49%
78%
189%
40
45
32%
67
73
40^
65M
39H
146
62
18%
67%
188%
73%
31
241
246%
31

Low

36%
70%
176
35
41
27
53
62
36
58
26%
128
44
m
57
160
64%
27
224
216%
28

H igh

55
86
195
44
51
38
SOY*.
124
43^
75
36
154
89
m i
93
195
70^
31
266
294%
31%

Low

High

46
74
177%
37%
41%
30%
66%
69%
38
58
264
138
60%
15
67
181
WA
26%
235
236
28M

7oy2

69
95
198%
52
54%
50
80%
143%
44
84
57
156)4
99
27%
103)4
201
77
37
274%
262%
$5
263%

M ay

Low

53%
83
180%
43 ’
45
35
67%
103
34
74
33
142
79%
17
87
180%
67
28
246
260%
31

High

65
88
183%
50
52
47H
74%
133
35%
84
55%
148)4
88%
263-2
97
187
75
34
251%
352)4
33%

June

Low

41%
73
165%
37
42 Mi
35)4
58,4
87
30%
71
44%
127
57%
17%
71
160
58%
23%
224M
276
30

High

55%
84
173%
45%
52
43%
66
124
33
80
54
148
78
28
95)4
183)4
64
28
232Vi
288%
32%

38%
1

1 Among the stocks cited the precipitate rise of the Radio-Keith stock in the spring of 1930 was exceeded b y one stock only, namely, Fox Film.




July

Low

32M
62
151
28
38
27%
38J/2
664
21
60
37)4
108%
43
144
58^
124%
40
16
200
15&)4
25%

High

46
74%
170
35
41
35
46
106
26
75
49
135
63
im
76
162
49
20%
221
203V^
29

Low

33
64
153%
29
38
26
35)4
75
22%
63
38H
112^
48%
12)4
63%
127%
42%
15
203%
160
24^

PRACTICES

S4
60
166
SO
S7
> 19
S8
49
SI
62
16
117%
43)4
12)4
49%
HO
62
U
216
192%
23%
175)4
63%
22

High

April

EXCHANGE

45%
66M
184
37
43y2
30%
54
69%
38
66
34
131
53
22^
60
163
75
31
226%
249
28M

Low

M arch

STOCK

R a d io ........... — ....................................
General Electric.......... ......................
United States Steel........ .................
United Corporation_____________
General M otors............. ....................
Radio-Keith-Orpheum__________
Warner Bros___________ _________
Vanad iu m ___
International N ickel___________
Standard Oil of N ew Jersey_____
Fox Film .............................................
American C an........... .......................
United Air & Transportation____
Grigsby Grunow...............................
Electric Power & Ligh t...........
Westinghouse Electric...................
International Telephone...............
Columbia Graphaphone..............
American Telephone____________
Case, J .1.............................................
Kreuger & T o ll..........- .....................

February

GO

to

STOCK EXCHANGE PRACTICES

828

Mr. S t ir n . I have prepared, also, statistics giving the date of the
number of short sales, the daily number of short sales, the weekly
number of all short and long sales, and the high and low prices for
the day from September 18 to November 30, inclusive, 1931, and the
weekly number of all sales and daily prices from November 30 to
December 29, 1931, with reference to the Radio-Keith-Orpheum
Corporation.
Senator G ore. Was that when this raid was on, Mr. Stirn s
Mr. S t ir n . Yes, sir; when the public headlines of the press an­
nounced these bear raidings, without having any evidence to sub­
stantiate those headlines at that time.
Senator B la in e . I s that Schedule D, page 4?
Mr. S t ir n . Schedule E, page 11, and Schedule F, page 16, of
that blue book, Senator.
Senator B la in e . G o ahead.
Senator F letcher . Does that give the daily transactions in the

stock ?
Mr. S t ir n . Yes. I am also showing terms of percentages as com­
pared to all sales. The data from which I shall base my statement
is that of the New York Stock Exchange statistics in regard to
short selling, May 25 to November 30, 1931. It may perhaps be a
strange coincidence of history that this report by President Whit­
ney’s stock exchange, which President Whitney says shows that
short selling does not contribute to the depreciation of prices on the
Exchange, says it was genuine liquidation, and I believe that he
made that statement under oath.
Now, with particular reference to the case of Radio-Keith-Or­
pheum Corporation-----(Thereafter the witness submitted to the committee clerk, for the
record, a telegram containing statistics from his memorandum used
at the hearing as to the daily short position of Radio-Keith-Orpheum
class A stock for a part of September and for October and November,
1931, as follows:)
M i l w a u k e e , W i s .,

A ugust 1, 19S2.

J u l ia n W . B l o u n t .

Senate Committee on Banking and C u rrency:
Figures given at hearing from my memorandum o f New Y ork Stock Exchange
statistics in regard to short selling, May 25 to November 30, 1931, as follow s:
Total Radio-KeithrOrpheum Corporation class A
Shares listed as o f Oct. 28, 1931---------------------------------------------------------- _ 2,379,725
Total shares (sam e stock) listed as o f Nov. 30, 1931__________________ 2,380,291
D A I L Y S H O R T P O S IT IO N

Num ber of |
shares
8ept. 21, 1931..
Sept. 22, 1931..
Sept. 23, 1931.
Sept. 24, 1931..
Sept. 25, 1931.
Sept. 28, 1931.
Sept. 29,1931.
Sept. 30, 1931.
Oct. 1, 1931...
Oct. 2, 1931..
Oct. 5 ,1931...
Oct. 6, 1931—




10,400
5,000
4,400
4,700
4,905
3,900

8,100

6,800
7.100
5,200
6,800
11.100

N um ber of
shares
Oct. 7, 1931..
Oct. 8, 1931...
Oct. 9, 1931...
Oct. 13, 1931.
Oct. 14, 1931.
Oct. 15, 1931.
Oct. 16, 1931.
Oct. 19, 1931.
Oct. 20, 1931.
Oct. 21, 1931.
Oct. 22, 1931.
Oct, 23, 1931.

8,000

8.500
6,800
5.500
6.900
11,800
11.900
13,400
12.900
6.400
13,800
13.400

829

STOCK EXCHANGE PRACTICES

2, 380,291

Total shares (same stock) listed as o f Nov. 30, 1931--------D A IL Y

SH O RT

P O S IT IO N — C ontinued
N um ber of

26, 1931..
27, 193128, 193129, 1931..
30, 1931N'ov. 2, 1931Nov. 4, 1931 Kov. 5, 1931..
N'ov. 6, 1931 N'ov. 9, 1931 N'ov. 30, 1931Nov. 11, 1931-

Oct.
Oct.
Oet.
Oct.
Oct.

N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.
N ov.

12, 1931.............. - ..................................
13, 1931.............. - ..................................!
16, 1031...................... - ..................— - j
17, 1931...................................................
18, 1931...................................................1
19, 1931.......................................- ..........1
20, 1931____________________________
23, 1931_______________________ 23,942
24, 1931.....................................- ............i
25, 1931...... ............- ..........................21,840
27, 1931____________________________,
30, 1931............ ................................---I

691
82,679
63.f27
4i ’ 5§*
42,003

100-

22,285
20,560
18,885

The C h a ir m a n . Y ou may proceed, Mr. Stirn.
Mr. S t ir n . N o w , as Mr. Morgan, former attorney general of the
State of Wisconsin, has shown that on November 5 a directors’ meet­
ing was held by the Radio-Keith-Orpheum Corporation, and the
developments at that meeting were outlined to you by Mr. Morgan.
Therefore I shall not need to go further into that.
M r. M organ . Do you like at this time to make President Brown’s
letter to the stockholders a part of your testimony ?
M r. S t ir n . I w ould.
The C h a ir m a n . All right; if there is no objection, it is so
ordered.
(The document here presented by the witness is printed in the
record in full, as follows:)
OFFERING

To the Stockholders:

OP D EBENTURES

AND

CO M M O N

STOC K

New Y ork , N. Y „ N ovem ber 10, 1931.

The board o f directors ol the corporation has determined subject to the
adoption by the stockholders o f the proposed amendments to the certificate
of incorporation o f the corporation described in the accom panying letter, to
issue $11,600,000, principal amount o f 10-year 6 per cent gold debentures o f the
corporation and 1,740,000 shares o f the common stock o f the corporation, and
to offer to each holder o f the present class A stock o f the corporation, the right
to subscribe, upon the terms and conditions hereinafter stated, before 3 p. m.,
eastern standard time, December 21, 1931, fo r $5 principal am ount o f said
debentures and three-fourths o f a share o f common stock fo r each share o f
class A stock registered in the name o f such holder on the books o f the cor­
poration at 3 p. m., eastern standard time, November 23, 1931, at a price equal
to the principal amount o f the debentures subscribed fo r w ith accrued inter­
est. F ift y per cent o f said subscription price must be paid at the time o f
subscription, and the remainder w ill be payable on call, on 30 days’ notice,
but m ay be prepaid at the option o f the subscriber.
The debentures w ill be dated December 1, 1931, w ill mature D ecem ber 1, 1941,
MU bear interest from Decem ber 1, 1931, at the rate o f 6 per cent per annum,
Payable semiannually on June 1 and Decem ber 1 o f each year, and w ill be
issued In coupon form in the denominations o f $100', $500, and $1,000, w ith
privilege o f registration as to principal. A sinking fund w ill be provided pay­
able $550,000 on Decem ber 1, 1934, $550,000 on Decem ber 1, 1935, $1,100,000
on Decem ber 1, 1936, $1,650,000 on Decem ber 1, 1937, $1,650,000 on Decem ber
1, 1938, $2,000,000 on Decem ber 1, 1939, $2,000,000 on D ecem ber 1, 1940, and
$2,100,000 on December 1, 1941. Debentures purchased by the corporation
Bay be credited at their principal amount against such sinking-fund require­
ments, an d cash paid to the sinking fund is to be applied, at the option o f the
c o r p o r a t i o n , to the purchase o f debentures in the market or by tender or




830

STOCK EXCHANGE PRACTICES

otherwise, or to the redemption of debentures. The debentures will be redeem­
able at the option of the corporation, on 60 days’ notice, as a whole or In part
on any interest payment date, at their principal amount and accrued Interest.
So long as any of the secured 6 per cent gold notes Issued under the col­
lateral note indenture, dated as of July 1, 1931, to Chemical Bank & Trust Co.,
as trustee, are outstanding, the debentures will be secured by a lien (subject
to the lien of said secured gold notes), on all property now pledged or here­
after validly pledged under said collateral note indenture, and on such other
property, if any, as may be specified in the indenture under which the deben­
tures are to be issued, equally and ratably with such other outstanding un­
secured indebtedness of the corporation maturing on or before January 1, 1933,
not exceeding in the aggregate $1,548,000, as may be given such Hen In consid­
eration of an extension of the maturity thereof, in whole or In part. Upon
the payment of said secured 6 per cent gold notes, the lien securing the debentures will terminate, but the indenture under which the debentures will he
issued will provide that, so long as any of the debentures shall be outstanding,
tile corporation will not create any lien on any of its property, whether now
owned or hereafter acquired (other than liens on after acquired property,
created in connection with the acquisition thereof, as will be provided in the
indenture) unless effective provision be made that the debentures shall be
secured by such lien ratably with any other indebtedness secured thereby.
The price of subscription is an amount equal to the principal amount of
the debentures subscribed for, payable in New York funds together with
accrued interest to December 21, 1931, on such debentures. At least 50
per cent <>f the subscription price, together with such accrued interest, must
be paid at the time of the exercise of the warrants. The balance of the
subscription price will be payable (with interest at the rate of 6 per cent per
annum) on the call of the corporation in one or more installments, on 90
days’ notice. Any subscriber may at any time make full payment o f the sub­
scription price. Against payment of 50 per cent of the subscription price,
transferable certificates will be issued entitling the holder thereof to receive
on December 1, 1934, or earlier at the option of thi* corporation, provided full
payment has been made, the principal amount of debentures and the number
of shares of common stock subscribed for by him. Such certificate wiU
contain appropriate provisions for sale and/or forfeiture of any debentures
and common stock in respect of which default is made in payment the balance
of the subscription price. Debentures and stock certificates will not be
delivered prior to full payment, or prior to December l. 1934, unless the
corporation elects to make delivery earlier.
As stated in the accompanying letter, Radio Corporation o f America has
agreed to purchase, on the same terms, such of the debentures and common
stock offered to stockholders as are not subscribed for by stockholders or
their assignees. Application will be made in due course to list on the New
York Stock Exchange the debentures, the common stock, and the certificates
to be delivered in the first instance.
Warrants will be issued to each holder of class A stock as soon as possible
after November 23, 1931, specifying the amounts of debentures and common
stock in respect of which each stockholder is entitled to a subscription privi­
lege. Unless otherwise requested by the stockholder, warrants will be mailed
to the address on file with the transfer agent of the corporation.
R a d io -K e ith -O rp h e u m C o r p o r a tio n ,
B y H ibam S. B ro w n , President
RADIO-KEITH-ORPHEUM CORPORATION— NOTICE OS' EXTBAORDINART U1XTIKO Of* STOCK*
HOLDERS TO BE HELD ON DECEMBER 10, 1931

tbat 5 n extraordinary meeting of the stockholders of
^dio-Keith-Orpheum
Corporation, a Maryland wcorporation,
att tthe
*
.
.
m
t
i i v i i y will
i n be held
n t»m n
ho
ptincipai office of the coloration, First National Bank Building, Baltimore,
purposes ;
ber 10, 1981» at 11 o’clock in the forenoon for the following
of

?£d toke a<2 ion upon the Proposal to amend the certificate
corporation to accomplish the following objects:
.. ( ) The reduction of the number of outstanding shares of class A c w i r




831

STOCK EXCHANGE PRACTICES

(6 )
The reduction o f the number o f outstanding shares o f class B stock o f
the corporation from 500,000 to n o n e ;
(c ) The reclassification o f the authorized class A stock, issued and unissued,
and the authorized class B stock o f the corporation into common stock, so that
the authorized stock, issued and unissued, o f the corporation shall be 4,500,000
shares o f common stock without nominal or par v a lu e ; and
(<i) The amendment o f article 6 o f the certificate o f incorporation o f the
corporation, so that said article 6 shall be in substantially the form set out in
Schedule A hereto.
(2 ) T o approve all action taken or authorized by the board o f directors or
the executive committee o f the board o f directors o f the corporation since the
last meeting o f the stockholders o f the corp oration ; and
(3) T o consider and take action upon all matters incidental to the foregoing
Purposes and upon such other business as may properly com e before said meet­
ing or any adjournment or adjournments thereof.
The proposed amendments o f the certificate o f incorporation o f the corpora­
tion w ere declared advisable by the board o f directors o f the corporation by
resolutions adopted, at a meeting held November 5, 1931.
The date fixed by the board o f directors as the record date fo r the deter­
mination o f the stockholders entitled to notice of, and to vote at, said meeting
is November 23, 1931. Accordingly, only stockholders o f record at the close o f
business on that date w ill be entitled to notice of, and to vote, at said meeting.
By order o f the board o f directors.
W m . M allard,

Secretary.

Dated New York, N. Y., November 10, 1931.
N o t * .— I f you do n ot expect to be present a t tae m eetin g, p lease date an d sign the
iecom panying proxy and return it in the Inclosed stam p ed en velope, addressed to the
necretary o f the corporation, No. 1 5 6 4 B road w ay , N ew Y o rk , N. Y .
Schedu le
H OPOSED

AM END ED

AR TICLE

6

OF

A

T H E CE R T IF IC A TE
CORPORATION

OF

IN C O R PO RA TIO N

OF

TH E

S ix th : The total amount o f authorized capital stock o f the corporation is
4,500,000 shares without nominal or par value, all o f which are common stock.
Dividends upon the stock o f the corporation shall be payable only out o f
surplus or net profits applicable to dividends as determined by the board o f
directors, and only as and when declared by the board o f directors. The board
of directors shall have power to fix, from time to time, the amount to be
reserved out o f surplus or net profits o f the corporation as w orking capital,
or fo r an y other law ful purpose, and to determine whether any, and. i f any
What part, o f the surplus or net profits o f the corporation shall be declared as
dividends and paid to its stockholders; and all rights o f holders o f stock o f
the corporation in respect o f dividends shall be subject to the pow er o f the
board o f directors so to do.
At a ll elections o f directors o f the corporation, each holder o f record o f the
common stock shall be entitled to as many votes, given in person or b y proxy,
ag shall equal the number o f his shares o f stock multiplied by the number o f
directors to be elected and such stockholder may cast all such votes for a
single director or may distribute them am ong the number to be voted for, or
among any tw o or more of them, as he may see fit.
No h older o f stock o f the corporation shall, as such stockholder, have any
rtght to purchase or subscribe for any shares o f the capital stock o f the
Corporation which it may issue or sell, w hether out o f the num ber o f shares
authorized by the certificate o f incorporation o f the corporation as originally
filed o r by any amendment thereof or out o f shares o f the capital stock o f the
corporation acquired by it after the issue th e r e o f; nor shall any holder o f stock
of the corporation, as such stockholder, have any right to purchase or subscribe
for any obligation which the corporation may issue or sell that shall be con­
vertible into, or exchangeable for, any shares o f the capital stock o f the corIwation, or to which shall be attached or appertain any w arrant or w arrants
or other instrument or instruments that shall confer upon the h older or owner
of such w arrant the right to subscribe for, or purchase from the corporation, any
shares o f its capital stock.
At an y time and from time to time any o f the provisions o f this certificate
of incorporation may be amended, altered, or repealed and other provisions




832

STOCK EXCHANGE PRACTICES

authorized by the statutes o f the State o f M aryland at the time in fo rce may
be added or inserted in the manner at the time prescribed by said statutes, ana
all rights at any time conferred upon the stockholders o f the corporation by’ its
certificate o f incorporation are granted subject to the proyisions o f tms
paragraph.

Senator F l e t c h e r . What year was that you have?
. ^,
Mr. S t i r n . This date is 1931. What I have been dealing with be­
fore is 1930. In other words, I am trying to make this analysis as
all-embracing as possible.
Mr. M o r g a n . Getting right down now to what the Senator asked
for a moment ago ?
Mr. S t i r n . Precisely.
Now, it is an established fact that where boards of directors have
in mind a conversion and a confiscation of stock as outlined to you
by Mr. Morgan, the result of such a vote by the board of directors,
when it becomes public, will create a panic and a fear in the minus
o f investors, encouraging them to sell their holdings at panic prices.
There are many instances which can be established from the invoices
o f former investors, former class A stockholders, of the Radio-KeithOrpheum Corporation, who bought that stock at $50 a share on
April 24,1930, who by this intensive short-selling campaign, were so
stricken by fear and panic that they disposed of these holdings at
75 cents a share.
Senator T o w n s e n d . Who carried on this short selling? Was it at
the direction of the company?
Mr. S t i r n . I have not access to the books, as you well know. Only
your accountants have that. But I know who the specialist is in
that stock. That is J. M. Meehan & Co.
Senator B l a i n e . M. J. Meehan.
Mr. S t i r n . J. M. Meehan.
Senator B l a i n e . Michael J. Meehan.
Mr. S t i r n . He is the key witness.
Senator B l a i n e . Yes.
Mr. S t i r n . As I understand, he took the next ship to Europe,
under plea of ill health.
Now, I have referred to this directors’ meeting by which a con­
version, a confiscation of stock, was authorized, by this meeting.
Senator B l a i n e . That is where the directors decided to reorganize
the corporation?
Mr. S t i r n . Exactly. That is, if a stockholder who, say, had 100
shares of stock, and aid not give to the company $5 for every share
owned and thereby obtain a debenture bond at par, at 100, if he
did not give the company on the plea of impending insolvency and
upon the plea of receivership, this $5 per share, he lost three-fourths
of his prior holdings.
In other words, if he could not subscribe—and this stock was
timed at such a time when people could not afford to contribute this
$5 assessment to the corporation—he would lose three-fourths of
his holdings. That is in November, 1930, when the panic on the
exchange caused so much concern in Wellington.
Now, it is an established fact that when such a vote is made and
when the plea of insolvency is put before the press, then the inevit­
able result on the price of the stock will be downward. Anticipat­
in g
perhaps, there was an intensive short-selling campaign



STOCK EXCHANGE PRACTICES

833

prior to the date of the publication of this vote made by the directors
of the Radio-Keith-Orpheum Corporation, as announced by Hiram
Brown’s letter to stockholders on November 10. These dates are
important to bear in mind: November 10, when this debenture-----Senator G ore. I s this 1930 ?
Mr. S t ir n . November 10, 1931. This debenture plan was mad©
public by Hiram Brown’s letter. On November 5 was held the
directors’ meeting. Two or three weeks prior to November 5 an
intensive short-selling campaign was waged against this stock.
Senator F l e t c h e r . What was the price of the stock on November
Mr. S t ir n . First I would like to show you the increase of the
number of short sales and then I shall answer your question, if I
may.
The C h a i r m a n . Mr. Stock would like to ask one question.
M r . S t ir n . G la d ly .
Mr. S t o c k . Mr. Stirn,

do you know whether or not a corporation
or its directors have a right to assess the stockholders of a solvent
corporation that is not in receivership against their will?
Mr. S tern . Not under the laws of Maryland.
M r . M or gan . N o; if it is a nonassessable stock.
Mr. S t o c k . Well, of course, a nonassessable stock may be assessable
in time of receivership.
The C h a i r m a n . Y ou are asking a legal question.
Mr. S t o c k . I want the thing brought out so that it is on the
record. This corporation was not in receivership ?
M r . S t i r n . I t was not in receivership.
Mr. S t o c k . And this in effect was an involuntary assessment?
Mr. S t ir n . Absolutely.
Senator G ore. Have you had the legal question investigated, Mr.

Stirn ?
Mr. S t i r n . I think Mr. Morgan can answer that better than I,
as I am not in training.
The C h a i r m a n . I will say, Senator Gore, that before you came
in when we started the hearing, Mr. Morgan, former attorney
general of Wisconsin, came in here with Mr. Stirn as his attorney,
and he made an opening statement of this case.
Senator G ore. I have wondered a good deal about that.
The C h a i r m a n . And I should feel that you are perfectly at liberty
to ask Mr. Morgan any question you want to.
Mr. M o r gan . What was it, Senator ?
Senator G ore. Did you put it in the record? I do not know
much about this Radio-Keith reorganization except in a general
way, but I have known about it to wonder a good deal whether it was
a legal transaction or not, whether they had a right to do what they
did.
M r . M or gan . Senator Gore, the corporation was organized under
the laws of the State of Maryland, and therefore neither the statutes
of Maryland nor the charter of the corporation permitted a decrease
of the capital stock. It was a nonassessable stock and it could not
legally be assessed.
Senator G ore. It looked like confiscation to me, what little I know
about it.



83 4

STOCK EXCHANGE PRACTICES

M r . M o r g an . It was a so-called reorganization fo r the purpose
of assessing a nonassessable stock. It was absolutely ille g a l, Mid a
gentleman named Cookman Boyd at Baltimore brought a suit to
enjoin him, and that is a part of the record of the circuit court of
Baltimore County, and I would now suggest that this committee
subpoena Mr. J. Cookman Boyd, who can give you the inside of
that deal and the legality or illegality of it.
Senator G ore. What became of the suit?
Mr. M o r g a n . The suit was settled by the purchase of C o o k m a n
Boyd’s stock.
Senator G ore. It looked like confiscation to me, what little 1
know of it.
Mr. M o r g a n . It was, precisely, three-quarters of their holdings.
It was the alternative of confiscation or pay on the assessment.
The C h a i r m a n . All right, the witness may proceed.
Mr. S t ir n . Of course my investigation upon short selling on the
New York Stock Exchange is limited to the report as published by
the New York Stock Exchange. That is, the exchange authorities
have seen fit only to allow to become public figures ftora May 25,
1931, to November 30, 1931.
In the beginning of this report, which I have here, the first figures
from May 25 to September 18 are based on a weekly basis. In other
words, not upon a daily basis. From September 18, 1931, to No­
vember 30,1931, they come on a daily basis.
This stock exchange report, moreover, does not include sales
against the box, which statisticians and economists of most universi­
ties will testify are actual short sales, because an actual covering
movement has to be made before the close of the deal, but which
President Whitney maintains is not an actual bona fide short sale.
In addition, this New York Stock Exchange report-----The C h a i r m a n (interposing). I think Mr. Whitney said that it
was “ not necessarily a short sale.”
Mr. M o r g an . That is it.
The C h a i r m a n . I think that is his testimony.
Mr. S t i r n . But he does not incorporate that in the figures.
The C h a i r m a n . And then he admits inferentially that under
certain conditions it might be a short sale.
Mr. S t ir n . Perhaps, but he does not include it in the figures. If
he included the various types of short sales, these figures would be­
come colossal, Mr. Chairman.
However, for the purpose of Radio-Keith-Orpheum which comes
between these dates the incidence of this practically proves the fa ct
that an intensive short-selling campaign was waged against the
price of the stock of the Radio-Keith-Orpheum Corporation.
From May 25 to October 21 a normal average number o f short
sales against the stock of the Radio-Keith-Orpheum Corporation
was between 6,300 shares short sales and 10,000 short sales.
Senator B l a i n e . That is short position ?
Mr. S t ir n . Short position at the close of these days.
Senator B l a i n e . According to the records of the stock exchange?
Mr. S t ir n . Yes. Thank you for that correction. Senator. PerhaP,s 1 should say “ short position ” instead of “ short sales.”
The inference from these figures is, being a normal development,
that this activity was maintained by professional traders on the New




STOCK EXCHANGE PRACTICES

835

York Stock Exchange and the various branches all over the country
and by margin traders. But since October 21 to November 5, that
is, approaching the date of this directors’ meeting, astounding
figures appear.
Senator F letc h er . Now you are going back to ’30.
Mr. S t ir n . 1931. I don’t know why I always should say 1930.
1931. Thank you for the correction.
On October 21, 1931, there were 6,400 short positions as shown by
President Whitney’s own report. On October 22, as this secret di­
rectors’ meeting approaches, there being no public news of this
directors’ meeting held on November 5 until November 10, which is
the date of Hiram Brown’s letter to stockholders, we see a gradual
increase in the number of short sales.
On October 22, 1931, the short position amounted to 13,800 shares,
an increase of over a hundred per cent over night.
On October 23, the position was still maintained at 13,400 shares.
On October 26 the short position was 15,000 shares.
On October 27 it was 30,300 shares; on October 28, 62,300 shares.
And, mind you, there was no public news of this.
Senator G ore. H ow many shares outstanding of this, Mr. Stirn?
Mr. S t i r n . T w o million three hundred and seventy-nine thousand.
But these are short positions, so one really can not compare this
position with the number of shares outstanding.
M r . M or gan . T w o m illio n three h u ndred and e ig h ty -e ig h t th o u ­
sand tw o hundred and n in ety -eig h t shares seems t o be exact.
Mr. S t ir n . Likewise, on October 28, there was a jump to 62,300

shares. On October 29 another increase to 88,126 shares. On Octo­
ber 30 the short position was 89,891 shares. On November 2 it was
109,436 shares.
Senator G ore. Could you give the prices of this ?
Mr. S t i r n . I shall; yes; and I shall show you that the chart shows
just opposite Mr. Whitney’s testimony, which tried to prove that
short selling stabilized stock prices.
Mr. M o r g an . At the close of October 21 it was 9, and it has been
brought down to November 4 to 6.
Mr. S t i r n . The effect of this short-selling campaign was bringing
down the stock. Offhand I think $12 to 75 cents, which is a tre­
mendous depreciation.
Senator G ore. What was the price on October 31 ?
Mr. S t ir n . Permit me first, Senator, to complete this increase,
and then I shall answer your question.
Senator G ore. All right.
Mr. S t i r n . That meeting was November 4 or 5.
Mr. M o r g an . November 5.
Mr. S t ir n . On November 2, three days before this meeting, the
short position was increased to the great amount of 109,436 shares,
which is a tremendous increase ratio to the number of shares out­
standing, if you compare it to other stocks.
On November 4 the short position jumped from 109,436 shares
to 148,681 shares.
On November 5, the date of the directors’ meeting, the short posi­
tion stood at 148,852 shares.
The history of the volume of short sales after this meeting shows
a gradual tapering off, with the exception of November 11, one day
119852 —32— PT 3-------4




836

STOCK EXCHANGE PRACTICES

after Hiram Brown’s letter became public. But, inasmuch as that
letter was mailed, it could not become public until two or three days
thereafter.
Senator B l a i n e . Mr. Stirn, what was the total sales of stock of the
R -K -0 on November 4? Have you got that figure V
Mr. S t i r n . Oh, yes. I can give you the figure for the week includ­
ing November 4. Perhaps that is what you have reference to.
Senator B l a i n e . Yes.
Senator G or e . Could you parallel these short sales over this period
with the total sales ?
Mr. S t i r n . Precisely. I have those figures here, Senator.
Senator G o r e . Paralleling the short with the long sales ?
Mr. S t i r n . Precisely. Because a short sale is also registered on
the tape of the New York Stock Exchange.
To answer your question, Senator Fletcher, the figures show that
there were 166,300 sales of all types, long and short sales, on Novem­
ber 6th. The short position on November 6, the same date, was
137,226, nearly a hundred per cent of total sales.
In other words, if a person were standing in the brokerage office
of any broker’s house in the country and watching the tape, prac­
tically every figure that came over that tape was a short sale.
Mr. M o r g a n . Can you give us November 4, Mr. Stirn, the day
before the directors’ meeting?
Mr. S t i r n . The total number of sales?
Mr. M o r g a n . Yes.
Mr. S t i r n . No, I can not, because these sales are only on a weeklv
basis, but the Financial Commercial Chronicle and the New York
Times might give that data.
Mr. M o r g a n . What is the preceding date if you can give it?
Senator B l a i n e . Per week?
Mr. S t i r n . All right; October 30, on which date I show that the
short position amounted to 89,891 shares.
Senator B l a i n e . And the total?
Mr. S t i r n . The total number of shares on that date was 94,900
shares. In other words, the short position or number o f sales con­
tributed practically a hundred per cent.
Senator B l a i n e . Less than 5,000 shares not short—“ not necessar­
ily short ” ?
Mr. S t i r n . Taking out the long sales, practically all of it amounted
to short sales. These figures, therefore, are not insignificant, as
President Whitney of the New York Stock Exchange would have
the country to believe.
After November 10, when the public became aware of this direct­
ors’ meeting, the short position was gradually reduced. That is, a
covering movement by those people on the inside, this inferentiallv
being an inside rigging operation, it was purely manipulation, a cov­
ering movement ensued thereafter.
Senator B l a i n e . Mr. Stirn, have you given the peak short posi­
tion ?
Mr. S t i r n . Yes; the peak short position, strangely enough, coin­
cides with the date of this directors’ meeting, which is November 5,
and the short position on that date was 148,852 shares, which is a
great, colossal figure for a corportion having so few number o f shares
outstanding.



STOCK EXCHANGE PRACTICES

837

On November 11, one day after Hiram Brown’s letter to stock­
holders, there were 138,486 shares sold. On November 12, before
this letter could have reached the stockholders all over the country,
having been mailed in the regular fashion, there were 143,693 shares.
On November 13 a great tapering off in the number of short posi­
tions is noticed.
Mr. M o r g a n . On November 13, when there was public knowledge
of the proposed reorganization or proposed assessments, can you
give the total sales? There is a discrepancy there I want you to
bring out.
Mr. S tirn . Yes. November 13, the date which you have reference
to, the short position was 119,669 shares. The total position o f all
sales was 150,400.
M r . M o r g a n . The general sales by the public, in other words ?
Mr. S t e r n . Probably; and you will see the ratio widening between
the short position and the total position.
M r. M organ . Yes. Liquidation increasing there?
Mr. S t ir n . Precisely. That is a definite pointing to liquidation.
On November 16 the short position stood at 100,691. On Novem­
ber 17 the short position-----M r. M orga n . Give Senator Gore the figure at which it was sold
on November 16.
Mr. S tir n . On November 16 the stock, Senator Gore, sold at 2y2,
the low there. When this operation for the short-selling campaign
started the stock sold at eleven or twelve dollars a share, which I
think, strangely enough, contradicts the statements by President
Whitney, and his addresses as made in the country.
On November 18 the short position stood at 63,827 shares. On
November 17 another decrease, the short position standing at 41,586
shares. On November 20 the short position stood at 42,008 shares.
M r. M organ . And the total?
M r. S t ir n . The total number of shares on that date stood at
161,900 shares. Therefore showing an increase in liquidation, that
the stock was selling, actual liquidation, and a covering movement
maintained probably by insiders who had inside information of this
directors’ meeting in advance.
Senator G o re . The theory is that this conspiracy broke the price
of the stock before they went to cover and they covered at a low
price.
Mr. S t i r n . That is the clear inference.
November 23 the short position showed another tremendous de­
crease to 23,943 shares. On November 24 the short position stood at
22,285 shares; on November 25 at 21,840 shares; on November 27 the
short position stood at 20,560 shares; and on November 30, tlie date
upon which President Whitney closes his report——
M r . M o r g a n (interposing). Pardon me—did the total sales ex­
ceed the short sales on November 12, sir?
Mr. S t i r n . Yes; they did. On November 30, to repeat, the short
position stood at 18,885 shares.
Senator F l e t c h e r . What was the price then?
Mr. S t i r n . The price then was 1%, Senator, a decrease, showing
that short sales do contribute to a downward trend in prices.
Mr. S t o c k . I f you want the short positions after November 30,
you have them right there.



83 8

STOCK EXCHANGE PRACTICES

Mr.

S t i r n . I am not acquainted with this.
S en ator B l a i n e . W e have th a t in the record.
Mr. S t ir n . I would ask the Chairman then

to incorporate that
in the record without remarks by myself.
Senator B l a i n e . We might just have the expert state the short
sales there, Mr. Chairman.
The C h a i r m a n . There being no objection, it is agreed that Mr.
Stock, the expert for the committee, go ahead and finish his state­
ment.
Mr. M o r gan . Mr. Stirn has this for once a week.
Senator B l a i n e . Let the expert just state that. W e w ill com­
plete that here and save a lot of time.
Mr. S t o c k . The short position on December 1 was 19 442; on
December 8, 1931, was 17,592; on December 15, 8,682; on December
22, 9,036; on December 28, 8,356; on December 29, zero.
Senator G ore. Zero on the 29th?
M r . M or g an . What was it on December 28 ?
Mr. S t o c k . On December 28, 8,356, and zero on December 29.
The C h a i r m a n . What year was that?
Mr. S t o c k . 1931.
Senator F l e t c h e r . Then it was taken off the list?
Mr. S t o c k . It dropped from the list on December 29, 1931.
Mr. S t i r n . No longer quoted.
Senator B l a i n e . N o w , Mr. Stirn, before you go on t o another
subject there is one thing I do not believe has been made clear to
the committee. R. C. A., that is the Radio Corporation o f America,
acquired the R. K. O., as I understand it. Is that correct ?
M r . S t i r n . Yes.
Senator B l a i n e . After all this wrecking, why, the R. C. A. be­
came the owner of the assets of R.-K.-O.?
Mr. S t i r n . Precisely.
Senator B l a i n e . Can you state to the committee the amount that
the R. C. A. paid for the control of the R.-K.-O. ?
Mr. S t i r n . By this plan voted on by the directors o f the RadioKeith-Orpheum Corporation on November 5, 1931, this refinancing
plan, which assessed the stockholder $5 per share, and which he
could not produce, his producing power evidently having decreased
by these operations of short selling, he could not therefore describe
to these debentures which had been paid at par.
Senator B l a i n e . Leave out all those explanations, because that is
going to confuse us. Just go on with your $5 assessment.
M r . S t ir n . Yes.
Senator B l a i n e . Not as to its consequences; but I want to find out
how much the R. C. A. paid.
Mr. S t ir n . They paid the price of the debentures, $11,500,000. In
other words, they obtained this corporation for this price.
M r . M or gan . A l l except ju st sm all am oun ts th a t m ig h t have been
retained b y stockholders?
M r . S t ir n . Exactly. That I think will stand on the record.
Senator B l a in e . And the assets of the company-----Senator B r o o k h ar t (interposing). What was" the date this

acquired i




was

STOCK EXCHANGE PRACTICES

839

Mr. S t ir n . Well, as Hiram Brown stated, there was to be a meet­
ing of all stockholders December 10, if that is the correct date, Mr.
Morgan ?
Mr. M organ . It was adjourned.
Mr. S tibn . That was adjourned from time to time by lack of
proxies. There was a minority committee organized in New York, I
think, under the leadership of Mrs. Caroline Cole, an outstanding
stockholder, who since this time has become a director, by what
methods I do not know how, but she is now a director in the RadioKeith-Orpheum Corporation.
M r . M organ . The stockholders ratified that action on December
14. 1931.
Mr. S t ir n . In other words, her tremendous resources having been
dissipated, she having Class A stock, which strategically controlled
the corporation in the matter of future dividends.
Senator G ore. Did Mr. Morgan explain that about your answer to
Senator Blaine, that they acquired this through the acquisition of
these debentures for $11,000,000? I do not quite understand that.
M r . M or gan . The total clear assets were $67,000,000.
Senator B l a i n e . According to the letter that President Brown of
the R.-K.-O. sent out on November 10, 1931, stating the assets and
liabilities, the gross assets in round numbers were $127,000,000. The
net assets, the actual value of the company, was $67,000,000 in round
numbers.
Mr. S t ir n . Yes.
Senator B l a i n e . And that was acquired by the R. C. A. for
$11,500,000 in round numbers, less the few shares that outside par­
ties——
Mr. S t ir n . Contributed.
Senator B l a in e . Contributed.
Mr. S t i r n . There are some instances where people subscribed to
this plan; that is, buying these debentures at par, 100, a $1,000 bond
for $1,000, which is now worth around 46 cents on the dollar. That
would therefore make the price by which R. C. A. controlled this
corporation less than $11,500,000—cheaper perhaps; I don’t know the
figure; perhaps $10,000,000.
Senator B l a i n e . As it figures out after the wrecking began?
Mr. S t ir n . Yes.
Senator B l a i n e . The R. C. A. purchased whatever interest they
have, which is largely the total interest, the assets of the company,
for about one-sixth of what the actual assets were according to the
statement of the president of the company on November 10.
M r . M o r g an . You mean clear assets, Senator Blaine?
Senator B l a in e . Clear assets. Is that correct?
Mr. S t i r n . Correct.
Senator F l e t c h e r . Do you know what the assets consisted of?
Mr. S t ir n . Perhaps Mr. Morgan can answer that, Senator.
M r . M or g an . There was a financial statement here which was
inclosed in Hiram Brown’s letter.
Mr. S t ir n . Perhaps I may say in passing that a similar operation
was indulged in by people who are now interested in Radio City,
N. Y. They indulged in a similar operation in the control of the
Masabe Mines in northern Michigan, which they bought, I think,




STOCK EXCHANGE PRACTICES

840

for something like several millions of dollars and sold it to the
United States Steel Corporation for about 10 times the amount.
Senator G ore. Sold to what corporation ?
Mr. S t i r n . The United States Steel Corporation.
Mr. M or gan . Mr. Stirn, may I interrupt you to ask you if you
have a copy-----Mr. S t ir n (interposing). Then previous to that, according to Ida
Tarbell’s book, the control of the oil well interests in Oklahoma in
the late 80’s is also comparable to this rigging operation indulged
in practically by the same parties. In other words, their history is
practically the same for over 40 years.
Senator G ore. Was this an oil transaction, you say? You men­
tioned some oil transaction.
Mr. S t ir n . Yes; and condemned by Ida Tarbell’s book. That is,
if I may mention names, the early Rockefellers, John D. and his
brother William, came in control of the oil wells in Oklahoma and
east Texas fields.
Mr. M or gan . Mr. Stirn, have you in your files another copy of
the financial statement that accompanies President Brown’s letter?
My copy seems to have disappeared.
Mr. S t i r n . I think you have it, Mr. Morgan.
M r . M or g an . I h a d one.
Mr. S t ir n . Perhaps it is here on the table somewhere.
Mr. M or gan . We have been looking for it and unable to find it,
and I wanted to know if you had another one in your files?
Mr. S t ir n . No.
Senator F l e t c h e r . Y o u don’t know but what these might have
been, as one witness testified about the assets of a corporation when
I asked him what the assets were and he said, “ Simply an idea ” ?
The C h a i r m a n . The Senator wants to know what the assets of
the company consisted of. Were they theaters, property ?
Mr. S t ir n . Theaters, property; yes, sites, and also good will and
controlling these motion-picture actresses.
Senator F l e t c h e r . Contracts?
Mr. S t ir n . Their contracts, yes; which in the instance of Warner
Bros., having reference to Constance Bennett, was worth around the
figure of—what was the figure, Senator Blaine? $25,000 a week
salary ? I don’t know the figures. I stand corrected on that point.
Senator F l e t c h e r . I think that would be classed as a liability
rather than an asset.
Mr. S t ir n . Not if you see the profits made by reason of the pic­
tures produced by these actresses. They actually produce dividends.
The C h a i r m a n . D o you care to tell, something about your own
experience, your ownership and your own profit or gain? You were
interested in the company yourself, were you not, as a stockholder?
Mr. S t ir n . Yes; I was.
T h e C h a i r m a n . Y o u are one o f the stockholders?

Mr. S t ir n . Yes. Well, taking my own case, if you wish to know
about it, and that has nothing to do with these figures, because these
figures are history and my case therefore can not be' put down as
prejudiced, because no true story ever told was better than the fig­
ures and the records.
0
Having my case in mind, and others in my family, who, having
held thousands of shares of this corporation, having bought most



STOCK EXCHANGE PRACTICES

841

of them in the peak of April, 1930, between $46 and $50 a share,
which in the instance of my father-in-law, Doctor Collins, Rufus G.
Collins, of Chicago, who, panic-struck by reason of this short selling
campaign, sold his total amount, equalling several thousands oi
shares, at 75 cents on the dollars.
The C h a i r m a n . At 75 cents on the dollar, or 75 cents a share ?
M r . S t ir n . 75 cents a share. That is concrete evidence which can
be proved from invoices held by the brokers.
Mv experience is that I still hold the Class A shares, believing
firmly as I do in their worth.
Senator B l a i n e . And now, Mr. Stirn, with these short sales,
of course I can clearly see how it would have been possible for a
pool to have conducted the short selling and made enough out of
the short selling to have been paid the $5 assessment.
Mr. S t ir n . Precisely. I think that answers the question.
Senator B l a i n e . Now, of course, you know nothing about thatr—
you could not $
Mr. S t ir n . No, not having access to the brokers’ accounts. That
could only be determined, Senator, by subpoenaing Meehan, who
knows the whole story.
Senator F l e t c h e r . How would you have stood if you had paid
your $5 per share?
Mr. S tern . That would have meant in my instance an assessment
of $5 per share on the 1,234 shares which I owned at that time an
assessment of $6,000. That is, subscribing to these debentures at
par. And then had I done that, that $6,000 would have been worth
probably less than $3,000 now, because these debentures I believe are
quoted around 46 cents a share.
Senator B l a i n e . But that would not have preserved your stock­
holder’s interest in the 1,200 shares?
Mr. S t ir n . Precisely not, because I would be holding new com­
mon stock, which to my mind is worthless.
Senator F l e t c h e r . So you would have lost your stock and half
of the assessment?
Mr. S t ir n . On the bonds as well as on the depreciation on the
business, which is good business.
Senator B l a i n e . Which is good bad business, good poor business.
M r . M or g an . This seems to be one lamb who developed teeth,
Senator Norbeck.
The C h a i r m a n . Yes; most of them hate to admit the facts. We
get a great many anonymous letters.
Mr. S t i r n . Irrespective of my interest in the company, having
learned first of this company, that it was to be bulled to about $150
to $250 a share by the personal manipulation of Mr. Hiram Brown,
since resigned. That was the source of my material.
Mr. S t o c k . Mr. Stirn, you say the debentures are now selling at
40 cents on the dollar?
M r . S t i r n . T o m y best kn ow ledge at th is tim e.
Mr. S t o c k . D o you know whether or not they

are being depressed
at the present time by the company so that the company may buy
in cheap and get rid of them ?
Mr. S t ir n . That may be evidence from the price quoted.
The C h a i r m a n . Go ahead. Proceed with your statement.



842

STOCK EXCHANGE PRACTICES

Mr. S t ir n . I have finished as far as the statistics on the short sell­
ing campaign are concerned. Any further questions I shall gladly
welcome. I should like, however, to examine a method which Presi­
dent Whitney used in demonstrating, as he said, that short sales do
not depress the market.
Senator F l e t c h e r . What I want to make clear is-----Mr. S t i r n (interposing). By reference to a chart I have prepared.
Senator F l e t c h e r . What I want to make clear is that after this
meeting of the directors and the course determined on as to what
they were to do in order to save the company, ostensibly—
Mr. S t ir n . That was the plea.
Senator F l e t c h e r . Yes. Then they devised this plan to assess
the stock $5 a share. The experience is, and the result has been,
that those who put up the $5 would simply have lost about one-half
of it and not saved anything for it?
Mr. S t ir n . Precisely.
Senator F l e t c h e r . So that that plan would not have worked if
everybody had put up the $5, would it?
M/r. S t ir n . I think that is a good analysis of the whole situation,
Senator, and I think the figures conclusively point to that analysis
perhaps.
Senator B l a i n e . N o w , Mr. Stirn, this is just for m y own personal
information and may be of no value. The Radio-Keith-Orpheum
was a company that had bought out the Keith Theaters and movingpicture houses.
jVlr. S t i r n . Keith-Albee and the Orpheum Circuit; yes.
Senator B l a i n e . Those were scattered all over the country?
Mr. S t ir n . Those were subsidiaries; yes.
Senator B l a i n e . What other large moving-picture o rg a n ization
is there? What is the name?
Mr. S t ir n . Y o u mean some other motion-picture co n cern s, like
Fox and Warner Bros, and Paramount?
Senator B l a i n e . That owns the Fox theaters?
Mr. S t ir n . Y ou mean, who owns the Fox theaters?
Senator B l a i n e . Yes. That is a separate company, is it?
Mr. S t i r n . That is a separate company, has no relation to RadioKeith. Your investigation respecting Warner Bros, has proven
that insiders, who are Warner Bros, themselves, indulged in a cam­
paign, leading the public to believe in the worth of this stock by
sending: out letters at that time interesting people in being stock­
holders, myself included, as I had Warner Bros, stock at 16, now
worth about seven-eighths of a dollar.
The C h a i r m a n . How many cents, so we will know what it means?
Mr. S t ir n . Seven-eighths is about 87V2 cents, but I will not refer
to that, as it has nothing to do with Radio-Keith-Orpheum.
M r . M or g an . M r . Stirn, have you put into the record or testified
to the bull movement in this stock earlier?
Mr. S t ir n . No, sir. The bull movement in this stock, in raising it
upwards, is just as outstanding, Mr. Chairman, as th e d ep reciation
which I have outlined to you, which was undertaken in th e latter
months of 1931.
Senator B r o o k h a r t . Do you know if they had brokers buying and
selling both at the same time?




STOCK EXCHANGE PRACTICES

843

Mr. S t ir n . Probably, as a hedging operation; yes.
Senator B l a in e . D o you have a graph of the Radio-KeithOrpheum?
Mr. S t ir n . Yes, sir; showing its entire stock history.
Senator B l a in e . Have you two of those?
Mr. S t e r n . They are alike; yes.
Mr. M organ . M r . Stirn, the reporter has marked your graph of
the Radio-Keith-Orpheum Corporation class A stock “ Committee
Exhibit 1, June 10,1932.” Will you tell us briefly what that is?
Mr. S t ir n . This Exhibit 1 shows the weekly volume of sales of
Radio-Keith-Orpheum, that is, of the class A stock, and the weekly
swings in prices from the time of the inception of the company, that
is, on the New York Curb, the stock being at that time on a whenissued basis, from October 31, 1928, to December 29, 1931, at the
time the stock was taken off the list of the New York Stock Ex­
change. In other words, the weekly price swings are noted here and
also the volume of weekly sales.
Mr. M or gan . Mr. Chairman, may the committee’s Exhibit 1 now
be received as a part of th6 witness’s testimony ?
The C h a i r m a n . I f there are 110 objections, it will be received and
printed in the record. It is so ordered.
(The chart marked “ Committee Exhibit 1, 6-10-32 MDR,” sub­
mitted by Mr. Stirn, is here printed in the record in full, facing this
page.)
Senator G ore. Mr. Stirn, there have been other instances of rapid
depreciation in stock prices. Have you indicated some of those ?
Mr. S t ir n . You mean if there were other cases in addition to those
that I mentioned?
Senator G ore. Yes.
Mr. S t i r n . I mentioned the most outstanding cases. In the last
300 years of financial history I believe I have enumerated the most
outstanding seven or eight stock manipulations.
Senator G ore. T h e y are on the record?
Mr. S t ir n . They are in the record; yes, sir.
Senator G ore. N o w , there is one little error, Mr. Stirn, I call your
attention to. You referred to John Law as being connected with
the South Sea bubble in England.
Mr. S t ir n . Yes.
Senator G ore. He was connected with the Mississippi bubble or
Mississippi scheme in France.
Mr. &iirn. Also the South Sea Co.
Senator G ore . Well, it occurred the same year, but one was in
France and one in England. You check that.
Mr. S t i b n . That was under Walpole’s ministry.
Senator G ore. Yes. I am very familiar with it, very familiar
with it.
Senator F l e tc h e r . N o w , you are going on to give something about
that bull campaign whereby they first built up the prices and made
the market?
Mr. S t ir n . Yes.
The C h a i r m a n . And then began to bear it.
Mr. S t o c k . Mr. Stirn, did you have occasion in connection with
your investigation to look into the question of publicity? JDo you
Know whether or not during the time this stock was declining and






m

i

844

STOCK EXCHANGE PRACTICES

the short selling taking place there were statements given out b y the
company or on behalf of the company that would frighten, stock­
holders 1
Mr. S t i r n . Well, on the bull side I could answer your question.
The Wall Street Journal at this period, through one of the editors,
as mentioned by Representative LaGuardia, made many statements
on the worth of Radio-Keith.
Mr. S t o c k . Was that in connection with Radio City?
Mr. S t i r n . No, not with Radio City. And many statements ap­
peared in the Financial and Commercial Chronicle at the time o f its
bull rise, and many other financial sheets.
Mr. S t o c k . Do you know what the nature of the newspaper com­
ment was while this stock was declining? Have you looked into
that ?
Mr. S t i r n . Well, I remember a specific newspaper report, that of
the Milwaukee Sentinel, I think of the date of just after the publica­
tion of this directors’ meeting, November 5. I do not know the exact
date.
M r . M o r g a n . Was there an absence of news appearing on the
worth of this stock during the period of the intensive short drive
from October 22 to November 10 5
Mr. S t i r n . There was no news.
Mr. M o r g a n . There was no news?
Mr. S t i r n . No news.
Mr. M o r g a n . Not until President Brown’s letter became public
property ?
Mr. S t i r n . Not until President Brown’s letter became public
property.
Senator B l a i n e . Y ou were about to tell about the Milwaukee
Sentinel.
Mr. S t i r n . The Milwaukee Sentinel I think in the week beginning
November 10 made a comment in its financial section—I stand cor­
rected on that date, however—that Radio Corporation received
through this stock rigging operation full control of Radio-KeithOrpheum Corporation.
Senator B l a i n e . Of course, that was not made for the purpose of
depressing the price?
Mr. S t i r n . N o; it really amounted to a criticism.
Senator B l a i n e . That was a legitimate article?
Mr. S t i r n . That was a legitimate criticism, yes.
Senator B l a i n e . Mr. Stock does not refer to that type o f adver­
tising.
Mr. M o r g a n . He has answered the question, there was no news.
Mr. S t i r n . N o; there was no news. I think what affected the minds
of stockholders was the seeing of the constant depreciation, o f the
price of the stock.
The C h a i r m a n . In other words, boosting articles ceased to an near?
Mr. S t i r n . That is it.




STOCK EXCHANGE PRACTICES

845

Mr. S t ir n . Precisely; that is the answer.
Mr. M organ . It was five days between the date of the meeting
and the date of President Brown’s letter. We do not know what
date that was mailed.
The C h a i r m a n . What happened in those intervening five days
immediately following the secret meeting?
M r . M organ . Very heavy sales.
Mr. S tern . Heavy sales, genuine liquidation, and a short covering
movement.
The C h a i r m a n . A genuine liquidation?
Mr. S t ir n . Yes.
The C h a i r m a n . H ow do you kn ow there was not bear ra id in g , or
can you tell?
M r . M organ . Very heavy sales during those days.
The C h a i r m a n . Don’t use the term “ genuine liquidation ” when
it was bear raiding.
Mr. S t ir n . Yes; very heavy sales were made, and immediately
after November 12 then you began to have a large proportion of total
sales to short positions.
Senator B l a i n e . Which probably was liquidation?
M r . M or gan . Probably liquidation, a result of the publication of
President Brown’s letter.
Senator B l a i n e . N o w you have indentified the short sales graph.
Have you got a long sales graph?
Mr. S t i r n . Y ou have a graph, by the way, which I would like
to incorporate in the records, because that graph is as outstanding
as this. That is Appendix D, or E.
The C h a i r m a n . Y ou are r e ferrin g to a g ra p h th at h as a lrea d y
been show n to the com m ittee previou s to the h ea rin g ?
Mr. S t i r n . Yes.
The C h a i r m a n . By whom, on what occasion?
Mr. S t i r n . As I have outlined-----The C h a i r m a n . In connection with which stocks?
Mr. M o r g a n . Who furnished that graph?
Mr. S ter n . That graph was made by myself.
The C h a i r m a n . Well, we want some man to identify it so that
we can get it in the record here to tally with the description.
Mr. S t ir n . Y ou have the graph.
The C h a i r m a n . Y ou say it is already in the record of the com­
mittee hearing?
Mr. S t i r n . Yes.
T h e C h a i r m a n . H o w is it design ated in the record?
Mr. S t ir n . I believe by Appendix E or D.
Senator B l a i n e . Of what?
Mr. S t i r n . Which I previously sent to the committee.

The C h a i r m a n . In connection with what stock?
Mr. S t i r n . With short-selling campaign waged against the
Radio-Keith-Orpheum stock. There is only one graph in existence
and that was sent to the committee.
Mr. M or gan . Is this it?
Mr. S t i r n . Yes; that is the graph.
Senator B l a i n e . Identify that now.




846

STOCK EXCHANGE PRACTICES

Mr. S t ir n . That is a very important graph which shows the rela­
tion of the volume of short sales to the price structure o f the
company.
Senator B l a in e . Yes. That is graph identified as Exhibit 2 now ?
Mr. S t ir n . Yes; Exhibit 2.
(Graph designated “ Committee Exhibit 2 6-10-32 MDR,” sub­
mitted by Mr. Stirn, is here printed in the record in full, facing this
page.)
Senator B l a i n e . Just describe it.
Mr. S t ir n . Exhibit 2 in the form of a graph demonstrates an in­
tensive short-selling campaign; that is, from the point of volume of
short sales; that is, the number of the short positions in the period
of September 20 to November 30, 1930, inclusive. It also shows a
chart line demonstrating the fall of prices corresponding and being
coincident to the great volume of short sales waged against the price
of the stocks of this company. That, I believe, answers your ques­
tion, Senator?
Senator B l a i n e . Yes. Now, will you let us have that a n d w e
will have that introduced in evidence the same as the others ?
Senator B r o o k h a r t (presiding). Does that graph also show the
full promotions?
Mr. S t ir n . No; that is Exhibit 1, Senator Brookhart.
Mr. S t o c k . Mr. Stirn, at the time that this short-selling activity
began to increase-----Mr. S t ir n . Yes.
Mr. S t o c k . And the stock began to decline-----Mr. S t ir n . Yes.
Mr. S t o c k . Was there any news concerning the intrinsic position
of the company, something that had not existed prior thereto, some
new development that was unfavorable that might have accounted
for this decline in the stock, other than the short selling t h a t you
know of?
Mr. S t ir n . Well, the news was that o f President Hiram Brown’s
letter.
Mr. S t o c k . No; I mean before that. I mean when your stock
was declining in October prior to the directors’ meeting, when the
short selling was increasing.
Mr. S t ir n . I think President Brown was interviewed from time
to time.
Mr. S t o c k . What was the nature of the statements he made
concerning the company?
Mr. S t ir n . And the nature of his statements tended to throw an
unfavorable light on the financial operations of the company.
Mr. S t ir n . And the nature of his statements tended to throw an
unfavorable light on the financial operations of the company.
Mr. S t o c k . That is the thing I referred to before w h e n I asked
you if there was any publicity during this period of an unfavorable
nature.
Mr. S t ir n . Yes.
Mr. S t o ck . That accompanied the decline of the stock.
Mr. S t ir n . Perhaps I did not recognize the question or t h e fhintr
you had m mmd.
wimg
Mr. S t o c k . Now, the statements made by President Brown at t w
time that he was interviewed, did they concern any new condition



D A ILY RI3COKD S H E E T
S

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10 IS 2 0

IO IS 2 0
M AY

25

23




5

10

8

IO

JU N E
13 2 0

15 2 0
JU NK

25

25

5

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IO

JU L Y
15 2 0

IO

15 2 0
JU L Y

23

28

5

8

AU G U S T
IO 15 2 0 2 5

IO 15 2 0
AU GUST

29

S

S

SEPTEM BER
IO 15 2 0 2 5

IO 15 2 0 2 5
SEPTEM BER

5

8

O CTO BE R
IO 15 2 0

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O CTO B E R

25

25

NOVEM BER
IO 15 2 0 2 S

5

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NOVEM BER

DECEMBER
IO 15 2 0 2 5

5

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IO 15 2 0 2 8
DECEMBER

m i
11 9 8 5 2 — 32— p t 3.

(Face p. 846.)

STOCK EXCHANGE PRACTICES

847

that had not existed prior thereto, or was it a statement that he made
about something that always existed ? Do you see what I am getting
Mr. S t ir n . Yes. Specifically, I think Vice President Cahane’s
statement—I am not familiar with the date of that—he made a
statement saying that since May, 1931, the company had difficulty
in renewing its loans with the New York banks.
Mr. M o r g a n . Was that statement made otherwise than in the
directors’ meeting?
Mr. S t i r n . Yes; that was made otherwise than in a directors
meeting, but offhand I do not know the date of that statement.
I have seen records of that statement in the news section of the
Financial Commercial Chronicle, and the date of that can be verified
by looking at the index of this journal.
Mr. S t o c k . D o you know what banks held these loans of the
R -K -O ?

M r . S t i r n . Mr. Morgan can answer the question. He has that.
M r . M or gan . T h a t is in th a t ex h ib it w h ich th e o th er official re­
porter has.
The C h a i r m a n . Let him go ahead and state the case here.
Mr. M or gan . State the facts.
The C h a i r m a n . State it briefly what your trouble was. There

is no need to make this long.
Mr. M or g an . Don’t go into detail on that. Just give the gist
of it. Tell what your experience was, Mr. Stirn, on that, without
putting the letters in in full. Use the letters to refresh your recol­
lection of the dates.
Mr. S t ir n . The National Bank of Commerce of Milwaukee, Wis.
The C h a i r m a n . Now, he is getting something in the record there
that doesn’t mean a thing.
Mr. M o r g an . Which held these shares of stock?
Mr. S t i r n . Which held these shares o f stock.
Mr. M o r g a n . At least that loan that you had made.
Mr. S t i r n . Yes. I had sent these stocks, 1,234 shares of them, to
be transferred to my name.
Mr. M o r g a n . At your request?
Mr. S t i r n . At my request. These shares were sent to the Empire
Trust Co., New York City. The bank specifically requested the
transfer of these shares from the brokerage name to the name of
Ernest W. Stirn. This request was not fulfilled. The Empire Trust
Co., instead of acceding to the request of the National Bank of Com­
merce. sent these shares to the Commercial National Bank & Trust
Co. oi New York, who returned not the 1,234 shares in the name of
Ernest W. Stirn, as requested by the National Bank of Commerce,
but instead of that sent one-fourth of the amount. That is, around
300 shares, thereby recognizing this assessment and its confiscation
of stock before it actually was voted upon by the stockholders of the
company.
Senator B l a i n e . What were those dates?
Mr. S t i r n . These dates are significant. These stocks were not
finally returned to the bank until January 6, 1931.




STOCK EXCHANGE PRACTICES

848

Mr. M or gan . When did the bank send them in?
Mr. S t i r n . The bank sent them in December 7,1930.
The C h a i r m a n . The point is this, they did not return your old
stocks?
M r. S t i r n . N o .

The C h a i r m a n . But returned new certificates of one-fourth the
amount ?
Mr. S t ir n . That is it precisely.
The C h a i r m a n . Notwithstanding your instructions?
Mr. S t ir n . Precisely.
Mr. M or g an . That is, new common stock?
Mr. S t ir n . Yes; new common stock. The National Bank of Com­
merce demanded new certificates in my name or the return of the old
class A stock.
Mr. M o r gan . Or the the return of the original certificates?
Mr. S t ir n . And in its letter it even said, upon the advice o f coun­
sel, it demanded this action.
Mr. M o r g an . Just a minute, M r . Stirn. Let me clarify that for
you. Is it a fact that the National Bank of Commerce, having origi­
nally sent your certificates, which were Street certificates-----Mr. S t ir n . Yes.
Mr. M o r g a n . In to the transfer agent-----Mr. S t ir n . Yes.
Mr. M or g an . With a request that they issue new certificates in
your name-----Mr. S t ir n . Yes.
Mr. M o r g an . That being done on December 7-----Mr. S t i r n . Yes.
Mr. M o r g a n . Prior to the ratification of this plan of the stock­
holders-----Mr. S t ir n . Yes.
Mr. M o r g an . Did the transfer agent then send back to the bank
one-quarter of the number of shares in the form of new common
stock, which the bank refused ?
M r . S t ir n . It did.
M r . M o r g a n . And the bank then returned that new stock with a
request either that they issue old class A stock in your name or
that they return the original certificates?
Mr. S t ir n . Precisely.
Mr. M o r g an . And when did the bank succeed in getting your
certificates back ?
Mr. S t i r n . You mean you want the date on which the bank ob­
tained the certificates finally ?
M r . M organ. Y e s .
M r . S t ir n . That is, they
M r . M o r g an . Yes.
Mr. S t ir n . That I think

obtained the old class A stock?

will be obtained if this should be incor­
porated in the record. There are so many letters here and I can
not verify them.
M r . M or g an . Look and see if you can find it.
S e n a to r B l a i n e . December 7, 1931, was before the stockholders
lma lantied this new reorganization?




STOCK EXCHANGE PRACTICES

849

Mr. S t ir n . Precisely.
Senator B l a in e . N o w , let me inquire here: Those stockholders, I
assume, were represented largely by proxies. I don’t know as you
know. Do you know whether they were proxies or actually voting
and present?
Mr. S tern . Well, they sent their proxies; yes.
Sen ator B l a in e . Y

ou

were n ot present, were y o u ?

Mr. S t ir n . No; I was not. I did not send any in.
Senator B l a in e . Y ou can not testify to that.
M r . M organ . The bill of complaint of J. Cookman Boyd filed in
the circuit court of Baltimore City, Md., against the Radio-KeithOrpheum Corporation alleged under oath that [reading] :
At a meeting recessed from time to time but finally held on December 14,
1931, an overwhelming number of shares of stock were alleged to have been
voted in favor of said amendment and the votes were cast through alleged
proxies.

And further alleging [continuing reading] :
That proxies for a large amount of stock were illegally cast in favor of
the proposed amendment; that proxies illegally in form cast many votes in
favor of said amendment; that proxies given for the voting of stock against
the said amendment were actually and fraudulently cast in favor of said
amendment; that persons wrongfully held proxies and unlawfully voted same
in favor of said amendments; that not all of the outstanding class A stock
was voted in favor of said proposed amendments, as required by the law of
this State, nor were all votes cast at said meeting in favor of said proposed
amendments, but votes of stockholders were in fact cast against same.
That in consequence said amendment mentioned herein as Amendment 3 was
not adopted, and the alleged action on Amendments 1 and 2 was likewise con­
trary to law and consequently null and void, but that notwithstanding, said
amendments were thereupon arbitrarily declared to have been adopted by the
said B. B. Kahane.

Were those allegations contained in Mr. Boyd’s bill filed in the
circuit court of Baltimore City ?
Mr. S t i r n . To the best of m y knowledge, yes, sir.
Mr. M o r g an . Y ou have a copy o f th a t b ill?
Mr. S t i r n . Yes. Now in answer to the previous question as to
the final date on which the Commercial National Bank & Trust Co.
of New York sent back the original certificates of class A stock 1,234
shares, as demanded by the National Bank of Commerce upon the
advice of counsel, that date was January 26,1932, nearly two months
after the original request, and it does not take two months to transfer
certificates from a brokerage name to the name of the investor. In
other words, they were fearful of people still owning the old class
A stock, which, according to the charter and the law of Maryland,
as I am legally advised by Mr. Morgan, these stocks have priority
in matter of dividends whenever and wherever they should be
declared.
Senator B l a i n e . Mr. Chairman, I am going to suggest that the
reporter identify the papers I have just handed him as Exhibit 3.
If Attorney Morgan has no objection I would like to have the
amended complaint offered in evidence and left with the committee.
I am not asking that it be put in the reporter’s record, but I would
like to have it for the use of the committee and its experts.
The C h a i r m a n . I f there are no objections, it will be so ordered.




850

STOCK EXCHANGE PRACTICES

(The document presented by Senator Blaine was d esign a ted
“ Committee Exhibit 3, 6-10-32, MDR ” and the same is here p rin ted
in the record in full, as follows:)
In the circuit court of Baltimore City. J. Cookman Boyd v. Radio-KeithOrpheum Corporation
A M END ED B IT X OF C O M P L A IN T

T o th e h o n o r a b le , T h e J udge o f S a i d C o u b t :

The amended bill of complaint of J. Cookman Boyd respectfully represents:
1. That the defendant, Radio-Keith-Orpheum Corporation, is a corporation
duly organized under the laws of the State of Maryland.
2. That said corporation has an authorized capital stock of 4,500,000 shares
without nominal or par value, divided into 4,000,000 shares of class A stock
and 500,000 shares of class B stock, of which about 2,400,000 shares of class
A stock and 500,000 shares of class B stock have been issued, and that said
corporation is engaged in the business of owning, leasing, and managing
theaters and other places of amusement, and in the manufacture, production,
sale, buying, leasing, and showing of all kinds of still and motion pictures, as
well as in broadcasting news, music, etc.
3. That under its charter said corporation is authorized to borrow or rai9e
money for any of the purposes of the corporation without limit.
4. That your complainant is the owner of 300 shares of the class A stock
for which he paid the sum of $6,300.
5. That said stock is now selling for 75 cents per share.
6. That said corporation, through the gross mismanagement of its officers and
directors, has expended and disposed of many millions of dollars of its assets
in the purchase and acquisition of places of amusement, as well as the pur­
chase of other motion-picture concerns for excessive and grossly fictitious
financial considerations, when the acquisition of same were not only not nec­
essary but palpably inadvisable, and some of these complainants are reliably
informed, verily believe, and therefore charge and aver same was done through
interlocking directorates, directors on both of the board of directors o f vendor
and vendee, and directors acting fraudulently and for their personal interest,
and to the fraud of the rights of many of the stockholders of this defendant,
as well as to the great financial loss and damage of said stockholders as a
result thereof. That in consequence thereof, as well as for other acts o f gross
mismanagement and incompetence on the part of said officers and directors,
and by reason of the payment of unwarrantedly large and grossly excessive
salaries to its officers and employees, the defendant is unable to meet its
obligations in due course as they mature, and said defendant is hopelessly
insolvent.
7. That the officers and directors of said defendant, although claiming the net
worth of defendant to be at least $50,000,000, although complainants allege
and charge said claim is erroneous, admit the inability of defendant to borrow
money for its necessities in ordinary course, and, it was compelled and so
agreed—complainants allege and charge that its necessities were a result of
the defendant’s mismanagement—to borrow the sum of $6,000,000, which has
already been expended for current expense, although it was authoritatively
stated that same was for financing through the year 1932, and not only were
compelled to pay the legal rate of interest thereon, but in addition, was
further compelled to pay a bonus therefor of the sum of $330,000, as well as
to secure said loan by a first lien on practically the entire assets of said
defendant. That the officers and directors of said defendant prepared re­
ports of defendant’s financial condition showing that as late as the latter
part of August, 1931, the net profits available for dividends on class A stock
of defendant were in excess of $5,000,000. That there have been filed with
the petition heretofore filed in this cause statements of said defendant marked
“ Complainant’s Exhibits I and II ” which same are prayed to be taken oa a
part of this bill of complaint.
n aa a
8. That on or about November 5, 1931, at a meeting of the officers and
directors of the defendant, it was resolved—and by a circular letter Hat-oH
November 10, 1931, signed by the president, Hiram S. Brown, and sent’ t o Iht
stockholders, notifying them of the action of said officers and directors that
certain amendments to the charter of defendant be aonroved and recommended




STOCK KXOHANGB PRACTICES

851

for the action of said stockholders thereon at a meeting called for December
10, 1931, at 11 o’clock a. m., and reciting in said circular letter that unless
itid proposed amendments were adopted a receivership for said defendant
would be inevitable. That said proposed amendments were substantially as
follows:
" L By the reduction of the number of outstanding shares of the class A
Kock of the corporation from 2,380,291 shares to 896.072% shares, so that
each bolder of one share of class A stock will hold one-fourth share of class A
Kock.
“ II. By the reduction of the number of outstanding shares of class B stock
of the corporation from 500,000 shares to none.
“ III. By the reclassification of the authorized class A stock, issued and
anissned, and the authorised class B stock into common stock, so that the
authorized capital stock, issued and unissued, of the corporation shall be
4^00,000 shares of common stock without nominal or par value.”
That thereafter, at the meeting of said stockholders called for December 10,
lflSl, at 11 o’clock a. m., called to order by erne B. B. Kahane, vice president
«nd general counsel of the defendant, which said meeting, over the protest
of the complainant, was unlawfully recessed from time to time until December
14, 1961, at 7.80 o’clock p. m., for the sole purpose at said alleged recessed
meeting to endeavor to obtain proxies for sufficient votes to pass said amend­
ments, at which alleged meeting an overwhelming number of shares of stock
alleged to have been voted in favor of said amendment was cast through
»Deged proxies, and this plaintiff, as already appears in a petition heretofore
filed in this cause, alleges that proxies for a large amount of stock were
illegally cast in favor of the proposed amendment; that proxies illegal In
term cast many votes in favor of said amendment; that proxies given for
the voting of stock against said amendment were actually and fraudulently
cast in favor of said amendment; that persons wrongfully held proxies and
oalawfully voted same in favor of said amendments; that not all the out■tandtog class A stock voted in favor of said proposed amendments as required
by the law of this State, nor were all votes cast at said meeting in favor of
Hid proposed amendments, but votes of stockholders were in fact cast against
*%me. That in consequence said amendment mentioned herein as “ Amendment
III ” was not adopted, and the alleged action on “ Amendments I and II ”
was likewise contrary to law and consequently null and void, but that not­
withstanding, said amendments were thereupon arbitrarily declared to have
been adopted by the said B. B. Kahane.
9. That notwithstanding the matters and facts set forth in paragraph 8 as
herein stated, said defendant has unlawfully attempted to reclassify said stock,
as well as to confiscate three-fourths of the stock of these complainants and
other stockholders of said defendant, and has publicly announced that it has
reclassified Mid stock and that It has reduced the holdings of stock of its share­
holders proportionally from four shares to one share.
10. That no reduction of the capital stock of said defendant was made, nor
attempted to be made, by said proposed amendments but merely an attempt to
change the class A stock and the class B stock into common stock.
11. That although the shares of stock of defendant are fully paid and non­
assessable, the defendant by a system or subterfuge of issuing, or attempting
to Issue, so-called debentures of $5 each on each share of stock, and upon
payment of same to return to said shareholders within three years thereafter
three-fourths of a share of stock for each so-called debenture, has attempted
to force the shareholders to pay an assessment of $5 per share by calling same
subscriptions to said debentures rather than an assessment on said stock, and
in lieu of the payment for said debentures has threatened to confiscate threefourth* of the stock of each shareholder as herein previously stated.
12. That said defendant has entered into an illegal, unlawful, and uncon­
scionable agreement with a corporation known as the Radio C o r p o r a t io n of
America, whereby It is agreed that said Radio Corporation of America,
is likewise a large holder of defendant’s stock, in consideration of Bubscribing
for such of said so-called debentures as may not be subscribed for by other
stockholders, to turn over to said Radio Corporation of America the sto?T
attempted to be confiscated from such of the stockholders of defendant wno
fail or refuse to subscribe to said debentures. That the action o f this defe110**^
in entering Into such agreement with the Radio Corporation of America io
the refinancing of this defendant and the changing of this defendant’s
get-up was induced by the fact that the dominant directors in defendant
119652—82—PT 8------ 5



852

STOCK EXCHANGE PRACTICES

poratlon were also directors In the Radio Corporation of America. That the.
action taken was that redounded entirely to the interest of the Radio C orpora­
tion of America but at the expense of the defendant’s stockholders. That such
action was conceived in fraud, was unconscionable and illegal, and should be
fully reviewed by this honorable court and the same set aside.
18. That said defendant has likewise attempted to enter into an illegal,
unlawful and unconscionable agreement with said Radio Corporation of America
wherein, by said agreement, it is proposed to give the said Radio Corporation
of America 125,000 shares of defendant’s preferred or class A stock, but which
in said agreement is erroneously and unlawfully designated as common stock,
in exchange for 500,000 shares of defendant’s class B stock standing in the
name of the said Radio Corporation of America, thereby placing the said class
B stock standing in the name of the Radio Corporation of America o n * *
equality with defendant’s class A stock, all of which would be to the benefit
and advantage of the said Radio Corporation of America but would be to the
great loss and irreparable injury of the stockholders holding class A stock of
said defendant corporation.
14. That notwithstanding the nisi order of this honorable court passed upon
the original bill of complaint, dated the 2d day of December, 1931, and not­
withstanding the nisi order of this honorable court, dated December 14,
and notwithstanding the notice and warning by these complainants to said
officers, directors, and agents of the defendant against further waste and
dissipation of defendant’s assets and against any attempt to proceed in accord­
ance with said proposed but illegal amendments, said defendant, its officers,
directors, and agents have continued to waste and dissipate the assets o f said
defendant in the payment of unconscionable and grossly excessive salaries to
said officers and employees and they have actually attempted and are now
fraudulently proceeding to carry out the acts, matters, and things which were
attempted to be provided for in said proposed amendments, notwithstanding
it is well known by these officers, directors, and agents, and said defendant,
that siid actions on their part are illegal and therefore void, all o f which is
to the great loss, damage, and irreparable injury of these complainants and
in contravention of the constitutional rights of these complainants.
15. That unless the defendant, its officers, directors, and agents be restrained
by this honorable court from fuither disposing of defendant’s assets, and from
carrying out said agreements with said Radio Corporation o f America, as well
the confiscation of complainant’s stock, and unless said alleged agreements
with the Radio Corporation of America are set aside and voided, and the
action of the directors and certain stockholders at the meeting or meetings
called to act upon said proposed amendments be likewise set aside, and a
receiver be appointed to take charge of and manage its affairs, the remaining
assets of the defendant will be in and lasting danger of being dissipated and
disposed of, all of which would be to the almost entire and irreparable loss
of these complainants, and other stockholders, as well as the creditors of said
defendant.
16. That it would be to the manifest benefit and advantage of the stock­
holders, as well as all others in interest, to have a receiver appointed by this
honorable court to take charge of and manage its affairs and if necessary to
wind up the same and make distribution of any of its remaining proceeds
among those lawfully entitled thereto.
To the end, therefore—
(1). That the defendant corporations, its officers, agents, and employees, may
be restrained from further disposing of any of the assets o f said corporation,
and of issuing said alleged debentures and of reclassifying said stock, or of
exchanging any of its stock for the class B stock held by the Radio Cor­
poration of America, and of carrying out its alleged agreements with said
Radio Corporation of America, and of confiscating any of the stock o f these
complainants.
(2). That a receiver or receivers may be appointed to take control o f and
manage the assets and affairs of said <lefendant corporation and make such
provisions for or distribution thereof as tliis honorable court by its order may
decree to be right and proper in the premises.
(3). And for such other and further relief as the nature of this cause may
require.
Wherefore this complaint prays that the writ of subpoena be issued, directed
to the said defendant corporation having its offices in the city of Baltimore,
commanding it to be and appear in this honorable court at some certain day




STOCK EXCHANGE PRACTICES

853

to be named therein and to answer the premises and abide by and perform such
decree as may be passed therein.
And as in the duty, etc.
J. C o o k m a n B oyd , Jr.,
B oyd a n d B oyd ,
H a r r y E. K a r i ,

jSolicitor8 for. Complainant.
City of Baltimore, to w it:
This is to certify that on this 29th day of December, 1831, before me, the
subscriber, a notary public of the State of Maryland, in and for the city of
Baltimore aforesaid, personally appeared J. Cookman Boyd and made oath in
due form of law that the matters and facts as set forth in the foregoing amended
Mil of complaint are true and correct as therein set forth to the best of his
knowledge and belief.
As witness my hand and notarial seal.
[ s e a l .]
R ic h a r d B. P u e , Notary Public.
Upon the aforegoing amended bill of complaint and affidavit, it is ordered by
the circuit court of Baltimore City, this 30th day of December, 1081, that the
prayer of the complainant in the above cause be granted unless cause to the
contrary be shown or or before the 9th day of January. 1932, provided a
eopy o f this amended bill of complaint be served on the defendant corporation
on or before the 31st day of December, 1931.
St a te

o f

M a rylan d ,

S en a tor B la in e . I am id e n tify in g Exhibit 3 as being a copy o f a
complaint o f Boyd v. Radio-Keitn-Orpheum Corporation in the
circuit court of Baltimore city. Is that correct, Mr. Morgan?
M r. M obgan . Yes. I would like to have a copy of that complaint
made.
Senator B b o o k h a b t. What became of that complaint? Has it
been decided?
Mr. M obgan . That suit was dismissed, Boyd’s stock having been
purchased by the defendants.
The C h a irm a n . Mr. Stock wants to ask you a question.
Mr. S t o c k . Mr. Stirn, I understand—this is from my own exper­
ience-----Mr. Stern. Yes.
Mr. S t o c k . That a great many complaints came to the New York
Stock Exchange authorities concerning the decline in the stock and
apparently what looked at that time like a great deal of short
selling.
Mr. S t ir n . Yes.
Mr. S t o c k . And many complaints came to the stock exchange

during this so-called reorganization.
Mr. S t ir n . Yes.
Mr. S t o c k . And after this assessment.
Mr. S t i r n . Yes.
Mr. S t o c k . D o you know whether or not the New York Stock
Exchange has taken any action of any kind?
Mr. S t ir n . The only action it took was taking the stock off the
list on December 29, 1931.
Mr. S t o c k . Has the stock exchange ever m ade a public statement
in reference to this matter as to what action, if any, it has taken?
M r . S tib n . No p u b lic statement th at I know o f .
Mr. M ob ga n . Mr. Stirn, you were going to give us the full move­
ment in this stock at the earlier time.
Mr. S tib n . If you wish to incorporate that in the record that
would be Exhibit 4.




854

STOCK EXCHANGE PRACTICES

The C h a i r m a n . Without objection that may be done.
(The chart presented bv Mr. Stirn was designated “ Committee
Exhibit 4, 6-10-32, MDR, and is here printed in the record in full,
facing this page.)
Senator B l a i n e . Tell what Exhibit 4 is briefly. Is that a graph
o f long sales?
Mr. S t ir n . Of all sales.
Senator B l a i n e . Of all sales on the New York Stock Exchange"
Mr. S t ir n . Yes; because short sales are also entered into it.
Senator B l a i n e . Not all Radio-Keith-Orpheum?
Mr. S t i r n . No. This is a graph of all sales according to the
Dow Jones average on 30 industrials for the year 1930.
Mr. M o r g an . Mr. Stirn, that is not what I asked for. I asked for
the bull movement in Radio-Keith-Orpheum.
Mr. S t ir n . I am going to come to that later, because I can estab­
lish that better by referring to the two graphs superimposing one
upon the other. 1 can establish that bull movement much more to
your satisfaction in th a t w a y .
Senator B l a i n e . Let us have this other identified.
Mr. S t ir n . This has already been identified, Senator, as Exhibit 1.
Exhibit 4 is a graph showing the prices of the Dow Jones average
for the 30 industrial stocks and shows the total volume for the spring
of 1930 and gradual increase in the price structure.
Superimposing Exhibit 1 upon Exhibit 4, Exhibit 1 being-----Senator B l a in e (interposing). That is the graph giving the long
sales of the Radio-Keith-Orpheum now, long and short?
Mr. S t ir n . Absolutely. Exhibit 1 graphically describes the long
and short sales in the Radio-Keith-Orpheum Corporation beginning
from 1928 and ending in December, 1931.
Mr. M or g an . Give us briefly the big bull movement in that stock.
Mr. S t ir n . Showing the big bull movement in the spring o f 1930
in Class A stock of the Radio-Keith-Orpheum Corporation.
Mr. M o r g an . As compared to what?
Mr. S t ir n . I f the investigator superimposes the graph known as
Exhibit 1 upon the graph known as Exhibit 4, the contrast in the
rise of the price structure of Radio-Keith-Orpheum Corporation as
compared with the Dow Jones industrial average shows a tremen­
dous comparison. In other words, the rise of the price of the stock
o f Radio-Keith-Orpheum Corporation for the spring of 1930 is most
precipitous.
Mr. M o r g a n . What was it? Give us the figures.
Mr. S t i r n . It began from a low of 19 in January and ended in a
high of 50 on April 24, 1930.
Senator B r o o k h a r t . In 1929 it had been up high and then dropped
down there?
Mr. S t ir n . Which just shows that similar operations were engaged
in by the company. In other words, they conform to record.
Senator B r o o k h a r t . It is a repetition of some manipulations?
Mr. S t ir n . There are about five or six big swings, Senator, which
infer manipulation and rigging.
Senator B r o o k h a r t . Y ou think they were all manipulated like
the ones you have just described ?
I think so; yes. M. J. Meehan & Co., being the floor
specialist, have the records. I think the committee can not arrive






119852— 32— pt 3.

(Face p. 854.)

STOCK EXCHANGE PRACTICES

855

at a satisfactory result in this matter without having Mr. Meehan
on the stand.
Mr. S t o c k . Mr. Stirn, you said that R -K -0 rose in price in the
spring of 1930 from about 12 to about 50; is that it?
Mr. S t ir n . Not 12; no. That was in December, 1929. That is
the low in December, 1929.
Mr. S t o c k . Well, it rose from that low point?
Mr. S h r n . It practically rose; yes, sir; one could even make a
larger figure. It rose practically from 12 to 50.
Mr. S t o c k . Just to get it on the record, this was included in the
Dow Jones averages in the rise showing that same comparison from
what to what?
Mr. S tern. From an average of 212 to 250 approximately.
Mr. S t o c k . S o that the Dow Jones stocks rose about 25 per cent?
M r . S t ir n . Yes.
Mr. S t o c k . And R -K -0 rose about 300 per cent?
Mr. S t ir n . Precisely.
Mr. S t o c k . Or about twelve times as much?
Mr. SnBN. Precisely. That is an interesting comparison, Mr.
Stock.
Senator B r o o k h a r t . Mr. Chairman, I would like to interrupt the
proceedings just a minute. I want to go to the floor. I have no­
ticed in the press reports that some kind of a pool or group or some­
thing has been organized for a bull movement up there now by the
Morgan Co., and I would like to have Mr. Morgan brought down
here and see if that is one of this kind of promotion schemes.
Senator B l a i n e (presiding). Well, I am just acting chairman
now.
Senator B r o o k h a r t . I understand. I am stating it for the rec­
ord for the attention of the steering committee.
Mr. M o r g an . Mr. Stirn, do you know it to be a fact whether a
pool had been organized in this stock for the bull movement?
Mr. S t i r n . That can only be ascertained, Mr. Morgan, by sub­
poenaing Meehan & Co. Meehan having fled to Europe, perhaps
will be unwilling to answer your question.
Senator B l a i n e . Are there any other questions, Mr. Morgan?
M r. M o r g a n . I think there is an error in the statement of the per­
centage of the rise in industrials as shown in the Dow Jones group.
Isn’t that between 18 and 19 per cent that they rose from 212 to
252?
Mr. S t i r n . Ask Mr. Stock.
M r. M o r g a n . That would be an increase of 40. That shows a
percentage increase of between 18 and 19 per cent.
Mr. S t o c k . That is accurate, a greater rise proportionately for
R-K-O than for the Dow Jones averages during that period.
Mr. S t i r n . Oh, yes.
Mr. M or gan . Yes; I am figuring that now.
M r . S t i r n . More figures on R -K -0 definitely tend to the point of
view that it is practically the most outstanding rigging operation
in the history of the New York Stock Exchange.
Mr. S t o c k . Have you ever had this matter up with the New York
Stock Exchange, Mr. Stirn?
M r . S t i r n . No, sir.
Mr. S t o c k . D o you know anybody that has?



856

STOCK EXCHANGE PRACTICES

Mr. S t e r n . N o, sir.
Mr. S t o c k . Is that because you have felt that you could not get
any redress from the New York Stock Exchange?
M r. S t ir n . Y es, sir.

Mr. M or g an . Mr. Stirn, are these figures not correct, that the per­
centage of increase in Radio-Keith-Orpheum showing that bull move­
ment was in excess of 316 per cent, while the percentage of increase
in the Dow Jones group was less than 19 per cent?
Mr. S t i k n . I think the record shows that very clearly, Mr. Morgan.
Mr. M o r g a n . The computation before was erroneous.
Senator B l a i n e . Yes. Well, mathematical computation is always
subject to revision.
Mr. S t ir n . I think the committee might be interested, Senator
Blaine, in the sources of the data which I have prepared. Naturally,
to any research worker, the most significant thing is showing the
sources of his data and where they may be found. That is to verify
the statements made. Now I should like to include the sources of
my data in the record.
Mr. M o r g an . You can make reference to it.
Senator B l a i n e . Just by reference, the name of the publication.
Mr. S t ir n . New York Stock Exchange Statistics in regard to
short selling November 25 to November 30, 1931.
Senator B l a i n e . Just give the list of publications.
Mr. S t ir n . Also the issues of the Commercial and Financial
Chronicle for the years 1928 to 1932, inclusive.
Also the Annalist, published by the New York Times for 1928,
1929, 1930, 1931, and 1932.
Standard Trade and Securities, volume 3, statistical section, pub­
lished by the Standard Statistics Co. (Inc.).
Senator B l a i n e . What year?
Mr. S t i r n . November 11, 1931.
The New York Stock Exchange Bulletin, volume 3, No. 5, of
May, 1932, the study of which will reveal the figures I have prepared
earlier for this report upon the colossal commissions made during
1929 and 1930 period on the New York Stock Exchange.
Mr. M o r g an . M r . Chairman, %ome Senator asked a quesion o f the
witness as to whether he had complained to the New York Stock
Exchange. My information is that J. Cookman Boyd did write
directly to the New York Stock Exchange, complaining that this
plan was being put through in defiance of a suit in equity that he
filed and in defiance of the rules of the exchange, and so forth, and
he might enlighten us as to what relief he got from the New York
Stock Exchange.
Mr. S t i r n . Additional to the data I have cited, is the Bank and
Quotation Record published by Dana & Co., and the W all Street
Journal for the years 1928 to 1932. That is all.
Senator B l a i n e . N o w , are there any other questions?
Mr. S t ir n . I could say; in passing, that the statistics which I have
presented upon short selling in the Radio-Keith-Orpheum stock defi­
nitely contradict the published statements on short selling by Rich­
ard Whitney, president of the New York Stock Exchange.
Mr. M or g an . Mr. Stirn, will you be willing to assist the account­
ants and analysts of the committee in tracing these stock exchange




857

STOCK EXCHANGE PRACTICES

transactions through the New York Clearing House into the broker­
age houses?
Mr. S t ib n . Gladly.
Mr. M o r g a n . To identify who made these sales through our friend,
Mr. Mjeehan ?
Mr. S t i b n . Yes.
Senator B l a i n e (presiding). Is there any other matter, Mr. Stirn?
Mr. S t i b n . I think I have concluded the citation of my sources.
Senator B l a i n e (presiding). Now, Mr. Stirn, I think I express
the feeling of the committee that we appreciate your coming down
here. As I suggested to the chairman, you were one witness who is
not an adverse witness; I mean, a witness who is somewhat reluctant
in disclosing all the facts. You have taken up a specific case, traced
it through, and have shown the effect of the rigging of the market,
not only as it relates to the stockholders but also as it relates to the
wrecking of a company and the absorbing of that company by an­
other organization. It has been very valuable.
Mr. S t i b n . I think that is a true summary of the situation.
Senator B l a i n e (presiding). I f there is nothing further, the com­
mittee will stand adjourned.
(Whereupon, at 4.35 o’clock p. m., the committee adjourned, to
meet at the call of the chairman.)
(Additional data submitted by Mr. Stirn is here printed in the
record in full, as follows:)
The high and the low prices of stocks—outstanding price depreciations—on the
New York Stock Exchange, New York Curb, and the Chicago Stock Exchange
Stock

Anaconda:
Old........................................

New..........................
American Telephone-------------

American C an ...............................

Auburn________________ _____
Case, J. I.....................................
Kreuger & ToO................. .......

Instill Utilities............... ..........
Investment Corporation (Inc.).
Without warrants......................

Middle West Utilities........ .
New York Curb.......................
Chicago______________ _____
Warner Broe.............................

High
price

140
99
310V4
184H
514
467
46?160

149^
90

1 51*
» 565
3 570
80

Radio C o r p o r a t i o n . --------- -----------Paramount Fam ous Lasky—
United States Steel......................

Borden.......................................
Sw ift* C o .............- - - - - ..........—
General Theaters Equipm ent.
Citie* Service.................................
Pox Film, class A .........................
Curb, September, 1928...............
Goldman Sachs-----------------------General Electric new..................

Xew...........................................
Wectinghoose................
Radio-Keith-Orpheum <

D ate

M ar. 22,1929.......................................
M ar. 20, 1929.......................................
Sept. 19,1929.......................................
Aug. 24, 1929......................... ..............
Sept. 18, 1929.......................................
Sept. 16, 1929.......................................
M ar. 6, 1929.........................................
August, 1929, N ew York C u r b .-.
August, 1929, Chicago......... ...........
August, 1 9 2 9 ................. ....................
September, 1929................................
April, 1930..........................................
Sept. 12,1929.................................
April, 1930.......................................... }
Oct. 15, 1929................ ........................
Sept. 3, 1929.........................................
July 10, 1929..................................
July 10, 1929.........................................
.........do......................................... ..

......................................

Low
price

D ate

l

Apr.

82 U
m i
28%
17^
2M
VS*
1 Ha

M a v — , 1932
M a y 16,1932
D o.
D o.
Apr. 11,1932
June 7,1932
D o.

SH

A pr. — ,1932

H

June — , 1032

m

8,1932

Apr. — , 1932

3 % Apr. 12,1932
25H June — , 1932
D o.
20H
D o.
7
Apr. 5,1932
M a y — , 1932
33
*2
Apr. 9,1932

119
April, 1930............................................
Dec. 9,1929..........................................
i April, 1930............................................ }
Aug. 16, 1929.......................................
Apr. 24, 1930........................................
50

M a y — , 1932
June — , 1932

.10

2m
H

M a y 10,1932
D ec. 28,1931

* Low pric«3 of corporations under receiverships.
* CI& 3 A stricken off the list computed on present price of new stock, at low of 1H» the class A at onefourth of new common would be about H or 37J4 cents.
N ot* __N o corporation not in actual receivership shows so sensational a depression of stock as that
Radio-Keith-Orpheum under the influence of concerted and concentrated short selling.

suffered b y




STOCK EXCHANGE PRACTICES

858

Volume of sales in 1930 of group of corporations compared in terms of ratio
Bales to the number of shares outstanding, to total number of sales of ail
stocks, and to the number of shares listed on the New York Stock Exchange
in per cent
Num ber of
Volum e of
shares out­
standing

Nam e of corporation

Radio Corporation.............................................
General Electric................ - - - - - - - - - ................
Radio-Keith-Orpheum, class “ A " —
Westinghouse Electric & Manufacturing.
Total
Ratio of volume of sales in per cent to—

per cen t..

13,130,000
28,845,036
2.377.315
2.586.315

37.038.890
21.865.890
18,398,908
10,592,975

46,949,566
191

88,896,663

Total sales

Number of
shares listed

810,038,161

1,296,794,480

10

0.069

SUM M ARY

Out of the entire number of sales on the New York Stock Exchange in
the group of corporations contributed over 10 per cent of the operations, and
this amount is out of 810,038,161 sales.
The volume of sales of this group compared to the number of shares out­
standing or actually existing in printed certificates (gold) actually amounted
to nearly twice this amount. No other group of stocks approach this figure
according to the data. This is clear evidence of professional handling and
manipulation, or rigging, if you please, and not honest investment or liquida­
tion, which Mr. Whitney testified to be the fact, under oath, before the
committee.
Compared to the total number of shares listed on the New York Stock
Exchange the volume of sales in this group approach or approximate 0.07 out
of over a billion shares.
The price upswing of the stock of the Radio Corporation during the pool
manipulation revealed by Counsel Gray’s examination of witnesses before the
Senate Committee on Banking and Currency held on May 19, 1982, quoted mi
the press of the country May 20, 1982
First pool:
Price
Mar. 5, 1929-------------------------------------------------------------------------------- 77%
Mar. 12, 1929------------------------------------------------------------------------------- 91%
Mar. 16, 1929------------------------------------------------------------------------------- 109%
Mar. 20, 1929------------------------------------------------------------------------------ 94
Second pool:
Mar. 23, 1929--------------------------------------------------------------------- 86 % - 91%
Mar. 25, 1929_____________________________________________ 88 - 91%
Mar. 26, 1929--------------------------------------------------------------------- 92 - 9 5
Mar. 27, 1929--------------------------------------------------------------------- 89 -100%
Mar. 28, 1929--------------------------------------------------------------------- 100 -109
Volume of sales in week, 1,863,200.
Profits accruing from operation of first pool, managed by J. M. Meehan, floor
specialist, admitted by witnesses to Gray to amount to $5,000,000. If I recall
the figures brought out by Counsel Gray, this pool held 1,493,000 shares at a
cost of $141,000,000, which makes the average cost price to the pool at the
figure $94.44. This was not brought out in the testimony as I remember.
Thus:
Top price reached during this pool operation------------------------------------ $109.25
Average cost of stock of the pool------------------------------------------------------94 ^44
Price differential------------------------------------------------------------------13 ^31
This price differential of $13.81 per share profit, with a play in 1,493 000
shares, results in a much larger profit than the $5,000,000 profit announced in
the headlines of the press. The profits, therefore, more closely approximated
$21,618,380 on the long side only. The short side also, in addition to the
$21,618,330, taking into account the drop from 109% to 94, should have netted
considerable profit.




STOCK EXCHANGE PRACTICES

859

The Investigation of the second pool as quoted in the press seemingly never
has materialized. From the point of view of price appreciation the second pool
inferentially netted a larger and more handsome profit than the first pool, as
managed by Meehan.
(Nora 2.—The $5,000,000 profits made by pool No. 1 in Radio, therefore, can
take into consideration a rise in the price of the stock of 2% points. On the
long and short side there was a play of 26 points.)
Inactivity of the Radio-Keith-Orphewn class A stock during the pool operations
in Radio in March, 1929
First RKO inactivity:
Prlce
36-37%
Mar. 9, 1929__________________________________________ _______
Mar. 11, 1929-----------------------------------------------------------------------35-36%
Mar. 12, 1929_______________________________________________ 34%-S5%
Mar. 13, 1929_______________________________________________ 34y8-35%
Mar. 14, 1929_______________________________________________
35^-36
Mar. 15, 1929------------------------------------------------------------------------ 36y8-36T/8
Mar. 16, 1929_______________________________________________
36^-37
Mar. 18, 1929------------------------------------------------------------------------ 35%-37%
Mar. 19, 1929------------------------------------------------------------------------ 35%-36%
Mar. 20, 1929------------------------------------------------------------------------ 35%-36%
Mar. 21, 1929-----------------------------------------------------------------------35-35%
Mar. 22, 1929------------------------------------------------------------------------ 34%-35%
RKO activity on down side:
Mar. 23, 1929_______________________________________________ 84%-34%
Mar. 25, 1929------------------------------------------------------------------------- 34%-29%
Mar. 26, 1929-----------------------------------------------------------------------30%-19
Mar. 27, 1929------------------------------------------------------------------------- 28%-25%
Mar. 28, 1929-----------------------------------------------------------------------28^4-30
(Nam—On Mar. 26, when RKO dropped so precipitously from 30% to 19,
the operation Radio on the same day was exactly opposite, the stock rising
from 92 to 95. Therefore, Mr. Whitney’s explanation that such drops are only
caused by liquidation is not accurate and truthful.)
Volume o f sales:
Shares

Mar. 9-15, inclusive-------------------------------------------------------------------- 71,100
Mar. 16-22, Inclusive------------------------------------------------------------------- 52,500
Inasmuch as Meehan is floor specialist for both Radio and R-K-0 stock
presumably he was too preoccupied with the Radio pool, which netted such
handsome profits, than to try for a play in R-K-O.
But during the operation of the second Radio pool which was supposed to
come under investigation later by Counsel Gray a bear play was simultaneously
waged in R-K-0 while a bull play was going on in Radio, in the latter part of
March, 1029.
1929 profit on commission record for stocks crnd bonds listed on the New York
Stock Exchange
1. Total number of shares sold from January 1 to December 31, 1929,
monthly average as of January, 1,124,991,490 (New York Stock Exchange
Bulletin May, 1932, only gives bank and quotation record January 10, 1930,
p. 28, voL 3, No. 1 ); 1,124,900,980 (New York Times, the Annalist, January 17,
I960, p. 212, vol. 35, No. 887). Quotes in dollars, but this can not be true
stock price index and monthly averages of all listed shares January,
1929, 89; January, 1930, 57; New York Stock Exchange Bulletin May, 1932,
page 4.
2. Rates of commission. Scale in effect since November 1, 1924, under
constitution of New York Stock Exchange:

Cents per share

On stocks selling below $10 a share----------------------------------------------------- 7%
On stocks selling at $10 and above but under $25-----------------------------------12%
On stocks selling at $25 and above but under $50---------------------------------- 15
On stocks selling at $50 and above but under $75---------------------------------- 17%
On stocks selling at $75 and above but under $100--------------------------------- 20
On stocks selling at $100 and above but under $200------------------------------- 25




300

STOCK EXCHANGE PRACTICES

On stocks selling at $200 a share and over, 25 cents for the first $200 in
price and 5 cents a share additional for each $50 increase in price or fraction
thereof.
Members of the exchange executing orders for fellow members follow a scale
of rates much lower than rates to nonmembers. (The Stock Market, Charles
A. Dice, Chicago and New York Shaw & Co., 1927, p. 113.)
3. T otal number o f shares listed on the New Y ork Stock Exchange, January
1 i930* 1,127,682,468 (source o f d a ta : New Y ork Stock E xchange Bulletin,
M ay 1932, p. 5, Vol. I l l , No. 5) ; 1,117,000,000 (Standard T rade and Securities,
Vol III, statistical section, Standard Statistics Co. (I n c .), New Y ork statistical
section 6, base b ook ; vol. 63, No. 7, sec. 3, p. 134, January, 1932).
4. Ratio sales to listing in per cent, nearly 100 per cent note; not 14 per cent,
given by New York Exchange Bulletin, May, 1932, page 11, first table.
5. Monthly volume of sales (unit, 1,000,000) : 1929—January, 110.8; Febru­
ary 77.97; March, 105.6; April, 82.60; May, 91.28; June, 69.55; July, 93.38;
August, 95.70 ; September, 100.1 ; October, 141.7 ; November, 72.46 ; December,
83.86. *( Source of data:. Standard Trade and Securities Standard Statistical
Bulletin, s.ec. 6, p. 156, vol. 3, January, 1932.)

6. Stock price index and monthly averages of all listed stocks: No. 1 flat
price average is flat average price (the average of all prices) in dollars;
No. 2 price index is price index (January 1, 1925, 100) based on the adjusted
average price, which is the average price (No. 4) adjusted to split ups, stock
dividends, etc.; No. 3 S. C. C. average price is Stock Clearing Corporation
Monthly average price of settled shares in dollars; No. 4, unadjusted average
price, unadjusted average price found by dividing the total market value by
the total number of shares listed, in dollars. See New York Stock Exchange
Bulletin, May, 1932, page 4.
Stock price index and monthly averages off all listed shares
January, January,
1925
1926

N o.
N o.
N o.
N o.

N o.
N o.
N o.
N o.

1 flat average price.........—
2 price index....... ................... 3 S. C. C. average price-----4 unadjusted average price..

1 flat average price......... —
2 price index..................... —
3 S. C. C . average price.........
4 unadjusted average price..

1 flat average price................
2 price index............................
3 S. O. C , average price------4 unadjusted average price.

$94.64
140.0
69.0
75.93

$96.76
166.1
78.6
89.09

$69.01
111.1
52.6
57.38

August,
1931

Septem­
ber, 1931

October,
1931

$47.05
67.8
35.5
34.09

$46.40
67.3
31.1
33.93

$37.11
48.7
27.8
24.55

$87.91
115.8
68.4
70.15

$83.49
115.7
64.6
65.53

M av,
1931

June,
1931

July,
1931

December,
1931

N o.
N o.
N o.
N o.

January,
1928

$80. i7
100.0
56.9
62.45

$50.09
74.0
39.4
37.23

$34.24
46.9
24.2
23.59

January, January, January,
1930
1929
1931

January,
1927

$46.20
64.8
36.3
32.58

$48.54
72.3
37.3
36.38

January,
1932

$29.37
40.2
25.8
20.24

February,
1932

$29.66
39.7
26.8
19.99

March,
1932
$29.89
41.5
22.5
20.90

New York Stock Exchange Bulletin, May, 1932.

April, 1932

$28.50
37.0
21.6
18.64

$50.95
75.2
37.2
37.80

N ovem ­
ber, 1931

$36.85
61.6
28.8
25.97

M ay,
1932

$24.26
3.4
15.34

p. 4.

7. All values expressed on the four charts below are unadjusted average
prices in dollars, calculated similarly to No. 4 (above). (See New York
Stock Bulletin, May, 1932, p. 4.)
8. Average of January, 1929, $89.08, according to No. 4 ; average of Januarv
1930, $57.38 ; adjusted average, $73.26.
'
9. Therefore: Number of shares sold multiplied by 17% cents; gross profit
on commission figure 17% arrived at by the mean 73.26; or gross income.
$191,248,553.30; expenses, ---------?------------ ; net income, ----------------?
gross income to brokers on commissions, salaries to employes, rents, telephone




861

STOCK EXCHANGE PRACTICES

rates, Western Union rates on private wires, cost of seat on the New York
Stock Exchange.
10. Total bond transactions on the New York Stock Exchange for year 1929,
$3,020,316,700.
Brokers rates of commissions, $1,000, $2.50; $500, $2; $100, $2.
11. Therefore, $3,020,316.7 multiplied by $2.50, gross profit on commissions
per $1,000 bond, or $7,550,000.
Conclusion. Commissions on bonds insignificant as compared to broker’s
commissions on stocks.
12. Referring back to tables in column 2 obtaining figure 17 Va by referring
to column 6 under January 30 for figure 57.38 under No. 4 column, and then to
monthly sales column for October, 1929, sales figure at 141, the commissions
profited by brokers for Black October, 1929, are obtained by multiplying
141,000,000 by $0,175 or $24,675,000, commissions gross profits for that month.
This figure does not apply to profits on short sales or on bear raids, or in bull
pools.
13. In December, 1914, after the Exchange was closed for several months
following the opening of the World War, the volume of sales were 1.91 (unit
of 1,000,000), see previous chart or table for 1914. If this were to be repeated
now with adjusted average May, 1932, at 15.34, which means $0,125 per share
commission. This means only $246,250 commission.

Year

Jan.

42.54
34.34
62.31
110.8
56.96
1927____ 34.26
1926____ 39.09
192S____ 41.43
1924____ 26.73
1923____ 20.21
1922____ 15.39
1921.... 15.98
1920.. . 19.65
11.63
1919
1918
13.50
1917.
16.42
15.94
1916...
1915..
5.08
1914.
10.11
1913
8.73
1912..
10.91

1931____
1932
1930____
1929____
1928____

1911
1910

Feb.

M ar.

64.15
31.72
68.72
77.97

Apr.

65.49 54.33
33.06
96.55 111.00
82. 60
105.6
47.17 84.99 80. 57
49.64
44.16 49.06 46. 60
35.46 52.04 30. 22
32.75 38. 57 24.84
20.64 18. 21 17. 70'
22.69 25.86 20.04
16.19 22.73 30.47
10.15 15.91 15.27
21.73 28.80 27.98
12.05 21.17 27.66
11.32 8. 21 7. 44
13.63 18.42 14.28
12.20 15.13 12. 53
4.38 7.88 21.05
5. 86
6.23
7. 14
6.64 7.18 8. 46
7.09 14.55 15.99

___ |1____

1 Exchange closed.




A v er­
age

M ay

Juno

July

Aug.

Sept.

Oct.

N ov.

D ec.

46.66

58. 72

33. 54

24. 89

51.14

47.89

37.37

50.19

48.03

78.04
91.28
82. 16

76. 59
69. 55
63. 7-1

47. 45
93.38
39.00

39. 87 53. 55 65.50 51.95
95.70 100.1
141.7
72.46
67. 70 90.91
99.08 115.4

58. 76
83.86
92.84

67.55
93.75
76. 71

47.63
23. 19
36. 46
14.99
23.11
28. 91
17.03
16.37
34. 24
21.10
19.54
16.40
12.67
4. 76
5.46
13.66

38. 4!)
37. 99 36. 73
30 86 32. 28
16 80 24. 23
19. 6.r> 12.67
24 04 15. 15
18. 17
9.30
9. 20 12. 40
32 8 5 34.17
8. 35
1 1 . ro
18. 99 12. 79
9.18
12. 79
11.21
14.33
4.00
7.89
5. 12
9 59
7.17
7.20

1

1

51.06
44. 19
32. 87
22. 43
15.98
17.85
10.99
13. 70
24.14
6.86
11. 51
14.60
20.42
(>)
6.08

8.97

51.92
36.90
36.89
18. 15
14.61
21.78
12.91
15. 32
23.88
8.03
13. 70
29. 85
18.50
0)
7.68
10.06
1

50.46 51.36 62. 37
40. 21 31.18 41.89
53. 42 48.98 42. 88
17. 83 41.37 42.88
15. 82 22. 57 24.07
25.68 22.88
19.69
12.88 15.33
17. 62
13. 61 22.16 ! 23.83
36.89 29.97 24.26
20.29 14. 72 | 11.96
14.71 1 12.78
17.43
27.98 34. 51 ! 31.71
26.64 17.56 I 13.68
1. 91
0)
(*)
7.41
3.77
7.15
14. 15
8.71
12.60
j
!

48.08

37.42
37. 69
23. 50
19.77
21. 73

14.30

18. 73
26.07
11.95
15.35
11.07
14.85
6.57
6 . ‘j 4
10.92
10.54
13.64




STOCK EXCHANGE PRACTICES
SA T U R D A Y , JTJNE 11, 1932
U
C o m m it t e e

S tates S e n a t e ,
B a n k in g a n d C ur r en cy,

n it e d

on

Washington, Z>. C.
The committee met at 10 o’clock a. m., pursuant to call, in the
hearing room of the Committee on Interstate Commerce, the Capitol,
Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart,Goldsborough,
Couzens, Townsend, Blaine, Fletcher, Wagner, Barkley, and Bulkley.
The C h a i r m a n . The committee will come to order. Mr. Boya,
will you take a seat right opposite the reporter ?

TESTIMONY OP J. C00KMAN BOYD, ATTORNEY AT LAW,
BALTIMORE, MB.
(The witness was duly sworn by the chairman.)
Senator B l a i n e . Y ou are an attorney at Baltimore, Md. ?
Mr. B o y d . Yes, sir.
Senator B l a i n e . How long have you p racticed th ere?
Mr. B o y d . Forty-three years.
Senator B l a i n e . Of course y o u began p ra ctic in g v e r y y o u n g ?
Mr. B o y d . I was hardly 21, Senator.
Senator B l a i n e . Were you the owner of some stock of the Radio
Keith Orpheum Co. ?
Mr. B o y d . On two or three occasions I was, sir. The last time
was stock which I had owned for probably a year, probably a little
more than a year—300 shares.
Senator B l a i n e . Were you the owner o f it in November, 1931?
Mr. B o y d . Yes, sir.
Senator B l a i n e . D o y ou recall a letter that was sent out by Mr.
Brown, president of that corporation, dated November 10?
Mir. B o y d . Yes, sir; I recall that very letter and I studied it very
carefully.
Senator B l a i n e . Thereafter did you take some procedure w ith
reference to your stock?
Mr. B o y d . I did, Senator, based on the reasons, as I saw them,
first, that in that letter was a clause that unless the transfer of stock,
the exchange of that character of stock, were effected, the concern
Would have to go into receivership. I was likewise very much pro­
voked at what I thought the excessive salaries that had been paid
tod what looked to be a great waste of money. The final considera­
tion was, however, that in my opinion as a lawyer, this being a
Maryland corporation the only way they could bring about a legal




863

864

STOCK EXCHANGE PRACTICES

exchange of stock would be by unanimous consent; and I k n ew o f at
least 300 shares that would not be voted for that proposition, they
being mine. That being the case I studied the situation a n d m y son
and I filed a bill for receivership.
Senator B l a i n e . In your own name?
Mr. B o y d . I was the plaintiff and J. Cookman Boyd, jr., was the
the attorney.
Senator B l a i n e . Y ou also represented clients who were stocKholders ?
M r . B o yd . Yes, sir.
Senator B l a i n e . Or a client?
Mr. B o yd . Yes, sir; I represent a client, Senator Blaine, from your
State.
Senator B la in e . I am not going to ask you what settlement you
made, but I am going to ask you this question, whether or n o t alter
the filing of the suit and after the filing of the amended bill o f com­
plaint a satisfactory settlement was made with you by the com pany
m respect to your own holdings and in respect to your c lie n ts
holdings?
Mr. B o yd . After there had been two days argument upon ques­
tions involved before the court, there was a satisfactory settlem en t
made with me.
Senator B l a i n e . Not on the basis of the low price, however, a t
which the stock was selling at that time?
Mr. B o yd . N o , sir.
Senator B l a i n e . In fact, the stock had been taken o ff th e stock
market at the time the settlement was made, had it not?
M r . B o yd . Yes, sir. I do not think that entered into it.
Senator B l a i n e . The settlement was made in 1932, I assume?
Mr. B oyd. The settlement was m ade about th e 1st o f March, 1932,
I would say.
Senator T o w n s e n d . This year ?
Mr. B oyd . Yes, sir; 1932.
Senator Blaine. Did you ever notify Mr. Whitney, president of
the New York Stock Exchange, respecting this matter?
Mr. B oyd . Senator Blaine, I did notify Mr. Whitney.
Senator Blaine. Have you with you a copy of your communication to him?
Mr. B oyd . Yes, sir; I sent him a telegram.
Senator B l a i n e . W ill you kindly produce th a t?
(The witness produced a paper which he handed to Senator
Blaine.)
Senator B l a i n e . You have handed me, Mr. Boyd, a c o p y o f a
telegram or day letter dated December 15, 1931, addressed t o R ic h ­
ard Whitney, president, New York Stock Exchange, New York
City, which I will read (reading):
No such thing as Radio-Keith-Orpheum Corporation rights. Proposed Issu­
ance of rights absolutely illegal. Sale would only defraud innocent purchasers.
Hasn't there already been done enough harm on New York Stock Exchange to
the many small hoders of RKO stock? Why not investigate as to manipula­
tions of this stock?
J . Co o k m a n B o yd.

Was that day letter sent to Mr. Whitney?
Mr. B oyd . Yes, sir.



STOCK EXCHANGE PRACTICES

865

Senator B laine . Did you ever receive a reply to that letter ?
Mr. B o y d . N o , sir.
Senator B laine . Did you ever receive an acknowledgement of
the letter from Mr. Whitney or from anyone in his office ?
Mr. B q yd . Unless you might say that having received no reply
to this telegram I wrote to the secretary of the New York Stock
Exchange, and I wrote that letter on the 17th. The telegram was
sent on the 15th of December, and on the 30th o f December I re­
ceived an acknowledgment only of the receipt of the letter, from the
secretary of the New York Stock Exchange.
Senator B l a in e . We will offer in evidence the telegram you sent.
The letter which you received is in my hands, on the letterhead
of the New York Stock Exchange, office of the secretary, dated
December 30, 1931, and is addressed to J. Cookman Boyd, Esq., 2
East Lexington Street, Baltimore, Md., and reads as follows
(reading):
D eab Mb. B o y d : Your letter of December 17th was duly received. I regret
that through an oversight in my office an earlier acknowledgement was not
sent to yon.
Very truly yours,
A sh b e l G reen , Secretary.

And that is the only communication that you ever received from
or on behalf of President Whitney in answer to your letter?
Mr. B o y d . No, Senator Blaine. That was not an answer to my
telegram to Mr. Whitney.
Senator B l a i n e . Oh, n o; it was-----Mr. B o y d . I wrote a letter on the 17th to Mr. Green.
Senator B l a i n e . I beg your pardon.
Mr. B o y d . I got no recognition from Mr. Whitney at all.
Senator B l a in e . N o answer from Mr. Whitney, directly or in ­
directly, to your telegram of December 15?
Mr. B o y d . No, sir. I sent the secretary a letter. I wanted to
have no mistake.
Senator B l a i n e . I will recur to your letter, o f which I have a
copy in my hand, dated December 17, 1931, addressed to the New
York Stock Exchange, New York, N. Y., attention Mr. Ashbel
Green, secretary, and reading as follows [reading]:
Dbab Sib : On the 15th instant we sent a telegram to Richard Whitney, presi­
dent of the New York Stock Exchange, advising him that there was no such
thing as Radio-Keith-Orpheum Corporation rights, that the proposed issuance
of rights was absolutely illegal and sale of same would only defraud innocent
purchasers, with the suggestion that enough harm had already been done on
the New York Stock Exchange to the many small holders of RKO stock, and
suggested the advisability of an investigation as to manipulations of this stock.
We learn to-day that the Now York Stock Exchange yesterday decided to
adm it to the list for trading Radio-Keith-Orpheum Corporation temporary
certificates for common stock without nominal or par value, and that it had
likewise admitted to dealings Radio-Keith-Orpheum Corporation rights.

I shall not read the balance of the letter; but the letter from Mr.
Green o f December 30, which I read, is the only reply that you
have had to your letter of December 17 which I just read.
Mr. B o y d . That is correct.
Senator B l a i n e . I suggest, Mr. Chairman, that we have made a
part o f the record the day letter dated December 15, 1931, the letter
from Mr. Boyd dated December 17, 1931, to the New York Stock




ggg

STOCK EXCHANGE PRACTICES

Exchange, and the reply of Mr. Green, secretary, dated December
30 1931; but there are two or three other communications in this
file of papers which you have handed me, Mr. Boyd. Do they relate
to this matter?
. -wr r%
Mr. B oyd . I replied again to that acknowledgment o f M r. (jre e n ,
Senator Blaine.
Senator B l a i n e . What date was that ?
Mr. B oyd . January 2 , 1 think.
Senator B l a i n e . J a n u a ry 2, 1932. I w ill read th a t [reading]:
Ja n u a r y

2,1932.

N e w Y o r k St o c k E x c h a n g e ,

New York, N. Y.
Attention Mr. Ashbel Green, Secretary.
D ear Sir : Yours of December 30, 1931, received.
I am not so much interested in your acknowledgment that through oversight
in your office earlier acknowledgment was not made of my communication of
December 17.
I made certain statements in that letter which to my mind required action
by the New York Stock Exchange. Evidently the exchange is more interested
in the quantity sold rather than in the quality or legality of same.
I think perhaps more beneficial results might be obtained if a copy o f this
correspondence was submitted to the Senate in Washington.
Very truly yours,

I assume that that was signed by you ?
Mr. B o y d . Yes, sir. May I say that I never anticipated this, and
that I am not a voluntary witness here. I was summoned last night.
I talk with a great deal of reserve, at least, about matters in which I
have had business connections, and I might say that, so far as the
R-K-0 is concerned, the ending of my relations with them was quite
satisfactory. That reference to the Senate in my letter o f January 2,
1932, rather evidently was due to the fact that I had written to
Senator Dill, who had introduced a resolution in the Senate some
time before that providing for an investigation of R-K-O.
Senator B l a i n e . I offer the letter of January 2, of Mr. B oyd, to
the New York Stock Exchange; and I feel that all these letters,
unless you have objection, Mr. Boyd, ought to be made a part o f the
record.
Mr. B o yd . I have no objection, Senator Blaine, to any communi­
cations I had with any official of the New York Stock Exchange. I
feel now just as those letters represented my feelings at that time.
(The correspondence referred to will be found printed at the end
of the testimony of this witness.)
Senator B l a i n e . Would you care to testify as to the total amount
you received in your settlement of the suit and the settlement o f your
client’s claim?
Mr. B o yd . Senator Blaine-----Senator B l a i n e . I f you do not care to, I am not going to ask
you to.
Mr. B oyd . There is no reason why I should not, except that I think
it is a personal matter, and unless the committee insists, I would
rather not do it.
vSenator B l a i n e . I would not insist, of course.
Mr. B o yd . There is nothing of which I need to be ashamed in the
matter, except it may be that I did not settle with them for a larger
*um.
®



STOCK EXCHANGE PRACTICES

ou*

The C h a irm a n . Y ou brought action for how much money? It
was to recover how much ?
Mr. B oyd . My action was for a receivership of the concern, sir.
It was not a suit brought for a specific sum. I alleged that this con­
cern had been very wastefully managed, and, to my mind, there were
matters bordering on fraud.
The C h a ir m a n . Did you get as much as $20,000 in this settle­
ment—or don’t you care to answer that?
Mr. B o m I might say again. Senator-----Senator T ownsend . Mr. Chairman, if the gentleman does not care
to answer that question-----The C h a ir m a n . Oh, n o ; I am n ot g o in g to insist on it.
Senator B lain e . It is really not material.
Mr. B oyd. I can on ly say that it was a substantial sum.
Senator B la in e . It has the relationship o f attorney and client.
The C h a ir m a n . It was not 75 cents a share, like the others got?
Mr. B oyd . Oh, no.
Senator B lain e . It was very close to the price the stock had been
selling for when it was selling at a respectable price?
Mr. B oyd. I would say it was very much nearer to the respectable
price than the price at the time they made the settlement.
Senator B lain e . In spite of your telegram to Mr. Whitney and in
spite of your letter to the New York Stock Exchange, attention of
Mr. Green, the secretary, do you know whether or not it is a fact
that the New York Stock Exchange continued to list the stock of the
K-K-0 on the stock exchange?
Mr. B oyd . They d id ; that is, new stock.
Senator B lain e . And did it also continue to list the debentures?
Mr. B oyd . It did do that. Just how it was done, Senator, I do not
know. A 3 I stated in one of my letters, it looked like it was undue
haste in the matter.
Senator B la in e . D o you recall what letter that is?
Mr. B oyd . I think that was the letter of the 17th. It had the im ­
pression on me that this matter was being urged more to make it
appear that their action in attempting to amend the character of
their stock was legal.
Senator B la in e . You called the attention of the New York Stock
Exchange not only to the fraudulent feature of the manipulation,
but also to the illegal feature of the reorganization?
Mr. B oyd . Yes, sir; and I am still of the opinion, sir, that the
reorganization was and is illegal.
Senator B l a in e . The company, or those who represented the com ­
pany, must have been of the same opinion when they made the settle­
ment with y o u to prevent a receivership on the basis of the substantial
amount f o r the stock?
Mr. B oyd . That may be. I can not answer for them.
Might I say, Senator, that in connection with the other matter,
we sent practically the same letter to Mr. David Saranoff of the
Radio Corporation. There was too close a connection, in my mind,
between those two concerns, interlocking directors, and that had a
great deal to do with my bitterness of feeling, if there were any
Senator B la in e . D o you recall w h o the in terlock in g directors
were?

119852—32—p t 3------6




868

STOCK EXCHANGE PRACTICES

Mr. B oyd. N o ; I can not remember that. I know Mr. Saranoff
was one; I know some others that I would rather not mention.
Senator B l a in e . I am going to read a portion of the letter of
December 16, 1931, to the Kadio Corporation of America-----Mr. B oyd. Yes; that is the one I am referring to.
Senator B l a in e . It is addressed to the Radio Corporation of
America, attention of Mr. David Saranoff, president [reading]:
G e n t l e m e n : We are writing to inform you that any action taken by your
corporation, or any expenditure made by your corporation, for or on account
of the Radio-Keith-Orpheum Corporation, and especially on account of any
matter connected with the attempted amendments to the charter of the RadioKeith-Orpheum Corporation, or of the change in the 500,000 shares of class B
stock of the Radio-Keith-Orpheum Corporation owned by the Radio Corpora­
tion of America, or the purchase of any so-called indentures, will be done at
the peril of the Radio Corporation of America, as the legality, as well as the
outcome of the whole proceedings in connection with the alleged amendments
to the charter of the Radio-Keith-Orpheum Corporation, or any transfer of or
change in or reduction of the stock, has been questioned and is pending in the
circuit court of Baltimore City, in the State of Maryland.
Any action of the court in determining the legality or illegality of said pro­
ceedings of the Radio-Keith-Orpheum Corporation will date from the day of
the filing of the proceedings—in one instance, as to the question of receivership,
dating from December 1, 1931, and in the other instance as to the question of
the legality of the alleged amendments to the charter of the Radio-KeithOrpheum Corporation, accounting as from December 14, 1931.
Very truly yours,

B oyd & B o y d .

That is, you and your son, attorneys ?
Mr. B oyd . Yes.
Senator B l a in e . By yourself, J. C. Boyd ?
Mr. B oyd . Yes, sir.
Senator B l a in e . I think all this correspondence should be made a
part of the record, Mr. Chairman.
The C h a ir m a n . I f there is no objection.
Mr. B oyd. Senator Blaine, that represents our office files.
Senator B l a in e . You will have them returned to you.
Mr. B oyd. Oh, very well, sir.
(The correspondence referred to will be found at the end o f the
testimony of this witness.)
Senator F letcher . What reply d id you get from the New York
Stock Exchange?
Mr. B oyd. The only reply I received, sir, was an acknowledgement
by the secretary of my letter of December 17, written by him on
December 30, regarding the fact that it had been overlooked. As to
any reply to any material question involved in my telegram or
letter, there was absolutely nothing said.
Senator F letcheij. That is the only reply you received ?
Mr. B oyd. The only reply.
There are in this file a letter to Lehman Bros, and one to the
Commercial National Bank, which were the transfer agents o f the
concern, and I notified them along the same lines that I notified the
others.
Senator B l a in e . I think, if you have no objection, we should put
them all into the record.
Mr. B oyd. No objection. They have not been spoken of before,
and I just wanted you to know that if they were not combined there
I would not have spoken of them.




STOCK EXCHANGE PRACTICES

869

Senator F letcher . I want to get your idea, if I may, about what
you think Congress can do in the matter of regulation, or providing
for regulation or supervision or control over the New York Stock
Exchange in their transactions.
Mr. B oyd. I would have no objection to giving the matter some
consideration and giving you my views, but I would rather not— —
Senator F letcher . I did not know but what your experience in
connection with this case might enable you to point us how we can
do something to correct or remedy this kind o f business.
Mir. B oyd. Whether I can or not I could not say now. I would
be very glad to inform the committee, but you understand, Senator,
that we are just a couple of poor lawyers over in Baltimore trying
to make a living, and that takes a great deal of our time. Senator
Goldsborough would vouch for that.
Senator G oldsborough. Y es; I think I may say that Mr. Boyd is
a prominent member of the Baltimore bar, but I do not think he
knows much about the stock market, perhaps.
Senator F letcher . Y ou appreciate that we are trying to find
something that we can do to prevent transactions which you evi­
dently regard as being reprehensible in connection with the New
York Stock Exchange. We can not prevent corporations from ma­
nipulating their stock arrangements and issuing stock, and that sort
01thing. I think one great trouble with this business has been the
watering o f stock and listing it on the stock exchange and selling
to the public this watered stock which, after the water was squeezed
out, o f course, went down to nothing. I do not know that we can do
anything with reference to these corporations along that line.
Mr. B oyd . Except possibly something along this line, that a direc­
tor o f a concern, except to a very limited capacity, will be precluded
from dealing in his own stock, or indirectly deal with it in the nature
of a pool. _ Make it a criminal offense, or something along that line.
That requires some drastic action.
Senator F letcher . Yes; I appreciate that. We are concerned
here now in an investigation of the New York Stock Exchange and
its practices.
Mr. B oyd . I think this question of interlocking directors, Sena­
tor, is one of the worst things we have had to contend with and it
has been more responsible for these various pools than anything else.
One can not serve two masters at the same time.
Senator F letcher . Admitting all that, what has the New York
Stock Exchange got to do with it? Is there some way we can reach
the practices of the New York Stock Exchange? That is the mar­
ket place for these securities. You brought notice to them of what
was taking place, and it would seem that they ought to have paid
attention to that notice and perhaps canceled the listing of this stock
or protected the public in some way. That is a point that I would
like to see developed.
Mr. B oyd . Well, take this matter before us to-day. It was almost
indecent haste; it was worse than the marriage of Hamlet’s mother
to his uncle.
Senator B l a in e . I was going to suggest to Senator Fletcher that
Senator Couzens pursued the examination of Mr. Whitney respect­




87 0

STOCK EXCHANGE PRACTICES

ing complaints that had been filed, whether they made investigations
or what they did; and the chairman ascertained that Mr. Boyd, could
present a concrete case of how they handled complaints. That was
the main purpose of calling Mr. Boyd down here.
Mr. B oyd . I do not know how you got onto it, Senator.
Senator B l a in e . I knew about this last December.
M r. B oyd . I have been absolutely q u iet on the m atter since they
settled w ith me.
Senator B l a in e . Not December, but last March.

I beg your par­
don. I think it has been quite clear from your testimony that, not­
withstanding your telegram and notwithstanding the letter that you
wrote to the New York Stock Exchange^ bringing their attention
to these alleged fraudulent practices ana illegal practices, the stock
of the concern was still listed upon the New York Stock Exchange,
as well as the debentures?
M r. B oyd . Yes, sir; and is being sold now; and I think now, as I
did in December, that that stock is absolutely illegal and that it was
the duty of the exchange, after warning and before it proceeded with
the sale of it, to have its own attorneys look into tne matter and
advise it. It was not necessary to take the opinion of a 1-horse
lawyer.
Senator F letcher . Did you s o into the matter t o determine
whether there was watered stock?
Mr. B oyd. N o, sir; I was not interested in that.
Senator B rookhart . I f Congress would prohibit the use o f the
mails and the telegraph in interstate commerce with regard to prac­
tices such as you have described, that would meet it, would it not ?
Mr. B oyd. Yes; that would. The only trouble about that, sir, is
that you might strike the innocent.
Senator B rookhart . The innocent are being struck now by this
system so hard that you can afford to strike a few and still have a
result that would be to the grreat advantage o f the public, could you
not? Under proper regulation it would be much less than are suf­
fering under the system now ?
Mr. B oyd . I think there ought to be some regulation. Just w h a t
that is I am not prepared to say.
Senator B rookhart . The power to reach it is through the inter­
state commerce clause of the Constitution, by the control of the mails.
4 Mr. B oyd. Yes; but I would hope that it would not be turned over
to the Interstate Commerce Commission.
Senator B r o o k h a r t . No; I mean the interstate commerce clause
of the Constitution.
Mr. B oyd. Y es; I think vou have a right to do that.
(The correspondence referred to and submitted by the witness is
here printed in full, as follows:)
D ecem ber

15, 1931

R ic h a r d W h i t n e y ,

President New York Stock Exchange,
New York City.
No such thing as Radio-Keith-Orpheum Corporation rights. Proposed issu­
ance of rights absolutely illegal. Sale would only defraud innocent purchasers.
Hasn’t there already been done enough harm on New York Stock Exchange to
the many small holders of R-K-0 stock? Why not investigate as to maninn.
lations of this stock?
pu




J. Coo k m an

B oyd.

STOCK EXCHANGE PKACTICES

°« 1
D e c e m b e r 16, 1931.

R adio C o r p o r a t io n o f A m e r ic a ,

Neio York, N. Y.
(Attention of Mr. David Saranoff, president.)
GurraJOcEir: We are writing to inform you that any action taken by your
corporation, or any expenditure made by your corporation, for or on account
of the Radio-Keith-Orpheum Corporation, and especially on account of any
matter connected with the attempted amendments to the charter of the RadioKeith-Orpheum Corporation, or of the change in the 500,000 shares of class
B stock of the Radio-Keith-Orpheum Corporation owned by the Radio Cor­
poration of America, or the purchase of any so-called indentures, will be done
at the peril of the Radio Corporation of America, as the legality, as well as
the outcome of the whole proceedings in connection with the alleged amend­
ments to the charter of the Radio-Keith-Orpheum Corporation, or any transfer
of or change in or reduction of the stock, has been questioned and is pending
in the circuit court of Baltimore city, in the State of Maryland.
Any action of the court in determining the legality or illegality of said pro­
ceedings of the Radio-Keith-Orpheum Corporation will date from the day of
the filing of the proceedings—in one instance, as to the question of receiver«hip, dating from December 1, 1931, and in the other instance, as to the ques­
tion of the legality of the alleged amendments to the charter of the RadioKeith-Orpheum Corporation, accounting as from December 14, 1931.
Very truly yours,
B oyd & B oyd,

By J. C. B.

New Y o r k

D ecem ber

17, 1931.

S tock E xch an g e,

New York, N. Y.
(Attention of Mr. Ashbell Green, secretary.)
Dsab Sir : On the 15th instant we sent a telegram to Richard "Whitney,
president o f the New York Stock Exchange, advising him that there was no
snch thing as Radio-Keith-Orpheum Corporation rights; that the proposed
issuance of rights was absolutely illegal and sale of same would only defraud
innocent purchasers, with the suggestion that enough harm had already been
done on the New York Stock Exchange to the many small holders of R.-K.-0.
stock, and suggested the advisability of an investigation as to manipulations
of this stock.
Wa i«arn to-day that the New York Stock Exchange yesterday decided to
admit to the list for trading Radio-Keith-Orpheum Corporation temporary cer­
tificates for common stock without nominal or par value, and that it had like­
wise admitted to dealings Radio-Keith-Orpheum Corporation rights.
The issuance of this proposed stock is illegal, the stock must of necessity be
void for many reasons, among them being (1) that the alleged amendment of
the charter of the corporation was not provided for by the necessary votes
under the law ; (2) that proxies not duly executed were voted at said meeting;
(3) that proxies given for the purpose of voting against the proposed amend­
ment were voted for the same; (4) that the meeting itself was illegal; <tnd
(5) admitting for the sake of argument the legality of everything that trans­
pired, the amendments themselves, even if properly carried, were illegal and
void.
In consequence, to permit the sale of this proposed stock .and the so-called
rights would be a gross fraud upon the public who may purchase the same and
do not understand the situation.
Since yon have been notified of said illegality, it should be incumbent upon
your organization to be satisfied that the same are duly and properly author­
ized and are legal under the law before the same should be permitted to be
•old. The feeling of the general public as to alleged waste, extravagance, and
mismanagement of this corporation, as well as gross dissipation of its assets,
is of such character as that nothing less than a vigorous research on the part
of the stock exchange will satisfy.
The press asserts that there has been filed with you by the Radio-KeithOrpheum Corporation a statement of assets and liabilities as of September,
1881, which provided for assets of practically $17,000,000 and liabilities of
$10,000,000.



872

STOCK EXCHANGE PRACTICES

At the meeting of the stockholders in Baltimore on December 10, 1931, B. B.
Kahane, rice president and general counsel of Radio-Keith-Orpheum Corpora­
tion, who presided at that meeting, stated that the net worth of the assets of
the concern was at that time $47,000,000, over and above liabilities.
The times are too ticklish, values are too uncertain, and the stock market
generally is in such desperate condition as that no chances as to sale o f illegal
stock like the above should be permitted.
The people themselves have become tired and will demand a strict ac­
counting.
The haste in this matter seems so indecent as to make one ask whether there
may be an ulterior motive.
Very truly yours,
Boyd & B oot.
c/o to
Hon. O. C. Dnx,
United States Senate, Washington, D. C.
Mr. H iram S. B rown,
President Radio-Keith-Orpheum Corporation,
New York, N. Y.
December 18,1031.
Messrs. Lehman Bbos.,
New York, N. Y.
Gentlemen: We notice by a circular of the Radio-Keith-Orpheum Corpora­
tion, dated December 17, 1831, signed by Hiram S. Brown, president, that sub­
scriptions for debentures and common stock are accepted at your office.
Are you informing those who present same to you of the proceedings in the
Circuit Court of Baltimore city, State of Maryland, alleging the illegality of
this transaction and the order of that court passed in said proceedings? If
not, we should suggest from the standpoint of common honesty and fairness
that you do so.
Very truly yours,
Boyd & Born,
By J. Cookman Boyd.
December, 18, 1931.
New York,
New York, N. Y.
Gentlemen: We notice by a circular of the Radio-Keith-Orpheum Corpora­
tion, dated December 17, 1931r signed by Hiram S. Brown, president, that cer­
tificates for new common stock are now being delivered upon transfers and in
exchange for outstanding certificates for class A stock when presented fo r the
purpose at your office.
Are you informing those who present same to you of the proceedings in the
Circuit Court of Baltimore city, State of Maryland, alleging the illegality of
this transaction, and the order of that court passed in said proceedings? If
not, we should suggest from the standpoint of common honesty and fairness
that you do so.
Very truly yours,
Boyd & B oyd,
By J. Cookman B oyd.

Commercial National B ank & T rust Co.

of

New York Stock Exchange,
Office of the Secretary,
December SO, 1931.

J. Cookman Boyd, E sq.,
Baltimore, Md.
Dear Mr. Boyd : Your letter of December 17 was duly received. I regret that
through an oversight in my office an earlier acknowledgment was not sent to
you.
Very truly yours,
A shbel Green, Secretary.




STOCK EXCHANGE PRACTICES

873
J anuary 2, 1932.

Nmr Yosx

S tock E x c h a n g e ,

New York, N. Y.
(Attention of Mr. Aslibel Green, secretary.)
Dxab $ jb : Yours of December 30,1931, received.
I am not so much interested in your acknowledgement that through overright in your office an earlier acknowledgement was not made of my com­
munication of December 17.
I made certain statements in that letter which to my mind required action
by the New York Stock Exchange. Evidently the exchange is more interested
in the quantity sold rather than in the quality or legality of same.
I think, perhaps, more bonelicial result might be obtained if a copy of this
correspondence was submitted to the Senate in Washington.
Very truly yours,

(Witness excused.)
The C h a ir m a n . I want the attention o f the committee a moment.
This other matter has taken 2 hours and 30 minutes. There is no
criticism of the committee or the members. But Mr. Muir is here
to be heard and we would like to hear him also. But at this time X
had intended to put on Mr. Stock, the investigator of the com­
mittee, to make a partial report on Continental shares. He is ready
to make a statement of that as the investigator of the committee.
If there is no objection to that we will call him.
Senator B u l k l e y . I do object. Do you want to hear the reasons
for the objection?
The C h a ir m a n . You may state them.
Senator B u lk l e y . Mr. Chairman, the subject matter of this con­
troversy over Continental shares is the subject matter of litigation
in die courts. For that reason I do not want to express an opinion
one way or the other. I have no reason to question the good faith
of the people who brought the. action against Mr. Eaton and his
associates. I think the whole matter should be postponed until the
courts have had a chance to act. I do not think we should be in a
position o f giving publicity to a matter that is pending in the courts.
But that is not the whole point I wanted to address myself to here
to-day. If, for any reason, you think it is proper to go ahead not­
withstanding this matter is pending in the courts, there is an orderly
and there is a disorderly way to go ahead. We all know that where
anybody is under suspicion of doing anything that is not right, he
has been called here and questioned in person. I do not know of any
precedent for a committee expert to go on in a public hearing and
spread matters on the record here and have it broadcast through the
newspapers of the United States, at a hearing at which the person
mentioned has not been called. I protest against that very
vigorously.
The C h a ir m a n . I desire to make a brief statement on that matter*
It is well understood that this matter is in litigation and, unfortu'
nately, many of the cases that should be investigated are in litigation*
The report came, to me, which now seems to be erroneous, that thi£
case would be heard on the 6th of June, and that it should not b®
heard here until that time. I said that we would try to postpone it
Until that time. It now turns out that it is to be tried at a later date;
and at a date after the expiration of the date for the authority of
this committee to act. That is one of the reasons for investigating
it now. And I think that this is a peculiar case in many respects*



874

STOCK EXCHANGE PRACTICES

I think this is the first case which has come to our attention which
has a tax-dodging feature, of $2,000,000. The record is very inter­
esting, as Mr. Stock has informed me. And he has gone into the
matter very carefully.
Now the question still remains, is this the best way to proceed 1
I understand they send out investigators in the courts and they make
reports.
Senator B u l k l e y . Without calling the man accused?
The C h a i r m a n . Yes. I do not think it is right to call the man
who is prosecuted, in the first instance.
Senator B u l k l e y . I assume you will put in the record any prece­
dents you have for that.
The C h a i r m a n . The members of the committee will bear me out
that that is done, if I am not wrong in it.
Senator B r o o k h a r t . Practically every case is done like that. Mr.
LaGuardia brought in several cases.
Senator B u l k l e y . Mr. LaGuardia was an original witness on his
own responsibility.
Senator C a r e y . Mr. Chairman, these people will have a chance to
come here, if they care to, following this hearing, if anybody wants
to be heard.
The C h a i r m a n . I want the committee to pass judgment on the pro­
priety of handling it this way. Our time is getting very, very short,
and our attorney has been very busy in other matters. And you
know there has been criticism or him when he was spending time on
these other matters, and when he made a statement to us he was
criticized that he was trying to testify.
I want to leave it to the committee which is the best way to pro­
ceed in the matter. I do not want to do anything wrong or anything
unethical, neither do I want to delay it until the committee’s author­
ity expires.
Senator C o u z e n s . May we not take this up, Mr. Chairman, in
executive session?
Senator B u l k l e y . I have suggested that it should be taken up in
executive session.
Senator F l e t c h e r . I think that would be better.
(Thereupon the committee proceeded to the consideration o f other
business.)




STOCK EXCHANGE PRACTICES
TUESDAY, JUNE 14, 1932

C om m ittee

U n ited S tates S en a te ,
on B a n k in g an d C u rren cy ,

Washington, D. G.
The committee met at 11.30 a. m., pursuant to call, in the hearing
room o f the Committee on Interstate Commerce, the Capitol, Senator
Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Blaine, Carey, Watson, Couzens, Steiwer,
Fletcher, Glass, Wagner, and Morrison.
TJle C h a i r m a n . The committee will come to order. Professor Rip­
ley, of Harvard, is a witness now on the stock exchange investigation.
Senator C ouzens . Are you going to swear the witness?
The C h a i r m a n . Whatever you say.
Senator C ouzens . We have sworn all the other witnesses.
The C h a i r m a n . He is here at my suggestion in hopes that he could
help us out a little. He has been before the Banking and Currency
Committee before.
STATEMENT OF WILLIAM Z. RIPLEY, PB0FESS0B OF ECONOMICS,
HARVARD UNIVERSITY, CAMBRIDGE, MASS.
The C h a i r m a n . Doctor Ripley, you may proceed. Give your full
name and address and occupation, and then proceed.
Mr. R i p l e y . William Z. Ripley, Harvard University.
Senator W atson . What is your position there, Doctor Ripley?
Mr. R ip l e y . Professor of economics.
Senator W atson . And how long have y o u been?
Mr. R ip u e y . Thirty-two years.
Senator W atson . And were you connected with the railroads be­
fore that ?
Mr. R ip l e y . No.
Senator W atson . Never were in the railroad business?
Mr. R i p l e y . I was educated as a railroad engineer.
The C h a i r m a n . You are a railway director now, are you not,
Doctor Ripley ?
Mr. R ip l e y . Of the Rock Island, and I have been since the re­
organization in 1917.
The C h a i r m a n . Proceed, please.
Mr. R ip l e y . We seem to be standing at a parting o f the ways in
some respects, due to the widespread phenomenon of separation of
ownership of property from its management. It is getting to be
an old theme now, but the events subsequent to 1929 seem to me




875

876

STOCK EXCHAXGE PRACTICES

to indicate more and more clearly that tlie State must take hold.
Among other causes for the protraction of this depression is the
state of utter bewilderment on the part of the common people, not
the wealthy people, not the farmers so much as those found
from end to end of our communities, the industrial working class
with a little money, the white collar workers up to those of some­
what more ample means. All of those people have been induced to
entrust their savings to the care of others. There is nothing else
to be done under city life and modern conditions but to turn over
your property, whatever it is, except your house and your garden,
for somebody else to manage. And this bewilderment at the present
time, as I see it, arises from the fact that those who have assumed
this duty have, in too many cases, been recreant to their trust. I
might give many striking illustrations, but you know them as well
as I.
<
. . . .
Now, what comment I might offer to you would avoid, if possible,
increasing this bewilderment. The facts are already pretty well
known. We ought to have, perhaps, some more disclosure in order
sufficiently to arouse public attention; but the real constructive thing
to which I wish this committee might address itself is that of recom­
mending legislation to meet this situation.
The public, a very large group, numbers millions of people. It
has been estimated recently that stock holdings in the United States
are not less than 18,000,000. I do not mean the number of people
holding stocks, but stock holdings.
And the striking phenomena is—and this is particularly true in
the public utility field, that the number of people who have taken
a small flier—$50, $75, or $100—runs into the hundreds of thousands.
I might cite the striking case in the advertisements of Cities Serv­
ice, lor example, that over 1,000,000 people are registered security
holders in a property which aggregates assets of over $1,000,000,000.
That is a modern phenomena. It makes even United States Steel,
American Telephone & Telegraph, General Motors, and corpora­
tions of that size, seem of relatively minor importance as far as this
great public interest is concerned. *
Senator F l e t c h e r . D o y ou mean they are perm anent in v e sto rs or
ju st speculators ?

Mr. R i p le y . Permanent investors. They have been asked, solicited
even, particularly in the field of public utilities, to become owners.
I have in mind Associated Gas & Electric Co., in which it is pub­
licly advertised that not less than $1,000,000 a week, in $10 bonds—
they were called baby bonds—are being sold at the present time;
at the most difficult period industrially and financially, perhaps,
for placing securities that we have ever known. To my thinking,
the phenomena of the continuing thrift of people o f this sort is
very striking. The New York Times the other day in an article
indicated that the postal savings banks—the public governmental
accounts of the people in England were surpassing all previous
records. Our postal savings have reached an all-time peak of
$700,000,000. I f you gentlemen would visit an institution like the
Bowery Savings Bank, the biggest savings bank in the world, and
note the horde of people who come in there, filing in and out to
increase their deposits. This bank is now doubling its quarters
The common people do not know what to do with their money I




STOCK EXCHANGE PRACTICES

877

suspect also that the savings banks do not know what to do with it,
either.
What are you going to do about it ? And I am glad of the oppor­
tunity to urge upon you that same suggestion previously made to
this committee. Many of these abuses and evils which have been
exposed at your public hearings—failure of the Bank of the United
States; the Gillettee Razor scandal; and the collapse of the Insull
properties—all of these thrive upon secrecy. You would better stop
short selling and speculation if everybody Knew just what was going
on among those companies than in any other way. Therefore, I
urge once again that you exercise the Federal power as appurte­
nant to the taxing power, to require that all means by which the
Federal income taxes are computed, should be disclosed upon stand­
ardized, accepted forms prescribed by the United States Government.
Senator C ouzens . How frequently would you have that done,
professor?
Mr. R iple y . I think that has got to be determined by experience.
The result of a little book which I published a few years ago, called
Main Street and Wall Street, has been, in five or six big corpora­
tions, as they have written me themselves, to demonstrate the feasi­
bility of quarterly statements. Some of them had never reported
before oftener than once a year.
The most pitiable thing about these great collapses is the lack of
information among the owners. •I am not urging upon you that the
widow and the orphan can analyze corporate accounts. But there
are professional analysts by the hundreds who get their living that
way. There are research departments through which this informa­
tion would soon be made available, thus becoming public property.
Senator B r o o k h a r t . They are found too often 011 the pay rolls o f
those fellows, employed to boost stocks and bonds.
Mr. R ip l e y . That is true. But now it is all a guess. Nobody
knows. A few corporations have adopted a fairly sound policy in
that respect. The United States Steel Corporation deserves a good
deal of credit. From the first day it published, in a full page of the
newspapers, the complete condition of their company.
Senator C ouzens . Is it your opinion that that would have any
effect on the bull and bear pools ?
Mr. R ip l e y . I think so. When a man tries to run a bull or a
bear pool he does it because of the lack of information, among the
public, largely. I f there were a Federal bureau which, as for the
railroads, compiled and issued this material, you would have a check
upon such affairs. It is, of course, a difficult matter. The New
York Stock Exchange has tried to do it for a number of years; but
they can not accomplish more than a certain amount. In the first
place, they can only deal with those companies which voluntarily
put tneir heads in the noose, through listing on the exchange.
Senator B rookhart . Now in regard to the railroad stocks, in spite
of the Interstate Commerce Commission, has there not been about as
much speculation in the railroad stocks ?
Mr. R ip l e y . Not so.
Senator C ouzens . N o; I think there has not.
Senator B rookhart . There has been plenty o f it.
Senator C ouzens . There has been 110 bulling of the market.




878

STOCK EXCHANGE PRACTICES

Mr. R ip le y . Railroad securities have just gone down, as th e y bad
to do under the circumstances. There has been no wild flu ctu ation
as there was a generation ago. Where will you see a n y th in g lik e
this Auburn business!
Senator C otxzens. It is outrageous.
Mr. R ip le y . It is outrageous. I should like to show you letters
that come in to me from the common people, school-teachers and
white-collar workers. They have been done out of the product of
their thrift and industry. It is not always by fraud. Corrupt
practice is not always evident. Not infrequently when the business
is going on its way, honestly and decently conducted, but without
mftkiiig full disclosure of the state of its affairs, these dealers in
Kewxork who have no other interest besides speculation as a living,
will, nevertheless, play with it one way or the other by manufactur­
ing information through means disclosed through this committee.
Senator F le tc h e r . Would you have those statements a p p ly to
every concern listed on the stock exchange?

Mr. R ip le y . I would go farther than that, sir, and require that
any business engaged in interstate commerce, with more than a cer­
tain minimum number of stockholders, with assets of more than a
certain amount, andso forth, should be required to make, either to
a bureau of the United States Treasury Department, because they
handle the income tax, or to some other bureau such statements.
. Those statements ought to include’ those tilings now c u rre n tly re-

orted. They ought also to include particularly such matters as
S
epreciation, which is just a football in the hands of the unscrupu­
lous in corporate accounts. The matter of the form of statement
would have to be carefully provided for by cooperation between'good
representative business accounting organizations and the Govern­
ment. It has been done for banks for years, although it is not even
yet done properly. Bank accounts ought to be more intelligible and
considerably amplified.
Senator B r o o k h a r t . D o not b a n k stocks vary about as much as
any stocks?
Mr. R ip le y . I f so, that may be due to the imperfection of those
accounts as now rendered. But with the railroads, publicity o f their
affairs, has among other things put the railroad out of politics. They
are not in politics now, as^they used to be 20 years ago, when I first
knew the business. Publicity has been also extended to telephones
and telegraphs. There is no reason in the world—and I have
the advice of good constitutional lawyers—there seems to b e no
reason in the world why this same requirement might not b e ex­
tended to industrial corporations which are of a sufficient size and
public importance to warrant the procedure.
Senator F le tc h e r . Doing an interstate business.
Mr. R ip le y . Doing an interstate business, of course. You could not
take hold otherwise.
Senator G la s s . I think I asked you when you were before th e com ­
mittee before, more than a year ago, this question: Do you thlnfe it is
impossible to define the difference between an investment and a trare
gamble in securities?
F
Mr. R ip le y . I will tell you frankly how I feel about this specula­
tive and gambling end of it. A good deal as I do about gang tot-




STOCK EXCHANGE PRACTICES

879

fare. I would let them shoot each other up until they are all alike
cleaned out.
Senator G lass. The trouble is that they shoot everybody else up.
Mr. R ipley . That is true, but if there were disclosure currently of
these corporate affairs, it would at least be a damper on such
activities.
Senator G lass. But, Doctor, the average manj who is not an ex­
pert, does not understand these matters. Do you think a man invests
his money for an hour, or a day, or a week, or a month? Do you
call that an investment ?
Mr. R iple y . No more than I would a man who takes a flyer in the
Irish hospital sweepstakes. Hundreds o f people do that. But there
are also people of another sort. These have impressed this on my
mind, because I get so many letters, which run like this: “ I am a
school-teacher. I have invested three years’ earnings in Schulte
Retail Stores. Nobody on earth knows less about Schulte Retail
Stores than I do, and I lost my money. Yet nobody can tell me
how or why it has all come about.”
Senator G la ss. To come back to my question, do you think it is
impossible to define the difference between an investment and
gambling?

Mr. ]m p l e y . It is as indefinite a line as the difference between
right and wrong.
Senator G la ss. Well, I think I called your attention to the fact,
more than a year ago, that I had had prepared a chart which showed
that the average period that stocks which passed on the stock ex­
change, six or seven years before, was held 30 days, and that had
been reduced to 22 days. Do you think people invest their money
for 22 days.
Mr. R ip l e y . N ow . Senator, I would, right at the start, strike
down the validity ot those figures, for this reason: Speculators are
selling a hundred times over, while those other people invest but
once. When you arrive at that figure of 22 days, you are including
an overweight speculative transaction on the stock exchange. The
people I have in mind are those who are buying utility bonds at
the rate of $1,000,000 a week. There is no market for those bonds.
There is no way to dispose of them. Those who take them take
them for keeps. They can not speculate if they would.
The C h a i r m a n . What is the name of the concern, if y o u d o
not mind telling, Professor?
Mr. R if l e t . I am perfectly willing to say. It is the Associated
Gas & Electric Co.
The C h a ir m a n . Is that the one about which there was some criti­
cism or remarks in the papers because o f refusals to put an address
on the air?
Mr. R if l e t . This same issue of the small investor I was asked

to discuss before the National Association of Savings Banks. After
the arrangement for the address had been made an offer was extended
to broadcast it. I gave the text of the address to those in charge.
They said it was not the policy of the National Broadcasting Co.
to name names. I said I had been naming names all my life. You
either take the broadcast as I read it, or you do not have it all.
And so it was delivered but was not broadcast at all.




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STOCK EXCHANGE PRACTICES

Senator G l a s s . Doctor, what I am trying to arrive at—and I do
not want you to get away from the point—what I am trying to
arrive at is some accepted definition of an investment which could
be taxed by taxing transfers of stock on the New York Stock Ex­
change, which did not conform to that definition.
Mr. R ip l e y . The dividing line is so indefinite that it is very diffi­
cult to draw up such a definition. I would say in this pending crash
of Kreuger & Toll, a quarter of a billion dollars of securities have
been sold to the American people.
The C h a i r m a n . What amount did you say?
Mr. R ip l e y . A quarter of a billion.
The C h a i r m a n . $250,000,000?
Mr. R ip l e y . Yes, sir.
T h e C h a i r m a n . Y o u have reference to stocks, o r b o n d s ?
M r . R i p l e y . Both, all along the line.
Senator G la ss . They were sold as an investment.
Mr. R ip l e y . Yes; tney were bought and sold-----Senator G lass (interposing). I am talking about those securities

that are passing on the exchange, and you must stand by and find
out what they are offered for to-day, and the day they are offered*
Mr. R ip l e y . One can sometimes differentiate, by experience, those
corporations which are essentially speculative from those which art
not. Such corporations pass from one state over to the other. 1
can take you back a few years, citing American Can. It was highly
speculative. Everybody was playing with it.
Senator G l a ss . Those are the people I want to get out. Not
those who buy for an investment, but those I want to get out, the
ones I am talking about are those who gamble on American Can,
buying it to-day, and gamble on what it will be like to-morrow.
Mr. R ip l e y . 1 would go along with you in any practicable attem pt
to minimize all such dealings.
Senator G l a s s . That is what we ought to do.
Mr. R i p l e y . But my opinion is, Senator, you would discourage
speculation more effectively by insisting upon a state o f affairs
where all of those companies shall have nothing to play with. If,
once a quarter, the real status of Auburn Motors was made known;
if Radio-Keith-Orpheum, and those other companies, that were up
before you, were not blind pools, you would nnd that speculation
would nave quite a lot of the heart taken out of it.
Senator G l a ss . That would affect the professional traders. I
asked Mr. Mitchell, when he was before this committee not long
ago? if 10 per cent of the people who take fliers, as your expression
is, in market transactions had any knowledge whatsoever o f the
earning power or the management of the companies who were issu­
ing those various stocks, and he said he did not think 10 per cent
had.
Mr. R ip l e y . American Telephone & Telegraph has become a na­
tional corporation. The men who represent it on the board of direc­
tors are not there because they have a proportionate investment:
there are men on there, like Daniel Willard, I suppose, who was
put on because he was personally a national asset. The affairs of
the American Telephone & Telegraph Co. are public property
under the provisions of law which require that then- earnings^haU
be filed, as railroad earnings are filed, with the Interstate Com­



STOCK KXCHANGE PRACTICES

881

merce Commission. You do not find Western Union played with
to-day as in the day when Jay Gould had it in hand. Why i Be­
cause Western Union has to disclose its assets, and whatever is
going on.
Senator C o u z e n s . That is true o f A. T. & T.
Mr. R iple y . Exactly the same way. It seems to me, as a prac­
tical measure, Senator, directed to the same goal which you have
in mind, that this would be most effective. There is grave difficulty
in defining the difference between a speculator and an investor.
The whole thing is a product of the war. It was these great sales­
manship campaigns in Liberty bonds which taught the consumer of
electricity, and the farm family—if the farm family ever has any
money at all these days—to take the money out from behind the
chimney piece and to buy one or two or three shares of the local
utility. And, by the way, the workingmen, the employees of some of
these corporations and utilities, have been too often forced to make
the investment. That is one of the things that is going to come out
in this Insull situation in Chicago.
The C h a i r m a n . In other words, we will find that the men were
forced to buy their securities or lose their jobs 4
Mr. R ip l e y . I have many letters saying that I was obliged to
buy or I would have lost my job if I had not bought this—we com­
monly call it stuff.
Senator C o u z e n s . But the aggregate of that is not very great.
Mr. R ip l e y . I did not mean to say that it is the basis o± it. And
please do not understand me to say that I decry this investment in
public utilities. It is a great growing industry which, in the main,
is soundly handled.
Senator B r o o k h a r t . D o you value speculation; has it any legiti­
mate value in business?
Mr. R i p l e y . Not very much.
Senator B r o o k h a r t . Then why not set an arbitrary definition
between speculation and investment?
Mr. R ip l e y . I f we could.
Senator B r o o k h a r t . We could all right.
Senator G l a ss . We could propose it, but I do not think we could
get it through.
Senator B r o o k h a r t . And would it not be better for business to live
under some of the inconveniences rather than go on with speculation?
Mr. R ip l e y . Would it deal with the business effectively? Would
it not hamper the man on the border line?
Senator B r o o k h a r t . Suppose it does. Could he not afford to
submit to that rather than have speculation ?
Senator G l a ss . I think those hundreds of thousands of people
who bought A. T. & T. in response to a perfectly legitimate financing
campaign were investors.
Mr. R ip l e y . Those people did not buy through the company.
Senator W alcott . They did not sell their own stock?
Senator G lass . A. T. & T. did. They conducted an elaborate
campaign of salesmanship. The stock was offered to me over and
over again.
Senator W alco tt . I think that is true.
Senator G l a s s . And being a man of average sense I did not buy it.
And talk about the matter of a statement of their condition, I will



882

STOCK EXCHANGE PRACTICES

tell you I do not think half o f the Senators and Representatives in
Congress could understand it.
__
Senator Couzens. I f that is true, why is this bulling and bearing
not done with railroad stocks ?
Senator G la ss. It is not variable, that is all.
Senator Couzens. It is because they have to report to the Govern­
ment. And for years they have done it.
Senator G la ss. We have not a man in this room that can te ll me
what is the condition of the Pennsylvania Railroad. You can not
Senator Couzens. Yes: I can.
Senator W agn er. Would you not try to find out if you intended to
invest in them?
Senator G la ss. No ; not if I wanted to speculate. I would try to
find out what it would be to-morrow. And they transfer ten times
as much stock, frequently, in one day as the institution has put out
Senator W agn er. That is not true of rails.
Mr. R ip l e y . I d o n ot see h ow you ca n define the b o rd e r line be­
tween the tw o.
Senator G lass. I can define it mighty quick if they would let me

do it ; and I would put enough money into the hands o f the United
States Treasury to repeal these measures o f high taxation, or break
this gambling up.
Mr. R ip l e y . Suppose I bought Gillette Safety Razor and to-mor­
row found out the real facts and sold it?
Senator G lass. That would be an exception. One-tenth o f 1 per
cent. That would be an exceptional case. That would not be touched
by the plain definition of the distinction between investing and
gambling.
Senator W agn er. It is difficult to make that distinction.
Senator G la ss. I do not think it is. It is suggested that it m ight
be inconvenient. It might have been inconvenient to you in
the Gillette Safety Razor business, but the immense good accom­
plished in other directions would override that.
Mr. Ripley. O f course, Senator Glass, you would have great
trouble with fictitious accounts. You have already in your records
before this committee had ample demonstration of fictitious accounts.
I just wonder if it would be workable, however desirable the end
might be. And I am aiming at that same end you are.
Senator G la ss. The stock gamblers thought it would be workable.
When I proposed it in the Senate they got Dusy.
Senator W agner . Doctor, I wanted to ask y o u i f in a d d itio n to
this in form a tion that the p u b lic ou g h t to have— a n d I th ink it is
one o f the greatest preventatives— w ou ld it n o t b e w e ll fo r the
G overnm ent as w ell to supplem ent th at in fo rm a tio n as w ell to
the general con d ition o f the co u n try ; such as a ta b u la tio n o f the
unem ploym ent situation ?
Senator W a lc o tt. The Department of Commerce is doing th at.
Senator W agn er. We have not yet devised a proper system to do
that, although we passed some legislation some time ago th a t passed

under my name. That is difficult to do.
Mr. R iple y . At Harvard for quite a few years we attempted to
do that. I never had anything to do with the Harvard Economic
Service, but three or four of my colleagues did, and if ever there
was a disinterested service, it was that. It was an honest endeavor



STOCK EXCHANGE PRACTICES

883

to give a true picture. But it proved difficult and unworkable. It
seems to me, desirable as that information might be, too many people
would come back at you, if they acted upon any advice that you
gave, that I would rather make a beginning along this line of a
simple statement of facts. And may I say-----Senator W ag n e r (in te r p o sin g ). I d id n o t in ten d it to tak e the
place of your suggestion but th a t m y am en dm ent would supple­
ment it.
Mr. R ip l e y . I would like to think it over.
This question of publicity is up all along the line. And with
your permission I would like to file an editorial from the Journal
of Commerce, of May 23, 1932, upon this plea which I made to the
Savings Bank Association.
The C h a ir m a n . I f there is no objection, it will be printed in the
record.
(The editorial is printed in the record in full, as follows:)
A d v ic k

to

S m alt. I n v esto rs

Enormous losses have been suffered by thousands of men of small means wlio,
in years o f prosperity, invested in securities of a speculative type not suited to
their special requirements. Many of these unfortunate people now realize the
folly of placing savings that may be needed in emergencies in stocks and bonds
of fluctuating and uncertain values. The passion for speculation and the lure
of risk taking are irrepressible and will always claim a large number of victims
who can not be protected against themselves.
There is, however, another class of small investors who, having no wish to
gamble with their hard-earned savings, nevertheless fall a prey to ignorance of
the speculative character of the enterprises in which they are induced to place
their money. To investors of this type, who want safety but fail through lack
of knowledge to obtain it, the address delivered by Prof. W. Z. Ripley of
Harvard before members of the National Association of Mutual Savings Banks,
carries a special message. His plea for open, sound, and intelligible standardi­
zation of the accounts of public utility companies, with Federal regulation of
accounting practices as a safeguard, is also of particular concern to the man­
agers of institutional investment agencies, such as the mutual savings banks,
which hold in trust funds deposited by millions of small investors.
The recent collapse of two great holding company systems, one in the United
States and one in Sweden, has afforded startling evidences of the dense igno­
rance of supposed experts and financial advisors regarding the involved account­
ing practices and mispractices of organizations whose bonds and debentures
have been widely recommended as sound investments to the people of this coun­
try. These revelations emphasize the need for full and authentic information
to throw light in dark corners, where dishonest manipulators work, and to
give facts about concealed operations which, even when legitimate, ought to be
known to prospective investors.
A great many people are inclined to waste time bemoaning the losses of the
past, but doing nothing to protect the investors of the future against the same
kind o f exploitation to which they themselves have been subjected. Professor
Ripley is doing the public a great service, therefore, in emphasizing the need
for speedy action and the value of a positive program. In forceful language and
with the aid of profuse illustrative material distressingly specific in character,
which prevented the broadcasting of his remarks, he called the attention of
savings bankers to the need for reforms in public utility accounting practice.
He urges full and enforced publicity not only as a means of according increased
Protection to investors but also to the industry itself, since its growth and
sound expansion are dependent upon utilization of the savings of the American
People.
•
As Professor Ripley said: “A major development of public-utility finance is
the far-reaching campaign to bring about customer ownership of such securities.
The immediate future is big with possibilities of such a rush of popular invest­
ment. The public-utility industry, quite deservedly when properly managed,
has been more nearly depression-proof than any other branch of investment”
119852—32—pt 3------7



884

STOCK EXCHANGE PRACTICES

Unfortunately, tlie solid character of the industry does not protect from loss
the investor who acquires interest in mismanaged paper companies many times
removed from the operating organizations that are depression-proof. It does
not prevent him from sharing in speculative ventures, if he invests in bonds
of public-utility companies whose underlying holdings may be of a speculative
character. Professor Ripley is asking, therefore, that the investor shall be
placed in a position to know what he is doing when he invests in public-utility
is s u e s .
He l>elieves that tlie investor ought to be told when a bond is not a
senior obligation but merely a junior claim upon the unstable earnings of many
scattered companies, of varying degrees of soundness. The present complexity
of organization, moreover, frequently confuses the expert as well as the man
of average intelligence and facilitates manipulations that defeat the purpose
of regulatory safeguards.
Although the demand for full publicity, greater simplicity, and uniform prac­
tice in public-utility accounting is advocated by Professor Ripley primarily in
the interest of the investor, it is plain that uniform, comprehensible accounting
acts also as a check upon the efficiency of management. Hence, it assists the
work of the regulatory bodies that are chiefly concerned to protect the consumer
against excessive charges. Professor Ripley’s words no doubt have aroused a
timely interest in an important subject among representatives of institutions
that control over a third of the savings deposits of the country. It is a pity
that he was unable to reach the large audience of small savers, who stand hi
need of instruction and protection.

Senator B r o o k h a r t . Mr. Chairman, I would like to ask another
question or two about the stability of railroad investments. I am in
full accord with your publicity idea, but is it not true that the pub­
licity as to the earnings of railroads by law tended to stop specula­
tion, more than the publicity?
Mr. R ip l e y . I am not aware of any considerable speculation since,
at least, the Federal or War Administration. There is not a road
one can play with, because the moment anybody tries to organize
a pool somebody else gets in touch with the Interstate Commerce
Commission and says: “ Are their earnings really falling off or are
they holding up ? ” The minute you get that public-----Senator B r o o k h a r t (interposing). That is not my question. My
question was, do not the earnings put on the railroads by the law
tend to stop that speculation, and that complaints made to the com­
mission are on the basis of the limitations of the law; that is, for
instance, 5% per cent, and a recapture of half over 6 per cent ?
Mr. R ip l e y . As things have gone in the last few years, it is not
limitation on the earnings by the Government ; it is the limitation
put on the earnings by competition on the highways and the water­
ways and other ways.
Senator B r o o k h a r t . But there is an excess of earnings o f mil­
lions of dollars now.
Mr. R ip l e y . Yes; by a very few companies, such as the Chesapeake
& Ohio, and the Norfolk & Western.
Senator C o u z e n s . May I point out that it is not only outside
competition: it is inside competition that has helped, favoritism to
shippers, and multiplicity of building warehouses, and so on, has
contributed a large part.
Mr. R ip l e y . Yes; that is so. And while earnings have slid some­
what before, the toboggan slide has had a more or less steady grade.
The line goes like this [illustrating], following what you might call
the trend, due to fundamental circumstances, all the way up or down.
Senator B r o o k h a r t . There isn’t anything to play with in co­
operative markets.




STOCK EXCHANGE PRACTICES

885

Mr. R ip l e y . I s there an open market? You have to have an
open market before you can have speculation.
Senator B r oo k h ar t . They do not need it. Now the English co­
operatives are about the best institutions in Great Britain, and they
have an absolute fixed arbitrary earning for their capital, do they
not?
Mr. R ip l e y . Yes; I suppose they do. I do not know.
Senator B r o o k h ar t . Well, they do all right, and that stabilizes
them and destroys speculation entirely in their enterprises, and their
percentage of gross is considerably greater than the gross of private'
business, and has been ever since the war. And its stability is assured,,
and it is stabler and sounder than anything else. So why can not
we prescribe some way of limiting capital earning and stop this
speculation? Of course, the definition suggested by Senator Glass
would do that.
Mr. R ip l e y . I am not objecting to his remedy, but I am asking.
you how you would deal with the man who buys and has got to sell
the next day because he needs the money for something else? Itmay be an emergency with him.
Senator G lass . Are they not very few, contrasted with the great
body of speculators?
Senator B r o o k h a r t . I could write a definition in the law which
would distinguish between an investor and a speculator and give’
the investor the benefit of legitimate investment o f his capital, and;
if he could show a fraud was practiced on him he would have certain.
remedies against those who sold him the stocks or bonds.
Mr. R ip l e y . That would m ake difficult work for the courts.
Senator B r o o k h a r t . It would not make anything like the increase
in losses we have now.
Mr. R ip l e y . What you say may be true, but I would like to see
this gimple, practical remedy of corporate publicity applied first.Senator F l e t c h e r . Doctor, let me ask you a question: The reason
why we do not have this speculation in railroad stocks is because
we have some governmental supervision oyer the railroads. Now,applying that to the stock exchange, there is the greatest financial
institution in the world, the New York Stock Exchange, without
any regulatory power or supervisory powers anywhere. Now sup­
pose we undertake to regulate that institution by the Government,
would not that be helpful in this matter o f preventing these collapses,
such as happened in October of 1929, and in 1930?
Mr. R ip l e y . That raises an entirely different issue, as to what w a s
the cause of the collapse in 1929.
Senator F le t c h e r . Well, to get back to this thing we have in 1
mind, that is, the Stock Exchange, whether there isn’t a regulatory
power required on that?
Mr. R ip l e y . I will answer that, then, directly. I think that inde-pended standardized publicity would do more than you could hope
to do in any other way. Because, can you not see, sir, that the stock'
exchange can only deal with those who list upon it? I am urgin g
that all companies, whether they list or not, should be required to*
make periodical statements.
Senator T o w n s e n d . Doctor, would you go farther than banks are*
required to go at the present time?



886

Mr. R ip l e y . I
sp ecifica lly; but

STOCK EXCHANGE PRACTICES

do not know enough about bank accounts to answer
I have a very definite impression that it was the
weakness of its requirements which rendered possible some o f the
bank collapses we have had.
Senator T o w n s e n d . I presume you have noticed that the decline in
prices of bank stocks has been quite as severe as in any other line.
Mr. R ip l e y . I would expect it to be more so, because the banks lie
just a little nearer to the causes of collapse.
The C h a i r m a n . Doctor Ripley, may I ask your view on another
matter? Is not a part of the trouble that people who hold positions
o f trust in these corporations betray them ? Would it help if there
were a restriction on officers and people selling stock under fictitious
names while they are in charge of the property?
Mr. R ip l e y . I would like to see this committee recommend a meas­
ure, alongside of the requirement of reasonable publicity for all cor­
porations engaged in interstate commerce above a certain size, some­
thing which shall deal with speculation by directors o f great cor­
porations in the stock of his own company. The officer in one of these
companies is unlike the ordinary shareholder, because, while he con­
tinues to manage, he can step in and out of ownership with the great­
est ease. I happen to know of some cases in detail o f the adminis­
trators of great businesses who had a heavy investment up to 1929,
which they completely unloaded at the present time, large companies
that have even gone into receivership, but by reason o f advance in­
formation the directors stepped out from under. The only way to
deal with that question would be publicity. I would like to see some
requirement that periodically the president and the members o f the
boards of directors of corporations, sufficiently imbued with a public
interest, should make a showing of the number o f shares which they
hold. And I would add very severe penalties for evasion through
the use of fictitious names. One of the best safeguards for the great
body of people who are looking around for a safe placement of their
savings, is that the men who manage that business are staying with
it; that the captain is still on the ship; that he has not taken to the
lifeboat, steering it by radio.
The C h a i r m a n . And telling others to stay in.
Mr. R ip l e y . Yes; and sending out wireless messages for others to
stay or even to come on board.
Senator T o w n s e n d . That the ship is safe?
Mr. R ip l e y . Yes. What happened in Gillette Razor and Kreuger
& Toll? There was undue credulity. None of the steps were taken
that they should have taken, to have audits made; to have their law­
yers examine the concessions, to be sure they had actually been made
and that nothing could go wrong. The whole Kreuger & Toll busi­
ness was for the creation of a monopoly on a prime necessity o f life,
matches; that is to say, fire. In other words, a tax on matches is like
a tax on salt. Those who get the exclusive right to sell salt or
matches through selling third-rate Government bonds are resorting
to bribery for a license to extort.
Senator W alcott . That is^b y the Government?
Mr. R ip l e y . They got a Government monopoly on a necessity o f
life. The whole theory of the thing from the start was false. ‘But
I do not believe there was any corrupt purpose on the part o i those




STOCK EXCHANGE PRACTICES

00'

who placed those securities in America. I know some of those mer^
Thev were of marked integrity, but of incredible stupidity.
The C h a i r m a n . They did not look in to it ?
Mr. R ip l e y . They p u t their own m on ey into it.
Senator W alcott . What about Ernst & Ernst I
Mr. R ip l e y . Did Ernst & Ernst go to Sweden ? Did they do any­
thing but take the figures presented to them by Kreuger ( That is
the trouble with a great deal of the auditing that goes on now. The
auditor is looking at two sets of figures to see-----Senator W alcott (in te r p o sin g ). I f it is in balance, th a t is a ll th a t
is required?
Mr. R ip l e y . That is too true. And you will find there is often in
the certification a little notice that reads something like this: “ Hav­
ing examined the figures submitted to us, this audit is correct,” or
“ to the best of our knowledge and belief.”
Senator W alcott . They may not have looked into it carefully.
Mr. R ip l e y . Yes; th ey do not say we have gone to the bottom o f
this whole business and pledge our repu tation th at a ll is ex actly as
it is set forth.
Coining back to your question. Mr. Chairman.
The <Ch a i r m a n . I do not remember what that was, but I am
going to a sk you another one. You said $1,000,000 of baby bonds
were being sold to small investors at the present time.
Mr. R ip l e y . A million dollars worth a week.
Senator W a l c o t t . Of one com p an y (
Mr. R i p l e y . O f a single issue.
The C h a i r m a n . D o you desire to m ake any com m ent on w hat
kind of an investment it is?
Mr. R i p l e y . The primary comment I should make on it is that
it is not suitable for people of small means, because it has not the
attribute that such things ought to have, instant convertibility.
That is what the savings banks offer. I f you break your leg or lose
your job. you can get the money back. There should be an open
market tor any security that is widely held. And the pathetic
thing is that very large amounts of money at the present time, by
these sales campaigns are being withdrawn from savings banks
in order to be devoted to this other kind of investment.
The C h a i r m a n . Has it a promise o f a great return?
Mr. R i p l e y . A very much greater return.
The C h a i r m a n . A very much greater return ?
Mr. R ip l e y . These bonds which I have in mind are offering
8y2 per cent at the beginning. They are in $10 denominations,
with only $3 paid down. I invite your attention to the bookkeeping
and handling charge, $40,000,000 in $10 lots, and ask you to consider
who is going to pay those charges through rates on light and power.
In addition to the partial payment arrangement, there are all
sorts of participation rights; rights to exchange, warrants, and so
forth; together with the advantage that you will be allowed to
deduct, or that there will be deducted for you, the amount of income
tax in the State where you happen to live. Now is it possible to do
all that with respect to $40,000,000 worth of bonds ?
The C h a i r m a n . And that was Associated Gas & Electric?
Mr. Rxpuby. Associated Gas. I do not know, in fact, and nobody
can know, how sound that company is in and of itself. It is one of



888

STOCK EXCHANGE PRACTICES

those blind pools, so far as accounts are concerned, in which you
trust your investment to somebody else.
That is what the people did in Chicago, and now they, discover
that all of the facts were not disclosed to them. I want all corpo­
rate facts spread on the record so that he who runs may read. You
could contribute nothing else by law which would further stabilize
conditions.
And, furthermore, you would not meet the opposition of the best
and most soundly financed companies. I am trying to interest the
industry in this direction, as I told Senator Glass's committee, and
I have the promise of six or eight public utility leaders that they
would not oppose the proposition. There was put into the record
at that time a report which President Gifford, of the American
Telephone & Telegraph Co., had prepared. It stated that the
American Telephone & Telegraph Co. had not been prejudiced by
enforced publicity of accounts; but that they found it worked to
their advantage in two ways; first, when they had to raise new
capital, immediately the books are opened, every one may know
what the situation actually is. I f they want to borrow a certain
amount of short-term money the bankers may get in touch Vfch
the Interstate Commerce Commission and know precisely how things
stand.
Senator F l e t c h l k . D o those people you speak of furnish a state­
ment of their assets, their business, and their earnings, when they
are selling these bonds?
Mr. R ip i j e y . After a fashion, but who knows with certainty? All
the Insull companies furnished statements.
Senator F l e t c h e r . D o they set forth what their purpose is in
raising this $40,000,000?
Mr. R ip l e y . Yes; I will read you-----Senator F l e t c h e r (interposing). Is it to go into their develop­
ment, or expansion, or what?
Mr. R ip l e y . This is a circular of Associated Gas & Electric Securi­
ties Co., April 7, 1932:
Since the offering of 8 ‘Xs per cent 8-year gold bonds was made, stockholder
customers throughout the territory served, and other security holders, have
purchased these bonds at the rate of nearly $1,000,000 a week. Approximately
$5,000,000 of bonds have been already sold on the installment basis.

Now, in mentioning that company I am using it only as an illus­
tration of the way in which popular investment in small lots is
spreading at the present time, in order to impress on your minds
the desirability of taking action without waiting too long.
The C h a i r m a n . Mr. Stock wants to ask you a question.
Mr. S tock . Mr. Ripley, I do not know whether you are familiar
with advertisements of Associated Gas running in the newspapers
of about a year ago. These showed, as I remember it, two charts
with an upward trend, one of the gross revenues, and the other of
power output, giving the distinct impression that the company -was
progressing during the depression, as contrasted to other companies
m the same field.
Mr. R ip l e y . Quite inevitably, the amount of money that goes into
construction account-----‘
Mr. S tock . What I meant was that they had those two lines only,
one of which showed the gross revenues and the other the kilowatt


STOCK EXCHANGE PRACTICES

889

hours, the output. Now, the reason that they were going up all the
time was because they were continually acquiring additional proper­
ties with the money which they were getting all the time from the
people they sold their securities to.
Mr. Ripley. Yes; you can incroase earnings any time if you sell

enough securities to keep on buying more properties.
Mr. S tock . T o m y p oin t there is, d o y ou n ot th in k that w as a gross
fraud and misstatement?
Mr. R ifley . I think it is open to that suspicion. A cu rve o f gross
revenues.on ly was published, w ithout indication o f the attendant fixed
charges incurred in raising new capital.
The C h a i r m a n . In other words, it was made to look like a good
business when it was not.
Mr. R if l e y . In connection with the work I am doing at Cambridge,
we have taken sample periods, say a month at a time, and have tabu­
lated the amount of advertising in the newspapers, applying the
standard rate for advertising. We computed in this instance of
Associated Gas & Electric that they are spending not less than
$1,000,000 a year for newspaper space; not to get people to buy elec­
tric refrigerators or service, but to get people to buy stocks and bonds.
Senator F l e t c h e r . D o you th ink now , P ro fe sso r, th a t this b u y in g
and d ealin g in stocks and bonds is g o in g on n ow to a considerable
extent, even in these depressed tim es ?
Mr. R ip l e y . Nothing like what happened in 1929. Many of the
great sales organizations have disbanded because there is nothing to
sell. I speak very feelingly there, because of the college men who
have taken employment as stock and bond salesmen.
Senator F l e t c h e r . You mean to say this bond speculation has
fallen off very considerably?
Mr. R i p l e y . My impression would be that outside of the group of
people who do nothing else in and around Wall Street, the public
participation was practically stopped. The people have not got the
money.
Senator F l e t c h e r . I th o u g h t y ou were sh o w in g b y th e ta lk of
these bonds th a t the d isposition o f th e p u b lic w a s to continue.
Mr. R ip l e y . W e ll, th ey have g o t these u tility securities fo r keeps,
because there isn’t any open m arket f o r them . T h e banks w ill n ot
lend you m oney on them , because they have n o depen dable m arket
value.
Mr. S t o c k . These bonds of Associated Gas are selling now at 8*4
per cent!
Mr. R i f l e y . The statement indicates that the base return is about
8% per cent.
Mr. S t o c k . I saw an analysis a few days ago, that all of the issues
of better rank are selling for more than that, anywhere from 10 to 12
per cent, so that a person could walk out into the open market and
buy them for less than that 12 per cent.
Mr. R ip l e y . One of my colleagues was solicited by a salesman to
buy one o f these securities at a price of $85. We immediately looked
up the quotations in case this had to be sold. We could not find a
listed sale for three months, and the price at that time was something
under 40. So the person who was persuaded to buy at 85, supposing
he had to cash in on it, the most he could get was $30 or $40.



890

STOCK EXCHANGE PRACTICES

Senator T o w n se n d . Doctor Ripley, are you familiar with the effort
to sell the Government baby bonds to the public?
M r. R ipley . I d o n ot kn ow about that.
Senator T o w n se n d . Y ou understand it was n o t successful*
M r. R iple y . I do n ot kn ow at all.

Senator T o w n se n d . I was just wondering why the people refu sed
to buy the Government baby bonds and bought these others.
Mr. R ip l e y . These Associated bonds were advertised as baby
bonds, and they were offered coincidently through a g re a t b o d y o f
salesmen throughout the country.
Senator W alco tt (reading circular). They have a new wrinkle
here. They say that “ the legality of these bonds will be passed
npon by Messrs. Travis,” and so 011. So after they have sold them,
they guarantee that they may be sometime passed upon. This sounds
like a swindle. They snow here what they say they have by a con­
solidated statement. It looks like a swindle on the face of it.
Mr. R ip l e y . Well, I do not know. But with all these figures, it
is utterly confusing. It makes it impossible for anybody, n o m atter
how skilled an analyst he may be, to make a comparison o f one cor­
poration with another.
Senator F l e t c h e r . It is a matter of interest. Senator Townsend’s
question was why they did not buy the Government bonds. They
do not pay as much interest.
Mr. R ip l e y . I f you want to bother with it, this statement will bear
me out as respects the complexity of the corporate set-up. When
this issue was first offered it was by Associated Gas & Electric Co.,
which is the holding company at the top. They were advertised as
“ baby bonds, guaranteed.
Now the guarantee was by whom? The
guarantee was by Associated Gas & Electric Corporation, every dol­
lar of the stock of which was owned by other company at the top.
The C h a i r m a n . That is, were the bonds a first lien o n a n y
property?
Mr. R ip l e y . They were not in any event. Nor did the guarantee
mean anything, because it was by a corporation 100 per cent owned
by the other corporation. It is exactly as if I borrow money at the
bank and get my son to guarantee payment when his only income
is from me.
Senator W al c o t t . Like one pocket in v ou r breeches guaranteeing
the other.
Mr. R ip l e y . It would not be possible to do that if all these com­
panies were forced to make full disclosure.
Senator W a l c o t t . But there are all the figures, and nobody reads
them. I am beginning to think, from the hearings we have had
here, that what fools the public is these tremendous campaigns of
selling, instituted, as we found a week ago, by the National City
Bank, in which the officers and directors of the Anaconda Copper
were interested, and then if they have anything left over that is
sticky, they get the National City Bank to organize another pool,
buy 200,000 additional shares and sell it to the public.
Mr. R i p le y . Better than that, you may have an investment trust,
and you put what you have left over in your investment trust.
Senator W aixjott. But here is a great bank that puts up the
money for its affiliate, which, in turn, places the stock on the market,




STOCK EXCHANGE PRACTICES

891

selling it out to the customers who have to take it to keep 011 the
affiliate’s list.
Mr. B eplet. There is no question about that.
Senator W alco tt . N o w , that leads to what the chairman asked
you a little while ago: Is it not justified to have some kind of a
Federal regulation that will prevent officers and directors of corpora­
tions speculating in their own stock ?
M r.]R ip ley. That is one of the most infamous things in the situa­
tion to-day. The statement of a man like Percy Rockefeller, director
of a number of corporations, in stating to you that his major interest
in those companies was buying and selling stocks, getting in and out
of them was outrageous.
Senator W alco tt . And the man who was helping him to run the
pools was a specialist on the stock exchange. You can not beat that.
Mr. B i f l e t . But my proposition is that we most need publicity.
The stock exchange is doing the best it can. They have their own
experts. I f they see that a security was being blown up unduly, they
begin to check upon it.
Senator W a l c o t t . England goes a step further, and Berlin used
to; it has a fortnightly statement. That prevents a lot of specula­
tion. I am inclined to- think we have got to come to something like
that.
Mr. B epley . I think so.
Answering your question, Mr. Chairman, suppose it were part and
parcel of corporate publicity that once a quarter all directors in
these corporations should be compelled to disclose the number of
shares thev own directly or indirectly. Now, they could evade such
a law witn all kinds of fictitious names. But you could impose a
heavy penalty on, making it so dangerous that they would not dare
to conceal. In the older days when a man owned a little property
in his own business, he was there forever. He slept with it. I f it
went, his whole fortune disappeared. What happens in the present
dayf The officers of the corporation are merely taken on as receivers.
Their salary goes on just the same. It is a completely different sys­
tem we are facing at the present time from the one which our
fathers created. We have not even attempted to deal with it as we
should.
May I say here, sir, that there is presently to be published a book
to which I would like to direct your attention. It strikes at this
whole business in a way different from anything else in print. It
is a book by Prof. A. A. Berle, jr., of the Columbia University Law
School. He is an eminent lawyer, as well as a student of social
affairs. This is a large volume which will deal with these problems
concerning popular investment. The title of the book, is Private
Property and the Corporate System. It should have a profound
influence upon legislation, because he brings to the front and makes
evident by all sorts of concrete data, that we are living in a different
world than that which existed before the war.
The C h a i r m a n . It is getting late, and I am sure the Senators
would like to leave, and we will have to bring this to a close very
soon. But I would like to ask you a few questions.
Do I understand it is a general practice among business men to
add all the expense of advertising to the expense of production and
charge it to the consumer?



892

STOCK EXCHANGE PRACTICES

Mr. R i p le y . Yes; as a part of the operating expenses of the
corporation.
•
The C h a ir m a n . So if it is necessary to sell more stock the expenses
of that are added to the consumer?
Mr. R i p le y . Yes, sir.
The C h a ir m a n . A s a part o f his light bill?
Mr. R ip le y . Yes. Who else will pay for it? And that is why
under these financings involved at the present time the cost o f rais­
ing capital, which is so extraordinarily high, and must be so, adds a
large item to operating expenses. The consumer has got to pay for
it in the long run. We have a right to know how much it all costs
as well as what the proper return thereon should be.
The C h a ir m a n . Y o u have said something about several witnesses
here. You have not said anything about Mr. Whitney’s testimony.
Did you go over that, too ?
Mr. R i p le y . I have read his testimony. I am less interested in
the prevention of short selling than in these more fundamental prob­
lems. Speculation is just as vicious when it runs the other way.
Senator W a l c o t t . It is the marginal buying-----Mr. R i p le y (interposing). It is marginal buying, and all such
business which does the mischief. But if you let the light in upon
these transactions, through the accounting publicity which I have
recommended, there are many people who will help to correct the
undue fluctuation of prices through understanding transactions in
such stocks and bonds.
The C h a ir m a n . Mr. Stock wants to ask another question.
Mr. S t o c k . Mr. Ripley, I had a definite impression when I heard
Mr. Mitchell testify. I had read countless letters from many people
who had bought stock, and I had read the interoffice correspondence
over Mr. Mitchell’s name urging them to sell various securities, and
his explanation of that, and to my mind his whole testimony, and
the essentials of it can be put in one sentence, that he thought he
had to use the same methods in selling investments that you do
in selling carpets. That came from him as head of one of the
biggest banks in the world. Do you care to make any statement
in regard to that ?
Mr. R ip le y . I think there is too large a cost in selling. A car­
dinal rule with me is never to buy anything which anybody wants
to sell me very badly. The entire organization of great sales com­
panies affiliated with great banks, ought to be abolished by law.
Senator W a l c o t t . The affiliates?
Mr. R i p le y . The affiliates. Banking is one thing, and investment
is another. The two should be rigidly set off from one another.
The C h a ir m a n . I f there is nothing further, the committee will
adjourn to meet on Thursday morning on the stock exchange inves­
tigation.
( A t 12.45 o ’clock p. m., the com m ittee a djou rn ed to meet on
T h u rsd ay, June 16, 1932. at 10 o ’clock a. m .)




STOCK EXCHANGE PRACTICES
THURSDAY, TUNE 16, 1932
U
C o m m it t e e

on

n it e d

B

S tates S e n a t e ,
O dbrenct,

a n k in g a n d

Washington, D. G.
The committee met, pursuant to call, at 10 o’clock a. m., in the
hearing room of the Committee on Banking and Currency, Senate
Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Carev, and Fletcher.
Present also: William A. Gray, Esq., counsel to the committee.
Mr. B e n j a m i n R eass . Mr. Cnairman, I th o u g h t th a t-------Senator T o w n s e n d . Mr. Chairman, Mr. Reass has something to
sav.
M r. G hat . Wait a minute, Mr. Reass. Just £k moment. Mr.
Chairman, Mr. Reass represents Mr. William Fox. I am not going
to make any statement about the situation. I am only going to
introduce you, Mr. Reass.
Mr. R eass . Thank you very much.
Mr. G b a t . Mr. Reass and I have had a colloquy over Mr. Fox.
He asked me to discuss the matter with the steering committee. The
matter was in my hands and the steering committee left it with
me. He evidenly wants to say something to the committee.
The C h a i r m a n . D o y ou w ant h im to sp ea k ?
Mr. G r a y . I th in k the com m ittee sh ou ld h ear h im .
STATEMENT OF BENJAMIN REASS, ATTORNEY FOR WILLIAM FOX,
NEW YORK CITY
The C h a i r m a n . Give your name and address, Mr. Reass.
Mr. R eass . My name is Benjamin Reass, 100 Broadway, New
York. I do not know what this reference to the steering committee
is, but if-----The C h a i r m a n . This is a meeting of the full committee here.
Mr. R eass . Yes, sir. I did say to Mr. Gray that I was desirous
of addressing the committee with respect to Mr. Fox, and I found a
rather angry attitude with respect to him. I have taken the liberty
of coming here and presenting the facts to you.
Mr. Fox, pursuant to a promise that he made to be here this
morning, left with me at half past 6 last night, and foolishly, we
started by motor, the weather was bad, and we got here about halfpast 4 New York time, half-past 3 your time. During the trip Mr*
Fox complained of being ill. I knew he was not well, had not been
for some time. This morning I went into his room shortly after
9 to tell him to get ready and come here.




893

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STOCK EXCHANGE PRACTICES

I know he is eager and anxious to tell his story to you. I found
Doctor Hornaday there, the hotel physician. Doctor Hornaday
said that so far as he was able to determine at that moment Mr. Fox
had a bilious attack. He was still examining him and he would
notify Senator Norbeck just exactly what the condition was.
In the meanwhile I hurried on here to show this committee that
we are not lacking in deference and respect for your request, al­
though it was only in the form of an agreement to come here, and
to urge on you to give him a little time, to give the doctor a little
time to determine whether his physical condition will enable him
to come either to-day or to-morrow morning.
I want to make it clear that Mr. Fox is eager and anxious to
present his side of the story here.
Let me add another thing while I am on my feet here in behalf
of what has been described as a controversy. I received a phone
message not couched in particularly courteous language last week
requesting that Mr. Fox come to Mr. Gray’s office. O f course, I
knew perfectly well that there was no obligation on the part of
Mr. Fox or anybody else to come to Mr. Gray’s office but, neverthe­
less, I said he would be glad to do so, and he went and a sort of
stenographic record was taken of the requests they made. There
were so many questions, accounting questions and other matters that
Mr. Fox could not answer. You know, of course, that Mr. Fox
has been the head of many huge enterprises, that he was a trader
in the markets, that his operations were in the hands of accountants;
that it was humanly impossible for a man to answer as to figures
covering a period o f years antedating and covering the rather stren­
uous era of 1929 and 1930. You doubtless are familiar with the con­
troversies that revolved around the Fox enterprises.
But we gave him what we had and we got a copy of the steno­
graphic minutes the next day, and I told him that whatever he
wanted we would answer.
Yesterday morning at half past 10 Mr. Fox went to Mr. Gray’s
office prepared with a typewritten statement answering the matters,
and there was hurled at us a mass of new matter o f which there
was not the slightest suggestion or intimation of any kind. One of
the inquiries I am going to make before I get through is just where
they come from, because that is an important part of the investiga­
tion and bears strongly on what Mr. Fox came here to tell you.
There was a different atmosphere, a different attitude; no longer
an inquiring attitude but a very different one. Mr. Fox remained
there until half past 1 answering questions. I want to repeat that
they were not couched in a merely inquiring mood at all. State­
ment after statement was spread in tne questions, which did not
seem to me to be asking for answers, but merely stating facts. O f
course, it was a physical or mental impossibility for Mr. F ox or
any other human to answer these matters. They were matters for
accountants. I am certain that a lot of these matters and the ac­
countant’s report respecting them was available. I am sure o f it,
because I see here Mr. Hall, of Touche, Niven & Co., who has made
a written report concerning these matters to the banks o f the Fox
Film and Fox Theaters in April and May of 1929, and many o f the
questions of Mr. Gray’s inquiry to Mr. Fox are all answered in a
letter which was exhibited to us on Monday o f this week in the



STOCK EXCHANGE PRACTICES

895

office of Mr. Tinker, a name that yon will hear something about,
representing the Chase Bank.
The C h a i r m a n . Y ou came here to make a statement about Mr.
Fox being sick, and you come here and make a stump speech and
criticize Mr. Gray. I think you are entirely out of order, but I will
leave it to the committee.
Mr. G r a y . Suppose y ou leave it to m e to answ er ?
Hie C h a i r m a n . All right; are you ready to proceed, then?
Mr. G r a y . I don ’t care what he says.
The C h a i r m a n . I am leaving it to you.
Mr. G r a y . It will not do the gentleman any good. Every time he
opens his mouth while Mr. Fox is around, Mr. Fox says, “ Sit down,
Ben. You don’t know anything about it. I will do the talking.”
Let him go ahead. He can not help Mr. Fox. He will only hurt
him.
The C h a i r m a n . All right; proceed.
Senator F l e t c h e r . You were going to tell about Mr. Fox.
Mr. R e a s s . Yes, sir. I am sorry I went beyond the necessities o f
the occasion, but you see what I am driving at. Mr. Fox left there*
about half past 1 or 2 o’clock and we then went back to my office,,
where we tried to gather up as much as we could. At halt past 6last night we started for Washington.
Senator F l e t c h e r . We know that.
Mr. R eass . Mr. Fox is up here. He is not well. I don’t know"
what his condition is. I am hopeful the doctor is correct in hisstatement that it is a bilious attack which will shortly disappear.
Senator F l e t c h e r . We know that already.
Mr. R e a s s . In any event, I understand Mr. Gray is going to send
a doctor up there. We can get a statement exactly "what the situation;
is.
Senator F l e t c h e r . What do you want us to do ?
Mr. R e a s s . Hold this for an hour or two until I can get a report
from the doctor.
Senator F l e t c h e r . An hour or two ?
Mr. R e a s s . Yes. May I ask you to put this over to, say, 2 o'clock?
If the situation is as the doctor thinks it is, I haven’t any doubt he
can be here at that time.
Senator F l e t c h e r . We will g o on with Mr. Gray then.
M r R e a s s . That is all I am asking for.
STATEMENT OF WILLIAM A. GRAY, ESQ., COUNSEL FOB. THE
BARKING AND CURRENCY COMMITTEE, WASHINGTON, S. C.
Mr. G b a y . Mr. Chairman and members of the committee, my
friend makes some statements that are incorrect. He states, in the;
first place, that Mr. Fox was coming here under an agreement..
Neither Mr. Fox nor anybody else has been asked to come to thiscommittee under any agreement. Mr. Fox was subpoenaed to behere. I said to Mr. Fox when I communicated with his attorney,.
Mr. Reass, and requested his presence in my office, as I have said toevery other man that I have examined in New York City, that I.
have no legal authority in New York City to compel any o f those*




896

STOCK EXCHANGE PRACTICES

gentlemen to come to my office and answer my questions there; that
if they preferred simply to answer the subpoena and come before the
committee in Washington they could take that step; that I thought
it would be very much more convenient for both myself representing
the committee and the gentlemen whom I intended or had subpoenaed
to sit down and talk over the matter with me in New York City,
because I have found in some of my investigations that after looking
carefully into them there, they did not require any presentation to
the committee. In other instances I have found that they required
presentation and have presented them.
Mr. Fox did come into my office and lie did sit down with Mr.
R eass and he did answer questions, though he preferred to make
statements rather than to answer questions when I would let him do
so, and they were taken down ste-nographically, and Mr. Fox, for a
man who managed and controlled his own organizations, displayed
an amazing ignorance1with respect to the transactions that occurred.
In between the time of Mr. Fox’s first visit and when I requested
him to see me again yesterday afternoon we, of course, had 10 or 12
accountants and others working on these various transactions and
got a great deal of information, which convinced me that Mr. Fox
was not, to say the least, open and above board with us.
I examined Mr. Fox from half past 10 yesterday morning until 2
o’clock yesterday afternoon in the presence of Mr. Reass, and Mr.
Fox very frankly admitted a number of things that I am going to
present to this committee, and again displayed quite an ignorance
with respect to certain other things. I told Mr. Fox that I wanted
him here at 10 o’clock this morning in response to the subpoena, and
he stated that he would be here. After Mr. Fox had left, an effort
was made to have me extend the time—some outside sources—to have
me extend the time when Mr. Fox would be required to come here,
in order that he might go into his vaults in !New York Oity this
morning and get certain papers with respect to this case in order
that he might present them to the committee, while prior to that
time he told me that he did not know where these things were or
where they could be secured, that they were not in his possession.
I was not at all satisfied with Mr. Fox’s attitude, and I am not
satisfied that he has been sincere. I do not know whether he w ill be
sincere before this committee when he is under oath or not, and I am
not at all satisfied that the man is doing anything else than avoiding
appearance before this committee this morning.
Mr. Fox told me yesterday afternoon that he would have Mr.
Leitstein, one of his closest associates, here, with certain books
and papers and his income-tax returns this morning. W e had Mr
Leitstein on the telephone at half past 11 o’clock last night, and
Mr. Leitstein said he was not coming. Mr. Leitstein has prob­
ably by this time been served with a subpoena to come down here
and produce all the books, records, papers, income-tax returns, and
everything else he has got, and I think he will come.
So that I have been not, as a representative of this committee,
treated with the fairness that I was entitled to have. Therefore, you
will not blame me if when this morning somebody sends word that
Mr. Fox had a bilious attack and can not come until to-morrow
morning, I have done that which I have already done under the



STOCK EXCHANGE PRACTICES

897

instructions of the chairman of the committee, sent two physicians
there for the purpose of examining him. I f Mr. Fox is able to
come upon the report of those physicians, I shall make application
to the chairman of this committee for the proper process to bring
him in. I f we find, of course, that he is not able to come after our
physicians report to us, why, the committee will, of course—I sug­
gest to them that they shall extend to him the necessary time.
Now, let me say this, that Mr. Fox organized and controlled—
and this is what I propose to show to this committee—Fox Films
and Fox Theaters; tnat he owned in one of the concerns 100 per cent
of the voting and controlling stock; that he owned in the other
concern approximately 51 per cent of the voting and controlling
stock; that while he owned and controlled that company he so
manipulated it that he used the stocks of the company in any way
that he saw fit, either for his own purposes or for the purposes of
the company; that he bought and sold their stocks; that according
to his statement the companies bought and sold their own stocks;
that they entered into syndicates; they entered into pools; that in
the very first issue of the stock of the Fox Films they went into
the hands of one of the brokerage concerns of New York City for
distribution and they had a written agreement that they should have
a certain amount of the commission. Another written agreement
was executed between that firm and Fox’s own daughter that the
commission should be divided with her. That was the inception of
the organization of those concerns, and it was traced on from
time to time.
Not only did he do as he chose, as I say, with these stocks, and
I think he will before this committee accuse others of wrecking the
company, but I think you will be satisfied that he did it before you
get through. When I get through with it all, I will show that at the
time Mr. Fox disposed of both these companies by the transfer of
this stock, what that agreement and arrangement was, and how he
still held on to so many interests, had moneys paid to this one and
that one and the other one, and I will show you how he sold 210,000
shares o f stock in Fox Theaters, and then when he sustained a loss
of three million three hundred and some odd thousand dollars,
claimed that he had been acting for the company; and, notwithstand­
ing the fact that he dumped it on them and said that it was their
trades; he took credit for the loss on his income-tax return.
I will show you plenty. This is one of the worst and most com­
plicated cases that I have ever investigated, and is it any wonder
that he is bilious?
The Chairm an. What is the effect of taking that loss?
Mr. G ray. The effect of taking that loss is that he first had the
loss made good to him by the Fox Theaters and then took credit for
it on his income-tax returns.
The Chairm an. Does that mean an evasion?
M r. G r a y . I t means an absolute income-tax evasion. There is no
question about it.
So I suggest, since we have reached this point, because I had ar­
ranged to go on with this presentation this morning—I understand
that the chairman, or some members of the committee at any rate,
are required to be on the floor of the Senate or in the meeting of some
other committees—I think under all of the circumstances, possibly



898

STOCK EXCHANGE PRACTICES

in deference to Mr. Fox, if he does happen to be sick, and in order
that I may properly present the picture, an adjournment be taken
until such hour as the chairman deems proper.
The C h airm an . Y ou are not ready to go ahead with anything else!
Senator W alcott. There is nothing else?
Mr. G ray. There is another matter, Senator Walcott, but a t the
same time I feel that this ought to be presented to the committee
first.
The C h airm an . What is the wish of the committee!
Senator W a lc o tt. I move we adjourn subject to call o f the chair.
Mr. G ray. Perhaps you better fix tho time. The witnesses will
have to be advised to come. In other words, there are a large number
of witnesses here who wiU follow up his testimony.
Senator W a lc o tt. I f 2 o’clock is agreeable I will amend my motion
to adjourn until 2 o’clock this afternoon.
The C hairm an . Not later than 2, then. I will try to arrange for
a meeting in Senator Couzens’s room if the room is not occupied, off
the Senate gallery, at 2 o’clock. I do not see how we can start sooner.
But the members of the committee will be advised as to that later
if the motion carries.
Those in favor of the motion will say, aye.
(Ayes.)
The Chairm an. Those opposed, no.
(None.)
The Chairm an. Carried.
(Accordingly, at 10.35 o’clock a. m., the committee adjourned, to
meet again at 2 o’clock p. m. of the same day.)
AFTERNOON

SESSION

Pursuant to adjournment of the morning .session, the committee
met and resumed the hearing at 2 o’clock p. m. in the Interstate
Commerce Committee room in the Capitol, Senator Peter Norbeck
presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Carev, Couzens, Fletcher, Bulkley, and Gore.
Present also: William A. Gray, Esq., counsel to the committee.
The Chairm an. The committee will come to order. Mr. Gray
will make a report on the absence of Mr. Fox.
Mr. G ray. Mr. Chairman, after the occurrences o f this morning
and the failure of Mr. Fox to appear, we sent two physicians u p to
examine him. I have a written report from the two physicans which
I shall file with the reporter, and I also had an interview with one
of them. He assured me that although Mr. Fox is not at all danger­
ously ill and could come here this afternoon for the purpose of tes­
tifying, he did when he arrived here last night have a vomiting
attack: that he had a bilious condition to-day: that he observed
himself evidences of that bilious condition: that he had taken medi­
cine this morning which would justify a doctor in advising
to
remain in his room, if not in bed, during the day.
I therefore suggest, Mr. Chairman, that we go on as arranged
with some other matters and have Mr. Fox here at 10 o’clock to­
morrow morning, because the doctors have said that in their opinion




STOCK EXCHANGE PRACTICES

899

he will be able without any question to be here to testify to-morrow
morning.
Hie C h a ir m a n . I f there are no objections, the Fox Film matterwili be postponed until to-morrow morning. It is so ordered.
(The physicians’ report presented by Mr. Gray is here printed;
in the record in full, as follows:)
W a s h in g t o n ,

The Senate Committee o n

D. C., June 16, 193%.

B a n k in g a n d C u rh k n cy .

W ashington, 1). C.

Gentlemen : Examination of Mr. William Fox made on June 16 at 11 a. m._
shows the following:
He had a vomiting attack last evening and on attempting to rise this
morning he became dizzy and nauseated and returned to bed. He has tender-,
ness over the abdomen on right side, rather heavily coated tongue, and has
been belching gas rather frequently. His temperature and pulse are normal
and blood pressure, 114/70.
We feel this is a so-called bilious condition. Doctor Hornaday has given
him calomel, and we feel that it is best that he remain in bed to-day. In ouropinion he will be able to testify before the committee to-morrow.
W. Calhoun Stirling, M. D.,
W. D. Tewksbury, M. D.,
Examining Physicians.

Mr. G r a y . Mr. Chairman, the other matter which I desire to pre­
sent to you is a matter that involves Continental Shares & Trading
Corporation, also Foreign Utilities, which was a Canadian stock­
holding corporation—that is, holding of stocks of other companies—
and Otis & Co., which was a New York brokerage house. Mr.
Stock, my assistant, and I, too, are thoroughly familiar with the
situation, but I am going to ask him to present to the Committee a
little outline of what the situation is, and then I will call some wit­
nesses and offer some documents for the purpose of establishing
the facts in connection with the case. Mr. Stock will present the
matter to the committee.
The C h a ir m a n . This matter was postponed from a previous hear­
ing on account of the absence of Mr. Eaton, who suggested that he
wanted to be here. May I inquire whether he is here now ?
Senator B ijlkley . I would like to have Mr. Daley make a state­
ment. I think I can find Mr. Daley in the gallery here.
The C h a ir m a n . I am asking if Mr. Eaton is here now.
Senator B u l k l e y . I think not. I am quite sure he is not. Mr,
Daley is his associate and I think he is in town and I think I can
locate him.
Mr. S to c k . May I suggest, Mr. Chairman, that Mr. Eaton was
subpoenaed to be here to-day.
Mr. G r a y . The idea with respect to Mr. Eaton was this, Mr. Chair­
man: Mr. Eaton was subpoenaed some time ago. His subpoena, of
course, holds, and he should be here to-day, because he was notified
of the continuance of the hearing and his presence required; notified
in addition to other manners by sending him a wire yesterday.
However, as far as the counsel for the committee is concerned, Mr.
Eaton’s presence is absolutely unnecessary. I mean by that, that the
entirepicture will be presented, but there are reasons known to you,
Mr. Chairman, and the other members of the committee^ why we
deferred taking up the matter until he had an opportunity to be
present. Now he has this opportunity. I f he does not choose to
take advantage of it, why, that is his responsibility.
118852—32—FT 3------8



900

STOCK EXCHANGE PRACTICES

The C h a i r m a n . I have a telegram from George T. Bishop, of
Cleveland, sent me on behalf of Mr. Eaton, which, if there is no
objection, I will ask be inserted in the record at this point, as follows:
C le v e la n d , O h io ,

Hon.

June lo, 1932.

P etek N orb eck ,

Chairm an Com m ittee on Bunking and Finance,
U nited Staten Senate:

I understand your committee lias under consideration hearing and possibly
making public a report prepared by one of your committee examiners concern­
ing certain financial and business transactions of Continental shares, o f which
I am now president. I also understand that matters so investigated and cov­
ered by report are the subject of litigation pending in Ohio and Maryland courts.
All implications of illegality or impropriety of matters investigated are denied
in court proceedings by parties against whom charges are made. I respectfully
request that you and your committee await outcome litigation so as to avoid
possible prejudice to rights of Continental shares and other parties involved by
premature publication of such ex parte investigation and report.
G bobge T . B is h o p .

TESTIMONY OF DAVID STOCK, ASSISTANT COUNSEL TO THE
COMMITTEE, WASHINGTON, D. C.
The C h a i r m a n . You will be sworn, Mr. Stock. Do you solemnly
swear that you will tell the truth, the whole truth, and nothing but
the truth, in the matter of this investigation before this committee,
so help you God?
Mr. S t o c k . Yes, I do.
The C h a i r m a n . The witness may proceed in his own way. You
have investigated this matter ?
Mr. S t o c k . I investigated this matter thoroughly and have docu­
mentary proof here, documents and audits of the books of Continen­
tal Shares and other companies that had relations with Continental
Shares. So that every statement that I make has been taken from
that documentary evidence.
That evidence shows that a company, an investment trust or in­
vestment company, was formed in the early part of 1926 for the
purpose of buying and selling and holding securities in various ven­
tures ; that the public investment in that investment trust was about
$150,000,000.
Senator C o u z e n s . What is the name of it?
Mr. S t o c k . Continental Shares (Inc.). That at its peak the com­
mon stock of that trust sold at 78 and was selling at 25 cents a share
to-day, resulting in a loss of about $150,000,000.
Senator B r o o k h a r t . What price?
Mr. S t o c k . Twenty-five cents a share; 78 down to one-quarter.
The C h a i r m a n . $78 down to 25 cents?
Mr. S t o c k . $78 down to a quarter of a dollar—25 cents.
This situation is being presented, I understand, because it in­
volves a great many features of manipulation and the use of public
money to further the personal ventures of persons in control of the
public moneys.
Now, the stock in this company, Continental Shares, was sold
through a banking and brokerage firm, Otis & Co., members o f the
New York Stock Exchange, through their various branch offices all
over the country, by methods which I believe will be recognized as
high-pressure selling methods.




STOCK EXCHANGE PRACTICES

901

Senator B u lk le y . Mr. Chairman, let me interrupt just a minute
to protest again against the unfairness of this. Mr. Daley is in
town to-day, reported to the clerk of the committee this morning,
and asked to be advised what would be done and has not been advised
of this. I think it is outrageously unfair. I renew my protest.
The Chairm an. Of course, I can not speak for the clerk of the
committee, but we postponed this hearing in order that ^Ir. Eaton
and his friends might nave notice or might be here. Now we are
told that the attorney is here, and lie can not be located.
Senator B u lk le t. Mr. Daley reported to the committee room
while you were not available, while you were in session with the
steering committee, and he did the proper thing.
The Chairm an. Did he report to you. Mr. Blount ?
Mr. B lo u n t (clerk to the com m ittee). He handed me a memo­
randum this morning stating he would like to be called if the com­
mittee took up Continental Share* at the morning session. I asked
one of the stenographers to call him up in case they did. This case
was not reachedby the committee this morning, so the Daley request
could not be complied with.
Senator B u lk le y . He took the trouble to be here in town' to
attend this, and I just can not locate him at the moment.
The Chairm an. King up the stenographer and see if she got in
touch with him.
Senator Couzens. May I suggest, Mr. Chairman, that in view of
the fact that this is being taken down stenographically, the witness
might proceed?
The C hairm an. Yes; we m ight proceed.
Senator Couzens. In view of the fact that it is being taken down
stenographically and the witness is under oath.
The Chairm an. Yes; I think we might go ahead. I do not see
how we can do otherwise. It will be a stenographic report anyway.
You may proceed.
Mr. S to ck . The evidence shows that Continental Shares, the in­
vestment company, was controlled by Cyrus S. Eaton, of Cleveland,
-one of the directors, and a member of Otis & Co., the brokerage firm
that managed the affairs of Continental Shares and marketed the
securities of Continental Shares; that Mr. Eaton was the principal
partner of Otis & Co., having a 40 per cent interest in that company;
that in addition to Continental Shares, the investment company,
and the brokerage house of Otis & Co., mere was still a third com­
pany, Foreign Utilities, a Canadian corporation, which was Mr.
Eaton’s personal holding company and which he used as his own
instrumentality for furthering nis own investments and ventures.
I will show that various methods were used to use the moneys of
the public in Continental Shares to further the personal ventures of
Mr. Eaton and his associates.
One of these is the transaction whereby the founders of the com­
pany, Mr. Eaton and his associates, took founders’ shares, which
provided that those shares shall receive 25 per cent of all profits after
the common stock has been paid a certain dividend; that in 1929, in
order to take such a cash payment jof dividends to founders’ shares,
a stock dividend was paid on the common stock in order to make this
p a y m e n t possible, which was in direct violation of the provision of
the charter and the laws of Maryland, where the company was



902

STOCK EXCHANGE PRACTICES

formed; that in spite of the fact that Otis & Co., the brokerage house,
had taken underwriting fees of about two and a half million dollars
for underwriting the stock of Continental Shares and marketing it*
in 1930 it saw fit to sell back a great deal of the common stock of
Continental Shares to Continental Shares at a price more than twice
the then market, thereby causing a loss of $3,600,000 to Continental
Shares.
The evidence shows a great many syndicates, in rubber ventures,
steel, and public utilities, all of which were sponsored personalty and
controlled personally by Mr. Eaton through Otis & Co., and that
these syndicates were financed and furthered with the public moneys
of Continental Shares, the investment company, either by having— —
Senator Brookhart (interposing). What do you mean by “ public
moneys” ?
Mr. Stock. Why, the moneys that were obtained from the public
by selling the stock in the investment trust.
Senator Brookhart. That would be money of the private investors
rather than the public?
Mr. Stock. By the public I mean the public investors. I mean
those who were outside the inner control of the company.
I will come to these things more specifically as soon as I outline
what the evidence shows. In a general way these syndicates were
furthered and financed with the moneys of Continental Shares by
having Continental Shares buy the shares in those syndicates or
by having Continental Shares loan money to the syndicates or by
having Continental Shares guarantee or indorse the notes o f the
syndicate or by having Continental Shares put up its own collateral
to obtain loans to further operations of those syndicates.
That in five years or so that this company operated—we have
three full books of minutes here—there is not one single instance
where any director ever objected to any action taken by Conti­
nental Shares. That and other things indicate very clearly to my
mind that the directors of Continental Shares were dummy direc­
tors put in office and maintained there by Cyrus S. Eaton.
Senator Buckley. Have you named the directors?
Mr. Stock. I will come to that a little later, Senator Buljfcley.
Further evidence of the fact that they were dummy directors is
the fact that they subscribed to large amounts of stock in Conti­
nental Shares, which they have never paid for until this day. Those
shares were taken by Cyrus S. Eaton in his own name and voted
by him.
•
Senator Carey. These directors are the names-----Mr. Stock (interposing). I will give you those names.
Senator Carey. Does the record show that these directors appeared
at the meetings?
Mr. Stock. Yes; the record shows that they were present.
The evidence shows that Foreign Utilities was the personal hblding company of Mr. Eaton, and Eaton and Foreign Utilities were
one and the same.
The evidence shows that in order to maintain the confidence of the
public^ certain financial statements o f the company were altered__
there is evidence of that—at the direction of Mr. Eaton, and
certain items that should have been disclosed were concealed f rom
the public in those statements.



STOCK EXCHANGE PRACTICES

90 3

There is evidence that tlx* shares in Continental Shares were
manipulated—mind you. these* .shares wore listed on the New York
Stock Exchange—by Otis & Co. to further the sale of the securities
to the public, and that certain losses resulted from that manipula­
tion which were charged back against Continental Shares, the invest­
ment company. So that the public not only had been induced to
buy the stock but had later on ljeen cliargecl with a loss incurred
in manipulation.
The evidence shows a certain transaction in October, 1930, where
Otis & Co., the brokerage house, being very heavily in debt, and the
banks calling some of the loans, and being forced to obtain about
$20,000,000 immediately, put through a certain transaction which I
will describe in greater detail later,'which in effect resulted in Con­
tinental Shares obtaining a loan at various banks, putting up col­
lateral, and the proceeds of that loan being used to pay the obliga­
tions of Otis & Co. and Cyrus S. Eaton and Foreign Utilities.
Now that transaction probably more than any other resulted in
wrecking Continental Shares.
Senator B rookhart. H ow much was that?
Mr. S tock. That transaction involved $57,000,000, Senator.
The evidence also shows that when Hr. Eaton was involved in
litigation concerning the Youngstown-Bethlehem merger, which he
was interested in preventing and did prevent, he used the moneys
of Continental Shares to purchase large amounts of Youngstown
stock, in an effort to obtain control of Youngstown and block the
merger, and then charged the entire cost of litigation against Con­
tinental Shares and a subsidiary of Continental Shares.
Senator B rookhart. Was Continental Shares interested in the
suit?
Mr. S t o c k . Only in so far as Mr. Eaton saw that they were
interested. He saw fit to plunge them into that litigation.
Now, starting with the first item, the setting up of the company
and the creation of founders’ shares—or perhaps I should start and
give you the names of the directors at that time—would you want me
to name those directors, Senator Bulkley ?
Senator B ulkley . Certainly. I f you are going to tell the story
you will have to tell it all.
Mr. S tock. A t the time of the formation o f this company the
directors were F. H. Hobson, who was director and vice president:
W. R. Burwell, director and president; Philip Wick, director and
member of the executive committee; L. G. Watson, who was a direc­
tor for a short time and at all times was secretary and treasurer;
B. V. Mitchell. That is as far as I know the list o f directors.
Senator B ulkley . A t what time was that?
Mr. S tock . That was in 1 9 2 6 .1 believe. Yes.
Senator B ulkley . That hasn’t anything particularly to do with
the transactions that you are talking about?
Mr. S tock . N o. It has in connexion with these founders’ shares.
Senator B ulkley . Mr. Chairman, I see Mr. Daley coming in here
now. This is Mr. Daley, who is president o f Otis & Co.
Mr. S tock. N ow , when the company was set up, it was provided
that 10,000 founders’ shares be issued at $1 a share for a total
consideration o f $10,000. These founders’ shares were distributed



904

STOCK EXCHANGE PRACTICES

to various persons, Mr. Eaton getting 5,000, which he turned over
to Foreign Utilities.
The charter provided that after $1 a share had been paid on the
common stock in dividends and if there was an excess of earnings,
25 per cent of that could be paid to the founders’ shares, but the
dividends on the common were cumulative as far as this provision
was concerned.
In 1929, there were certain arrears of dividends on the common;
that is, back in 1927 and 1928, dividends had not been paid on the
common. A stock dividend was declared and paid in lieu o f cash.
After that stock dividend was paid, a dividend was paid on the
founders’ shares.
Senator C a k e y . Was that money or stock?
Mr. S t o c k . That was not money, Senator. As a matter o f fact,
the stockholders had no more after they got the stock dividend than
they had before.
Senator C a k e y . I mean on these founders’ shares, was that in
cash %
Mr. S t o c k . That was in cash. They paid a dividend in two years
on the founders’ shares. The total amounts paid were as follows:
To Cyrus S. Eaton through Foreign Securities, $164,324.61; to
Otis & Co., $108,454.23: to F. H. Hobson, $13,145.96; to W. R. Burwell; $9,859.47; to Philip Wick. $9,859.47: to L. G. Watson,
$9,859.47; to R. V. Mitchell, $3,286.49: to John S. Brooks, $6,572.98;
to F. H. Blackburne, $2,356.49.
Now, the stock dividend was paid in lieu of cash, although the
charter provided that $1 a share be paid to the common.
I f this method had been used logically and long enough, this com­
pany could have paid all of its profits to the founders’ shares in cash
and given the stockholders nothing but stock dividends. As a
matter of fact, in the year 1929, dividends on these founders’ shares
were paid, although the company had a deficit of over $3,000,000.
The C h a i r m a n . How much was paid as dividends on the founders’
shares?
Mr. S t o c k . I have not added this up, Senator. I have it in here
somewhere. I can look it up.
The C h a i r m a n . Never mind. Go ahead with what you are doing.
Mr. S t o c k . N o w , all of this, mind you, was authorized b y the
board of directors. Of course, we have the minutes. Not only did
the board of directors authorize that the dividends be paid to
founders’ shares upon payment of a stock dividend to the common
stock, but it provided that an underwriting fee be paid to Otis &
Co., the bankers of Continental Shares in connection with distribut­
ing the stock dividend. I am unable to find where there was any
banking function exercised in that connection.
Senator B r o o k h a r t . H o w much was the payment to Otis & Co.?
Mr. S t o c k . Why, the amount was not very much, Senator. It
was 10 per cent of the stated value of the common stock, which was
distributed as a stock dividend. It was about $4,600, but to my
mind the principle of the thing is very important.
Senator B u l k l e y . What other similar payments were afterwards
made?
Mr. S t o c k . A s a founders’ dividend, Senator?
Senator B u l k l e y . No; as commissions to Otis & Co.



STOCK EXCHANGE PBACTICES

905

Mr. S tock. There is a whole list of them here. They amount to
about two and a half million dollars in the aggregate, and they are
all in connection with the underwriting of securities.
I am not going to criticize any of those underwriting fees with the
exception of one feature of it which I will come to later, where the
banking firm sold back to Continental Shares securities which they
had; previously underwritten at more than twice the then market
price, so that having been paid for underwriting securities and then
having securities left over which they were not able to distribute,
they unloaded those securities back on Continental Shares, thereby
foisting-----Senator B u l k l e y (interposing). You are going ahead with the
details of that, are you ?
Mr. S tock. Yes.
On June 6, 1930, Otis & Co., having up to that point charged
underwriting fees aggregating about two and a half millions dollars
in connection with the distribution of Continental stock, unloaded
back onto Continental over 36,000 shares of common stock, some of
which was sold back to Continental at $76 a share and some of which
at $62 a share, although the market at that time was only $32 per
share. This resulted in selling Continental stock for $3,600,000 more
than it was selling in the market for at that time.
I might say that in a pending lawsuit in Baltimore an allegation
to that effect in the bill of complaint was admitted in the answer.
Senator G o ld sb o r o u g h . Can you refer to the suit that is now
pending for receiver in the Baltimore courts?
Mr. St o c k . I can do that right now, Senator. There is a suit
pending right now in the Circuit Court No. 2 in Baltimore by George
L. Gugle, plaintiff, against Continental Shares (Inc.), defendant.
Now, evidence of this sale by Otis & Co. to Continental Shares of
its own stock at a loss appears m a n audit of the books of C o n t in e n t a l
Shares by Lybrand, Ross Bros., and Montgomery, from which a
great deal of the facts of the statement have been taken.
Now, there were a great many syndicate operations of Mr. Eaton
and Otis & Co. I will just name a few of them. There was Indus­
trial Shares (Inc.), Utilities Syndicate, Steel Syndicate, Ohio Indus­
try Syndicate, Rubber Syndicate, Cleveland Cliffs Preferred Syndi­
cate, the Cliffs Corporation, International Share Corporation, Good­
year Shares (Inc.).
I will just refer to one o f these as illustrative of the m e t h o d of
operations. About November 10, 1928, a syndicate that w a s con­
trolled by Mr. Eaton and Otis & Co., called the Inland Syndicate,
sold to Continental Shares 66,960 shares of Inland Steel at $70 per
share. This purchase by Continental was authorized by its own board
of directors at a meeting on November 10,1928.
Senator B u l k l e y . Did you tell us who the directors were at that
Mr. S t o c k . I can give that, Senator. I do not have it right here.
Senator B u l k l e y . I think it has a bearing.
Mr. S t o c k . Yes. (Addressing Mr. Tresemer:) Would vou let me
have a list of directors in November, 1928, please, Mr. T r e s e m e r ?
Now, this sale of 66,960 shares of Inland Steel at $70 per share to
Continental was stock for which Inland Steel had paid on an option
$35 per share. It is obvious that if Inland Syndicate had wanted



90 6

STOCK EXCHANGE PRACTICES

to sell that much Inland Steel on the open market they could never
have realized the market price of 70.
An audit of Continental Shares’ books shows in its accounts re­
ceivable certain unpaid stock subscriptions by directors and officers
and employees of Continental Shares. These are as follows: W . B.
Bur well, president, 25,860 shares, on which he owes $754,709.
L. G. Watson, secretary and treasurer, 11,614 shares, on which he
owes $322,306.
F. H. Hobson, vice president, 1,400 shares,’ for which he owes
$26,600.
E. C. Brelsford, secretary and treasurer International Shares, a
subsidiary of Continental, 1,500 shares, on which he owes $62,500.
R. J. Lehman, an employee, 720 shares, on which he owes $24,200.
And Maurice Howard, another employee, 300 shares, on which he
owes $7,466.
Making an aggregate subscription of 41,394 shares, on which there
is still owing $1,197,781.
Mr. G ray. How is that carried on the books ?

Mr. S t o c k . As accounts receivable.
The fact that Mr. Eaton and Foreign Utilities were one and the
same, Foreign Utilities being the Canadian corporation, is very im­
portant, because many, if not most of these transactions whereby
the funds or the credit of Continental Shares were used, revolved
around that Canadian corporation.
The books of Continental Shares show that on August 10th, 1929,
Foreign Utilities subscribed on rights to 38,433 shares of the common
stock of Continental Shares at $60 a share, amounting to $2,305,980,
and that the same was paid for by cash obtained from Continental
Shares for which Foreign Utilities was charged on Continental’s
books.
In other words, Continental loaned this money to Foreign Utilities
to enable them to exercise rights and to take up this stock, 38,433
shares, and loaned them $2,305,980.
Now, when you go back to the minutes of Continental Shares
which authorized this transaction you find the authorization does
not run to Foreign Utilities but runs to Mr. Eaton personally, show­
ing that Mr. Eaton and Foreign Utilities were one and the same.
I would like to refer to those minutes.
The minutes of the meeting of the board of directors of Continen­
tal Shares of July 16,1929, contains the following [reading] :
Attention is directed to the fact that subscription rights aggregating 38,433
shares of stock will accrue to stock held by Mr.
S. Eaton by virtue o f the
offering of additional common stock authorized at this meeting.
Thereupon, upon motion duly made, seconded and unanimously carried, with
the exception of Mr. Eaton, who did not vote, thereon, it was resolved that the
company exercise in behalf of Mr. C. S. Eaton the subscription rights of 38,433
shares of common stock which accrue to stock held by him under the offering
•of additional common stock authorized at this meeting, upon payment by him
of 20 per cent of the total subscription price of August 10. V.V29. and 10 per
•cent monthly thereafter until full payment has been completed.

That was later on entered on the books.
Senator B u l k l e y . What directors were present at that meeting?
Mr. S t o c k . I would like to look in the minute book fo r that.
‘Could you tell me the directors [addressing Mr. Tresemer] ?
M r. C a r l T r e s e m e r . D o you want these as you go along?



STOCK EXCHANGE PRACTICES

W l

Mr. S tock. I might ask" if you would let us know who the directors
were who were present at the meeting of July 10,1929.
Mr. T besemer. I found them on the Inland transaction that you
inauired about.
M r. S tock . Who were the directors at that time, at the time of
the Inland transaction.
Mr. T besemer. Those who voted on it were Burwell, Hobson,
Inglis, and Philip Wick.
Mr. S tock . And do you have the minutes of July 10,1929?
Mr. T resemer. I have.
The C hairman . Might I suggest yon go ahead and testify to what
you are familiar with?
Mr. Stock. N ow, as I say, this was an authorization by the
board-----Senator B ulkley (interposing). Mr. Chairman, the witness has
testified that these were dummy directors. I think he ought to say
who they were. There are a good many people in Cleveland who
would hardly think they were dummies.
The C hairman . He says he does not have the names.
Senator B ulkley. I think if he could supply the names it would
be a fair thing to do.
The C hairman . Yes; it would be.

Mr. T resemer. July 10, 1929, directors present and voting:
Messers C. S. Eaton, W. R. Burwell, F. H. Hobson, and R. B.
Mitchell.
Mr. S tock . That authorization, which was made by the directors
to Mr. Eaton personally, was later on entered on the books of Conti­
nental as a transaction between Continental and Foreign Utilities.
Senator F l e t c h e r . In case of bills receivable, what happened?
Are these subscribers for stock still due certain amounts on account
of stock, just the certificates issued and no claim or liens on the stock
at all, but stocks were delivered and they simply hold that amount,
just like anybody else would hold an obligation to the corporation ?
Mr. S tock . I understand these certificates were placed in the name
of Mr. Eaton personally as trustee.
Senator F l e t c h e r . You do not know whether they were actually
delivered to the people who subscribed for them ?
Mr. S tock . I believe we have some one here, Senator, who is famil­
iar with that and can explain it better than I can.
Now, other evidence of the fact that Foreign Utilities and Mr.
Baton were one and the same appears in a letter which Mr. Eaton
wrote.
Senator B ulkley. Is not that a transaction of Foreign Utilities
where Mr. Eaton was not voting ?
Mr. S tock . Oh, yes; the one ii. which the loan was made to Mr.
Eaton.
Senator B tjlkley. What?
Mr. S tock . The one which Mr. Eaton obtained the loan of over
$2,000,000; of course, he could not vote and did not.
Senator B ulkley. W as it in his own behalf?
M r. S tock . Yes.

Senator B ulkley. Then, I misunderstood you.

Foreign Utilities.



I thought it was

908

STOCK EXCHANGE PRACTICES

Mr. Stock. Yes. They entered it on the books as Foreign Utilities,
yes: but the loan was authorized to him personally.
Senator B u l k i j e y . Oh, I thought maybe you had some further evi­
dence that he and Foreign Utilities were one and the same.
Mr. Stock. Mr. Tresemer, would you mind bringing your records
around here and sitting close to me? I may have occasion to call
for various records.
Mr. T r e s e m e r . All right.
Senator Bulkley. I s that a thing that you are trying to prove,
Mr. Stock, that Foreign Utilities and Mr. Eaton are one and the
same ?
Mr. Stock. Yes, sir.
Senator B u l k l e y . I thought that was obviously true. I didn’t
think there was any doubt about that.
Mr. G ray. It is obvious. There is ample proof of it. There is
not any question about it.
Senator Bulkley. I didn’t suppose there was any doubt about it.
Is there any doubt about it, Mr. Daley ?
Mr. D aley. I understand that his family and he control it. They
do not own it.
Mr. G ray. There is ample proof that Foreign Utilities and Mr.
Eaton are the same. Foreign Utilities is a holding corporation for
the purpose of dealing in stocks in the name of the Foreign Utilities
in order that he need not deal in his own name. No question about
that.
Senator Bulkley. I understood that it was practically a family
corporation, but I suggest that Mr. Daley tell us what it was ana
then you would not have to bother about it so much.
Mr. G ray. Mr. Chairman, as counsel for the committee, I would
suggest that if Mr. Daley in due course, after we get through pre­
senting anything, desires to testify with respect to matters the same
as any other witnesses called-----Senator B ulkley (interposing). I was only suggesting a short
cut to something that I thought he was being at some labor to
prove.
Mr. Gray. There is no doubt that it will be proved.
Senator B ulkley. That is what I think.
Mr. Stock. I f the committee is satisfied that Mr. Eaton and
Foreign Utilities are one and the same, I will not take up any further
time in provinig it.
Mr. .Gray. I should not waste any time on that.
Mr. Stock. All right.
Mr. G ray. The other transaction demonstrates it beyond any
doubt.
Mr. Stock. N ow, I might say that while this Continental Shares
and its entire operations were predicated on the sale o f securities
to the public all over the country by the salesmen of Otis & Co.
from their many offices, I want to call' this one thing to the attention
of the committee, that in many of these cases most of the purchases
of stock do not take place on the stock exchange. A company lists
its shares and then goes out and has its salesmen sell the stock
directly, but the stock exchange is the show window in which the
goods are displayed. The salemen go out and they say, “ Well, now,
you saw that stock go up five points last week,” or go down,” or



STOCK EXCHANGE PRACTICES

909

whatever it was, and then try to explain prices, but the stock ex­
change is the show window that enables the salesmen to go out and
sell the stock while the attention of the entire country is riveted to
the ticker tope.
Now, this company operated on that basis. Most of the stock in
this company was sold directly by salesmen. So that it became a
very important part of the salesmanship that they make their state­
ments appear as favorable as possible.
I would like to read to this committee a letter written by Mr.
"Watson, secretary-treasurer of Continental Shares, to Mr. Fer­
dinand Eberstadt, a partner in Otis & Co., bankers, for this invest­
ment company.
July 21, 1930.
D hab Mb. Eberstadt: Mr. Eaton has suggested that we obtain your opinion
on the inclosed balance sheet and aecount sheets as at June 30,1030. There are
one or two points in connection with this balance sheet that we would like to
get your specific opinion on before endeavoring to have the auditors alter
them our way.
First, under “ other assets ” there was a loss of slightly in excess of
32^)00,000 taken in treasury stocks. This was due chiefly to two transactions,
one in connection with the Lehigh Syndicate, where we had to take back
certain securities, and the other in connection with our convertible preferred
fttoek.
My feeling in this is that we should write down the loss but leave out the
statement in the parentheses made by the auditors “ less reserves to reduce
indicated market values.” Also under “ unpaid subscriptions ” I see no reason
why we should show the number of shares held.
Second, income and expense account: Neither Hr. Burwell nor myself
1* at all satisfied with this, in so far as we believe that it would not be any
particular breach from accounting principles if the four hundred and twelve
thousand-odd dollars representing the loss in Continental Allied and the
2,052,000, the written down total treasury stocks, were combined by way of
a reduction under the caption “ Profit on sales of securities,” so that there
would be only one heading here representing approximately 15,700,000.

Now, what happened there was this: The accountants for Con­
tinental Shares had prepared a balance sheet and that balance sheet
had on the credit side a profit of about $22,000,000 on the sale of
securities in the early part of the year. It also showed certain
losses, losses on treasury stocks and losses on other transactions. It
showed among other losses a loss of $412,000 incurred by a subsidiary,
Continental Allied, which was set up for the purpose o f operating
the market in Continental Shares.
Senator B rookhart. What part did it take in that manipulation?
How did it operate?
Mr. S tock . Well, Senator, I do not know exactly how they op­
erated. It was set up for that purpose, to handle the market and
trading operations in that stock.
Senator B rookhart. Either buying or selling?
Mr. S tock . Either buying or selling.
Mr. G rat . Or both?
Mr. S tock . Or both.
Senator B rookhart. Would they be doing both?
, Mr. S tock . Yes, sir. That company was in existence all during
tiie year 1930, and I suppose in endeavoring to maintain the
market on the stock it lost about $030,000 in 1930, which of course
was sustained by Continental Shares; but by June, 1930, the date of
this semiannual statement, those manipulations or operations in the
market had resulted in a loss of $412,000.



910

STOCK EXCHANGE PRACTICES

In order that the stockholders should not know about that, al­
though the accountants saw fit to include it in the statement thiPf
drew up, it was suggested by Mr. Eaton that the auditors alter th »
statement “ their way ” and absorb those losses in the profit which
they had on a transaction the early part o f the year,
benator B rookhart. What evidence have you o f that?
Mr. S tock. The statement that actually was issued was exactly
in conformity with the suggestion o f Mr. Eaton, and those loea*
did not appear under that balance sheet.
Mr. G ray. The answer to your question, Senator Brookhart, is
that the evidence is contained in the letter that was written first and
in the fact that the account afterwards was drawn and published in
accordance with the suggestions contained in the letter.

Senator B r o o k h a r t . May I understand i t : You say that the net
result of the losses is that reflected in the balance sheet!
Mr. S tock. No, Senator. The fact that they were losses in these
instances was not shown.
Senator B rookhart. I see. But the net result o f them in
there-----Mr. S tock. Oh, o f course, it had to be.
Senator B r o o k h a r t . I am trying to find out whether you say
the balance sheet was false or not.
Mr. S tock. Well, I will put it this way, that the original balance
sheet showed a $22,000,000 profit in one transaction and smaller
losses on other transactions. Now, that is how the accountants
showed that statement when they first drew it up. Mr. Eaton saw
fit not to show those losses, and have them deducted from the profit
of twenty-two million, really showing merely a profit of $15,000,000.
Senator B r o o k h a r t . But the net result of the balance sheet-being
the same?
Mr. S tock. Yes.
Senator B rookhart. That is what I wanted to get.
Mr. G r a y . The net result was the same.
Mr. Stock. The committee has heard a great deal of evidence
about methods of salesmanship in connection with selling securities.
I would like to read a letter—in order to save time I will just read
parts of a letter written by Rex Arthur, a partner in Otis & Co..
and the resident partner in Denver, Colo., where the operations oi
Otis & Co. were very extensive, a letter by Mr. Arthur to Ferdinand
Eberstadt, a partner of Otis & Co. in the New York office, dated
May 22,1930. [Reading:]
On several occasions I have been at the point of writing yon exactly what I
think of the Continental Shares situation. Your telegram of yesterday decided
me.
First, let me assure you that we are not overestimating the seriousoees of
the local situation. When Continental Shares breaks below 30 we are in
imminent danger of having to sell out a large number of our beet accounts,
not Joy riders and weak speculators, but friends of ours who got this stock
In the beginning and all the way up. Naturally, if we start this selling the
market will go lower, which will in turn force further liquidation. Granted
that this predicament is most serious to the Denver office, I still feel that It Is
not our predicament alone, but one which in a much larger sense affects the
entire firm and the firm’s future. When I tell you that the morale at the entire
selling organization of Otis & Co. is shot to pieces Just over this Continental
Shares matter alone, I am not guessing, as I know the feeling of practically
every office in the circuit.




STOCK EXCHANGE PRACTICES

911

As I see Continental Shares, this company is not only the most important
financial vehicle which Cyrus Eaton has at his command, but is potentially a
tremendous business Incubator for us as bankers. For the past nine months
this stock has been continuously and persistently working down. W ith all due
allowance for the condition o f the general market, it is perfectly clear that
the handling of this particular market lias been extremely bad. Sporadic at­
tempts have been made from time to time to give support, but there has been no
continuity to the effort, and at no time has the market been aggressively w ork­
ing on the up side. Negative support only, that is, w ith buying orders under
the market is just wasted effort, and money, since any stock le ft to flounder
will inevitably work down and through any support level.

Senator F l e t c h e r . What is the date o f that letter ?
Mr. S tock . May 22, 1930. [Continues reading:]
To remedy the situation first the market should be placed entirely in the
bauds of one operator. I do not think the streets o f New Y ork need to be
combed to find some one talented enough to handle this market, but whoever
the operator is, he should stay in New York and be given a free hand.
Second, the popgun idea should be definitely abandoned and heavy artillery
brought on. The Allied Corporation [which is the subsidiary referred to before]
did authorize the buying o f as much as 10 per cent o f the outstanding capi­
talization at current levels. W e accept human nature as it is, and w hile in
theory an investor would be willing to patiently aw ait the incom e o f assuredly
three of the most recognized organizations in the field, it is reasonable to
assume that he w ill change his mind when it gets to the point that there is
neither a m arket nor a possibility o f returning to the levels. W hen the general
market has an upturn these shares should easily be distributed by our retail
organization and outside dealers. It is ju st a cinch, by the way, that money
and effort spent in building up a dealer follow in g is throw n aw ay until such
time as the stock is properly sponsored. Other corporations w ho need capital
constantly are perfectly alive to this, and we must come to it. Our own retail
clientele alone could supply us with millions o f dollars each year. A t present
instead of doing that we are letting them and their money be booted right to
bell or into the hands o f our competitors. It is the most perfect exam ple o f
killing the goose that laid the golden egg that has ever com e to my attention.

Now, that, gentlemen, was written by one partner of a banking
firm to another.
Mr. G r a y . Rather would you not say, Mr. Stock, by one partner
of a brokerage company to another, Otis & CoJ
Mr. S to c k . Well, they were a banking firm and brokerage com­
pany, Mr. Gray. Of course, this Otis & Co., as I stated, were
members of the New York Stock Exchange.
Senator B u l k l e y . Was there no action taken pursuant to that
to peg the market?
Mir. S to c k . I did not go into that, Senator Bulkley. I do hot
know.
Around October 10, 1930, or slightly before that time Otis & Co.
had total obligations of $125,000,000, and the various banks were
calling on them for payment, and on the night of October 13, 1930,
a meeting was held at which representatives of the New York Stock
Exchange and banks were present and demand was made on Otis
& Co. as members of the New York Stock Exchange, the demand
being based upon an audit by the New York Stock Exchange of
the affairs of Otis & Co. that Otis & Co. would not be permitted
to open the next morning unless' they obtained $20,000,000. The
arrangement also that night was that they would be permitted to
open the next morning if they obtained this money by noon the
next day.




912

STOCK EXCHANGE PRACTICES

Now, in anticipation of this action on October 8, 1930, a trans­
action was arranged whereby this money was to be obtained, and
this is what was done: It was arranged that Continental Snares
purchase certain securities from Foreign Utilities, the Canadian
corporation, for $57,000,000, $35,000,000 of which would be paid
in cash and the balance in stock of Continental Shares Co. at $21 a
share, which was presumably the market price at that time.
That transaction appears in the minutes of Continental Shares*
the authorization for it, together with the list of the securities
involved.
Pursuant to that authorization-----Senator B u l k l e y (interposing). That was an authorization by
the directors?
Mr. Stock. Directors of Continental Shares.
Senator B u l k l e y . What directors were present and v o tin g ?
Mr. Stock. Directors present were Messrs. C. S. Eaton, W . RBurwell, Richard Humsted, F. H. Hobson, R. V. Mitchell, and
Philip Wick.
Mr. G ray. Let the committee get that transaction perfectly clear*
Mr. Stock, as it appears by that resolution. By that resolution
Continental Shares agreed to purchase from Foreign Utilities, the
Canadian corporation, that has heretofore been designated as Mr.
Eaton’s corporation, certain stocks which are listed in that resolu­
tion.
Mr. Stock. That is correct.
Mr. G ray. And they were to give to Foreign Utilities for that list
of stocks $57,000,000, $35,000,000 of which was to be in cash and
the balance to consist of a certain number of shares of Continental
Shares itself, their own stock?
Mr. Stock. Yes: I was coming to that.
' Mr. Gray. Figured at a basis of $21 a share. Now, as far as the
books of the Continental Shares are concerned, that is to say, the
minute book where you have indicated this resolution is to be found,
there was no mention of Otis & Co. in any way, shape, or form*
was there?
Mr. Stock. No.
Mr. G r a y . All right. That resolution was dated the 8th day of
October. It was the 10th day of October, 1930, was it not, that the
stock exchange through its governing committee stepped in on
Otis & Co.?
Mr. Stock. That is right.
Mr. G r a y . And it was the night of the 13th of October, 1930,
which was a Monday night, that Otis & Co. were advised that they
could not open the next day unless they reduced their liabilities or
likewise increased their capital one wav or the other, approxi­
mately $20,000,000?
Mr. Stock. That is correct.
Mr. G r a y . And at a meeting Jield—and this is all proved by
records—-at a meeting held as late as 9.30 in the morning Tuesday*
Otis & Co., having advised the stock exchange that they could put
themselves m that position by noon of that day, were permitted to
open at 10; that is correct, is it not?
Mr. Stock. That is correct.
Mr. G r a y . All right; now, from there on?



STOCK EXCHANGE PRACTICES

913

Mr. S t o c k . I f I have not mentioned it, I would like to do it at
this point, that the New York Stock Exchange audit of Otis & Co.
showed that their obligations totaled $225,249,000, and that their
capital was impaired to the extent of $18,423,000.
Mr. G b a y . Not their capital but their position with respect to
their securities?
Mr. S t o c k . That is correct.
Mr. G r a y . N o w , right there let me develop another point: It is a
fact which the audit of the affairs of Otis & Co. at that time showed
that a great deal of their obligations consisted of loans from various
banking institutions for which there had been deposited as collateral
either stocks that were owned by Eaton himself or stocks that were,
owned by Foreign Utilities, Eaton’s corporation?
Mr. S t o c k . That is correct.
Mr. G r a y . Is that correct?
Mr. S t o c k . That is correct.
Mr. G r a y . S o that the committee may get the picture and under-,
stand it as Mr. Stock goes along, it was m order to furnish Otis &
Co. money that it was necessary to sell those securities, pay the
loans of Otis & Co. or Eaton or both, and release those securities,
in order that they might be delivered to Continental Shares for the
consideration that was to be paid. That was the scheme, was it not?
Mr. S t o c k . Yes, sir.
Mr. G r a y . All right; now, go ahead and relate it in detail.
Mr. S t o c k . Before relating how they did this, in order to show
that-----Mr. G r a y (interposing). I f you go ahead and relate how they
did it, when we have gotten to that point, instead of diverging to
something else, the committee will get it clear.
Mr. S t o c k . All right. There was at that time, of course, col­
lateral at various banks on which Foreign Utilities, Eaton, and Otis
& Co. were obligated, and it was in order to lift those obligations
that this transaction was put through. This transaction was put
through originally-----Senator B r o o k ii a r t (interposing). That is Eaton and Otis & Co.
or these banks?
Mr. S t o c k . With those banks’ money; yes, sir.
Senator B r o o k h a r t . H o w much was the total amount ?
Mr. S t o c k . I f you will permit me— it is diffiuclt to answer that
directly.
Mr. G r a y . The answer is, Senator, that the total amount of their
obligations was $125,000,000.
M r . S t o c k . But how much of that was the bank loans and how
much was another type of loan we have never analyzed.
Senator B r o o k h a r t . W h a t w as the oth er ty p e o f loan ?
Mr. S t o c k . Well, they may have owed money to persons individ­
ually. I do not know. There were these particular loans with
various banks.
Senator B r o o k h a r t . What were those particular loans ?
Mr. S t o c k . There were loans at a New York bank and several
Cleveland banks.
Senator B r o o k h a r t . Which New York bank?
Mr. G r a y . Several New York banks, Senator. Give Senator.
Brookhart the names of the four banks.



91 4

STOCK EXCHANGE PRACTICES

Mr. S t o c k . Guaranty Trust Co., Chemical Bank & Trust Co., both
of New York.
Senator B r o o k h a r t . How much for each one?
Mr. S t o c k . $‘2,550,000 paid to the Guaranty Trust Co.; $1,655,000
paid to Chemical Bank & Trust Co.; $50,000 paid to the Public
National Bank & Trust Co. of New York; $1,600,000 paid to the
Chase National Bank. There are other payments here to those
banks. There is $666,000 paid to the Union Trust Co. of Cleveland;
$1,000,000 paid to the Union Trust Co. of Cleveland; $3,333,333 paid
to the Bankers Trust Co. of New York; $7,000,000 paid to Otis &
Co.; $636,666 paid to Otis & Co.; $390,000 paid to Otis & Co. I have
a complete distribution that was made of that transaction.
Senator B r o o k h a r t , What is the total amount of that distri­
bution?
Mr. S t o c k . That total amount was $37,000,000-----Mr. G r a y . I will get that for you, Senator, as long as you have
asked that question. We jumped perhaps a little in order to answer
Senator Brookhart’s question and you have referred to the distribu­
tion there. That distribution sheet represents the payments, in part
at least, that were made by the Chase National Bank, from whom
Continental Shares borrowed the money, on account of the various
loans of Otis & Co. in order to relieve the collateral for delivery to
Continental Shares—that is true, is it not?
Mr. S t o c k . That is correct.
Mr. G r a y . And that distribution not only represents certain
moneys paid in cash to Otis & Co., but represents certain moneys
paid to the banks in New York and to the banks in Cleveland to take
care of loans, and it also shows bookkeeping transactions by which
credits were given for certain amounts, which was the equivalent of
the payment of a loan, does it not?
Mr. S t o c k . Yes, sir.
Mr. G r a y . Or such transactions of that type.
Senator B r o o k h a r t . That means that $37,000,000 was furnished
by the Chase National Bank?
Mr. G r a y . I will go a little further than that: The first amount
furnished by the Chase National Bank was thirty million, was it not?
Mr. S t o c k . That is correct.
Mr. G r a y . The second amount furnished by the Chase National
Bank was $5,000,000?
Mr. S t o c k . That was furnished by Union Trust of Cleveland.
Mr. G r a y . And that was the amount in cash or represented the
entire amount in cash that was to be paid by Continental shares
in their deal with Foreign Utilities?
Mr. S t o c k . That is correct.
Mr. G r a y . N o w I don’t want you to go into the details f o r a m o ­
ment of the other transaction, because we will reach it in a m o re
orderly way, but the fact is that there was a ch an ge in th e a rr a n g e ­
ment for the delivery of $21,000,000 of stock by w h ich th ere was a
substitution of about seven million and some od d in cash , w h ic h re­
sulted in Continental Shares paying even seven m illio n m o re becau se
it was necessary that that amount-----Mr. S t o c k (interposing). $670,000.




STOCK EXCHANGE PRACTICES

915

Mr. G b a y . $7,670,000—in order that Eaton and Otis & Co. should
still be saved ? In other words, the thirty-five million was not enough,
was it?
Mr. S t o c k . That is correct.
Mr. G r a y . Now, I want you to go back to the point where we left
off, if you please, starting after this deal was made with Continental
Shares and that resolution was adopted and we are told of the posi­
tion of Otis & Co., and tell us just exactly how the transaction was
carried out, by what financial manipulation, through what institu­
tion, and then how the moneys were distributed, that is, how they
reached the point that it was distributed in the way you indicated.
Will you go back to that now ?
Mr. S t o c k . Pursuant to the authorization of the board of directors
of Continental Shares, 19 blank promissory notes were given by
Continental Shares to the Chase National Bank. These notes were
subsequently filled out for various amounts for the purpose of tak­
ing up existing loans of Eaton, Otis & Co., and Foreign Utilities
at various banks at New York and Cleveland.
Mr. G r a y . What was the provision in the resolution with refer­
ence to the authority to be given to the Chase National Bank to
use those notes?
Mr. S t o c k . There was not any that I could find.
Mr. G r a y . Was there not a provision to the effect that those notes
should not be used except upon the authority of certain officers of
the company ?
Mr. S t o c k . Oh, yes. I was just coming to that.
Mr. G r a y . And did the Chase National Bank when this distribu­
tion part of it was made early on the morning of the 14th of Octo­
ber, 1930, for the purpose of saving Otis & Co., wait for the carrying
out and the receiving of the necessary authority ?
Mr. S t o c k . N o , they did not. They filled out several of these
notes immediately in order to obtain the cash to lift the obligations
that morning. And subsequently that was handled as a bookkeep­
ing transaction. But the depositary agreement between Continental
Shares and the Chase Bank provided that it was necessary for Chase
to have a written authorization signed by two officers before Chase
could honor any draft, check, or order against Continental. These
notes were filled out and used without Chase having any such
authorization.
In the larger sense, what happened here was that Foreign Utilities
was selling $57,000,000 worth of securities to Continental, which
really were up as collateral at various banks.
In addition to that collateral, Continental put up of its own port­
folio, not part of the securities that they were buying but out of
its own portfolio, securities of a value of $28,240,000. In other words,
what was done in this case was to use not only the collateral that was
already up at the banks but to add to that certain collateral already
owned by Continental Shares.
Mr. G r a y . Let us get that straight. The collateral, which was sold
by Foreign Utilities to Continental Shares for $57,000,000, was not
sufficient to put up to obtain the $35,000,000 loan; is that correct?
Mr. S t o c k . That is correct.
Mr. G r a y . Therefore, Continental Shares had to dip into its own
portfolio of outside stocks which it held and deposit them with the
119852—32— i>t 3------9




916

STOCK EXCHANGE PEACTICES

bank in addition to $57,000,000 worth—or supposed to be valued at
$57,000,000—of Foreign Utilities that were turned over before they
could get these $35,000,000 in loans; is that right?
Mr. S t o c k . That is correct.
Mr. G r a y . So the effect of the transaction, as far as Continental
Shares was concerned, was to have them part with $35,000,000 abso­
lutely ; that is, in the original agreement to change it to forty-seven
thousand six hundred-----Mr. S t o c k . Forty-seven million.
Mr. G r a y . Forty-seven million six hundred thousand—I am used
to talking in smaller figures—in cash, original $21,000,000 worth of
their stock, which was reduced proportionately as the cash in­
creased-----Senator B r o o k h a r t . Twenty-one million.
Mr. G r a y . Twenty-one million. I told you I was used to small
figures. And in addition to that, required them to take $28,000,000
of their own portfolio, stocks out of their own portfolio, and put
them up as additional collateral in order to put through this deal
to help out Otis & Co. ?
Mr. S t o c k . S o when this transaction was all finished, the net result
of it was that Continental Shares was obligated at the various banks,
that its collateral, its own collateral as well as the collateral that it
had purchased from Foreign Utilities, was also up as collateral, and
the various persons, Otis & Co., Foreign Utilities, and Eaton, had
been relieved of the obligations that they owed.
Senator B r o o k h a r t . Your idea of this whole thing is that it was
a scheme to loot Continental Shares?
Mr. S t o c k . No; I would not put it that way, Senator. I would
say that Otis & Co. and Cyrus Eaton got into a very tight hole at
this time and the only place that they could turn to to save themselves
was this investment company, and that is what they did.
Mr. G r a y . Mr. Stock, it is important to develop one other thing.
I can develop it by the accountant, but you probably can state the
facts. Continental Shares was an investment trust or a trading cor­
poration. In other words, it was a trust in which the people bought
the stock of the particular company which used the money obtained
from the sale of their own stock for the purpose of dealing in and
investing in other securities?
Mr. S t o c k . That is correct.
Mr. G r a y . It had as a result of its investments a certain definite,
fixed—or if not fixed a varying income— during the period of a year.
What was the effect, if any, on the reduction of the income to Con­
tinental Shares stockholders as a result of this transaction?
Mr. S t o c k . It cost Continental Shares for carrying charges, inter­
est charges, on the loans at the banks, $800,000 a year more than the
dividends on the securities which they purchased from Foreign
Utilities.
Mr. G r a y . Then it cost them a reduction of $800,000 ?
Mr. S t o c k . Yes, in that year. Now, in the following year-----Mr. G r a y (interposing). It cost them a reduction of $800,000 in
their income.
Mr. S t o c k . In the second year it cost them $2,000,000 in income.
In that connection I want to point out one thing: Otis & Co. being
in a very tight fix and the banks being somewhat reluctant to help



STOCK EXCHANGE PRACTICES

917

them, charged a very fancy figure for these loans. I would like to
read a letter written by James Bruce, vice president of the Chase
Bank, to Mr. Clarkson, president of the Chase Securities Co., con­
cerning this transaction [reading]:
I really think we are doing Otis & Co. a big service, chiefly because they are
not securities which they could put up for their loans, but would have to make
special loans on them, and I believe the Cleveland banks are pretty well loaded
up with loans on Otis’s enterprises, and I think the New York banks are probably
a little skeptical. For this reason they should certainly pay a substantial rate
on a loan of this kind, and I do not think we should soften up Mr. Wiggin’s
proposition in any way.

The loan in this case was 3 per cent higher than the rediscount rate.
That was a loan of Otis & Co. Why should Continental Shares be
charged with it? As a result, it cost Continental Shares $800,000
the first year and $2,000,000 the second year more as carrying charges
than dividends on the securities that were securing them.
Senator B r o o k h ar t . Who got Continental Shares?
Mr. S t o c k . The public, Senator.
Senator B r o o k h a r t . That stock had been sold up to $150,000,000?
Mr. S t o c k . That is correct.
Senator B r o o k h ar t . By people over the country generally?
Mr. S t o c k . Yes, sir.
The C h a ir m a n . Y o u said it was 3 per cent over the rediscount
rate. What was the actual rate?
Mr. S t o c k . The actual rate was 5y2 per cent, and the discount
rate at that time was 2y2 per cent. Mind you, this was a security
loan. It was not a commercial loan; it was a loan on securities
on which I should say the rate is usually not over 1 or IV2 per cent
above the rediscount rate.
T h e C h a ir m a n . G o ahead.

Mr. S t o c k . In order that there be no mistake about the purpose
of this transaction, and what the money was to be used for, I would
like to read a letter from Mr. S. Smith, vice president of the Chase
Bank, to Mr. Wiggin, chairman of the Chase National Bank.
Mr. G r a y . I should say to the committee that these letters are
absolutely correct, that they are copies of communications obtained
from the Chase National Bank, and that I, myself, personally com­
pared them with the letters, so that they are absolutely correct.
Mr. S t o c k . N o w , this refers to Otis & Co.
Senator B r o o k h ar t . What is the date of the letter?
Mr. S t o c k . The date of this letter is October 10, 1930, and inci­
dentally, the date of the letter from Mr. Bruce to Mr. Clarkson is
October 9,19 30 .
M r. G r a y . T h e y are interoffice com m unications.

Mr. S t o c k . I will not read all of this. It refers to the calling
of bank loans by various banks and goes on to refer to a statem ent
made by Mr. Eberstadt of Otis & Co. [reading] :
He says the $30,000,000 loan will clean up their biggest debit account,
which is Foreign Shares or Foreign Securities Co.

He is referring there to Foreign Utilities.
They have been buying utility securities and owing Otis. The proceeds of
our loan to Continental Shares will go to Foreign Shares and from them to
Otis.




918

STOCK

exchange

p r a c t ic e s

(The documents referred to by Mr. Stock are here printed in the
record in full, as follows:)
Memorandum.
M r. Clarkson,

President Chase Securities:
Referring to the matter of a loan to Continental Shares (Inc.), it seems
to me the following collateral is all right:
United Light & Power B should be taken at 40. This stock sells at TO
but has purely a nominal market, whereas the A stock, which shares equally
in assets and earnings but has no voting power, sells at 32. In other words,
according to market values, 2,100,000 shares of A stock sell for $67,000,00ft
whereas 1,000,000 shares of B stock sell for $78,000,000. I think, however,
the B stock should be allowed a 25 per cent increase in value of the A stock,
which would bring it to about 40. This would give a value to their holdings
of U. L. & P. B of $6,000,000.
,.
Lehigh Coal & Navigation I think is all right to take in at the market, whica
would be $12,400,000, and subject to seeing the balance sheet of Cliffs Corpora­
tion I think we could make the balance of the loans on this stock.
They have valued the same at $40,000,000 and I presume that reasonable
valuation would be around $30,000,000, which would give us ample margin.
On the other hand, none of the manuals have anything on this corporation
since the end of 1929 and the information they give is rather meager, and I
think we should make the loan subject to seeing the balance sheet and a rea­
sonable valuation being substantiated.
I am quite sure, however, from the set-up of the company, which is turn
owns the Cleveland Cliffs Corporation, that their holdings are worth this
amount of money.
With regard to any possible option, the Continental Shares (Inc.) has 10,000
Founders shares which are entitled to 25 per cent of the available net profits
of the company after common stock receives $1 per share. I presume it would
be a hard matter to get any sort of a hold on any of these shares, although
that is the desirable thing if the company has a good future. The amount
of common shares issued is 3,400,000 shares.
It seems to me that Mr. Wjggin’s proposition to them with regard to interest
is overfair in every regard, and I do not believe it is worth while for us to
employ our money on any better terms. The only suggestion I could make in
case we wanted to go more easy on them would be to establish a rate of 3 per
cent over the Federal reserve rediscount rate with a minimum of 5% per cent
In other words, it would run at 5% per cent at the moment and if the redis­
count rate were lowered we would still get 5Vfc per cent, but would get any
raise that may be in the rate.
I really think we are doing Otis & Co. a big service, chiefly because they
are not securities which they could put up for their loans, but would have to
make special loans on them, and I believe the Cleveland banks are pretty
well loaded up with loans on Otis’s enterprises and I think the New York
banks are probably a little skeptical. For this reason they should certainly
pay a substantial rate on a loan of this kind, and I do not think we should
soften up Mr. Wiggtn’s proposition in any way.
J a m e s B ru ce ,
O cto be r

9, 1930.

Vice President Chase Bank.

Memorandum for Fr. Wiggin, re Otis & Co. Continental Securities:
I believe LHJ has or Is making a memorandum. He is tied up and I have
not seen him. As the matter now stands, the $30,000,000 Continental Shares
(Inc.) loan is to be for 18 months at 5% per cent interest, payable monthly.
The company has a right to pay at the end of any quarter on 30 days' notice.
If loan is paid before maturity the commission for the unexpired Hwia at the
rate of one-fourth of 1 per cent per annum is due. Otis & Co. to use best efforts
for Chase on future financing of concerns In which Interested and also best
efforts to see that we receive as substantial balances as possible. The only
item which Eberstadt quibbled over was the penalty for prepayment. The
collateral Is not yet fully decided. At present we are discussing as follow s:




STOCK EXCHANGE PRACTICES

919

416.000 United Light & Power B, at 40_____________________ $16,600,000
403.000 Lehigh Coal & Navigation, at 30_____________________ 12,100,000
11.400.000 Brooklyn Union Gas, at 115________________________
1,311,000
96,000 Goodyear__________________________________________
4,600,000
1,500,000
2.625.000 Continental Illinois Bank & Trust, at 570____________
772.000 Guaranty Trust, at 583_____________________________
430,000
5.850.000 Bank of Manhattan Trust, at 100__________________
585,000
10.888.000 Union Trust of Cleveland, at 75____________________
800,000
3.687.000 Cleveland Trust Co., at 385________________________
1,400,000
480.000 Harris Trust of Chicago, at 700_____________________
336* 000
68.850.000 Youngstown Sheet & Tube, at 100__________________
6,800,000
Total___________________________________________________

46,462,000

Mr. Clarkson has told them that while we have listed 416,000 shares United
light & Power we understand there is more available, and we want it all I
have not checked the prices on the above list. I understand most of them
are about at the market although United Light & Power B is down at 40 when
the market is near 80. In all probability soiue of this loan at least, may be in
temporary form, will be taken to-morrow, because of the following:
Be Otis & Co.
There has been considerable conversation about the firm for sometime past;
more of it to-day when they had $11,500,000 of loans called. Morgan’s First Na­
tional, Guaranty, and ourselves agreed to take these up. Eberstadt says they
already have $7,500,000 cash on the way for partial payment. He says the
Ann this morning conservatively had capital of $20,000,000, probably more;
that they are absolutely solvent. Their total loans were probably $120,000,000,
an properly secured but, of course, he is uneasy if continual calling like there
was to-day continues. He says the $30,000,000 loan will clean up their biggest
debit account, which is Foreign Shares or Foreign Securities Co. They have
heen buying utility securities and owing Otis. The proceeds of our loan to
Continental Shares will go to Foreign Shares and from them to Otis. Ebertfadt says he is satisfied that they have no other debit balances which are large
enough to cause them any uneasiness. He says the members of the firm
altogether don’t owe the firm more than $4,000,000 all properly secured. He
don’t think there is anything in their debts outside to cause any concern. In
addition, he is satisfied the principal partners have very substantial net
worth outside the firm. I think he estimated this conservatively at $25,000,000.
Be is very emphatic there is no internal situation or buying in of their own
shares which is a problem. He says that, of course, in their customers’ collat­
eral are large amounts of the stocks of companies they have bought into but
they are properly margined and he feels sufficiently diversified with no concen­
tration in any one of such size as to cause undue concern.
S. Smith,
Vice President, Chase Bank.
October 10, 1930.

Mr. S t o c k . N o w , there can be no question that the Chase Bank
in this case knew all of the details in this transaction. They had
a copy o f the minutes of the meeting of the board of directors that
authorized this transaction. They referred to it in all of the inter­
office correspondents.
Several weeks later—I might say that this transaction was found
because of the fact that the audit of Continental Shares shows
that this transaction was entered twice and handled in two different
manners. It shows that several weeks after this transaction went
through it was decided to send the securities that had been purchased
by Continental Shares up to Canada. I will just state the facts
and let the committee draw its own conclusions.
The original sale had been put through in this country, of course.
Hie collateral was in the banks in New York and in Cleveland,
and the sale of the securities was a sale of those particular securities,
but several weeks later it was decided to send those securities up



920

STOCK EXCHANGE PRACTICES

to Canada. They were sent up to Canada, St. John's New Bruns­
wick, I believe, and they were there delivered.
Senator C a r e t . By whom, Mr. Stock?
Mr. S t o c k . They were there delivered by an agent of Foreign
Utilities—we have that here—to an agent for the correspondent
of the Chase Bank in Canada, and a notary public made an affidavit
to the effect that the securities were then and there delivered at
St. John’s. They were then shipped right back to where they had
come from, New York and Cleveland. The expense o f that ship­
ment up to Canada and back again was over $34,000, and they
were shipped up there just for the purpose of having a notary pub­
lic attest the fact that he had seen delivery made in Canada.
The C h a i r m a n . And why that?
Mr. S t o c k . Well, Senator, the Foreign Utilities was a Canadian
corporation, but all of its business was transacted in this cou n try.
This particular sale on October the 10th took place in this cou n try,
and the income tax in this country, of course, was lower th a n the
Canadian income tax.
The C h a i r m a n . Or higher?
Mr. S t o c k . Or higher, I meant to say: yes. One item alone in
this transaction, United Light & Power, one of the securities sold
by Foreign Utilities to Continental Shares showed aj profit* o f
$17,000,000.
The C h a i r m a n . It showed that profit as happening in Canada? ^
Mr. S t o c k . Well, as they later on put through this transaction, it
was made to appear that it was a sale in Canada and not subject
to the American tax.
The C h a i r m a n . It has the appearance of being planned t o g et
away from the tax of the American Government?
Mr. S t o c k . Yes. I would like to indicate the manner in which
they did this. Several weeks after this original transaction went
through they put through another transaction in which-----The C h a i r m a n (interposing). What was the amount o f ta x e s,
probably ?
Mr. S tock . Our corporation tax at that time, I believe, was 12
per cent.
The C h a i r m a n . The total sum, about how much?
Mr. S t o c k . Well, I don’t know h ow m u ch all the profits were. I
am only familiar with that one item of United Light, which was
$17,000,000.
The C h a i r m a n . And the tax on that would have been?
Mr. S t o c k . $2,000,000.
Mr. G r a y . A little over $2,000,000.
Mr. S t o c k . I might say that the way that this matter was handled
it appears on the books of Continental Shares in both ways, first
put through as a sale on October 10, and several weeks later they
put it through a second time, in this way, that instead of Continental
Shares buying these securities from Foreign Utilities and letting
the proceeds go to various persons, they made it appear that Con­
tinental Shares had loaned $57,000,000 to Foreign Utilities.
Now, to my mind that is perfectly absurd, because the Chase Bank
had not only recognized that there had been a sale from Foreign
Utilities to Continental but had used the securities involved as col­
lateral in extending the original loan to Continental Shares. How



STOCK EXCHANGE PRACTICES

921

could the Chase Bank extend a loan of $57,000,000 to Continental
Shares without getting any collateral from Continental Shares ? And
if the securities in question had not been sold to Continental Shares,
where was the collateral on which Chase Bank loaned that money?
So they put the thing through as a loan of Continental Shares to
Foreign Utilities, and had Foreign Utilities send a note down, a note
from Foreign Utilities to Continental. They shipped the securities
up to St. John’s, New Brunswick, and then had an exchange made
of the notes for the securities, Continental returning Foreign Utili­
ties notes and taking back the securities.
The C h a irm a n . Is there any income tax at all in New Brunswick?
Mr. S t o c k . Well, Senator, I would hesitate to testify as an incometax expert. I have inquired of various people that are well informed
on the subject and they say that, if I have stated the matter to them
correctly; they think there is a tax. I will state this about that, that,
if the original transaction, which was a sale from Foreign Utilities
to Chase, resulted in an income tax, nothing that they did after that
would have removed that tax.
Senator B u l k l e y . Did you mean Foreign Utilities to Chase?
Mr. S t o c k . Foreign Utilities to Continental.
Mr. G b ay. Likewise, if a transaction, theoretical as well as actual,
took place in this country, the tax was due to the United States Gov­
ernment and not to the Government of New Brunswick, unless, in
addition to the tax having to be paid to the United States, Foreign
Utilities, as a Canadian corporation, itself might have been liable
in some way under some taxing laws of New Brunswick to New
Brunswick itself—isn’t that true ?
Mr. S t o c k . That is correct.
Senator B r o o k h a r t . What is the date of this transaction?
Mr. S t o c k . October 10, 1930.
Senator B r o o k h a r t . It is not too late to collect that tax yet, is it?
Mr. S t o c k . No.
Senator B u l k l e y . Did I understand you to say that Continental’s
books were balanced ?
Mr. S t o c k . N o; they had two separate sets of entries; one was a
sale on October 10 and one-----Senator B u l k l e y (interposing). They showed it as a sale on Octo­
ber 10?
Mr. S t o c k . Yes; that is correct.
Senator B u l k l e y . And, then, what is the other one?
Mr. S t o c k . Then, the other subsequent entry showed it as a loan.
Senator B u l k l e y . T h en , there m ust h ave been so m eth in g else in
there.
Mr. S t o c k . No; they really showed it in duplicate, Senator. Of
course, you see, the semiannual statements only come out in June
and the end of the year. When the end-of-the-year statement came
out on December 31, 1930, it was then considered on the books of
Continental as a loan transaction.
Senator B u l k l e y . T h e y ju st disregarded the first one?
Mr. S t o c k . They disregarded the first altogether.
Senator C a r e y . Mr. Stock, who was responsible for sending the
bonds to Canada ?
Mr. S t o c k . Just what do you mean by that, Senator?



922

STOCK EXCHANGE PRACTICES

Senator C a r e y . Did the Chase Bank send them or did Continental
send them or Otis send them?
Mr. S t o c k . Well, I can only answer that, Senator, in this way,
that I do not know whose idea it was or who originated the idea;
I do not know that. I will say that the securities were sent up to
the Canadian correspondents of the Chase National Bank, so that
they had never left the custody of the Chase National Bank.
Senator C a r e y . Who would have saved the income t a x on these
securities ?
Mr. S t o c k . Whoever owned Foreign Utilities.
Senator C a r e y . Mr. Eaton?
Mr. S t o c k . They were the people that made the profit, and that
was Mr. Eaton’s personal company.
Senator C a r e y . Were not these securities pledged with Chase for
a loan ?
Mr. S t o c k . Originally; yes.
Senator C a r e y . They were released after the sale?
Mr. S t o c k . They were released; yes.
Mr. G u g l e . No; they were not released.
Senator C a r e y . Didn’t Chase still retain these ?
Mr. S t o c k . Oh, yes; they still retained them as collateral. That
is the point. They did not release them at all.
Senator C a r e y . They were really still in the possession o f the
bank?
Mr. S t o c k . Exactly; because they still owed money to Chase on
that particular collateral.
Senator C a r e y . It would not be a natural thing to send bonds
which were used as collateral and have them transferred. I do not
see the object of the transfer.
Mr. G r a y . May I develop that by a question, Senator ?
Senator C a r e y . Yes.
Senator W al c o t t . In the first place, Mr. Gray, in order to cor­
rect the record, those securities were not released.
Mr. S t o c k . N o ; they were not released. I misunderstood Senator
Carey.
Senator W al c o t t . The record ought to be made clear.
Mr. G r a y . As a matter of fact, in order to clear the record and
so that we may understand it better, the securities, prior to the little
visit that they paid Canada were lodged with the Chase Securities,
or with the Ohase National Bank, rather, as collateral for the loan
that had been made to Continental Shares, the money involved in
which loan had been distributed either by bookkeeping entries or by
the payment of cash to the various institutions that held these
securities prior to that time as collateral for loans to Otis?
Mr. S t o c k . That is correct.
Mr. G r a y . And right there, by the way, some of Eaton’s personal
loans were taken up, were they not ?
Mr. S t o c k . Y e s .
Mr. G r a y . Having passed into the hands of the Chase National
Bank, they having held it as security, as Senator Carey suggests
in his question, there was no reason in the world and no interest
that the Chase National Bank had in having those securities sent
to Canada for any purpose whatsoever, was there?
Mr. S t o c k . No; there was not.



STOCK EXCHANGE PRACTICES

923

( Mr* G r a y . All right; therefore, the only person that had any
urfepeai in the sending of those securities to Canada in order to
waad the tax was whoever it happened to be that made a profit on
fee sale?
Mr. S t o c k . That is correct.
Mr. G r a y . That is true, is it not ?
Mr. S t o c k . That is c o r r e c t .
Mr. G r a y . And the concern which made the profit on the sale, or
the concerns if you please, because there seems to have been several
different ownerships, were Foreign Utilities, Otis & Co., and Cyrus
Baton!
Mr. S t o c k . That is correct.
Mr. G r a y . So that, though we may not know the exact inside of
who issued those instructions, the fact remained that it must have
been one or all of those three individuals or corporations, because
those are the only people that would have been interested in saving
the tax?
Mr. S tock. That is correct.
Mr. G bay. Does that answer your question, Senator Carey?
Senator C a r e y . Yes.
Mr. G r a y . Is that the end of the statement, Mr. Stock?
Mr. S t o c k . That is all I have to say; yes.
Mr. G b a y . All right. Probably some of the Senators may want
to ask you something. I f not, why, I will make a statement myself
a b o g | th e situation.
S e n a to r B r o o k h a r t . I want to get something straightened out in
h e a d i f I can: This Continental Shares, $150,000,000 corporatioiL h a d sold it s stock through the stock exchange ?
Mr. S t o c k . Well, Senator, the stock was listed on the stock ex­
change and being traded in every day, but most of the sales to the
public t o o k place by stock salesmen all over the country.
Senator B rookhart . They went out with this high-pressure
sa le sm a n sh ip ?

Mr. Stock. That is correct. I have a lot of that material right here
in my files.
Senator B r o o k h a r t . At what price did they sell?
Mr. S t o c k . Well, they sold over a period of years. You just can
not put your finger on a price. There were split ups and convernons, and it would be difficult to generalize about what the price
was.
Mr. G b a y . Can y o u tell Senator Brookhart the range of prices on
the s t o c k exchange?
Mr. S t o c k . I would say that the high was $78 and the low 25
cents.
Mr. G r a y . And at or about the time in October o f 1 9 3 0 that this
tr a n s a c tio n w a s put through the market was approximately $21 and
s o m e th in g , w a s it not?
Mr. S t o c k . $ 2 1 ; yes, sir.
M r , G r a y . And as a matter of fact, however, before the deal was
finally put through, consummated, entirely and absolutely com­
pleted, the stock fell to a value of about $10 a share, did it not?
Mr. S t o c k . That is correct.
Mr. G b a y . So that in the place of stock of the Continental Shares
e q u iv a le n t t o twenty-one or twenty-two million dollars, the difference



924

STOCK EXCHANGE PRACTICES

between the thirty-five million and the fifty-seven being delivered,
there having been in the meanwhile $7,600,000 additional cash re­
ceived by Eaton or Otis & Co. out of this deal, what they actually
delivered was 280,000 shares of stock at $10 a share ?
Mr. S tock . That is correct.
Mr. G r a y . Which was the proper equivalent of the difference in
stock to make up the $57,000,000 ?
Mr. S tock . I might add this to that line of thought^ and that,
is that as a result of these loans incurred by Continental, Continental
at the present time is insolvent to the extent of about $23,000,000.
Mr. G r a y . And Otis & Co. ?
Mr. S tock . Well, Otis & Co.-----Mr. G ray (interposing). The long and short about Otis & Co. is
that they finally could not stand the strain and they went out of
business; that is so, is it not?
Mr. S tock . Well, I think they have some kind of investment busi­
ness that they are running, but the brokerage business is not in exist­
ence.
Mr. G r a y . Y o u are a little wrong about that, Mr. Stock. They
went out absolutely, although there has been a reorganization and a
new firm.
Senator B u l k l e y . I was just going to ask when the high o f $78
was reached.
Mr. S tock . That was 1929.
Senator B u l k l e y . On the New York Exchange?
Mr. S tock . Yes; 78.
Senator B u l k l e y . And it went down steadily from then o n , did
it?
Mr. S tock . Well, it had its ups and downs.
Senator B rookhart . When was this stock sold, mostly when it
was issued?
Mr. S tock . Y es; I would say it was sold mostly in the years 1928,
1929, and the early part of 1930.
Senator B rookhart . Now, you have listed several charges of
losses against the Continental Co. that apparently were illegal that
ought not to have been charged against it. Is that what you mean
by those items?
Mr. S tock . Yes; I say the entire founders’ shares arrangement was
illegal.
Senator B rookhart . How much was that ?
Mr. G r a y . It is impossible, Senator Brookhart, to figure that in
an exact figure. I do not know whether it was made clear to you.
It was simply this-----Senator B rookhart (interposing). What I wanted to get was the
total of those charges.
Mr. G r a y . You can not get that in dollars and cents, unless it was
gotten by some extensive accounting work. The founders’ shares
were issued at a dollar a share to certain favored people. They were
all taken up by Otis & Co. The understanding and agreement was
that the holders of founders’ shares should get 25 per cent o f the
profits that were made by Continental Shares over and above the
payment to the stockholders of a certain dividend, and after that
had been in operation a short time, during the period of one year,




STOCK EXCHANGE PRACTICES

925

instead of paying that dividend to the stockholders in cash, which
would have exhausted the cash that was available for dividends and
+1rald have left nothing for distribution to founders’ shares, they
distributed to the regular stockholders a stock dividend, which did
not increase the cash that they had, which is not a dividend at all, as
a matter of fact, as every student of economics will tell you, and left
the cash in the treasury in order that they might distribute that as
25 per cent of the profits to the holders of the founders’ shares, who
were Otis & Co. and Cyrus S. Eaton. That is where the fraud is.
' Mr. S tock . May I add that the founders’ shares cost a dollar a
share and the return for the years 1928 and 1929 on those founders’
shares on the original investment was 1,600 per cent per annum,
whereas the return on the common stock on the original investment
during those two years was only 2 per cent per annum.
The C h a ir m a n . That is the public.
Mr. S tock . Correct.
Mr. G r a y . The public got 2 per cent on their investment and
on these founders’ they got 1,600 per cent.
Senator B rookhart . What particular connection did the stock
exchange have with all of this?
Mr. G ray . There is one more factor, Senator. I will interrupt
again, because of one thing Mr. Stock did not state I want to put
into the case. Eight after this loan was put through on October
14 what was done by Continental Shares with respect to the New
fork Stock Exchange and the listing of additional stock, after all
of these things had happened, was that they applied to list
1,040,000 shares.
Senator B rookhart . For sale?
Mr. G ray . For sale, which was part of the fifty-seven million
consideration in that transaction. This is the listing application.
Senator B rookhart . All right now; let us stop there just a
moment. The stock exchange had investigated Otis & Co.?
Mr. G ray . That is correct.
Senator B rookhart . They knew that Otis & Co. had gotten on
their feet, is that right?
Mr. G r ay . That is correct.
Senator B rookhart . They should have known, and if they did
not know they should have investigated the question of how it
was done?
Mr. G ray . Correct.
Senator B rookhart . But without any investigation they enter­
tained an application for Continental Shares to list this number of
shares on tne New York Stock Exchange in addition to the stock
which had been already listed and permitted it to be listed and sold
to the public; is that right?
Mr. G ray . That is correct. In other words-----Senator B tjlkley (interposing). What is the date of that appli­
cation ?
Mr. G ray . October 20, 1930, six days after this deal was put
through.
Mr. S t o c k . In other words, after the stock exchange had made an
audit o f all of the offices of Otis & Co. and knew all about their
•flairs after this application was made the stock exchange was



926

STOCK EXCHANGE PEACTICES

satisfied that the money be taken away from the stockholders of
Continental Shares so that a member firm would be able to meet
its obligations.
Senator C a r e y . Mr. Stock-----Senator W alcott (interposing). Just a minute; excuse me. You
say that was October, 1930 ?
Mr. S t o c k . Yes, sir.
Senator W alco tt . What was the price at which those were p u t out,
what was the price when the application was made?
Mr. S t o c k . They were selling at $21 a share at that time, Senator.
Mr. G r a y . That is on October 10, Senator.
Mr. S t o c k . Yes; October 10.
Senator C a r e y . Mr. Stock, when this stock was sold by Foreign
Utilities to Mr. Eaton, Continental Shares, was there an agreed
price ? There must have been an agreed price.
Mr. S t o c k . As to the stock that was being delivered.
Senator C a r e y . Continental Shares was making this loan to Otis
& Co.?
Mr. S t o c k . Yes.
Senator C a r e y . There was an agreed price and Foreign Securi­
ties or Mr. Eaton sold certain stocks at that time at a profit?
Mr. S t o c k . That is correct.
Senator C a r e y . It would be a profit?
Mr. S t o c k . That is correct.
Senator C a r e y . Do you know what that profit amounted to ?^
Mr. S t o c k . I only know as to one item, Senator, and that is the
United Light & Power, on which the profit was $17,000,000.
Senator C a r e y . You do not know the amount of income t a x th a t
was avoided by the Canadian transaction?
Mr. S t o c k . Our own corporation tax at that time was 12 per cent.
Senator C a r e y . Y ou do not know what the Canadian tax was?
Mr. S t o c k . N o; I do not.
Senator W alco tt . And if there had not been a Canadian tax,
what would be the saving?
Mr. S t o c k . I beg pardon?
Senator W alco tt . I f there had not been a Canadian tax-----Mr. S t o c k . $2,000,000.
Mr. G r a y . I am of the opinion, Senator Walcott, that this is, you
understand, a capital sales tax and not the ordinary income tax, and,
although I do not pretend to have a thorough knowledge of the sub­
ject and maybe no knowledge, I do not believe there is a capital sales
tax in New Brunswick.
Senator W alco tt . No; there is not, but capital sales tax is more
than 12%.
Mr. S t o c k . There would not be a capital gains tax in this, Senator.
It would be a corporation tax.
Senator W alcott . This is not subject to a capital gains tax.
Mr. G r a y . This is stock sold by a corporation.
Senator W alco tt . It is not a capital gains tax. At least, I should
say so.
Mr. S t o c k . It would be about the same in both instances, 12 or 12^.
Mr. G r a y . I do not know how long Foreign Utilities held, t h a t
stock, you know, before it was sold.




STOCK EXCHANGE PRACTICES

927

The C h a irm a n . Let me ask one question: I am not sure that you
developed the price at which these shares were selling on the day
that application for listing was made.
Mr. S tock . I am afraid I do not know that price, Senator.
Senator W alcott . W e ll, Senator, he has just stated—that was my
question—that on or about that date they were selling at 21.
Mr. G r a y . That was on October 10.
Senator B u lkley . That w as the 10th, and they were listed on
the 20th.
Senator W alcott. Well, that is pretty close.
Senator B rookhart. What became of these loans from the Chase
National Bank?
Mr. S tock . You mean, does Continental Shares still owe all of
that money that was borrowed ?
Senator B rookhart . Yes.
Mr. S t o c k . I know that they owe some of it. I can not say that
they owe all of it. Can you answer that, Mr. Gugle?
Mr. G tjgle. They owe a balance of $27,000,000.
Senator B rookhart . What security was put against that?
The C h a ir m a n . I suggest that we will have these witnesses sworn
if they are to answer questions. They have to answer under oath
if they are going to answer questions like that.
Mr.* G r a y . I i the committee pleases, although I had asked Mr.
Stock to outline the matter for you and had present Mr. Gugle,
who is thoroughly familiar with the situation and who has insti­
tuted this suit in Baltimore, and had present Mr. Tresemer, who is
an accountant and is thoroughly familiar from every angle with the
situation, and had intended to call them, Mr. Stock has so thoroughly
outlined the matter that I am asking, if you please, suggestions
from either the chairman of the committee as to whether or not you
have the situation fully before you for the purposes of the commit­
tee or whether you would like me to call either or both of these
gentlemen in addition thereto.
I might also suggest, if it is considered proper by the committee,
that I might make inquiry of Mr. Gugle now or Mr. Tresemer or
both as to whether there is any phase of the transaction that has
been omitted by Mr. Stock which they feel they should supplement
bv their own testimony, or has it been fully covered?
Mr. G ugle . There are one or two points that might be developed.
Mr. G r a y . Then I think, Mr. Chairman, that I should put Mr.
Gugle upon the stand for the purpose of developing those additional
points and answering any questions that the committee might desire
to ask him.
The C h a ir m a n . Mr. Gugle, you may come up here and take the
witness stand. Just have a seat opposite the reporter.
TESTIMONY OF GEORGE L. GTJGLE, COLUMBUS, OHIO
The C h a ir m a n . You do solemnly swear that the statement you
are about to make will be the truth, the whole truth, and nothing
but the truth in relation to this investigation by the committee, so
help you God?
M r. G ttg le . I do.




928

STOCK EXCHANGE PRACTICES

Mr. G r a y . Will you sit down, Mr. Gugle, and give your full name,
if you please?
Mr. G ugle . George L. Gugle.
Mr. G r a y . And you live where?
Mr. G ugle . Columbus, Ohio.
Mr. G r a y . And what was your relationship prior to th e tim e o f
the difficulties with Continental Shares ?
Mr. G ugle. Small stockholder.
Mr. G r a y . And since these various questions have arisen w ith
respect to which Mr. Stock has testified, your interest has been
what, the interest of yourself and other stockholders?
M r. G ugle . A n d an organ ization o f som e o f the m in o rity stock­
holders.
Mr. G r a y . Keep your voice up, and may I suggest that you face

the reporter and then all of the committee can hear, because I will
be able to hear you.
Now, your interest, you say, is that of a small stockholder and
an organization of the stockholders of a minority interest. You
having instituted the litigation in this case—and I want to develop
this, in fairness to Mr. Gugle. It was not you that sought the
opportunity to come here and testify, but as a matter of fact as
counsel for the committee I had you subpoenaed in Cleveland to be
here?
Mr. G ugle . Exactly. I protested against coming.
Mr. G r a y . That is correct, because Mr. Gugle felt that this was a
matter which was in litigation, and though he is here in answer to
the subpoena, he did not come here because he sought the opportu­
nity to testify.
N ow , suppose, Mr. Gugle, having heard Mr. Stock’s statement
with respect to this matter, before 1 make any specific inquiries o f
you, that you make any additional statement that yon desire in
order to either clarify any of Mr. Stock’s statements or to familiarize
the committee with any other phase of the transaction that has not
been referred to.
Mr. G ugle . Mr. Stock has fairly well covered the situation.
There is an item of about $16,000,000 of stocks which Mr. Eaton
took from Continental Shares and pledged them as collateral for
his various syndicates.
Mr. G r a y . To whom did those shares of stock belong?
Mr. G ugle . Continental Shares.
Mr. G r a y . Were they shares of Continental Shares or were they
shares in the portfolio of Continental Shares?
Mr. G ugle . Shares in the portfolio of Continental Shares.
Mr. G r a y . In other words, your statement is that he abstracted
from the property of Continental Shares, it being practically within
his control, a certain lot of shares of stock which he used to pledge
as collateral for individual and personal loans?
Mr. G ugle . Exactly.
Mr. G r a y . All right, now; what other statement in addition to
that do you want to make to us?
Senator F l e t c h e r . Were the shares held in the treasury, never
issued at all but held in the treasury ?




STOCK EXCHANGE PRACTICES

92 9

Mr. G ugle . Oh, no; they were shares in stock of other corpora­
tions that Continental owned.
Senator F letcher . Oh, I thought the Continental Shares them­
selves, their own stock.
Mr. G ugle . But it was shares o f stocks in other corporations,
like Republic Steel.
Senator W alcott. Investment shares?
Mr. G ugle . Investment portfolio; yes.
Senator C arey. This was an investment trust?
Mr. G ugle . This was an investment trust; yes, sir.
Senator B u l k l e y . Did y o u say when that happened, Mr. Gugle?
Mr. G ugle . T h at happened in th e p e rio d fr o m 1927 t o 1930.
Senator B u lk l e y . From time to time?
Mr. G ugle . From time to time; yes.
Senator W alcott . Were those displacements and substitutions
authorized by the board of directors ?
Mr. G ugle . They were taken first and then ratified.
Senator B bookhart . Will you give the various items?
Mr. G ugle . I made a notation this noon of some of them. There
was $1,399,500 of Cliffs Corporation, $8,800,000 of Cliffs Corporation,
and $3,000,000 of Cliffs, put up with the Cleveland Trust Co. as
collateral on an indorsement that Eaton had Continental make for
the Goodyear shares in the loan of $11,000,000. And to digress for
the moment, that $11,000,000 liability for Continental Shares did not
appear in several of their annual statements to stockholders.
Senator B u l k l e y . Who was the principal obligor in th a t case?
Mr. G ug le . Goodyear shares, the rubber company of Mr. Eaton’s.
Senator B u l k l e y . I take it that is the ru bber h o ld in g com p a n y?
Mr. G ug le . Rubber holding company, yes. Then there was $3,000,000 Republic Steel and $800,000 o f Youngstown Sheet & Tube.
That was me value at the time it was put up, but the Youngstown
stock was put up with his steel syndicate.
Senator B u l k l e y . Who was the p rin cip a l o b lig o r th en ?
Mr. G ugle . Steel Syndicate.
Senator B u l k l e y . I s that the name o f it, Steel Syndicate?
Mr. G u g le . The Steel Syndicate.
Senator B rookhart . O i course, these transactions did not go
through the stock exchange?
Mr. G ugle . Oh, no. They were just abstractions. You might
term them embezzlements. These stocks will never be returned to
Continental, because the loans are now more than the value of the
collateral.
Senator B rookhart . What authority did he have to transfer
those?
Mr. G ug le . None whatsoever. I f they had not been ratified by
the directors it would be embezzlement.
Senator B rookhart . They have been ratified, then?
Mr. G ugle . They have been ratified, if they can b e ratified b y a
board o f dnmmy directors.
Senator C arey. Did M r. Eaton give the company any note or
anything for those stocks?
Mr. G u g le . No, sir.
Sen ator C arey . Nothing to show the obligations?



93 0

STOCK EXCHANGE PRACTICES

Mr. G ugle . Nothing to show the obligations. Except in o n e in­
stance he took 25,000 shares o f Harbison & Walker and in place
thereof put up 10,000 shares of Youngstown Sheet & Tube.
Senator F letcher . What did he do with this stock?
Mr. G ugle . He put it up as collateral for notes of various syndi­
cates in which he was interested. For instance, he owed $11,100,000
in the Goodyear shares note at the Cleveland Trust Co., and for that
he put up this $1,399,500, $8,800,000, and the $3,000,000 of Cleveland
Cliffs, as collateral.
Senator C are t . And the loans against them now exceed th e value
of the securities?
M r. G ugle . They do.
Senator F letcher . Did they have any specified time to r u n ! The
loans on it?
Mr. G ugle . They are all short time loans, but they have been run­
ning several years, as a matter of fact.
Senator W alcott . Were they demand or time?
Mr. G ugle . Time, usually 90 days. No; one of them w as a year
loan renewed afterwards for six months and subsequently renewed
for a six months’ period.
The C h a i r m a n . Were these authorizations made before the act
or were they ratifications?
Mr. G ugle . They were ratifications.
The C h a i r m a n . Afterwards?
Mr. G ugle. Afterwards.
Mr. G ray . N ow , Mr. Gugle, what else besides that do you want
to direct the committee’s attention to?
Mr. G ugle . Nothing, unless it is letters that I saw in a bank
relative to that, if you care to go into that.
M r. G r ay . Y ou mean these letters, the interoffice letters o f the
Chase National?
Mr. G ugle . Interoffice letters of Chase concerning the sending of
those securities to Canada.
Mr. G ray . I have all of the letters with the exception o f two
certain letters that you have mentioned to me that you saw with
respect to the sending of those securities to Canada.
Mr. G ugle. Yes.
Mr. G r ay . N ow , those letters I have not seen. I can not produce
copies of them and you have seen them and you are here under oath.
W ill you tell the committee what was the substance of those letters,
from whom they were, to whom they were addressed, and what your
recollection of the substance of those letters is?
Mr. G ugle . The first letter w as dated November 7, from Mr.
Stem.
Mr. G r a y . 1930?
Mr. G ugle. 1930.
Mr. G r a y . Yes.
Mr. G ugle. From Mr. Stem to Mr. Clarkson.
Mr. G ray . And Mr. Clarkson is who?
Mr. G u g l e . President of the Chase Securities Co. and an officer
also in Chase National Bank.
Mr. G r a y . What w as the tenor and effect of that letter?




STOCK EXCHANGE PRACTICES

Mr.

G ugle.

931

The tenor of the letter was:

I am very much opposed to your sending Continental securities to Canada.
I also fear that this would amount to a conspiracy to evade an income tax,
and urge most strongly that your client’s request be not acceded.

Mr. G r a y . Y ou say that it said that “ I am also opposed to your
sending Continental Shares ” or “ Continental’s shares ” ?
Mr. G u g l e . Continental Shares’ securities.
Mr. G r a y . Meaning Continental Shares’, possessive?
Mr. G u g l e . Yes.
Mr. G r a y . Meaning the shares belonging to the Continental
Shares that had been lodged with the Chase National Bank as
security for this loan?
Mr. G u g l e . Yes.
Mr. G r a y . In other words, the shares that have been referred to
as having been thereafter sent to Canada ?
Mr. G u g l e . Yes.
Mr. G r a y . Therefore, the first letter was a statement from their
own counsel to the effect that he was opposed to the sending of those
shares to Canada, for fear that their act in so doing strongly ap­
proximated a conspiracy to evade the payment of an income tax?
Mr. G u g l e . Yes.
Senator G o l d sb o r o u g h . Who is this Mr. Stern that you speak
about?
Mr. G u g l e . He is of the firm of Rushmore, Bisbee & Stern.
Senator C a r e y . Is he attorney for the bank?
Mr. G u g l e . They are attorneys for the bank; yes.
Mr. G r a y . I should in fairness to Mr. Stern say that I have
given Mr. Stern an opportunity to be here to-day, but when I
communicated with his office yesterday afternoon he was away at
the convention in Chicago and I could not communicate with him
there.
I will say that this letter and another one which Mr. Gugle will
testify with respect to, I discussed with Mr. Stern, and Mr. Stern
indicates that he sent no such letters. But Mr. Stern, of course,
is an attorney and he represents the Chase Bank, and though I
have extended him an invitation to come here and state what was in
those letters and it was in my power to require him to come, it would
be unethical for me to do so, because it was confidential communi­
cation that he had given his client as an attorney with regard
thereto. That was one letter, and the second letter was dated when
and what was that?
Mr. G u g l e . I don’t recall the date of the second letter.
Mr. G r a y . Was it at a later date than the first?
Mr. G u g l e . A later date than that.
Mr. G r a y . What was the second letter ?
Mr. G u g l e . The second letter was substantially:
Since you are determined to accommodate your client and send Continental’s

securities to Canada, I wish the follow in g to be the letter w ritten by Con­
tinental to Chase.

And attached to that letter was the form of a letter which was
subsequently written by Continental to Chase, a copy of which I
have in my folder.
119852—32—p t 3------10




932

STOCK EXCHANGE PRACTICES

M r. G r a y . I w ou ld be g la d to have a c o p y o f th a t letter i f you
w ill subm it it to us.

Senator F letcher. Did Continental Shares show any not© or
obligation at all for these securities that were taken from their
portfolio ?
Mr. Gtjgle. They have nothing whatsoever to show for them,
Senator; no obligation to pay or return.
Senator F letcher. And these securities were used as collateral
for individual debts?
^
Mr. G tjgle. No; debts of syndicates or other corporations in which
Mr. Eaton was personally interested.
Senator F letcher. But Mr. Eaton did not give the Continental
Shares a note or memorandum or anything showing that he had
taken these securities and used them for his own purpose?
Mr. G tjgle. No, sir.
Senator Carey. Do the Continental books show this transaction?
Mr. G tjgle. Yes, sir.
Senator C aret . They are carrying that?
Mr. G tjgle. Yes, sir: they are carrying that.
In addition to what has been developed here, Mr. Eaton personally
owes the corporation $2,087,000, on a note dated December 3, 1980,
with collateral worth at that time about $400,000.
Mr. G r a t . That was a straight loan from the company, authorized
in the minutes.
Mr. G ugle. Exactly.
Senator W alcott. What is it worth now ?
M r. G r a t . W h a t is the collateral w orth n ow , S en ator Walcott
asks ?
Mr. G tjgle. About $15,000.
Mr. G r a y . And that obligation of Mr. Eaton’s, of over $2,000,000,
still remains upon the books of Continental Shares?
Mr. G tjgle . Yes.
Senator B tjlxlet. What does that represent? Was that a cash
advance to Mr. Eaton?
Mr. G tjgle. Yes.
There is another of $1,100,000, loaned to Industrial Shares. In ­
dustrial Shares is a wholly owned Eaton corporation, and the collat­
eral on that was 50,000 snares of Continental’s own stock.
Mr. G r a t . I would suggest, because I believe that is the only copy
of that letter, that you read it into the record. So that the com­
mittee might understand, first, this letter is a letter the form o f which
accompanied the letter from the counsel of the Chase National Bank
to one of the officials of the bank, instructing him that if they per­
sisted in following the suggestion of their clients in the sending o f
these stocks to Canada, that he wanted them to obtain from Con­
tinental Shares a letter in the following form. Is that right?
Mr. G ugle. Yes.
6
fetter was written by Continental Shares, and
that is the letter you are now going to read into the record?
Mr. G tjgle. Correct.
Mr. G r a y . Please d o so.
Mr. G tjgle (reading).




933

STOCK EXCHANGE PRACTICES

November 8, 1930.
The Chase National Bank

of the

City

of

New Y ork,
New York, N. Y.

Attention, Leon Johnson, Esq., vice president.
Deab Mb. Johnson : You hold under pledge from the undersigned as security
for a loan of $30,000,000, evidenced by the note of the undersigned in that
amount, dated October 28, 1930, the following shares: 394,987 shares United
Light & Power Co., class B common stock; 44.U4B shares Youngstown Sheet &
Tube Co., black stamp common stock, and/or certificates of deposit therefor;
3,600 shares of Union Trust Co. of Cleveland capital stock; 1,844 shares of
Cleveland Trust Co. of Cleveland, capital stock.
We are about to engage in a transaction under Canadian laws in New Bruns­
wick, Canada, which will be facilitated if the above-mentioned shares are
physiclly located in New Brunswick at the time the transaction takes place.
You are accordingly requested to send such shares by registered mail to the
Canadian Bank of Commerce, St. Johns, New Brunswick, Canada, to be held
by said bank for your account and promptly to advise the undersigned from
time to time upon the receipt by you of information from the Canadian Bank
of Commerce that such stock is so held. You are requested to send such shares
in separate lots, and if this be consistent with the insurance regulations, on
successive days. The first two lots thus to be sent are as follows:
Lot No. 1, 227,500 shares United Light & Power class B common stock, in­
sured for $16,000,000.
Lot No. 2,167,487 shares United Light & Power Co. class B common stock.
Forty-two thousand shares Youngstown Sheet & Tube Co., black stamp
common stock and/or certificates of deposit therefor, the lot insured for
$16,000,000.
We will advise you later as to how the subsequent lots are to be made up.
Upon advice from us of the completion of the transaction, but not later than
November 19, 1930, we request that you instruct the Canadian Bank of Com­
merce to return such shares to you by registered mail. We authorize you
to charge our account for all expenses incurred by you in connection with
your compliance with this request, and also request that you take out trans­
portation and detention insurance in amounts approximating the present
market value of the securities.
Very sincerely yours,
Continental Shabes (I nc.),
--------- --------- , Secretary-Treasurer.

With a note that it was written by L. G. Watson.
Senator F letcher. Mr. Eaton was then president of Continental
Shares?
Mr. G ugle. Chairman of the executive committee.
Senator F letcher. Had he been all along, during these transac­
tions you have mentioned?
Mr. G ugle. He had been all along chairman of the executive
committee of Continental Shares; since its organization.
Senator F letcher. He is yet?
Mr. G ugle. No. On April 25, 1931, his board of directors were
superseded by another lot of directors, put in by him.
Mr. G r a y . Mr. Gugle, before I put some other matters on the
record that connect up with the things about which you have testi­
fied, I want to give you an opportunity, if there is anything else that
you desire to call the committee’s attention to, to do so.
Mr. G ugle. I don’t recall anything.
Mr. G r a y . I f there are no other questions of Mr. Gugle, I will
put upon the record, if the committee please, this statement of the
distribution of that $30,000,000, which was the first portion of the
loan that was paid out by Chase National Bank.
I will ask Mr. Gugle one question. You have also a report of
that distribution that was made to Continental Shares by Chase
National Bank, which, with respect to an item that was numbered
thereon, as No. 19, failed to disclose how a certain sum of about



934

STOCK EXCHANGE PRACTICES

$5,166,000, if I recall correctly, was distributed, and w h e n i n v e s t i ­
gation was made, it was found that that distribution was t o t h e s e f o u r
banks in New York, including the Chase themselves, o f o n e m i l l i o n
and some odd thousand.
Mr. G u g l e . Correct.
M r . G r a y . That was not disclosed at first.
Mr. G u g l e . No.
Mr. G r a y . The investigation of this sheet that I have i n m y h a n d ,
showing the distribution, also establishes—I think I have developed
this before, but it will not do any harm if I develop it again—that
some of these stocks which were sold and purported to b e l o n g t o
Foreign Utilities, were, as a matter of fact, deposited with various
institutions or individuals, to secure loans made to Cyrus Eaton
personally.
Mr. G u g l e . That is correct.
Mr. G r a y . I will not bother reading this. It simply shows the
distribution, taking up the various loans. I will ask leave to hand
it to the reporter for printing in the record.
The C h a i r m a n . I f there is no objection, it is so ordered.
(The statement referred to is as iollows:)
C H ASE

B A N K — KE C O N T IN E N T A L

SH AK ES

(I N C .)

Details o f $30,000,000 loan made by Chase to Continental in October, 1930.
The Chase made 12 loans to Continental Shares on October 14, 15, 16, an d 20,
1930, aggregating in amount the agreed $30,000,000. These loans w ere each
secured' by collateral and were subsequently consolidated in a single $30,000,000
loan on October 28, 1930, which was to mature on A pril 28, 1932.
P r o c e e d s o f all loans were credited to Continental Shares (In c.) account
and in accordance with their instructions disbursed as indicated b elow :
Date of loan

Oct.

14,1930

Amount

$666,000.00

D o .............

1,000,000.00

D o ............

2,333,333.00

D o ............. 3,333,333.00

Collateral

20,000 shares United Light & Power
Co., class B common.
50,000 shares Lehigh Coal & Naviga­
tion Co., common.
70,000 shares United Light & Power
Co., class B common.
100,000 shares United Light & Power
C o., class B common.

Payment to

Union Trust Co. of Cleveland, Ohio,
credit account.
Do.
W e charged Continental’s account
$816,667 and credited Cleveland
Trust Co. of Cleveland, Ohio,
$3,150,000,
Bankers Trust Co. of N ew Y o rk ,
$3,010,833.33 balance remained in
account. Bank draft.

10,300 shares United Light & Power
Co., class B common; 5,350 shares
Manhattan Co. of New York.
400 shares Harris Trust & Savings
Bank, Chicago.
500 shares Continental Illinois Bank
Credited to Continental Shares ac­
& Trust Co., Chicago.
count.
D o ............. 1,800,000.00 3,945 shares United Light & Power
Co. class B common.
2,125 shares Continental Illinois
Bank & Trust Co., Chicago.
500 shares Manhattan Co. of N ew
York.
7,288 shares Union Trust C o., Cleve­
land.
1,172 shares Cleveland Trust Co,
80 shares Harris Trust & Savings
Bank, Chicago.
2,000 shares Youngstown Sheet &
D o.
Tube Co. common.
D o ............ 10,000,000.00 25.000 shares United Light & Power $7,000,000 paid to Otis & Co.
Co. class B common.
180.000 shares Lehigh Coal & N a v i­ Credit account.
gation C o., comon.
75,600 shares Goodyear Tire & R ub­
ber Co., common.
MW00 shares Youngstown Sheet &
Tube Co., common.
41.000_shares Cliff's Corporation____

D o ............

1,500,000.00




93 5

STOCK EXCHANGE PRACTICES
Date of loan

Amount

Payment to

Collateral

Oct. 14*1930 $1,565,000.00 50.000 shares Lehigh Coal & Naviga­ Credited to Continental Shares ac­
Do.____ 5,166,666.66

tion Co., common; 8,000 shares
Youngstown Sheet & Tube Co.,
common C/D.
155.000 shares United Light & Power
Co., class B common.

count.

$2,550,000, paid to Guaranty Trust
Co., New York City (by bank
draft); $1,655,000 paid to Chemi­
cal Bank & Trust Co., New York
City (by bank draft); $50,000
Public National Bank & Trust Co.,
New York City (by bank draft);
$1,600,000 paid Chase National

Oct. 15,1930 1,636,666.00 8,000 shares United Light

Oct. 16,1930
Oet. 20,1930

& Power $636,666 paid to Otis & Co. credit ac­
count.
Co. class B common 15,000 shares
Youngstown Sheet & Tube Co.
common; 18,500 shares Lehigh
Coal & Navigation Co., common.
390^000100 1,537 shares Cleveland Trust Co....... Paid to Otis & Co. credit account.
619,001.34 20,700 shares Lehigh Coal & Naviga­ Credited to Continental Shares ac­
count.
tion Co., common; 3,105 shares
United Light & Power Co., class B
common; 24,700 Youngstown Sheet
& Tube Co., common.

t Mr. G r a y . I will offer, so that it will be in the record, the applica­
tion o f Continental Shares for the listing, which was filed on October
20, 1980, with the New York Stock Exchange. Mr. Stock was in
error when he spoke of it being for 1,040,000 shares. The listing is
for an additional 990,000 shares. It is apparent that the 990,000
shares was the amount that they required in addition to the stock
that had already been authorized to be issued. That is, it was their
own stock, in their own possession, unissued, so that they might issue
it in connection with this transaction we have just been referring to.
So that the listing was for 990,000 shares. This application, how­
ever, will give you, in addition to that, certain other information
as to the construction or set-up of Continental Shares which, of
course, it was necessary for them to give to the stock exchange at
that time; and I direct the committee’s attention to the fact that this
application, of course, had to disclose to the stock exchange the fact
that there was outstanding this $30,000,000 loan on account of these
securities that had been deposited as collateral. I ask that that be
printed in the record.
The C h a i r m a n . I f there is no objection, it is so ordered.
(The statement referred to is as follows:)
Continental Shares (Ino.)—Common stock, without par value (voting)
[Incorporated under the laws of the State of Maryland, March 1, 1926; certifi­
cate transferable In New York, N. Y., Cleveland, Ohio, and Boston, Mass.]
Number of shares
Additional listing applied for__________________________________
990,000
Authorized by charter_________________________________________ 4,000,000
Outstanding__________________________________________________ 2,419,665^&
Total listing applied for_______ t--------------------------------------------- 3,696,317
Authorized by board of directors, October 8, 1930. No other authority
zequired.




936

STOCK EXCHANGE PRACTICES
Capital securities
N um ber of shares
Stocks

Par value

$100

Previously
Authorized Authorized authorized
b y charter1 for issuance to be listed

260,000
30,666

None.

30.000

128,229

None.

128,229

240,000
*3,696,317
10,000

None.
2,753,318
None.

Preferred (6 per cent cumulative).........
Preferred series B (6 per cent cumulaConvertible preferred (6 per cent cumulaFounders shares----------------- ----------- -------------

100
N o par.
N o par.

240,000
4,000,000
10,000

O utstand­
ing

240,000
*2,419,665*4
10.000

The corporation has no funded debt.
1 286,651 Vi shares of common stock are reserved as follows: 30,804 shares for exercise of outstanding warrants
originally issued with preferred stock and preferred stock, series B , of the corporation; 253,539 shares for
conversion of 240,000 shares of convertible preferred stock; 2,308 H shares to be issued in exchange for common
stock of International Share Corporation.
2 This figure does not include 47,001 shares formerly reserved for issuance, but released due to expiration of
subscription warrants, and to adjustment in the number of shares reserved for conversion privilege.
s Includes 46,898^ shares of treasury stock held on Sept. 30,1930, but since used as part consideration for
securities subsequently purchased.
C l e v e l a n d , O h i o , O ctober 20, 19S0.
Referring to its previous applications, especially to A-9316, dated A p ril
1930, Continental Shares (In c .), a M aryland corporation (hereinafter called
the corporation), hereby applies fo r the listing on the New Y ork Stock E xchange
o f permanent engraved certificates fo r 990,000 additional shares w ithout par
value o f its common stock on official notice o f issue in connection w ith the
acquisition o f certain securities hereinafter m ore fu lly described.
The total amount o f common stock, the listing o l w hich has been and is
hereby applied for, is 3,696,317 shares ( o f a total authorized issue o f 4,000,000
shares of common stock).
Said 990,000 additional shares o f common stock w ill be, when issued, fu ll
paid and nonassessable, w ith no personal liability attaching to the h olders
thereof.
PURPOSE OF AN D AU TH O R ITY FOR IS S U E

The corporation has acquired the follow ing securities pursuant to resolu tion s
adopted by the board o f directors at a meeting held on O ctober 8, 1930:
Num ber
of shares

M arket
price per
share 1

Total market
value

American bank stocks:
1,800
621
1,844
867
3,600

Central United National Bank (Cleveland, Ohio)................... ........
The Cleveland Trust Co. (Cleveland, Ohio).......................................
Fidelity National Bank & Trust Co. (Kansas C ity, M o .) ______
The Union Trust Co. (Cleveland, O hio)..........................................

$35.00
66.00
385.00
250.00
74.50

T o t a l .............................. ........................... - ..................................................

1.298,876.00

Canadian bank stocks:
T h s Bank of Nova Scotia...................................................
The Bank of Toronto............ - .....................................................................
The Canadian Bank of Commerce--------------------------------------- -------The Dominion B a n k ..- ................................ ................................. ............

500
3,500
649
466

238.00
240.00
228.00
235.00

.

Total___________ - ......... ......... .....................................................................
Steel stocks:
The Cliffs Corporation.........................................................
Republic Steel Corporation_______________________
The Youngstown Sheet & Tube Co., certificates of deposit
The Youngstown Sheet & Tube Co., unstamped stock

$63,000.00
40,986.00
709,9 4 a 00
216, 750.00
268, 200.00

|

192, ooa 00
119,000.00
840, 000.00
147, 972. 00
109, 510. 00
1 ,4 0 8 ,4 8 2 .0 0

84,351
4,888
44,646
1,100

115.00
24.00
120.00
99.00

9, 700,365.00
117, 312. 00
5,357,520.00
108,900.00
15,284, 097. 00

» Market price as of Oct, 8.




937

STOCK EXCHANGE PRACTICES
Market
N um ber!iI price
per
of shares j! share1

Total market
value
T

Bobber stocks:
The Firestone Tire & Rubber Co.
The B . F. Goodrich Co
United States Rubber Co.

126,950 :
93,800
40,000

$16.00
18.625
14.50

$2,031,200.00
1,747,025.00
580,000.00
4,358,225.00

Utility stocks:

Corporation Securities Co. of Chicago.
Insdll Utility Investments (Inc.)
International Paper & Power Co., A.
International Paper & Power Co., B
International Paper & Power Co., C.

4,859
4,858
25,000
171,400
251,000
450
394,987

20.00
50.00
11.25
6.00
5.00
500.00
78.875

97,180.00
242,900.00
281,250.00
1,028,400.00
1,255,000.00
225,000.00
31,154,599.62
34,284,329.62

Sundry stocks:
National Acme C o ._____
The Sherwin*William Co.

0,600
3,100

9.25
76.00

:
:

88,800.00
235,600.00
324,400.00

I 56,958,409.62

1 Market price as of Oct. 8.

The above securities were acquired at a valuation of $56,958,409.62, which
was the market value as of October 8, 1930, payment to be made as follows:
$35,000,000 in cash and the balance in the shares of the common capital stock
of the corporation, on the basis of the asset value thereof, through the issuance
of 990,000 shares of the common capital stock of the corporation and delivery
of 50,000 shares of Treasury stock.
Pull authority for the issuance of such shares of stock is contained in the
resolutions adopted by the board of directors on October 8, 1930.
OPINION OP COUNSEL

Opinion of counsel covering the authorization, issue, and validity of said
990,000 additional shares of common stock, rendered by Squire, Sanders &
Dempsey on October 17, 1930, is herewith furnished the New lo r k Stock
Exchange.
ORGANIZATION, BUSINESS, AND HISTORY

The corporation was incorporated under the laws of the State of Maryland
on March 1,1926, with perpetual existence. It possesses broad charter powers
authorizing it to acquire, hold, and deal in securities of all kinds, to participate
in syndicates and underwritings, and to engage in other financial transactions.
While the corporation places some of its funds in stocks purely for invest*
ment, its chief purpose is to acquire substantial holdings, either alone or in
cooperation with other interests, in prominent companies in such basic in­
dustries as steel, rubber, and public utilities. These larger investments are
held with a view to promoting the interests of the companies concerned
through cooperation in their financial and industrial activities.
ORGANIZATION EXPENSES

The initial organization expenses included only the usual expenses such as
expenses for legal services, organization, and stock issue taxes, etc., and
amounted to less than $5,000. Subsequent expenses incident to amendments to
the charter, etc., have been included in the item “ Expenses” appearing in
the income statement hereinafter set forth. Underwriting fees in connection
with different issues of capital stock are shown in detail under the caption,
“ Summary of issued and issuable capital stock.”




938

STOCK EXCHANGE PRACTICES
MANAGEMENT AND AFFILIATION

The executive management o f the corporation is vested in the b o a rd of
directors and executive committee, the latter taking action between m eetings
of the board. The actions o f the officers are governed by the execu tive com­
mittee whose actions are in turn approved a t subsequent m eetings o f the
board o f directors. The directors are elected annually. The voting righ ts are
confined exclusively to the common stock, except as may be otherwise provided
by law, and subject to the voting privileges conferred upon the preferred stock
in the event o f default o f fou r quarterly dividends.
The present directors a r e : O. S. Eaton, chairm an o f the board o f the corpo­
ration, partner, Otis & Co., and chairm an o f the board o f the U nited L ig h t &
Pow er C o .; W. R. Burwell, president o f the corporation and director o f the
Goodyear Tire & Rubber C o .; F. H Hobson, vice president o f the Cleveland
Trust C o.; D avid In galls; R ichard Inglis, partner, Otis & C o.; R . Y. Mitchell,
o f Mitchell, H errick & C o .; and Philip W ick, o f W ick & Co.
Management compensation paid by the corporation at the present tim e con­
sists o f fixed salaries paid to its officers and nominal fees paid to the members
o f its board o f directors and advisory committee, all o f w hich is included in
the item “ Expenses,” appearing in the hereinafter set forth incom e statement
from M arch 1, 1926, to September 30, 1930.
The founder shares (hereinafter described) are at present ow ned b y the
management or affiliated interests.

Summary of authorized, capital stock
Num ber of shares
Certificates filed in office of State Tax
Commission of Maryland—

Pre­
ferred
stock

M ar. 1, 1926, at incorporation.....................
60,000
Sept. 26,1927, creation of class...................
Dec 3,1928, incieased b y . ______________ 200,000
Mar" 21,1929, creation of class__________

Con­
vertible Common
stock
preferred
stock

Foun­
ders
shares

500,000

10,000

240,000

M ar 21, 1929, increased t o ...........................

Total...................................................... - 260,000




Remarks

1 P reviously authorized
500,000 shares became
2,000,000 shares.

4,000,000

240,000

4,000,000

10,000

October 8 , 1930, summary of issued and issuable capital stock
Num ber of shares

Date of authori­
sation

Pre­
ferred
stock

Convert­
ible pre­
ferred
stock

Common stock
Issued

Issuable

130,000

M ar. 9, 1926D o .............

Total

Found Total proceeds
ers’
shares

130,000

$6,590,316.10

10,000

Feb. 18, 1928.
M a y 15, 1928.

30,000
36, 239y2 .

36, 239^

3, 000, 000. 00
2, 718,383. 75

D o _______

48,726

48, 726J£

4, 385,407. 50

N ov. 10, 1928____ 40- 000

D o-

S e e f o o t n o t e s a t e n d o f t a b le .




2 36,147

13,853

40,000

46,452. 50
4, 000, 000. 00
4,699,110.00

* 15,797

17,500

3, 500,000.00
2,053,610.00

2,600

2,500

325,000.00

PRACTICES

Dec. 12, 1928_____| 35,000

4, 6 45^

4 ,645ML

Sold for cash at $50 and $52.50 per share.
Sold for cash at $1 per share.
Issued at $100 per share. To each share of pre­
ferred stock was attached a common-stock pur­
chase warrant entitling the holder to purchase
common stock on the basis of 1 share of com­
mon stock for each share of preferred stock, at
$65 per share to S ep t. 1 5 ,1928, th erea fter at $75
per share to Sept. 15, 1929, and thereafter at
$90 per share to Sept. 15, 1930.
Issued at $100 per share.
Sold to stockholders at $75 per share at the rate
of 1 share for every 4 shares held.
Sold to stockholders at $90 per share at the rate
rate of 1 share for every 4 shares held.
Stock dividend in lieu of accrued and unpaid
cash dividends on common stock.
15,097 shares issued at $100 per share for securities
taken at approximately the market value
thereof and 24,903 shares sold for cash at $100
per share. To each share of preferred stock
was attached a common stock perchase war­
rant entitling the holder to purchase common
stock on the basis of 1 share of common stock
for each share of preferred stock, at $130 per
share to Dec. 15, 1929, and thereafter at $150
per share to Dec. 15, 1930.
Issued at $100 per share for securities taken at
approximately the market value thereof. T o
each share of preferred stock was attached a
common-stock purchase warrant entitling the
holder to purchase common stock on the basis
of one-half share of common stock for each
share of preferred stock at $130 per share to
D ec. 15, 1929, and thereafter at $150 per share
to Dec. 15, 1930.
Sold for cash at $130 per share pursuant to
option granted to the sellers of the securities
for which the immediately above-mentioned
35,000 shares of preferred stock were issued,
such option price being the same as on the
common-stock purchase warrants attached to
said 35,000 shares of preferred stock.

EXCHANGE

29,865

>29,865

Oct. 15, 1928_.

10,000.00

3,000, 000.00
1,959,165. 00

STOCK

Aug. 18, 1927.

30,000

Remarks

CO
CO
CO

CO

October 8, 19S0, summary of issued and issuable capital stock— Continued
Number of shares
Date of authori­
zation

Pre­
ferred
stock

Convert­
ible pre
ferred
stock

C o m m o n stock
Issued

Issuable

23,229

D ee . 20,1928.

* 9 ,469)4

* 2,145

M ar. 21, 1929.

133,177
7,701

454,268

30,804

1,817,072

253,539

M ar. 2 4 ,1930.

274,741%

Oct. 8, 1930___

2.308H
090,000

158,229

240,000

2,419,665^

Remarks

$2,322,900. 00
1,420,425.00

Issued at $100 per share for securities taken at
approximately the market value thereof. To
each share o f preferred stock was attached a
common-stock purchase warrant entitling the
holder to purchase common stock on the basis
of one-half share of common stock for each
share o f preferred stock, at $150 per share to
Feb. 15, 1930, and thereafter at $175 per share
to Feb. 15,1931.
Sold to stockholders at $130 per share at the rate
of 1 share for every 2 shares held.

324,225.00

21,259,980.00

354,333.00

20,905,647.00

24,000,000.00

1,444, 250. 77

22,555,749. 23

253, 539
9,361,872.17

277,050

9, 361,872.17

990,000

1,276,651^ 3,696,317

10,000

112,289,857,02

2,654,008.95

Previously authorized shares were through
amendment of certificate of incorporation
quadrupled.
Issued at approximately $72.50 per share for
securities taken at approximately the market
value thereof.
Sold to stockholders at $60 per share at the rate
of 1 share for every 5 shares held.
Sold for cash at $100 per share.
Reserved for conversion of 240,000 shares of con­
vertible preferred stock.
Issued or issuable for all the outstanding com­
m on stock of International Share Corporation.
This listing.

109,635,848.07

legal fees,

1 Includes all expenses of selling each class of securities which have been Issued, but such expenses as
organization and original issue taxes, blue-skying expenses, etc.,
j included in the item “ Expenses" included in the hereinafter set forth Incom e statement from M ar. 1, 1926, to Sept. 30, 1930. Such Item “ Expenses” is as follows:
M ar. 1, to Dec. 31, 1928...................................................................................................................................................................................................................................... - .................................................. $6,583.17
Year ended Dec. 31, 1927....................................................................................................................................................................................................................................................................................... 24,607.17
Year ended Dec. 31,1928....................................................................................................................................................................................................................................................................................... 83,785.50
Year ended Dec. 31, 1929.....................................................................................................................................................................................................................- ................................................................ 371,234.16

P months ended Sept. 30,1930......................................................................................................- ..................... - .............................................................................. - .................. 415,253.41
* Issued from time to time on the exercise of common-stock purchase warrants which accompanied the preferred stock.
* Issuable on the exercise of common-stock purchase warrants which accompanied the preferred stock.




PRACTICES

240, 000

N et proceeds

16,980,067. 50

$332,942.50

324, 225.00

354,333

July 16, 1929.
July 18, 1929.
D o ...........

$2,322, 900. 00
1,420,425.00

17,313,010.00

4,323

Apr. 25, 1929..

T o t a l - .........

11,6HH

Underwrit­
ing fees »

EXCHANGE

446,567

T o ta l

Total proceeds

STOCK

133,177

D o.

Found
ers’
shares

STOCK EXCHANGE PRACTICES

941

PREFERENCES, ETC., OF TH E VARIOUS CLASSES OF STOCK

The original terms of the convertible preferred stock provided for its con­
version at par into common stock of the corporation at $80 per share up to and
including August 1, 1930, at $100 per share thereafter up to and including Feb­
ruary 1, 193% and at $125 per share thereafter up to and including August 1,
1933, on which date the conversion privilege expires. In case of redemption of
the convertible preferred stock, the conversion privilege may be exercised at
any time up to and including the redemption date. The amended certificate
of incorporation includes protective provisions safeguarding this conversion
privilege under which the above conversion prices have been adjusted.
The corporation has agreed that without the affirmative vote or written con­
sent of the holders of a majority of the convertible preferred stock then out­
standing, the corporation will not issue any preferred stock on a parity with or
having priority over the convertible preferred stock as to dividends or upon
liquidation, nor create or incur any capital indebtedness (other than debt for
not more than one year) if after such issuance, creation or incurrence the sum
total of the amount of convertible preferred stock and such other preferred
stock and capital indebtedness then outstanding would be more than two-thirds
of the then value of the assets of the corporation, less all indebtedness of the
corporation other than capital indebtedness. In computing this ratio, the
amount of cash and of United States Government securities is to be deducted
both from the assets and from the total of outstanding debt and such preferred
stock.
The amended certificate of incorporation provides that no preferred stock
In excess of the 398,229 shares now outstanding, or preferred stock of any other
class, shall be issued unless after the issuance thereof, and after giving effect
to the net proceeds of such issue, the net assets of the corporation, as defined,
shall equal at least 150 per cent of the par value of the total preferred stock
then outstanding and proposed to be issued: Provided further, That no stock
having priority or preference over the convertible preferred stock or 6 per cent
preferred stock shall be authorized or issued except with the consent of the
holders o f at least two-thirds of all preferred stock then outstanding.
The amended certificate of incorporation provides that no dividends shall be
declared or paid on the common stock or founders’ shares if net assets, as
defined, are or would by such payment be reduced to less than 150 per cent of
the par value of convertible preferred stock and preferred stock having a parity
with or preference over convertible preferred stock then outstanding.
The convertible preferred stock is entitled to receive $105 per share plus
accrued dividends in case of voluntary liquidation, dissolution or winding up
of the corporation and $100 per share plus accrued dividends in case of involun­
tary liquidation, dissolution, or winding up of the corporation, in preference
to the common stock and founders’ shares.
In the event of default in four quarterly dividends, the convertible preferred
stock during continuance of such default is entitled to 1 vote per share in
like manner as the common stock.
The provisions of the convertible preferred stock, the 6 per cent preferred
stock, and the 6 per cent preferred stock, series B, are substantially identical,
except that the 0 per cent preferred stock, series B, is redeemable at $107.50
Per share plus accrued dividends and upon voluntary liquidation is entitled to
receive a similar amount per share in preference to the common stock and
founders’ shares, and except as to conversion privilege of the convertible pre­
ferred stock. The convertible preferred stock and all series of 6 per cent pre­
ferred stock are on a parity with respect to the payment of dividends or in
the event of the liquidation of assets. The convertible preferred stock has no
Preemptive rights in any additional issues of stock.
Except as may be otherwise provided by law, and subject to the voting
privileges conferred upon the preferred stocks in the event of default of four
quarterly dividends, the voting rights are confined exclusively to the common
stock. The holders of tho founders’ shares shall not be entitled to participate
currently in the distribution of the surplus profits of the corporation for any
year unless the surplus profits of the corporation available for the payment of
dividends on the common stock and the founders shares for such year (after
deducting therefrom the accrued unpaid dividends, if any, on the common




94 2

STOCK EXCHANGE PRACTICES

stock), shall be in excess of an amount equal to dividends on the common stock
at the rate of $1 per share (which amount is herein called the “ excess profits ”
for such year), and unless dividends on the common stock at such rate for such
year and all previous years shall have been declared and paid.
In the event that in any year there shall be such excess profits and that
dividends on the common stock shall have been declared and paid at such rate
for such year and for all previous years, then the holders of the founders
shares as a class shall be entitled to dividends for such year in an amount
equal to 25 per cent, but no more, of such excess profits for such year before
any dividends shall be paid upon the common stock in excess of $1 per share
per annum. Upon any dissolution (voluntary or involuntary), or winding
up of the corporation, the holders of the common stock for each share thereof
shall be entitled to receive the sum of $12.50, plus accrued unpaid dividends,
before any distribution is made to the holders of the founders shares. From
any assets of the corporation remaining after such distribution to the holders
of the common stock, there shall then be paid to the holders of the founders
shares, as a class, a sum equal to 25 per cent of the aggregate excess profits of
the corporation, less the amount of all dividends declared* and paid upon the
founders shares. After such distribution to the holders of the founders shares,
the remaining assets of the corporation shall belong to the holders of the com*
mon stock.
There is set forth in said original application, A-9092, a more detailed sum­
mary of the privileges, preferences, voting powers, restrictions, and qualifica­
tions of the stock of the corporation, with respect to which there have been no
changes except that additional restrictions relative to the issuance of preferred
stock or the incurrence of any capital indebtedness were imposed upon the
board of directors by amendment to the certificate of incorporation recorded
March 26, 1930.
COMMON STOCK BESEKVKD

The outstanding warrants entitling the holders thereof to purchase addi*
tional shares of common stock of the corporation are the unexercised warrants
originally issued with preferred stock and preferred stock, series B, o f the
corporation. Such warrants entitle the holders thereof to purchase an aggre­
gate of 30,804 shares of common stock as follows:
Number o f share*

Price and duration:
purchasable
$37.50 per share to Dec. 15, 1930_________________________________ 22,224
$43.75 per share to Feb. 15,1931__________________________________ 8,580

Total-------------------------------------------------------------------------------------- 30,804
There are reserved 253,539 shares of common stock for issuance upon con­
version of the 240,000 shares of convertible preferred stock outstanding, on
the basis of the adjusted conversion prices referred to above. The number of
shares of common stock issuable upon such conversion is subject to increase to
protect against dilution as set forth in original application, A-9092.
There are also reserved 2,308% shares of common stock for issuance in
exchange for common stock of International Share Corporation.
SUBSIDIARIES

The corporation owns the entire capital stock of Continental Allied Corpora­
tion, a corporation of the State of Delaware, organized on February 8, 1930,
for the purpose of handling the distribution o f the capital securities o f the
corporation, and more than 99 per cent of the outstanding common capital
stock of International Share Corporation, a corporation of the State o f Dela­
ware, organized on April 23,1928, whose charter powers are similar to those of
Continental Shares (Inc.).
FUNM 3) DEBT

The corporation has no funded debt




943

STOCK EXCHANGE PRACTICES
DIVIDENDS

All dividends have been paid on all classes of preferred stock and the com­
mon stock of the corporation. The amount of dividends paid is hereinafter set
forth in the earned surplus account. The current rate of dividend on the
common stock is $1 per share per year.
Pro forma consolidated list of securities owned by Continental Shares (Inc.)
and its subsidiaries on October 8
{After giving effect to acquisition of securities the purchase of which was authorized on October 8, 19301

Number
of shares

Description

Market
price per
share

Total market
value

$115.50

$1,316,700.00
97,192.60

Source of quotation

PUBLIC UTILITY COMPANIES

The Brooklyn Union Gas C o____
Corporation Securities Co. of
Chicago (common).
Foreign Light & Power Co. (sec­

ond preferred).
Foreign Light & Power

Co.

• (common).
Insull Utility Investments (Inc.)
International Paper & Power Co.:
A ......................................................
B ......................................................
„ C ............................... - ................. ..
The Lehigh Coal & Navigation
.Co.
Niagara Hudson Power Corpora­
tion.
St. Lawrence Corporation (con­
vertible, preferred).
The United Light & Power Co.
B.

11,400
4,859‘ **$oo

20.00

500

25,000.00

2,000
4,858%oo

50.00

242,900.50

50.000
196,400
335,700
403,053

11.25
5.00
31.375

562,500.00
1.178.400.00
1.678.500.00
12,645,787.88

6.00

3,500

13.125

45,937.50

15.000

19.00

285,000.00

416,212

78.875

Total-

32,828,721.50

New York Stock Exchange.
Chicago Stock Exchange.
Appraised value.
Chicago Stock Exchange.
New York Stock Exchange.
Do.
Do.
New York Curb Exchange.
Do.
Montreal, unlisted.
New York Curb Exchange.

50,906,639.98

IB O N A N D S T E E L COMPANIES

The Cliffs Corporation (common)
The Cliffs Corporation, voting
trust certificates.
Inland Steel C o............................
Republic Steel Corporation (com­
mon).
Wheeling Steel Corporation........
Youngstown Sheet & Tube Co.,
certificates of deposit.
Youngstown Sheet & Tube Co.,
unstamped stock.

349,554
136

115.00
115.00

40,198,710.00
15,64ft 00

Cleveland, unlisted.
Cleveland Stock Exchange.

1,000

206,777

70.25
24.00

70,25ft 00
4,962,648.00

New York Stock Exchange.
Do.

3,243
62,796

m oo

58.00

188,094.00
7,535,52a 00

New York Curb Exchange.
New York Stock Exchange.

4,100

99.00

405,90000

T otal..................................

Do.

53,376,762.00

B U B B E S COM PANIES

The Firestone Tire & Rubber Co
The B. F. Goodrich Co..............
Goodyear Tire & Rubber Co___
Goodyear Shares (Inc.)..............
United States Rubber Co...........

156,700
113,900
96,800
582
110,300

16.00
18.625
46.50
3,024.83
14.50

Total .

2.507.200.00
2,121,387.50
4.501.200.00
1,760,451.06
1,599,35ft 00

Do.
Do.
Do.
Price Goodyear common.
New York Stock Exchange.

12,489,588.56

P A IN T CO M PANIES

Devoe & Raynolds Co. (Inc.) A__
The Sherwin-Williams Co___

40,000
73,150

18.00
76.00

Total.
b an k

720, ooa 00

5,559,400.00

Do.
Cleveland Stock Exchange.

6,279,400.00
stocks

Bancohio Corporation..................
The Bank of Nova Scotia______
The Bank of Nova Scotia (70 per
cent paid).




16,800
2,633
406

35.00
320.00
245.00

588,000.00
842,560.00
99,470.00

Cleveland, unlisted.
New York, unlisted.
Do.

94 4

STOCK EXCHANGE PRACTICES

Pro forma consolidated list of securities owned by Continental Shares {Inc.)
and its subsidiaries on October 8— C o n t in u e d
lAfter gjgfag effect to acquisition of securities the purchase of which was authorized on October 8,183® i

D escrip tion

Number
of shares

orteeDtt

Total market

va,ue

Source of quotation

BANE STOCK— con.

500
3,500

$238.00
24ft 00

621
3,552
2,625

66.00
385.00
540.00

$119,000.00
840,000.00

Montreal Stock Exchange.
Do.

40,986.00 Cleveland Stock Exchange.
Do.
1.367.520.00
1.417.500.00 i Chicago, unlisted.

165.00

251,790.00 i Youngstown, unlisted.

649
772
480

228.00
583.00
700.00

147.972.00 Montreal Stock Exchange.
450.076.00 I New York, unlisted,
336.000.00 j Chicago, unlisted.

1,177

29a 00

341.330.00 ! Columbus, unlisted.

867

250.00

216.750.00 | Kansas City, unlisted.
109.510. 00
585.000.00
26.400.00

466
5,850
200

888

1,526

lis t !!

The Bank of Toronto................ .
The Canadian Bank of Com
xnerce.
Central United National Bank...
The Cleveland Trust C o..............
Continental-Illinois
Bank &
Trust Co. (Chicago, 111.).
Dollar First National Bank
(Youngstown, Ohio).
The Dominion Bank....................
Guaranty Trust Co. of New York
Harris Trust & Savings Bank
(Chicago, 111.).
The Huntington National Bank
of Columbus, Ohio.
Fidelity National Bank & Trust
Co.
Imperial Bank of Canada----------The Manhattan Co......... .............
The National City Bank of New
York.
_
The Ohio State Bank & Trust Co.
(Akron, Ohio).
The Union Trust Co. (Cleveland,
Ohio).

302

125.00

37.750.00

10,888

74.50

811.156.00

Montreal Stock Exchange.
New York, unlisted.
Do.
Akron, unlisted.
Cleveland Stock Exchange.

8,628,770.00

Total....................................
FOREIGN INVESTMENTS
Qerman

Deutsche Bank & Disconto
Gesellschaft.
Hamburgische Electricitats werke A.G.
. . _
I. Q. Farben-Industrie A. G ------

>550,000

*115.00

>100,000

>118.00

28,081.05

>638.000

>136.00

206,486.15

150,519.19

385,086.39

Total.
Italian

Societa Meridionale Di Electricita (Meridionale).
Societa Generate Per L ’lndustria
Mineralia ed Agricola (Montecatini).
Societa Generate Electricita Dela
Sicilia (Seso).

8,782

>305.00

140,286.96

24,100

*203.00

256,234.21

8,000

*81.00

33,939.00

Total.

430,46a 17
Sundry

Cleveland Provision Co, (first
preferred),
eveland Provision Co. (com­
mon.
Eaton Axle & Sprtoe Co............
The Gabriel Snubbers Manufactruing Co. A.
Hazel-Atlas Glass Co
Harbison Walker Refractories Co.
Interlake Steamship Co.
James MacLaren, (Ltd.)
National Acme Co-------National Refining C o ...
Perfection Stove Co------

d

Total.
> Par value in reichmarks.
* Per cent of par.
* Lire (approximate).




1.500
7,125

}•

150,000.00

Cleveland, unlisted.

7.000
3,700

19.50
4.50

136.500.00
16.650.00

New York Stock Exchange.
Do.

5.500
40,000
3,405
450
9.000
1.000
1,000

61.00
46.50
68.00
. 500.00
9.25
27.50
30.00

335.500.00
1,860,000.00
231.540.00
225,000.00
88.800.00
27,500.00
30,000.00

New York Curb Exchange.
New York Stock Exchange.
Cleveland Stock Exchange.
Appraised value.
New York Stock Exchange.
Cleveland Stock Exchange.
New York Curb Exchange.

3,101,490.00

945

STOCK EXCHANGE PRACTICES

■Pro forma consolidated list of securities owned by Continental Shares (In c.)
and its subsidiaries on O ctober 8— Continued
[After giving effect to acquisition of securities the purchase of which was authorized on October 8, 1930]

Number
of shares

Description

SYNDICATE PABTICIPATIONS

Market
price per
share

Total market
value

Source of quotation

4

Ohio Industries..................
Libbey-Owens Securities Corp
Iron and steel companies............
utility companies...................
Cleveland Cliffs Iron Co. pre­
ferred.

$12,000.00
250.000.00
C17, 500.00
138.000. 00
209.000.00

Total.................................

1,286, 500.00

M ISCELLAN EOUS

Securities and syndicate partici­
pations. *

8,478,770.50

Total............................. .

145,363,467.60

* Syndicates are taken at their market values as of Sept. 30, 1930.
The foregoing market quotations are given to comply with the regulations of the stock exchange, but it
jjjthe opinion of the management that the quotations in important instances can not be regarded as conJtasive evidence of the value of the securities in question because both of the size and the nature of certain
Holdings.
In connection with valuing the portfolio of the corporation, attention is called to the fundamental pur­
poses of the corporation and to the fact that immediate accretions of market value are not its ultimate
Porpoae, but that the policy of the corporation is to look to the consummation of its plans for profits rather
“■an to current market quotations. From this point of view it is the feeling of the management that the
ingoing statement of values is conservative.
F IN A N C IA L

STATEM ENTS

There are hereinafter set forth financial statements o f the Corporation as
follows:
(1) Incom e statement from March 1, 192G, to September 30, 1930;
(2) E arned surplus account from M arch 1, 1926, to September 30, 1930;
(3) Paid-in surplus account from M arch 1, 1926, to September 30, 1930;
(4) B alance sheets as o f December 31, 1928, Decem ber 31, 1929, and Septem­
ber 30, 1930.
(1) I N C O M E S T A T E M E N T F R O M M A R C H 1, 1926, T O S E P T E M B E R 30, 1929
M ar. 1, 1926,
to Dec. 31,
1926

Year ended
Dec. 31, 1927

Year ended
Dec. 31, 1928

Year ended
Dec. 31, 1929

$163, 624. 47
5,211.92

$508,000.09
14,861.47

$1, 369,987.66
84,630.67

$3,297,802. 48
294,055.13

$3, 267,096.16
669, 429.48

9 months
ended Sept.
30,1930

Income:
Dividends..........................
Interest................................
Profit on sale of securi­
ties.....................................

21,701.99

403,410. 36

757, 559. 49

2,636, 754. 38

15, 802, 515.83

190,538.38

926, 271.92

2, 212,177.82

6,228,611.99

19, 739,041.47

6, 583.17
59, 209. 87

24,607.17
227, 272.33

83,785. 50
820,125.37

371,234.16
1,647,940.30

415,253.41
1, 224,074.39

65, 793. 04

251,879. 50

903,910.87

2,019,174.46

1,639,327.80

124, 745. 34

674, 392.42

1, 308, 266.95

4,209,437.53

18, 099,713.67

Less:
Expenses-----------------------Interest................................

Profit before Federal
income tax__________
federal income tax and con-

25, 842. 52

102, 500.00

2,100, 000.00

N et profit..................... ..

124, 745.34

648, 549.90

1,308, 266.95

4,106,937. 53

15,999,713.67

Unrealized appreciation or
depreciation in market
Values during each year
(or period) of securities
held as of the end of such
Tear (or p e r io d )..................

* 22, 212. 61

2, 015, 613. 53

12, 897, 287.67

» 6, 614,666.22

J 38, 202,202.46

1 Includes operations of subsidiaries since date of acquisition or organization.




* Depreciation.

946

STOCK EXCHANGE PRACTICES

(2) E A R N E D S U R P L U S A C C O U N T F R O M M A R C H 1, 1926, T O S E P T E M B E R 30, 1930
l
M ar. 1,1928,
to Dec. 31,
1926

Balance at beginning.............
N et profit as shown above..

$124,745.34
124,745.34 j

j
Less dividends:
On preferred stock--------- .............................!
On common stock........... ............................
.............................
Balance at end.............
1

124,745.34 '
i

\ ear ended
Dec. 31, 1928

\ ear ended
Dec. 31, 1927

Y ear ended
Dec. 31, 1929

9 m onths
ended Sept.
30,1930

$124,745.34 1 $567,796. 99 j $1,152,201.10
648,549.00 1 1,308,266.95 | 4,106,937.53

$1,578,852.24
15,999,713.67

1,876,063.94

5,259,138.63

17,578,565.91

43,000.00 i
162,498.25 |

318,583.34
3 405,279.50

1,511,929.75
2,014,539.69
* 153,816.95

1,792,030.50
1,745,234.75
> 174,832.22

205,498.25 (

723,862.84

3,680,286.39

3,712,097.47

567,796.99 1 1,152,201.10
1

1,578,852.24

13,866,468.44

773,295.24]
1

» Includes stock dividend of 4,645 25<Hooo common shares at paid-in or nominal value of $10 per share.
t Covers dividend requirement from date of organization to Dec. 31,1928.
» Covers dividend requirement from Jan. 1,1929, to Dec. 31,1929.
(3)

P A I D -I N S U R P L U S A C C O U N T F R O M M A R C H 1, 1 9 2 6 , T O S E P T E M B E R 3 0 . 1930

Credit

Sale of 130,000 shares of common stock (original issue). . .
Less:
Underwriting fee................ ........................... ..........................
Organization expense charged to surplus........................

$5,294,726.51
218,400.00
4,410.41

Underwriting fee on 30,000 shares of preferred s to c k .........................................
D o .......... ................................... - ................. ......... ....................................................Sale of 36,245 shares of common stock through rights at $75
per share_____________________________ _____ _________ ____ $2, 355, 933. 75
Less: Underwriting fee..................................................................
33, 668.00
Underwriting fee on 4,645*4 shares of common stock
(issued as stock dividend in lieu of accrued and unpaid
dividends on common sto ck )................................................................................
Sale of 48,726% shares of common stock through rights at
$90 per share........................................................................ ......... $3,898,140.00
48,553. 25
Less: Underwriting fee..................................................................
Underwriting fee on 40,000 shares of preferred s t o c k .......................................
Sale of 133,177 shares of common stock through rights at
$130 per share.................................................................................$15,981,240.00
Less: Underwriting fee............ ......................................................
332,942.50
15, 648,297.50
300,000.00
313,417.50

Sale of 10,000 shares of common stock (new)
Sale of 4,323 shares of common stock (new)
Sale of 112,584 shares of common stock (new) through warrants attached
to preferred stock, at $16.25 per sh a r e ........................................
Sale of 6,676 shares of common stock (new) through warrants attached
to preferred stock, at $18.75 per share.................. ................................................
Sale of 207,776 shares of common stock (new) through warrants attached
to preferred stock, at $32.50 per share..................................................................
Sale of 37,878 shares of common stock (new) through warrants attached
to preferred stock, at $37.50 per share_______________ __________
Sale of 200 shares of common stock (new) through warrants attached to
preferred stock, at $22,50 per share.................... ........................................
Sale of 333 shares of common stock through rights, at $60
per share------------ ................................. ......................................... $20,374,147.50
Less: Underwriting fee..........................................................
354,333.00
Underwriting fee on 240,000 shares of convertible preferred stock................
Premium on treasury stock sold....................................
Scrip canceled—22 shares................................................ V . V . V Y Y ~ ...........
Issuance of 274,741^ shares of common stock in exchanee for common
stock of International Share Corporation...............................

1.548.030.00
108,485.00
6.233.280.00
1.325.730.00
4,000.00

20,019,814.50
1,444,250.77
162,810"30
55.00
8,675,018.42

1,666,112. 20

65, 582, 706.82

, ,

1 666 112.20
Balance September 30,1930.




63,916,594.62

(4) Balance sheets as of December SI,

1968 and 1989, and September SO, 19S0
December 31,1038

December SI, 1929

September 30,1930 >

ASSETS

Cash and Government securities.
N otes and accounts receivable.....................................................
Investments—A t cost:
Securities......................................................................................
Syndicate participation payments *..................................

$5,356,895.23
3,611,77ft 49

$1,185,920.26
1,802,925.00
$44,621,489.41
2,655,001.00

$119,641,116,26
1,833,000.00

Treasury stock and unpaid common stock subscriptions.
Accrued dividends on securities.................... .............................
Prepaid corporate taxes.................................................... .............

$2,800,245.75
•30,170,398.86
$116,047,771.08
2,588,500.00

47,276,490.41
643,302.75
293,686.23

121,474,116.26
1,353,019.18
522,193.55

118,636,271.08
<3,824,659.55
333,907.06
27,527.89

51,202,324.65

132.317,994.71

155,793,010.19

LIABILITIE S

N otes, accounts and option payable:
Notes payable.................................................................
Accounts payable, including brokers’ accounts..
Balance due on option..................................................
Dividend payable.......................................................................................
Reserves.
For State taxes, preferred dividends, interest, etc................. .
For Federal taxes and contingencies........................................... .
For oustanding shares of International Share Corporation.

15,699,500.00
11,911,796.51
1,926,000.00

12,238,420.40
6,929,907.28
2,033,000.00
21,201,327.68
124 100.59
111,802.24

Paid-in.....................................................................................
Profit and loss.................................................................................... ..

Aggregate market value of securities held.
Total cost of securities as above....................
M arket appreciation or depreciation.

29,507,296.51
536 231.00
202,617.99
102,500.00

--------------Capital stock outstanding:!
Preferred (6 per cent cumulative)..................................................
Convertible preferred (6 per cent cumulative).........................
Common and common scrip (no par value)..............................
Founders shares— Nonvoting (no par value)............................
Paid-in capital.......................................................................................
Surplus:

23,100,000.00
6,071,738.96

111,802.24

• 135,000 13,500,000.00
*248,335

•10,000

,172,619.06
,
78,719.11

2 100 000.00
305,117.99

• 158.229
•240,000
• 2,144,924

15,822,900.00
24,000,000.00

.....................

5,372,310.00

•10,000

2,493,350.00
12,619,534.13
1,152,201.10

29,171,738.96
6 '4 806.25

2,351,338.17
• 158,229
• 240,000
• 2,419,665M

15,822,900.00
24,000,000.00

•10,000

55,195,286.97
1,578,852.24

6,059,163.75
63,916.594.62
13,866,468.44

13,771,735.23

56,774,139.21

77,783.063.06

51,202.324.65

132,317,994. 71

155,793,010.19

59,512,178.00
44,621,489.41

129,750,138.63
121.474.116.26

88,710,090.99
118,636,271.08

14.890,688.59

8,276,022.37

1 29,926,180.09

1 Includes operations of subsidiaries since acquisition and organization.
* Includes unpaid balance on sale of securities, and interest, of $24,272,376.60 which amount had been paid in full to the corporation b y October 9, 1930.
* In addition to the payments on syndicates, the corporation had at September 30,1930, a maximum commitment of $10,835,100 on syndicate participations when, as, and if called.
* Includes 46,898^6 snares of common stock, 8,245 shares of convertible preferred stock, and 8,530 shares of preferred stock.
* 286.651H shares of the common capital stock of the corporation were reserved at September 30, 1930; 30,804 shares for subscription warrants issued with preferred stock and
253,539 shares for conversion of convertible preferred stock and 2.308H shares to be issued in exchange for the common stock of International Share Corporation.
• Shares.
7 Depreciation.




948

STOCK EXCHANGE PRACTICES

Continental Shares (Inc.) and subsidiaries—Adjusted balance sheet
[B ased upon balance sheet as o f September 30, 1930, adjusted to giv e effect t o the
fo llo w in g : (a) Receipt on O ctober 7 and 9 o f $24,272,376.60 from th e sale o f securities
and the application thereof t o reduce notes and accounts p ay able; ( o ) purcnase oi
securities in th e aggregate am ount o f $56,958,409.62 and paym ent fo r sam e W
incurrence o f $35,000,000 o f indebtedness and issuance o f 990,000 common, sn ares oi
Continental Shares (I n c .), and delivery o f 50,000 shares o f treasury 8tock, o f wmca
approxim ately 3,100 have been purchased subsequent to September 30, 1930, a t current
market prices]
ASSETS

C a s h ________________________________________________________________________
$ 2 ,8 0 0 ,2 4 5 .7 8
Notes and’ accounts receivable---------------------------------------------------------------------5, 898, 022.26
Investments at c o s t : Securities and syndicate participations-------------------- 1 7 5 ,5 9 4 , egw. w
Treasury stock and unpaid subscriptions to common capital stock-----------2,
887. **
A ccrued dividends on securities held----------------------------------------------------------W J. w
Prepaid expenses------------------------------------------------------------------------------------------------------ o-iiT o ta l_________________________________________________________________ 187, 354, 271.10
LIABILITIES

Notes payable to banks— secured___________________________________________
A c co u n ts p a y a b le :

T o brokers— secured-------------------------------------------------

35, 000, 000.00

$4, 937, 093. 02

Sundry.............. ................................................. .......... 10.H9.61

Reserves and accruals----------------------------------------------------------------------------------C apital sto ck :
P r e f e r r e d (authorized 260,000
sh ares; issued,
6 per cent
cum ulative)—
Original issue, 30,000 shares— $3, 000,00 0. 00
Series B, 128,229 shares--------- 12, 822, 900. 00
-------------------------- 1 5 ,8 2 2 ,9 0 0 . 00
Convertible preferred (6 per cent cum ulative), au­
thorized and issued 240,000 shares--------------------24, 000, 000. 00
Preferred capital------------------------------------------------------Common (n o par v alu e)—
Authorized 4,000,000 sh a re s,.
issued 3,409,665% s h a r e s .. $ 8 ,5 2 4 ,1 6 3 .7 5
Founders’ shares (n on votin g), au­
thorized and issued 10,000 no
par shares-----------------------------------10,000. 00
Common capital--------------------

2 ,9 5 6 ,1 4 4 .4 2

39, 822, 900. 00

8, 534,163. 75

SUrPPaid in __________ $ 8 2 ,3 4 4 ,3 0 4 .2 4
E a rn e d __________
13, 749, 516. 06
---------------------------- 96, 093, 820. 30
-------------------------- 104, 62 7 ,9 8 4 . 05 144, 45 0, 884. 05
187, 354, 2 7 1.10
N o tts A.— In addition to the payments on syndicates, the corporations h a d a m a x im u m
com m itm en t o f $7,049,386 on syndicate participations, when, as, a n d i f c a l le d .

The foregoing financial statements of the corporation through December 31,
1929 (and also the statement of securities owned at December 31, 1929) have
been certified by Messrs. Ernst & Ernst, whose certificate as to the 1929 finan­
cial statements appears in the annual report of the corporation, which has been
duly published and distributed to the stockholders of the corporation. A copy
of the certificate appearing in the annual report is as follows:
“ We hereby certify that we have examined the books of account and record
of Continental Shares (Inc.), Maryland corporation, and that, in our opinion,
based upon the records examined and information obtained by us, the accom­
panying balance sheet sets forth the financial position of the corporation as at
the close of business December 31, 1929, and the relative summary of profit and
! * » aorplus is correct.
& Ekn8t>
“ Certified Public Accountants
“ J a n u a r y 9, 1930.”
The financial statements covering the period of nine months ended September
30. 1930, and also the statement of securities owned by the corporations as of
September 30, 1930. are taken from the books of the corporaions and the treas­
urer of the corporation has certified that the consolidated balance sheet as of
September 30, 1930, correctly sets forth the financial position of the corporation
and its subsidiaries as at such date and that the accompanying consolidated
income statement and earned surplus account, and also the statement of
securities owned by the corporations as of October 8, 1930, are correct.



STOCK EXCHANGE PRACTICES

949

AGREEMENTS

Continental Shares (Inc.) agrees with the New York Stock Exchange as
follows:
To notify the stock exchange promptly in the event of a change in the charac­
ter of its business.
To notify the stock exchange promptly in the event o f any substantial change
in the management or affiliations of the corporation.
To publish within 30 days after the close of each fiscal year, and to submit
to the stockholders, at least 15 days in advance o f each annual meeting, a de­
tailed consolidated statement of earnings and consolidated statement of surplus
covering the previous fiscal year, aud a consolidated balance sheet as of the
end of the yeai*, or separate statements of the parent company and each sub­
sidiary in which the corporation owns a majority of the voting stock.
To publish in each annual report, as a footnote to the balance sheet, a state­
ment showing the aggregate value of securities held directly, or indirectly, at
the close of the period, based upon market value for all securities listed on
recognized stock exchanges and upon fair appraisal of other securities, com­
pared with the aggregate cost of such securities.
To publish in each annual report a footnote to the income account showing
the increase or decrease during the current year of the amount by which the
market value of securities held exceeds or is less than their l»ook value.
To publish in each annual report a list of securities held showing names and
quantities, provided, however, that an amount equal to 10 per cent of either
the combined capital and surplus of the corporation or of the cost of the securi­
ties, whichever is lower, may be combined under the heading “ Miscellaneous.”
This list shall disclose the aggregate cost of the securities and their aggregate
value, and, in the case of securities not listed on either the New York Stock
Exchange or the New York Curb Exchange, the price at which each holding
is inventoried for the purpose* of determining aggregate market value will be
clearly set forth with such information as may be required to support such
valuation.
To append to all annual financial statements and inventories required by
tiie committee the certificate of a public accountaut qualified under the laws
of some State or country, which certificate shall Include a statement that no
one of the items carried under the term “ Miscellaneous’* hi the list of
investments has been held for more than one year.
Not itself, and not to permit any subsidiary, directly or indirectly controlled,
to take up as income stock dividends received at an amount greater than that
charged against earnings or earned surplus by the issuing company in relation
thereto.
Not to pay any cash or stock dividends on common stock when such divi­
dends, plus the amount by which the current value of securities held shall be
less than their cost, exceed the earned surplus and undivided profits, without
at the time of the payment of such dividends sending to stockholders a state­
ment, in a form which has been approved by the committee on stock list, setting
forth clearly the net impairment which will exist after the payment o f
such dividends stated both in aggregate dollars and dollars per share o f
common stock. If at the time of the payment of any such dividends the
corporation has senior securities outstanding such statement shall, in addi­
tion, state in terms of jterfcntage the ratio of the common stock equity
remaining after the declaration of such dividends, to such senior securities,
taken at par value or the sum to which they would be entitled upon involuntary
liquidation, whichever is the greater. For the purpose of this agreement, stock
dividends shall be charged against earnings on a basis approved by the
committee on stock list.
To notify the stock exchange, on behalf of itself or any subsidiaries which
have been, or may be formed, of any change in the terms of any management
contract existing at the time of listing and o f the terms and conditions o f
contracts subsequently consummated.
To notify the stock exchange, on behalf of itself and o f any subsidiaries, o f
any changes in the terms and conditions of option warrants.
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
■eenrities 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.



950

STOCK EXCHANGE PRACTICES

To notify the stock exchange 30 days in advance of the effective date o f any
change in the authorized amounts of listed securities.
Not to make any change in listed securities, of a transfer agency or of ft
registrar of its listed stock, or of a trustee of its listed bonds or other listed
securities, without the approval of the committee on stock list, and not to
select as a trustee an officer or director of the company.
To 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 listed securi*
ties, so as to afford the holders of its listed 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 with respect to listed securi­
ties shall be transferable; and shall be transferable, payable, and deliverable
in the Borough of Manhattan, city of New York.
In the event of issuance of options or warrants to purchase stock, otherwise
than pro rata to stockhoders, to notify the stock exchange promptly o f the
number of shares covered by such options, of their terms and of the time
within which they may be exercised, and thereafter to include this informa­
tion together with like information as to any options in existence at the time
of approval of this application so long as said options are outstanding in all
financial reports furnished to stockholders or published.
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 listed 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 redeem preferred stock in accordance with the requirements.
To notify the stock exchange if deposited collateral is changed or removed.
To have on hand at all times a sufficient supply of certificates to meet the
demands for transfer.
QENEBAX

The fiscal year of the corporation ends on December 31.
The annual meeting of the stockholders is held at the office of the corpora­
tion in the city of Baltimore, Md., on the third Tuesday of March in each year.
The principal office of the corporation in the State o f Maryland is Baltimore
Trust Building, 10 Light Street, Baltimore, Md.
The principal business office of the corporation is 520 Cuyahoga Building,
Cleveland, Ohio.
The directors of the corporation (elected annually) are: C. S. Eaton, chair­
man of the board; W. R. Burwell, F. H. Hobson, Richard Inglis and R. V.
Mitchell, all of Cleveland, Ohio; David Ingalls, of Washington, D. C .; and
Philip Wick, of Youngstown, Ohio.
The members of the advisory committee are as follows: F. H. Blackburn,
chairman of investment committees, General Electric employees’ funds; John S.
Brookes, jr., general counsel the Koppers Co.; H. W. Fenton, president Harris
Trust & Savings Bank (Chicago); T. M. Girdler, director Union Trust Co.
(Cleveland); G. M. Hubbard, vice president J. G. White & Co. (Inc.) ; J. F.
Schoellkopf, jr., vice president Schoellkopf, Hutton & Pomeroy (Inc.) ; and
S. D. Warriner, president Lehigh Coal & Navigation Co.
The officers of the corporation are: C. S. Eaton, chairman of the board;
W. R. Burwell, president; F. H. Hobson, vice president; and L. G. Watson,
secretary and treasurer.
The transfer agents for the common stock are: Guaranty Trust Co. o f New
York, New York, N. Y., the Cleveland Trust Co., Cleveland, Ohio, and the First
National Bank of Boston, Boston, Mass.
The registrars for the common stock are: Bankers Trust Co., New York, N. Y.,
the Guardian Trust Co., Cleveland, Ohio, and Harris Forbes Trust Co., Bos­
ton, Mass.
Certificates for the common stock are interchangeably transferable in New
York, N. Y., Cleveland, Ohio, and Boston, Mass.




C o n tin e n ta l Sham es ( I n c .) ,

By W. R. Bvbwdx, President.

STOCK EXCHANGE PRACTICES

951

This committee recommends that the above-mentioned 990,000 shares of com­
mon stock without par value, be added to the list on official notice of issuance
to connection with the acquisition of securities, in accordance with the terms of
this application, making the total amount authorized to be listed 3,696,317
shares.
Frank A ltsch u l, Chairman.
Adopted by the governing committee October 29, 1930.
Ashbel Green, Secretary.

Mr. G r ay . I ask that these letters, which I will read, be printed
m the record. Mr. Stock lias made reference to some of them. I
do not know whether he has covered them fully. The first one is
a memorandum dated October 10, 1930. It comes from Mr. John­
son, an officer of the Chase National Bank, to Mr. Clarkson, another
officer of the Chase National Bank. It is their interoffice communi­
cation. [Reading:]
Memorandum to Mr. Clarkson.
CO N TI N ENT At#

SH AR ES

(IN C .)

Mr. Eberstadt, partner of Otis & Co., called this morning and saw Mr.
Clarkson regarding the loan for .$80,000,000, which we have agreed to make
to the above. We have agreed to take the United Light & Power B stock
at $50 a share instead of $40 and release from the collateral the following:
$2,000,000, Lehigh Navigation; f>00 M 1,000,000, Brooklyn Union Gas; 1,500
M1,000,000 Goodyear.

That “ 500 M,” which, though it reads 500 million, is evidently
intended to mean half a million, and not 500 million. The “ 1,500
M ” is evidently meant for 1,500,000, that being his way of abbrevi­
ating it. [Continuing reading:]
They will give us as additional collateral $4,000,000 Cliffs Corporation
which he says has a market in Cleveland He will put the Cliffs Corporation
stock in at 15 points under the market price. They will further agree to
maintain a margin of 50 per cent at all times and will not withdraw any
collateral until the margin equals 00 per cent. Mr. Eberstadt says that this
$30,000,000 loan will be their entire indebtedness aside from the $7,000,000
loan shown on their statement. After allowing for a write-off of about
$25,000,000 to bring their securities to the market, he figures their net worth
about $120,000,000. He says last fall they owed $45,000,000, but were able to
clear this by the sale to Insull. They do not expect to borrow any more money
and Mr. Eberstadt says that they are all opposed to anything that would
increase their debt.
O TIS & CO.

With respect to Otis & Co. (these figures are New York office only) he is not
*ure of the figure but says that they owe between $130,000,000 and $120,000,000,
that they have a box of $6,000,000, practically all good usable stuff, and
$6,000,000 in cash. I pointed out to him that his box was entirely too small,
which he appreciates. He says he will give us the Cleveland figures as soon
as he can get them.
L. H. J.
O c t o b e r 10, 1930.

I point out to the committee that this was a loan that was being
made to Continental Shares, but the man who was negotiating it
was Mr. Eberstadt, who had absolutely nothing to do with Con­
tinental Shares, and was a partner of Otis & Co., a brokerage house
in New York City.
There is a memorandum dated October 11, which I shall not
read. It is addressed to Chase National Bank. It is headed u Otis



952

STOCK EXCHANGE PRACTICES

& Co.” It starts out by saying, “ I wish to confirm the arrangement
agreed upon by me acting on behalf of Continental Shares (Inc.)^
It simply recites the arrangement, and it is signed, “ Ot’S & Co.
by Mr. Eberstadt. So that he, having 110 interest in Continental
Shares, was the one who made the arrangement.
There is attached to that, which I ask also to go into the record,
a schedule of the securities, amounting to $50,671,000, the stated value
of the securities which are to be deposited with the Chase by Conti­
nental Shares as security for the loan.
(The statements referred to are as follows:)
Otis & Co.,
Sen' York, October 11, 1U30.
C hase National Bank,
Xew York, X. Y.
Gentlemen : I wish to confirm the arrangement agreed upon by me acting
on behalf of Continental Shares (Inc.).
(1) You will make Continental Shares (Inc.) a loan in the amount <>f
$30,000,000 for IS months, bearing Interest at the rate of
per cent per
annum, payable monthly. The obligation of the company will be evidenced
by its execution and delivery to you of a note substantially in the form at­
tached hereto market! schedule A.
(2) The company is to have the right to anticipate and pay off the above loan,
or any part thereof, at any time after 30 days’ written notice to you, at
100.25 per cent of the face amount of the part so to be paid off.
(3 ) There is attached hereto, marked “ Schedule B,” a list of collateral to be
lodged with you as security for the loan. This collateral will be delivered to
you piecemeal from time to time; and upon such delivery you will make ar­
rangements with the company to make advances to the company on the above
loan, from time to time, on a basis arranged between you and the company.
(4) The company is to have the right to substitute from time to time as
collateral securities satisfactory to you on a basis acceptable to you. in your
discretion, except that there is to be no substitution of the shares of United
Light & Power, regardless of basis, unless such substitution is agreed to by you.
(5) The company will deposit as collateral for the loan any additional shares
of United Light & Power B acquired by it from time to time during the con­
tinuance of the loan.
(6) The company will at all times maintain as collateral security a margin
o f HO per cent. In case the margin exceeds 60 per cent the company shall have
the right to draw down collateral.
(7) You will not subparticipate any part of this loan to any Canadian or
Cleveland banks, and you will, wherever convenient, advise us before o f any
proposed subparticipations of the loan, so that we can discuss them with you
from the point of view of mutual interest.
(8) The company will be pleased to use its influence to initiate or solidify
your business relations with companies whose stock it owns, both from the
point of view of deposits and financing.
Very truly yours,
Schedule: B
416.000 shares United Light & Power B, at 50________
337.000 shares Lehigh Coal & Navigation, at 30______
41.000 shares Cliffs Corporation, at 100_____________
7.000_shares Brooklyn Union Gas, at 115____________
75,600 shares Goodyear Tire & Rubber, at 41________
2,625 shares Continental Illinois Bank & Trust, at 570
772 shares Guaranty Trust Co. of New York, at 583_
5.850 shares Bank of Manhattan Trust, at 100______
10,888 shares Union Trust Co. of Cleveland, at 74___
3,687 shares Cleveland Trust Co. at 385________ I ™
480 shares Harris Trust of Chicago, at 700—I—"I
68.850 shares Youngstown Sheet & Tube, at 100




O m s & Co.

$20,800,000

,

10 110,000
4.100.000
805.000
3.100.000
1,5Q0,000
450.000
585.000
800.000
1.400.000
336,000
6, 885,000
5 0 ,8 7 1 ,0 0 0

STOCK EXCHANGE PRACTICES

95 3

Senator W a l c o t t . Was the partner of Otis & Co. a director in
Continental Shares?
Mr. G ugle . He was not.
Senator W a l c o t t . Was there any resolution on the part of Con­
tinental Shares to authorize him to do this ?
Mr. G b a y . None that we know of, and we have the minutes.
There was no resolution, was there, Mr. Gugle?
Mr. G tjgle. There was a resolution afterwards passed, confirming
his negotiations.
Mr. G b a y . Confirming his negotiations. They did not adopt this
resolution until the thing was through.
Senator G o ld sb o r o u g h . A ratification.
Mr. G u g l e . A ratification.
Mr. G b a y . I will say to the committee that I have subpoenaed Mr.
Eberstadt, and, not anticipating putting Continental Shares on until
to-morrow, and recognizing a really important matter that he had
to attend to to-day, I relieved him until to-morrow morning, t
did that yesterday in New York; so that he will be here to-morrow
morning, and we will put Mr. Eberstadt 011 and ask him a few
pointed questions about the situation.
Mr. Gugle states that there is another matter he would like to
present to the committee. I think the committee would be glad
to hear it, Mr. Gugle.
Mr. G u g l e . What I am about to speak of, is intended to indicate
that this loan was made for the relief of Otis & Co. During the
period from October 14 to 20, Chase and other banks paid out and
charged to the account of Continental, $50,500,000, of which $12,150,000 was later repaid by Otis & Co. That left a net-----Senator G o l d s b o r o u g h . Are you speaking about the $30,000,000
loan of Chase?
Mr. G u g l e . Speaking about the $30,000,000 loan. Chase was sup­
posed to be closing a transaction wherein it was to pay out not over
$35,000,000, and was to get $57,000,000 worth of securities. They
paid out during that period $50,500,000 of Continental’s money, part
of which was afterwards returned by Otis & Co., but the net amount
that Chase paid out was $37,500,000, and they did not get, by $12.000,000, the amount of securities that the contract called for, anil
later, to get that $12,000,000, we had to pay the $7,600,000 in addition.
Senator C a r e y . You say “ we.” You mean Continental?
Mr. G u g l e . Yes, sir.
Mr. G r a y . Continental Shares.
That is all, Mr. Gugle, as far as I am concerned.
Mr. Chairman, of course I anticipated, as I say, presenting the
Fox picture to-day, and, although we have one or two other small
matters, I think that the matter that has been presented, and the
Fox picture, which I do not hesitate to say to you publicly will
present an even stronger picture of manipulation of a man’s own
rsonally-controlled corporations than this docs, will be sufficient.
will present to you to-morrow morning, if Mr. Fox is able to be
here to present his side of it and answer some questions, that matter;
and if he is not here I will present it by authoritative testimony
without him.
The C h a i r m a n . I understand that Mr. Daley is present, and
desires to make a short statement, and subject himself to cross-

r




STOCK EXCHANGE PRACTICES

954

examination by counsel for the committee. You may make a bnef
statement under oath and be subject to cross-examination in case
counsel desires to ask you any questions.
TESTIMONY OF WILLIAM E. DALEY, PRESIDENT OTIS & CO.,
NEW YORK
The C h a i r m a n . D o you solemnly swear that the testimony you
will give in the matter under investigation by the committee will
be the truth, the whole truth, and nothing but the truth, so help
you, God?
Mr. D a l e y . I do.
I have given my name. Do you want to ask me any questions
first?
Mr. G ray. N o. It is only a matter of your making such statement
as you desire to make.
Mr. D a l e y . I f this case were tried in the regular manner in court,
strict proof of these charges could be required, and proper proof
could be submitted by the company and its officers.
Some of the statements made here to-day are false. Other in­
ferences are made which are supported here and there by docu­
mentary proof which makes a reasonable inference appear. ^ It is
very difficult to try to go through these charges one by one in this
committee hearing, but I submit to the committee that these charges,
having been denied, and in view of the fact that they are brought by
an investigator of the committee who has not in any degree examined
the records of the company, or the officers or directors of the com­
pany, it is unfair to have it come as a report of the investigator of
the committee. But, on the cursory examination of certain o f the
transactions, he would have known that some of the inferences he
has made here are not reasonable inferences.
Mr. G ray. N ow , Mr. Daley, you are a member of the bar in Cleve­
land, is that correct?
Mr. D a l e y . Yes.
Mr. G ray. What association, if any, have you with Continental
Shares ?
Mr. D aley . I have none.
Mr. G ray. What association, if any, had you with Otis & C o.!
Mr. D aley . I was an employee.
M r. G ray . Y ou were an employee in what capacity?
Mr. D aley . I was in what is known as their buying department,

the department that originated the purchase o f securities.
Mr. G ray. When was that?
Mr. D a l e y . That was from about the middle o f 1928.
M r. G ray. U ntil when?

Mr. D a l e y . I am still with the reorganized Otis & Co.
Mr. G ray. What is your business? Are you practicing law, or
are you in the buying department of Otis & Co.?
Mr. D a l e y . I am with Otis & Co. (Inc.).
Mr. G r a y . In other words, you are a member of the bar, but not
practicing?
Mr. D a l e y . Yes.
g*AY. Then, you know nothing about the affairs o f Conti­
nental Shares, because you are only connected with Otis & Co., is that
correct ?



STOCK EXCHANGE PRACTICES

955

Mr. D a l e y . That is correct.
Mr. G r a y . Then, any statements you have made with regard to
the statements or testimony that has been produced here with respect
to Continental Shares, represent only some personal opinion of yours,
based upon an absolute lack of knowledge ?
Mr. D a l e y . That is not correct.
Mr. G r a y . Where did you get your knowledge about Continental
Shares ?
Mr. D a l e y . One of the statements made by your investigator-----Mr. G r a y . N o ; pardon m e. Where did you get your knowledge
about Continental Shares ?
Mr. D a l e y . Otis & Co. was involved in the report. I am not
claiming to know about Continental Shares.
Mr. G r a y . Then, your statement with respect to any statements
made here to-day with respect to Continental Shares transactions,
you h ave no knowledge about at all, only where they contact with
Otis & Co.?
Mr. D a l e y . That is right. Some of the statements made were
included-----Mr. G r a y . We will come to that. What connection had you with
Foreign Utilities?
Mr. D a l e y . N o connection.
Mr. G r a y . What connection had you with Cyrus Eaton?
Mr. D a l e y . I worked for Otis & Co., in which he was a partner.
Mr. G r a y . He was the dominating partner?
Mr. D a l e y . The partner who had the largest interest.
Mr. G r a y . And the one who had the say as to what was to be
done?
Mr. D a l e y . N o, that is not true.
Mr. G r a y . Who did have, then? Name the man.
Mr. D a l e y . The executive committee.
Mr. G r a y . The executive committee of Otis & Co. ?
Mr. D a l e y . Yes.
Mr. G r a y . The executive committee consisted of whom?
Mr. D a l e y . It was changed from time to time.
Mr. G r a y . Of whom did it consist in October, 1930?
Mr. D a l e y . Mr. Eaton was not one of them; Mr. Inglis.
Mr. G r a y . Y ou are talking about Otis & Co. ?
Mr. D a l e y . I am .
Mr. G r a y . Mr. Inglis. Who else?
Mr. D a l e y . J . O . E aton, w ho is n o t related in any w a y to C . S .
Eaton.
Mr. G r a y . Who else?
Mr. D a l e y . Ferdinand Eberstadt; and I think M. C. Harvey.
Mr. G r a y . That same Mr. Inglis was connected with Continental
Shares ?
Mr. D a l e y . That is correct.
Mr. G r a y . Mr. Eberstadt is the one that has been mentioned here
to-day ?
Mr. D a l e y . That is correct.
Mr. G r a y . Who named the executive committee?
Mr. D a l e y . The members of the firm.
Mr. G r a y . Of which Mr. Eaton was the dominating member, and
held the largest interest ?



956

STOCK EXCHANGE PRACTICES

Mr. D a l e y . He held the largest interest, but under the articles of
partnership all questions were decided by the majority of the mem­
bers of the partnership.
M r. G r a y . Y o u say, o f course, that w h ich a ll o f us w h o happen
to be members o f the bar k n ow , that i f the m atter w ere trie d in cou rt,
strict p r o o f w ou ld be required.

Mr. D a l e y . That is correct.
Mr. G r a y . That is true. You have said that some of the state­
ments that were made here to-day were false.
Mr. D a l e y . That is correct.
Mr. G r a y . You have made a rather important accusation.^ I ask
you to detail each statement you say is false, and to tell me in what
the falsity consists in each case.
Mr. D a l e y . The investigator made one statement, that Conti­
nental Shares had unloaded stock on Otis & Co.
Mr. G r a y . Unloaded stock on Otis & Co.?
Mr. D a l e y . Just the opposite—Otis & Co. had unloaded stock on
Continental Shares at a price of $76 per share, when the market
was $3*2 per share. An examination of the Otis & Co. records
would indicate clearly to an investigator that that was a Continental
Shares account on Otis & Co.’s books, and that they have always
had that liability.
Mr. G r a y . Let me ask you whether or not Otis & Co., in the first
lace, did not underwrite the selling of the shares of Continental
hares ?
Mr. D a l e y . They did, on several occasions, I know.
Mr. G r a y . Let me ask you how much Otis & Co. made from the
underwriting of those shares?
Mr. D a l e y . I would have to give you approximate figures.
Mr. G r a y . Give it to me approximately, and I will know whether
you are correct or not.
Mr. D a l e y . For raising somewhere around $100,000,000, the total
fees are $2,600,000, approximately, gross, which they had, in turn,
to distribute among tne bankers, which worked out to be something
around 2 to 2% per cent on the amount of money that was raised
on the underwriting.
Mr. G r a y . What was the net result to Otis & Co.?
Mr. D a l e y . I would say the total net to Otis & Co. would run
$1,600,000.
Mr. G r a y . The statement was made by Mr. Stock to-day that a
certain amount of Continental Shares stock was unloaded by Otis
& Co. upon Continental Shares at a certain price, when it was
worth much less. I ask you whether or not, after Otis & Co. failed
to carry out their complete underwriting agreement, it is a fact
that some of the shares which they were to underwrite, and which
they did not dispose of, though they were obligated to do so, and
had been paid a commission for doing so, were handed back to
Continental Shares at the original price at which they were to be
underwritten, notwithstanding the fact that the price had dropped
from $76 to $32 at that time?
Mr. D a l e y . That not only is not the fact, but your own examina­
tion of the Otis records would convince you that was not a fact.
Mr. G r a y . Will you furnish to the committee the records o f Otis
& Co. here to-morrow, in order to confirm or disaffirm your state­
ment that has been made here to-day that that statement is false ?

g




STOCK EXCHANGE PRACTICES

957

Mr. D a l e y . I th in k I can do th at.
Mr. G r a y . If you will get them here at 10 o’clock to-morrow
morning, we will give you an opportunity to present them. What
other statement do you say is false?
Mr. D a l e y . The reference to Inland Syndicate. I think Otis &
Co. was not the manager of that syndicate. I f Otis & Co. did
since join it, any interest in it was small. Mr. Gugle, who testi­
fied, I am sure did have an interest in it, and that was a public
syndicate, the stock of which was sold to Continental Shares with
the approval of the directors of Continental Shares.
Mr. G r a y . The falsity in that statement you pick out is that Otis
& Co. were not the managers of it, and yet you are not sure whether
that is so or not?
Mr. D a l e y . I know they had only a small interest in it.
Mr. G r a y . Y ou do not know whether they were managers or not?
Mr. D a l e y . No; I do not.
Mr. G r a y . And yet th a t is the statement you do not know about,
that you are saying is false?
Mr. D a l e y . I know about the sm a ll interest th ey h a d in it.
Mr. G r a y . I s it not a fact that frequently the managers of syn­
dicates have only a small interest, while they make a very large
amount of money out of the percentage paid to them for operating
the syndicate, and the commissions they get upon the brokerage
transactions that pass through their houses ?
Mr. D a l e y . That is the case in many instances.
Mr. G r a y . That was where Otis & Co. made their money in this,
was it not?
Mr. D a l e y . Before I answer that, I think they made their com­
missions—I have forgotten that syndicate. I would like to look
that up.
M r. G r a y . Y ou look it up, and com e in to -m o rro w and tell us.
What else is false?
Mr. D a l e y . In the shares of the Cliffs Corporation that were put
out, with the Cleveland Trust Co.-----Mr. G r a y . By Continental Shares?
Mr. D a l e y . By Continental Shares.
Mr. G r a y . Had Otis & Co. anything to do with that ?
Mr. D a l e y . N o ; they d id not.

Mr. G r a y . Then, what do you know about it? You said a minute
ago, under oath, that you did not know anything about the affairs
of Continental Shares!
Mr. D a l e y . I have seen some of the transactions of Continental
Shares.
M r. G r a y . Y ou have seen some, but y o u have not seen as m any as
our p eop le have seen, have you ?

Mr.

D

aley.

I

do not know th at you h av e seen a n y o f th em .

M r. G r a y . Y ou say you have seen them?

Mr. D a l e y . Some of them.
Mr. G r a y . When did you see the books of the Continental Shares
with relation to this Cliifs Corporation matter?
Mr. D a l e y . This particular one, I talked to the president of Con­
tinental Shares about.
Mr. G r a y . Who is the president of Continental Shares?
Mr. D a l e y . His nam e is Burwell.



958

STOCK EXCHANGE PRACTICES

M r . G r a y . W h e n did y ou ta lk to h im ?
Mr. D a l e y . When the Gugle charges were first made.
Mr. G r a y . H o w lo n g a go w as th a t?
Mr. D a l e y . I think that has been pending six months, anyway.
Mr. G r a y . Y ou are drawing on your recollection of a talk you
had with Mr. Burwell, that makes you come in here and s a y mat

the statements we made are not so; is that it ?
Mr. D a l e y . I said statements and inferences. I have g iv e n you
one specific statement that is not so. I have not, of course, been
permitted to say what is the truth about the Cliffs Corporation.
Mr. G r a y . I am going to give you an opportunity.
Mr. D a l e y . I am pretty certain my information comes fr o m Mr.
Burwell, the president o f it.
Mr. G r a y . Why not wire Mr. Burwell and have him h ere to-m or­
row morning, and tell him what has been said about that corpora­
tion, in order that he may refute it if it is not so. Wouldn’t that be
a good idea?
Mr. D a l e y . I think it would.
Mr. G r a y . Mr. Burwell is Mr. Eaton’s brother-in-law, is he not?
Mr. D a l e y . N o , sir.
Mr. G r a y . What relation is he?
Mr. D a l e y . I think he married a niece.
Mr. G r a y . Then he is a nephew; is that it? Is there any other
statement that is false?
Mr. D a l e y . No; there are inferences in here that I am sure will
not be supported if the investigator would check-----Mr. G r a y . Inferences are a matter o f a man’s own personality.
He draws one inference, and somebody else might draw another.
Mr. D a l e y . The objection I make is that the inference w a s draw n
from a one-sided investigation.
Mr. G r a y . Y ou know mat Cyrus Eaton was supcenaed some four
or five weeks ago to come here.
Mr. D a l e y . That is correct.
Mr. G r a y . Y ou know that at your request he was relieved from
a subpoena that was returnable on a certain Thursday, until a cer­
tain Friday?
Mr. D a l e y . Yes.
Mr. G r a y . You know that you had a conference with me on that
Friday, as his attorney, and asked me to advise you when he would
be needed, and I told you I would. That is correct, isn’t it.
Mr. D a l e y . Yes.
Mr. G r a y . Y ou know that though you were in New York with
Otis & Co., and not in Cleveland with Continental Shares, that Mr.
Eaton got a wire yesterday afternoon telling him to be here to-day,
do you not?
Mr. D a l e y . I have not seen the wire.
M r . G r a y . Y ou kn ew o f it?
Mr. D a l e y . May I finish?
Mr. G r a y . Yes.

Mr. D a l e y . I did not understand that to be the wire.
Mr. G r a y . What did you understand the wire to b e ?
Mr. D a l e y . I understood your wire stated that the hearing o f the
committee would be held “ to-morrow morning”—substantially
those words.
J



STOCK EXCHANGE PRACTICES

959

Mr. G r a y . Yes.
Mr. D a l e y . Not that he should be there.
Mr. G r a y . Was the wire read to you?
Mr. D a l e y . It was not read to me, but the substance of it was
given to me.
Mr. G r a y . B y w h o m ?
Mr. D a l e y . By Mr. Eaton.
Mr. G r a y . In other words, he called you up over the long-distance
phone, and advised you about the wire, did he ?
Mr. D a l e y . No; I called him up.
Mr. G r a y . You called him up. Are you his attorney?
Mr. D a l e y . Y e s .
Mr. G r a y . Then, I will not ask you anything about your con­
ferences with Mr. Eaton. But, as a result of your calling him up,
and his reading you the wire, he is not here ?
Mr. D a l e y . Not as a result of that conversation.
Mr. G r a y . But he is not here, is he? Don’t you think that Mr.
Eaton is the best man in the world to tell us whether or not any
of these things are false, and that it would be a good idea to wire
him to-night and tell him to be here to-morrow morning ?
Mr. D a l e y . I do not think anybody in the world can defend a
transaction before a Senate committee where these charges are flung
here. I think it has to be tried out in court.
Mr. G r a y . D o y o u in t e n d t h a t as a r e fle c t io n o n t h e c o m m it t e e ,
or t o mean t h a t w e w i l l n o t g i v e h im a p a t ie n t h e a r in g ?
Mr. D a l e y . In any of those things—you, as a lawyer, know the
same thing—it takes weeks of trial to get this.
Mr. G r a y . I will say this to you, as counsel for this committee:
Without requiring Mr. Eaton to offer any absolute proof, we will
permit Mr. Eaton to take the stand and make any statement he
desires, subject, of course, to any questions either the committee
or myself desire to ask him. He can make any statement he desires,
whether it is hearsay, or whether it is something as to which he
will furnish us actual documentary or other proof at the same
time. Do you not think it would be very wise to have Mr. Eaton,
if he thinks he is being maligned by these statements, come into
this committee room to-morrow morning and accept that invitation?
Mr. D a l e y . No: I would not do it if I were in his place.
Mr. G r a y . Why?
Mr. D a l e y . I do not think a man has a chance to build up a
defense, or show his defense in a committee hearing.
Mr. G r a y . O f course, you understand that Mr. Eaton is under
subpoena.
Mr. D a l e y . Yes.
Mr. G r a y . It would be unpleasant to him, then, and he would
prefer me not to take any extreme measures to get him here ?
Mr. D a le y . I should think so.
Mr. G r a y . Why would it be unpleasant to him?
Mr. D a l e y . I have tried to explain that. I think it is a little
hit unfair to have him try his case here before the committee.
Mr. G r a y . Y ou say that the investigator has not examined the
books o f the company. How do you know that?




960

STOCK EXCHANGE PRACTICES

Mr. D a l e y . I was told that by the employees of Continental
Shares.
Mr. G r a y . Y ou were told that by one of the employees of Con­
tinental Shares. In other words, everything you have told us to­
day is based upon some information that you have gotten from
somebody else?
Mr. D a l e y . That is correct.
Mr. G r a y . All right. I think that is all I want to ask him.
Senator W a l c o t t . I move we adjourn, Mr. Chairman.
(The motion was agreed to.)
The C h a i r m a n . We will adjourn at this time, to meet at 10
o’clock to-morrow morning in the committee room.
(Whereupon, at 4.20 o clock p. m., the committee adjourned to
meet to-morrow, Friday, June 17, 1932, at 10 o’clock a. m.)




STOCK EXCHANGE PRACTICES
FRIDAY, JUNE 17, 1932

C om m ittee

U nited S tates S enate ,
B a n k in g an d C urrency ,

on

Washington, 1). C.
The committee met, pursuant to adjournment on Thursday, June
16, 1932, in the hearing room of the Committee on Banking and
Currency, Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Townsena,
Walcott, Carey, Couzens, Fletcher, and Bulkley.
Also present: William A. Gray, Esq., counsel to the committee.
The C h a ir m a n . The committee will come to order.
Mr. G ray . Mr. Chairman and gentlemen of the committee, I
should like at this time to put on the record a new rule that has
been adopted by the New York Stock Exchange. I am doing this
for the purpose of directing the attention of the committee to the fact
that there seems to be in this rule some recognition of the impro­
priety of at least one of the matters that has been directed to the
committee’s attention by the presentation of testimony, and that is
the operation of the specialist in his own stocks.
There was a notice sent by the New York Stock Exchange under
date of June 15,1932, to its members, reading as follows [reading] :
New Yobk Stock Exchange,
June 15, 1982.

To the Member9 :
At a meeting of the governing committee held June 14, 1932, section 13 of
Chapter I of the rules adopted by the governing committee pursuant to the
constitution, was amended to read as follows:
“ Seo. 13. When a member has an order to buy and an order to sell the same
security, he must offer such security, if bonds at one-eighth of 1 per cent, and
if stock at one-eighth of $1, higher than his bid before making a transaction
with himself.”
At the same meeting, section 1 of Chapter X I was amended to read as
follows:
“ Sec. 1. No member, while acting as a broker, whether as a specialist or
otherwise, shall buy or sell directly or indirectly for his own account or
that of a partner, or for any account in which either he or a partner has a
direct or indirect interest, securities, the order for the sale or purchase of
which has been accepted by him or his firm or a partner for execution; except,
as follows:
“ Exception (a). A member who, by reason of his neglect to execute an
order, is compelled to take or supply on his own account the securities named
in the order, is not acting as a broker, and shall not charge a commission.
“ Exception (6). A member may only take the securities named in the order,
provided he shall have offered the same in the open market, if bonds at oneeighth of 1 per cent, and if stocks at one-eightli of $1, higher than his bid, and
provided the price is justified by the condition of the market, and that the
member who gave the order shall directly, or through a broker authorized to
act for him, after prompt notification, accept the trade and report it.




961

962

STOCK EXCHANGE PBACTICES

“ Exception (c). A member may only supply the securities named in the
order, provided he shall have bid for the same in the open market, if bonds
at one-eighth of 1 per cent, and if stocks at one-eighth of $1, lower than his offer,
and provided the price is justified by the condition of the market, and provided
that the member who gave the order shall directly, or through a broker author­
ized to act for him, after prompt notification, accept the trade and report it.
“ Exception (d). A member, acting as a broker, is permitted to report to his
principal a transaction as made with himself when he has orders from two
p r in c ip a ls to buy and to sell and not to give up, such orders being executed
in accordance with section 13 of Chapter 1, in which case he must add to his
name on the report the words ‘ on order.’ ”
These changes are provided for in the reprint of pages 79, 80, 105, 106, 107,
and 108, which are sent you herewith and which should be substituted in your
loose-leaf copy of the constitution in lieu of the present pages of those numbers.
A shbel Green, Secretary.

The effect of that is this, that prior to that time a broker or a
specialist might either buy or sell, subject to no limitation except
the fact that there was a provision about the market prices justifying
his act. That is, he might buy or sell from himself or to himself or
any member of his firm. While now, if he desires to sell a certain
stock to himself he must offer it to the market at a price one-eighth
above the price he desires to sell it for to see whether he can get such
a bid before he sells to himself, and if he desires to sell his own stock
must endeavor to buy for his customer at one-eighth less than the
price that he is going to sell for before he executes the order for him­
self, thus, of course, checking up on the actions of the specialists in
dealing with themselves.
Is Mr. Eberstadt here ? Will you stand there and be sworn first,
Mr. Eberstadt?
TESTIMONY 0E FERDINAND EBERSTADT, HUNTINGTON, LONG
ISLAND
The C hairman . You do solemnly swear that you will tell the
truth, the whole truth and nothing but the truth regarding the
matter under investigation by the committee, so help you G od!
Mr. E berstadt . I do.
Mr. G ray . So the committee might understand, Mr. Eberstadt is
the gentleman who was mentioned yesterday in connection with
Continental Shares, and though the matter was pretty fully covered,
I desire to ask him one or two questions.
Mr. Eberstadt, your name is Ferdinand Eberstadt?
Mr. E berstadt . Ferdinand Eberstadt.
Mr. G ray . Where do you reside ?
Mr. E berstadt . Huntington, Long Island.
Mr. G r a y . Nobody can hear you.
Mr. E berstadt . Huntington, Long Island.
Mr. G r a y . And in what business or profession are you now
engaged?
Mr. E berstadt . Banking.
Mr. G r a y . What is the name of your firm?
Mr. E berstadt . F. Eberstadt & Co. (Inc.).
Mr. G r a y . And in New York?
Mr. E berstadt . 39 Broadway.
Mr. G r a y . In 1930 in the fall with what firm were y o u connected!




STOCK EXCHANGE PRACTICES

«/Od

Mr. E berstadt . Otis & Co.
Mr. Gbay. And Otis & Co. were members of the New York Stock
Exchange in New York?
Mr. ]1/berstadt. They were.
Mr. G r a y . Won’t you keep your voice up, please ? And when did
you cease your connection with Otis & Co. ?
Mr. E berstadt . Eleventh of June, 1931. Am I allowed to smoke
here?
Mr. G r a y . I have no objection, if you can do that and talk at the
same time. What, if any, connection had you with Continental
Shares?
Mr. E berstadt . None whatsoever.
Mr. G r a y . What, i f any. connection had you with Foreign Utili­
ties?

Mr. E berstadt . None whatsoever.
Mr. G r a y . Who were the members of the firm of Otis & Co. in
the fall of 1930?
Mr. E berstadt . Mr. Gray, that is a rather long list. The record
will show that. I think there were about 17, and in the interest of
accuracy, I suggest that I be permitted to give you that some time.
Mr. G r a y . I would be very glad if you will give me that and let
me put it upon the record. Primarily I want to know: You were a
member of the firm ?
Mr. E berstadt . That is correct.
Mr. G r a y . Mr. Cyrus K. Eaton was a member of the firm?
Mr. E berstadt . That is correct.
Mr. G r a y . And he was the partner who had the authority and the
largest interest and lie was the dominating factor in the company,
was he not ?
Mr. E berstadt . He was the party who had the largest interest, and
he was not the dominating factor." I was a partner and he did not
dominate me.
Mr. G r a y . I see. Did you engineer and take care of all of the
affairs of Otis & Co. ?
Mr. E berstadt . I d id not.
Mr. G r a y . What, if anything, did you have to do with arrang­
ing a loan for Continental Shares from the Chase National Bank?
Mr. E berstadt . May I ask you to repeat that question ?
Mr. G r a y . What, if anything, did you have to do with arranging
a loan for the Continental Shares with the Chase National Bank?
Mr. E berstadt . I was asked b y Continental Shares to negotiate a
loan in the fall of 1930 for Continental Shares with the Chase Na­
tional Bank.
Mr. G r a y . Who in Continental Shares asked you to do that?
Mr. E berstadt . My recollection is th a t it was Mr. Burwell, who
was then president.
Mr. G r a y . Mr. Burwell ?
Mr. E berstadt . Yes.
Mr. G r a y . Mr. Eaton, I suppose, never said anything to you about
it at all?
Mr. E berstadt . I would not say that Mr. Eaton had never said
anything to me about it at all. You asked me who had asked me
to negotiate the loan.
119852—32— PT 3------ 12



964

STOCK EXCHANGE PRACTICES

Mr. G ray. Yes.
Mr. E berstadt . It is very certain that in the course of the transac­
tion Mr. Eaton said something to me about it.
Mr. G r a y . Mr. Burwell was president of Continental Shares at
that time?
Mr. E b e r s t a d t . That is correct.
Mr. G r a y . And where were Continental Shares’ headquarters?
Mr. E berstadt . Cleveland, Ohio.
Mr. G r a y . How did Mr. Burwell communicate with y o u ?
Mr. E berstadt . Either personally or by telephone.
Mr. G r a y . No communication by writing?
Senator F l e t c h e r . Let me understand just a minute. Otis & Co.
was a partnership?
Mr. E berstadt . That is right.
Senator F le t c h e r . Composed of some IT members?
Mr. E berstadt . Yes.
Senator F le t c h e r . Continental Shares was a co rp o ra tio n ?
Mr. E berstadt . That is correct.
Senator F l e t c h e r . Organized under the laws o f what State?
Mr. E berstadt . I think of Maryland.
Mr. G r a y . That is correct. And you h ad no writing from Mr.
Burwell or from any other officers of the corporation authorizing
the making of this loan?
Mr. E berstadt . I have some writings. I received a subpoena ask­
ing me to bring along all papers involving transactions between F.
Eberstadt & Co. and Continental Shares.
Mr. G r a y . Y ou mean between Otis & Co.?
Mr. E berstadt . N o; I mean between F. Eberstadt & Co. and Con­
tinental Shares. That was a very easy order to comply with, in
view of the fact that there never were any transactions. On the
other hand, I assumed that the thing referred to Otis & Co. and not
as stated, Eberstadt & Co.
M r . G r a y . Y ou are p ro b a b ly correct in y o u r a ssum ption .
Mr. E berstadt . So I brought those papers along.
Mr. G r a y . And what papers have you, Mr. Eberstadt?
Mr. E berstadt . I have here an annual report. Do you want this?
Mr. G r a y . Annual report of what?
Mr. E berstadt . Continental Shares.
Mr. G r a y . This is with respect to December 31, 1931.
Mr. E berstadt . Whatever it is is on there, Mr. Gray.
Mr. G r a y . All right. That has no relation, as I see it, to the

present matter. What else have you ?
Mr. E berstadt . I have here a letter from myself, or a copy o f a
letter from myself to the Chase Bank, confirming the negotiation o f
the 10th o f October, 1930, which letter commences: “ I wish ”----- Mr. G r a y (interposing). Is that letter dated October 11, 1930?
Mr. E b e r s t a d t . That i s correct.
Mr. G r a y . That letter was read into the record yesterday. I f you
will let me see it so that I may make a comparison of it i f it is the
same as this. [The witness handed document to Mr. Gray.] Yes.
M y t ; t b t lttter was produced, together with a schedule attaCiiBu, and went into the record yesterday*
Have you any other documents?




STOCK EXCHANGE PRACTICES

96 5

Mr. E berstadt . I mention this letter in answer to your question
about this authority. This letter states that I was acting on behalf
of Continental Shares.
Mr. G r a y . Yes; I see it does.
Mr. E berstadt . I have here a letter of October 18, 1930, from
Burwell referring to this, in which Burwell-----Mr. G r a y (interposing). W ill you let me see the entire letter?
Mr. E berstadt . Yes [handing letter to Mr. Gray]. Discusses
some elements of the note. He wants certain changes made there.
Mr. G r a y . And the document which is attached to that letter,
which has some interlineations and changes, is that the form of the
collateral note?
Mr. E berstadt . Mr. Gray, I think that is the form of the col­
lateral note which is attached to the letter that you referred to be­
fore, and that the interlineations are certain changes which Burwell
wanted made in that note.
Senator F l e t c h e r . Burwell handled the matter, did he?
Mr. E berstadt . I assume so. I did not go further with the mat­
ter. It was handled entirely by Burwell and the bank from that
point on.
Mr. G r a y . That was explained in the testimony yesterday.
Mr. E berstadt . I assume so. I picked that letter up and thought
I would bringit.
Mr. G r a y . For that reason, rather than reading that, I will hand
it to the reporter and ask that it be entered in the record.
Senator T o w n s e n d . Without objection it may go in the record.
(The documents above referred to are here printed in the record
in full, as follows:)
Continental Shares (In c.),
Cleveland, Ohio, October 18, 1930.

Ferdinand Eberstadt, Esq.,
Otis & Co., New York, N. Y.
D e a r F e e d : In accordance with your request, I am stating herein the
points discussed in our telephone conversation this morning with respect to
the note of the Chase National Bank. They are as follows:
1. No provision hits been made for the withdrawal of security when the
value thereof reaches a point equivalent to 160 per cent of the unpaid portion
of the note.
2. The adjective “ market ” has been omitted in stating the value of the col­
lateral security which must, in the judgment of the bank, be maintained
against the loan. The bank could place an arbitrary value upon the collateral
without any recourse on our part if this provision is permitted to remain as
now written.
3. No provision is made for notice to the company, or demand for payment
or additional collateral, before the bank may sell the security, etc. This fact
when coupled with the point mentioned in (2) of this letter seems to prac­
tically leave us at the mercy of the bank.
4. It is provided that the bank may rehypothecate the security with the
United States or the Federal Reserve Bank of New York. This should not be
permitted In the case of the United Light & Power stock which the bank will
not allow the company to withdraw from under the loan.
Sincerely,
W. R. Burwell.
See letter for meaning of notes 1, 2, 3, 4.
$30,000,000.
New York, --------- 1930.
[Interlined: On or before 18 months after date] for value received, we the
undersigned promise to pay to the Chase National Bank of the city of New
York, or order, at its banking office, Pine Street, corner of Nassau, Borough
of Manhattan, city of New York, N. Y., In funds current at the New York
Clearing House, $30,000,000 with interest at the rate o f 5% per cent per



966

STOCK EXCHANGE PRACTICES

anuum, payable monthly, having deposited with the bank as collateral security
for the payment of this note and of all sums which the undersigned shall at
any time be liable to pay hereunder and of all other liabilities of the under­
signed to the bank, whether absolute or contingent, due or not due, or which
may hereafter be contracted or existing, whether incurred directly or indi­
rectly, by the undersigned to the bank, including as well promissory notes,
bills of exchange, and other evidences of indebtedness, made, indorsed, or
accepted by the undersigned and purchased or owned by the bank, the follow­
ing property, viz (see attached lis t ):
The undersigned hereby agree to deposit with the bank f o r t h w i t h upon
demand such additional collateral security as the bank may from time to
time demand in order that the securities deposited as collateral for this loan
shall at all times be of a value, in the judgment of the bank, equal to 150
per cent of the principal amount of this note then remaining unpaid; ana
also hereby give to the bank a lien for the amount of this note and of all
liabilities aforesaid upon all property and securities of the undersigned and
all right, title, and interest of the undersigned in or to any property or
securities, which have or shall come into the possession or custody of the
bank in any way for safe keeping or any purpose whatever, whether the bank
shall accept it for the purpose for which it is delivered or not, upon any and
all proceeds of said property and securities and every part thereof, and
also upon every balance of deposit account which the undersigned may at
any time have with the bank; and all remittances and property shall be
deemed to be in the possession and custody of the bank when actually in the
possession or custody of, or in transit to, it or any agent thereof.
[Marginal note, “ 160% (1).” ] On the nonperformance of any of the obli­
gations of the undersigned hereunder or upon any default under any of the
instruments evidencing any of said liabilities, or if at any time the [inter­
lined, “ market” ] value of the securities left in the possession of the bank
as security for the payment hereof shall, in the judgment of the bank, decline
to such extent as to make the [interlined, “ market ” ] value of the securities
deposited as collateral for this loan [marginal note, “ (2 )” ] in the judgment
of the bank, less than 150 per cent of the principal amount of this note then
remaining unpaid, then the bank is hereby authorized, at any time or times,
to sell, in one or more sales, assign, and deliver the whole or any part of the
said securities and property (whether or not the same consists in whole or
in part of negotiable instruments or choses in action or undivided interests in
property) or any substitutes therefor, or any additions thereto or any other
property or securities of the undersigned in or to any property or securities,
which have or shall come into the possession or custody of the bank, in any
way for safe-keeping or any purpose whatever as aforesaid, at any broker’s
board or at public or private sale, at the option of the bank, with or without
demand for payment or for additional collateral [margin, “ (3 )” ] security
or for other performance and without regard to any such demand, if made, and
without advertisement or notice of intention to sell or of time or place of
sale or otherwise, all of which are hereby expressly waive [interlined,
“ Rider ” ] ;and the bank may be the purchaser of any or all property so sold
and hold the same thereafter in its own right absolutely free from any claim
or right or redemption on the part of the undersigned, which is hereby expressly
waived and released.
The bank is hereby authorized, in its discretion, whether this note or any
of said other liabilities be due or not, in its name or in the name of the under­
signed or otherwise, to demand, sue for, collect and/or receive any money or
property at any time due, payable or receivable upon or on account of or in
exchange for, or make any compromise or settlement it deems desirable with
reference to, and/or otherwise realize upon, with or without suit, any o f said
property and securities, and, in so far as said property and securit!es shall
consist of negotiable instruments and/or any chose or choses in action, the said
bank may extend the time of payment of any such instrument or chose in
action as to other parties liable thereon, without thereby incurring responsi­
bility to or discharging or otherwise affecting any liability of the undersigned;
and the undersigned hereby waive presentation, protest, and notice o f nonacceptance and/or of nonpayment of any such negotiable instrument to which
the undersigned may be a party.
The undersigned will pay all expense of every kind of the enforcement o f
this note, or of any of the rights hereunder, and hereby agree to pay to the
bank on demand the amount of any and all such expense incurred by it.




STOCK EXCHANGE PBACTICES

967

The bank is authorized at any time and from time to time, at its option, to
appropriate and apply any or all of the net cash receipts from any of said
property and securities, and/or any or all of any balance of deposit account of
the undersigned with the bank and/or any or all moneys now or hereafter in
the hands of the bank and belonging to the undersigned, to the payment in
whole or in part of this note or of any of the said liabilities or any of said
expense, returning the surplus, if any, to the undersigned, or whoever may be
entitled thereto; and notwithstanding the holding by the bank of said security
for the payment of this note and said other liabilities, or any sale, exchange,
enforcement, collection of, realization upon, or compromise, or settlement, actual
or attempted, with reference to any of said property and security, the under­
signed shall be and remain liable for the payment in full, principal and interest,
of this note and of all said other liabilities, including any expense as afore­
said, except only to the extent that the same or any thereof shall be reduced
by payment or actual application thereon by the bank of security or the
proceeds thereof.
I f at any time the collateral held by the bank as security for the payment
of this note shall decline to such extent as to make the [interlined, “ market”
(“ 2 ” )] value of the securities deposited as collateral for this loan, in the judg­
ment of the bank, less than 150 per cent of the principal amount of th5s note
then remaining unpaid, and the undersigned shall not on demand forthwith
furnish such further security or make such payment, on account as shall be
satisfactory to the bank to restore the value of such securities to said 150
per cent, or if any sum payable under this note or any of said other liab lities
for principal, interest, or otherwise, be not paid when due, or if the under­
signed shall be in default hereunder for any matter or thing, or if the under­
signed, or any indorser or guarantor of this note, or any maker, indorser, or
guarantor of any of said security, shall become insolvent (however such in­
solvency may be evidenced) or make a general assignment for the benefit of
creditors, or if a petition in bankruptcy shall be filed against, or a voluntary
petition in bankruptcy shall be filed by, or if a receiver shall be appointed of
the property or assets, or any thereof, of the undersigned or any such maker
or indorser or guarantor, thereupon this note and/or any or all of said other
liabilities shall, unless the bank shall otherwise elect, be forthwith due and
payable.
[Marginal note, “ (4).” ] The bank may pledge any of said security (either
alone or with other) to the United States or to the Federal Reserve Bank of
New York, in its own right or as agent of the United States, to secure de­
posits or other obligations of the bank of any amounts whatever. Upon the
transfer of this note the bank may transfer any or all of said security and
shall be thereafter fully discharged from all liability and responsibility with
respect to the security so transferred, and the transferee vested with all the
powers and rights of the bank hereunder with respect to such security so
transferred, but with respect to any security not so transferred the bank
shall retain all rights and powers hereby given. No delay on the part of any
holder hereof in exercising any power or right hereunder shall operate as a
waiver of any power or right; nor shall any single or partial exercise of any
power or right hereunder preclude other or further exercise thereof, or the
exercise of any other power or right. The rights and remedies herein ex­
pressly specified are cumulative and not exclusive of any other rights or
remedies which any holder hereof may otherwise have or would have by the
law o f pledge or lien without said specification.
The undersigned is to have the right to anticipate and pay off the above loan,
or any part thereof, at any time after 30 days’ written notice to the bank at
100.25 per cent of the face amount of the part so to be paid off, plus accrued
interest on such part to the time of prepayment.
The undersigned is to have the right to substitute from time to time as col­
lateral securities satisfactory to the band on a basis acceptable to the bank, in
its discretion, except that there is to be no substitution of the shares of United
Light & Power Co., regardless of basis, unless such substitution is agreed to by
the bank.

Mr. E berstadt. Then I have here a letter of October 18,1930, from
Burwell to me, in which he acknowledges receipt of a schedule of
collateral, and I think you will see from those letters that, so far as



968

STOCK EXCHANGE PRACTICES

Continental was concerned, the thing was handled practically en­
tirely with Burwell.
Mr. G r a y . All right; I think that is unimportant.
Senator B u l k l e y . Is there anything in that letter that ought to be
read so the committee can understand what is going on here ?
Mr. G r a y . Which letter?
Senator B u l k l e y . This letter he just mentioned.
Mr. G r a y . I think not; but I will be glad to read it.
Senator B u l k l e y . I do not care about that, but I am only asking
if we should know what it is as a foundation for something else.
Mr. G r a y . The letter reads as follows. It was addressed to
Ferdinand Eberstadt of Otis & Co., in New York under date of
October 18, 1930. [Reading:]
In accordance with your request, I am stating herein the points discussed in
our telephone conversation this morning with respect to the note of the Chase
National Bank. They are as follows:
First, no provision has been made for the withdrawal of security when the
value thereof reaches a point equivalent to 160 per cent of the unpaid portion
of the note.

That is meant for 60 per cent, is it not ?
Mr. E berstadt. I guess you can say it either way, Mr. Gray. I f
you count the 100, it is 160; if you do not count the 100, it is 60. It
means a margin of 60.
Mr. G r a y (continuing reading) :
2. The adjective ‘'market ” has been omitted in statins the value of the col­
lateral security which must, in the judgment of the bank, be maintained againsi
the loan. Tbe bank could place an arbitrary value upon the collateral without
any recourse on our part if this provision is permitted to remain as now
written.
3. No provision is made for notice to the company, or demand for payment
or additional collateral, before the bank may sell the security, etc. This fact,
when coupled with the point mentioned in (2) of this letter, seems to practicaUy
leave us at the mercy of the bank.
4. It is provided that the bank may rehypothecate the security with the United
States or the Federal Reserve Bank of New York. This should not be per­
mitted in the case of the United Light & Power stock, which the bank will
not allow the company to withdraw from under the loan.
Sincerely,
W. R. B ubw ell.

With an attached copy of the note itself with the suggested changes
to be made thereon.
Mr. E berstadt. I think they were purely technical changes.
M r . G r a y . T h a t is a ll?

Mr. E berstadt. I had some other papers. This is simply a list
of those securities which I am sure you must have.
M r . G r a y . T h a t is already in the r e c o r d ; yes, sir.

Now, Mr. Eberstadt, in the negotiation of this loan, did you know
that there were a certain number of blank promissory notes sent by
Continental Shares to the Chase National Bank?
Mr. E berstadt. Mr. Gray, I am going to try very hard to answer
your questions with complete frankness, and sometimes I may ask you
to repeat your question. When you say, did I know when I was nego­
tiating this loan, you mean before the loan was closed or after ?
M r. G ray. Y

ou

can answer it either tim e , or both.

Mr. E berstadt. During my negotiations with the Chase Bank I
know there never were any blank promissory notes of Continental
Shares with the Chase Bank.



STOCK EXCHANGE PRACTICES

969

Mr. Gbat. Did you learn afterwards that blank notes had been
sent there?
Mr. Ebebstadt. After the transaction had been completely closed
and all terms agreed on, I have since been advised that, as a conven­
ience in clearing this transaction, which was one of considerable mag­
nitude, as you can readily see, some arrangements of that character
were made. They were not made by me. I Know nothing about them
except what I have heard.
Mr. Grat. And you did not have entire charge of the matter?
M r. Ebebstadt. I had 110 charge whatsoever o f the clearance o f the
transaction.
Mr. G bat . You only had charge o f the arrangement o f the loan

itself?
Mr. E bebstadt. I only had charge o f the negotiation o f the loan;
that is correct.
M r. G bat. Was this loan made 011 account of Otis & Co.?
Mr. E bebstadt. I beg your pardon?
M r. G bat. Was this loan made 011 account of Otis & Co. ?
Mr. E berstadt. In no sense. The term “ on account * might mean

two things. In either instance the answer is no.
Mr. G bat . Is it not a fact that the Chase National Bank, if you
know it, on the morning of tlu» 14th of October, 1930. without any
previous authorization from tlu* Continental Shares made distribu­
tion o f certain of the funds in that loan in order to protect Otis &
Co. and save them from closing their doors that day?
Mr. E berstadt. I do not know it. and I do not believe it is a fact.
Mr. G bat . Is it not a fact that negotiations had been had, or
rather the members of your linn had l>een brought before the gov­
erning committee of the New York Stock Exchange and were ad­
vised on the night of the IRth of October. 1930. that they would
not be permitted to open the doors unless certain obligations were
taken care of?
Mr. E berstadt. That is not a fact.
Mr. G bat . Was there a consultation between the members of the
firm and the governing committee on the night of the 13th of
October?
Mr. Ebebstadt. That is correct.
Mr. G b a t. And did you take part in it?
Mr. E berstadt. I did.
Mr. G b a t. And what was the ultimatum of the stock exchange to
your firm ?
Mr. E berstadt. I do not understand it as an ultimatum, but the
position taken by the stock exchange was that I think it was $12,000

of new capital------Mr. G bat (interposing). Twelve million.
Mr. E bebstadt. $12,000,000 of new capital-----M r. G b a t. Yes.
Mr. E bebstadt. Should be put into the firm, which is a very dif­
ferent thing, Mr. Gray, from insisting that the firm take care of
any obligations. One referred to capital and the other referred to
obligations.. I recollect 110 position taken by the stock exchange
with respect to obligations.




970

STOCK EXCHANGE PRACTICES

Mr. Gray. Is it not a fact that you were told that unless that
twelve million in new capital went into your firm’s office on the
morning of the 14th you would not be permitted to open?
Mr. Eberstadt. I don’t remember whether we were told that or
not. I think certainly that was a fair assumption from the meeting.
Mr. Gray. You think what?
Mr. E berstadt. I think that was a fair assumption, but the meet­
ing closed by the statement that the $12,000,000 would be put in
there.
Mr. Gray. Yes. And where did it come from?
Mr. Eberstadt. Most of that money was put up by Eaton.
Whether all was put up by Eaton I do not know.
Mr. Gray. You mean to tell us, Mr. Eberstadt, that as a member
of the firm of Otis & Co. you do not know—and you were not here
yesterday, and I might say to you that it was established as a fact
that the Chase Bank on the morning of the 14th made distribution
of a very large portion o f that $30,000,000 in order to take up obli­
gations of Otis & Co. and release collateral at different institutions
and thus save Otis & Co. and prevent them from closing.
Mr. E berstadt. Mr. Gray, you have put a pretty big contract in
that question there. May I ask you to divide that into two or three
questions ?
Mr. G ray. Well, I will.
Mr. E b e r s t a d t . I f you would just read that back. I can not an­
swer that question yes or no. The question involves several distinct
answers.
Mr. G ray. Do you mean to tell me that you do not know that the
Chase National Bank, on the morning of the 14th of October, paid
a number of Otis & Co.’s obligations?
Mr. E b e r s t a d t . It is possible that they did and they did not. The
records-----Mr. G ray (interposing). Anything is possible, Mr. Eberstadt.
Mr. E b e r s t a d t . Why, yes; surely.
Mr. G ray. Y ou were a member of the firm. Won’t you please
tell me whether you knew that to be true?
Mr. E b e r s t a d t . The firm’s business w a s a very large business.
Whether the Chase Bank, on the morning of the 14th, did or did
not pay certain obligations is a matter that no individual could tell
you honestly without looking at the records. That is two years ago.
The sums involved are a hundred million dollars or more, and I
can not sit here and tell you that on the morning o f the 14th the
Chase Bank paid certain obligations. I can tell you that I would
be very glad to get the records if you desire that.
Mr. Gray. We have them and have them in evidence.
Mr. E b e r s t a d t . Well, they should show.
Mr. Gray. What I am asking you, Mr. Eberstadt, is this: Y ou said
you wanted to be frank with me.
Mr. E b e r s t a d t . Yes.
Mr. G ray. Whether you, as a member of the firm of Otis & Co.,
now say to this committee that at a critical point in the business
affairs of O tis & Co., when they had to add to their capital on the
morning of the 14th, that you can not remember, even though
it has been a year and a halt or nearly two years ago, whether or




STOCK EXCHANGE PRACTICES

971

not the money required was furnished by the Chase National Bank
from this loan.
Mr. E b ek sta d t . I do not think it was. The Chase Bank put no
money into Otis & Co. Have you any evidence indicating that the
Chase Bank put money into Otis & Co. 1
Mr. G r a y . I will answer your question, yes; plenty—$30,000,000.
Mr. E b e r sta d t . I do not know of it.
Mr. G r a y . You do not know of it ?
Mr. E b e r sta d t . No; I do not.
Mr. G r a y . You never heard of it?
Mr. E berstadt. I never heard of the Chase Bank putting any
capital in Otis & Co.
Mr. G r a y . You are very technical, I see.
M r . E b e r s t a d t . N o; I a m n o t a b i t t e c h n ic a l.
Mr. G r a y . I am not talking about the Chase National Bank
putting money into the capital of Otis & Co. I am talking about the
Chase National Bank taking up obligations of Otis & Co. on the
morning of the 14th with funds created by a loan of $30,000,000
to Continental Shares.
Mr. E b e r s t a d t . I f they did so, they did so pursuant to instruc­
tions o f the officers of the Continental Shares.
Mr. G r a y . And you never knew that they did it ?
Mr. E b e r s t a d t . I do not know whether they did or not.
M r . G r a y . Y ou d o n o t k n o w w h e t h e r t h e y d i d i t o r n o t ?
Mr. E b e r s t a d t . I d o not know whether they d i d or not.
M r. G r a y . T h e re co rd s w ill s h o w ?
Mr. E b e r s t a d t . The records will show whether they did or n o t.
Mr. G r a y . And you have no recollection on the subject?
Mr. E b e r s t a d t . On th e morning of t h e 14t h ?
Mr. G r a y . Yes.
Mr. E b e r s t a d t . On the morning of the 14th?
Mr. G r a y . Yes.
Mr. E b e r s t a d t . I do not know whether they did on the morning

of the 14th or not.
Mr. G r a y . Do you know whether they did on the afternoon of
the 14th?
Mr. E b e r s t a d t . I do not know whether they did on the afternoon.
Mr. G r a y . D o you know whether they ever did ?
Mr. E b e r s t a d t . I a s su m e t h e y d id .
Mr. G r a y . Yes. When was it done?
Mr. E b e r s t a d t . It was done as soon as practical conveniently.
That was a very big transaction.
Mr. G r a y . Y o u , of course, did neither write nor receive the com­
munication that I am going to refer to in asking you another ques­
tion. It is a communication signed by one of the vice presidents of
the Chase National Bank, and it is an interoffice communication. It
contains this reference. It is addressed to Mr. Wiggin, chairman of
the board of the Chase National, under the head of Otis & Co.:
Tbere has been considerable conversation------

Mr. E b e r s t a d t . May I ask you for the date, Mr. Gray ?
Mr. G r a y . Yes. The date is October 10, 1930, wnile you were
about to or were negotiating this loan.




972

STOCK EXCHANGE PRACTICES

There has been considerable conversation about the firm [Otis & Co.] for
some time past—more of it to-day—whether they had $11,500,000 of loans
called.
Morgans, First National, Guaranty, and ourselves agreed to take these up.
Eberst.idt says they already have .$7,500,000 cash on the way for partial payment. He says the firm this morning conservatively had capital of $20,000,000,
probably more; that they are absolutely solvent. Their total loans were prob­
ably $ 1 2 0 ,0 0 0 ,0 0 0 , all properly secured, but, of course, he is uneasy if continual
calling like there was to-day continues. He says the $30,000,000 loan will clean
up their biggest debit account, which is Foreign Shares or Foreign Securities
Co. They have been buying utilities, securities, and owing Otis. The proceeds
of our loan to Continental Shares will go to Foreign Shares and from them
to Otis.

Did you tell them that?
Mr. E berstadt . What he said I told him is e x a c tly correctly
stated.
Mr. G r a y . In other words, as I have read it, that is corrects
Mr. E b e r s ta d t. Well, I don’t know where you stopped quoting and
where you didn’t. What he said there, so far as I am concerned, is
exactly correct.
Mr. G u a y . In other words, this loan to Continental Shares, where
he uses the word——
Mr. E berstadt (interposing). Excuse me. In other words, before
this transaction was made I absolutely believed the condition of Otis
& Co. to be completely sound and solvent, and every other partner
of Otis & Co. believed exactly the same thing. And the loan was
negotiated in the firm belief that Otis & Co. had absolutely no need
for capital of any sort or character. Any kind of an accountant’s
study of that situation, which I assume you have made, will show
you that resulting from the purchase of*these securities by Conti­
nental Shares the purchase price goes to the seller. The seller was
immaterial to Otis & Co. I am Otis & Co.—I was Otis & Co., and
not Continental Shares, and not Foreign Utilities—and I was inter­
ested in those that owed us money paying us the money that they
owed us.
Mr. G r a y . Then, you arranged this loan so that the money might
come from the Chase Bank to Continental, Continental to Foreign
Utilities, and Foreign Utilities to Otis & Co.; is that correct?
Mr. E b e r s t a d t . Mr. Gray, there is an innuendo in your question
which is not correct.
Mr. G r a y . What is incorrect and what is correct about m y ques­
tion?
Mr. E b e r s t a d t . I arranged this loan at the request o f Continental
Shares pursuant to their request in order that they might purchase
certain securities. I had nothing whatsoever to do with the deal
under which they purchased these securities. In fact, I did not know
it was completed until a short while before.
Mr. G r a y . Y ou knew that that money was ultimately coming to
take care of Otis & Co. ?
Mr. E b e r s t a d t . After the deal was— I beg your pardon— to r>av
debts due Otis & Co.
Mr. G ray. All right; to pay debts due Otis & Co.?
Mr. E b e r s t a d t . Y e s .
Mr. G r a y . In order that they might have capital instead o f stock?
create cap ital^ *




^

kn° W h° W? by a Payment of debts> Jou

STOCK EXCHANGE PRACTICES

973

Mr. G r a y . Two of the members of your firm were on the board
of Continental Shares?
Mr. E b e r sta d t . Did I answer the other question, Mr. Gray?
Mr. G r a y . I think you did. I am asking you another one.
Mr. E b er stad t . I b e g your pardon.
Mr. G r a y . Two of the members of Otis & Co. were on the board
of Continental Shares?
Mr. E b e r sta d t . Would you mind specifying who you had in mind,
please ?
Mr. G r a y . I f you do not know that there were two, say that.
Mr. E b e r sta d t . Well, there were different times.
Mr. G r a y . At any time were two o f the members of Otis & Co. on
the board o f Continental Shares ?
Mr. E b e r s ta d t . Eaton was on the board, I think, at all times.
Mr. G r a y . Yes; and who else?
Mr. E b e r s ta d t . And Inglis was on the board part of the time.
Mr. G r a y . Yes; and they were both members o f your firm?
Mr. E b sr st a d t . They were both members o f the firm.
Mr. G r a y . By the way, did yon know that Foreign Utilities was
a holding corporation in which the only person interested was Mr.
Eaton?
Mr. E b e r s t a d t . I never heard that.
Mr. G r a y . You never heard it?
Mr. E b e r s t a d t . I heard the contrary given under oath.
Mr. G r a y . You heard the contrary given under oath. Was Mr.
Eaton interested in Foreign Utilities?
Mr. E b e r s t a d t . I think s o .
Mr. G r a y . And he was interested in Otis & Co. ?
Mr. E b e r s t a d t . Yes.
Mr. G r a y . He was interested in Continental Shares?
Mr. E b e r s t a d t . Probably had the biggest interest and took the
biggest loss in case they lost anything.
Mr. G r a y . That is all.
Mr. E b e r s t a d t . May I be permitted to ask the chairman a
question ?
Mr. G r a y . I f the chairman wants to answer your question I
haven’t any objection.
Mr. E b e r s t a d t . After all, Mr. Chairman, it may be regarded as
an impertinence, but I am in a modest way a stockholder in this
enterprise, and while I am not familiar with the methods of pro­
cedure down here, I feel that the way this particular subject has
been approached is more in the sense of a prosecution than in the
sense of an investigation. I wanted to ask, if I might, the reason
for which the matter was taken up and the reason why it was taken
up in this way, particularly when the whole thing is a subject of
litigation, not simply in one place, but in several places, particularly
in view o f the fact that one of the witnesses who appeared here yes­
terday is the plaintiff in those litigations. I do not want to do any­
thing unfair, and I think that the work which the committee has
done in many respects has been done fairly and so impartially that
I am particularly amazed and shocked that the thing should have
been taken up in this way.
Senator T o w n s e n d (presiding). As acting chairman I would ask
Mr. Gray if he would like to answer that question.



974

STOCK EXCHANGE PRACTICES

Mr. G ray. I do not see, Mr. Chairman, anything to answer at all.
Mr. Eaton was subpoenaed to be here to make a statement and to
present any matters he desired to present to this committee. He
has not chosen to avail himself of that opportunity. Mr. Eberstadt
claims to have practically no interest in the matter except that he
was a member of the firm of Otis & Co., and has nothing to do with
the Continental Shares and nothing to do with Foreign Utilities.
Therefore, I take it he is not concerned.
What we have presented to you we have presented to you by facts
backed up by documents, and if Mr. Eberstadt is sufficiently inter­
ested he might look at the records of the suit which he refers to that
is pending m Baltimore, and he will find that the defendants in that
suit have admitted every allegation that has been made and proven
here. There is nothing more to present in the matter at all, Mr.
Chairman* I do not intend to get into any colloquy with Mr.
Eberstadt.
Mr. E b e r s t a d t . May I state, therefore, that counsel for the com­
mittee stated that he had investigated these matters. I heard for
the first time, I think it was Tuesday, that I was wanted. I volun­
teered to tell Mr. Watson and Mr. Gray everything that they wanted.
I was asked two short questions. I have inquired as to whether
Continental Shares was asked to furnish any information. I have
been advised that no investigation of any sort was made there. I do
not know that any investigation of any character was made with
respect to Otis & Co. I raise these points here, gentlemen, because
I think that a committee of this importance and this prominence
should not permit itself to be made the dupe of those who promote
investigations of this character for their own self-interest. I f Mr.
Gray would like to question me further on that statement, I would
be glad to answer the questions.
Senator C o u z e n s . Mr. Chairman, I do not think that is necessary.
We are not here to debate the ethics of this thing. We will debate
that among ourselves.
Senator T o w n s e n d . I think so, too.
Mr. E berstadt . Is that all?
Mr. Gray. Yes; that is all.
Mr. E b e r s t a d t . Mr. Gray, Mr. Daley has given me the list o f the
partners in Otis & Co. I am sure when he gives it, it is right.
Mr. G ray. I am very glad that the committee will permit that
this list shall go into the record as a list o f the proprietary and non­
proprietary partners of the firm of Otis & Co.
Senator T o w n s e n d . Without objection, that may go in.
(The list of partners in Otis & Co. referred to is as follows:)
Proprietary partners: Charles A. Otis; M. C. Harvey; C. S. Eaton; Richard
Inglis; J. O. Baton; S. E. Kline; P. Eberstadt, New York; J. W. Peters.
Nonproprietary partners: J. N. Darrow, New York; R. B. Porter, Detroit;
H. Conners, Chicago; Stanley Morrill, Chicago; Ray Sargeant, Denver; Emmet
Wilson, Denver; Rex Arthur, Denver; Frank L. Griffith, Columbus.

Mr. E b e r s t a d t . Are
Mr. Gray. Yes.

you

all

th r o u g h w ith

me ?

document presented by Mr. Gray in connection with
Mr. Eberstadt s testimony is here printed in the record in fu ll, as
follow s:




’

STOCK EXCHANGE PRACTICES

975

New Y o r k ,---------, 19SO.
On or before 18 months after date, for value received, the, the undersigned,
promise to pay to the Chase National Bank of the city of New York, or order,
at its banking office, Pine Street, corner of Nassau, borough of Manhattan,
dty of New York, N. Y., in funds current at the New York clearing house,
$30,000,000, with interest at the rate of 5% per cent per annum, payable
monthly, having deposited with the bank as collateral security for the payment
of this note and of all sums which the undersigned shall at any time be liable
to pay hereunder and of all other liabilities of the undersigned to the bank,
whether absolute or contingent, due or not due, or which may hereafter be
contracted or existing, whether incurred directly or indirectly, by the under­
signed to the bank, including as well promissory notes, bills of exchange, and
other evidences of indebtedness, made, indorsed, or accepted by the undersigned
and purchased or owned by the bank, the following property, v iz :
Shares

Goodyear Tire & Rubber Co________________________________________ 75,600
Lehigh Coal & Navigation Co______________________________________ 337,000
United Light & Power Co. B_______________________________________ 416, 000
Youngstown Sheet & Tube Co______________________________________ 68,850
Brooklyn Union Gas Co____________________________________________
7,000
Cleveland Trust Co., Cleveland, Ohio_______________________________
3,687
Union Trust Co., Cleveland. Ohio___________________________________ 10,888
Guaranty Trust Co., New York____________________________________
772
Bank of Manhattan Trust Co., New York___________________________
5.850
Continental Illinois Bank & Trust Co., Chicago_____________________
2,625
480
Harris Trust & Savings Bank, Chicago_____________________________
Cliffs Corporation_________________________________________________ 41,000
The undersigned hereby agree to deposit with the bank forthwith upon
demand such additional collateral security as the bank may from time to
time demand in order that the securities deposited as collateral for this loan
shall at all times be of a value, in the judgment of the bank, equal to 150
per cent of the principal amount of this note then remaining unpaid; and also
hereby give to the bank a lien for the amount of this note and of all liabilities
aforesaid upon all property and securities of the undersigned, and all right,
title, and interest of the undersigned in or to any property or securities, which
have or shall come into the possession or custody of the bank in any way
for safe-keeping or any purpose whatever, whether the bank shall accept it
for the purpose for which it is delivered or not, upon any and all proceeds of
said property and securities and every part thereof, and also upon every
balance of deposit account which the undersigned may at any time have with
the bank; and all remittances and property shall be deemed to be in the
possession and custody of the bank when actually in the possession or custody
of, or in transit to, it or any agent thereof.
On the nonperformance of any of the obligations of the undersigned here­
under or upon any default under any of the instruments evidencing any of
said liabilities, or if at any time the market value of the securities left in the
possession of the bank as security for the payment hereof shall, in the judg­
ment of the bank, decline to such an extent as to make the market value of
the securities deposited as collateral for this loan, in the judgment of the
bank, less than 150 per cent of the principal amount of this note then remain­
ing unpaid, then the bank is hereby authorized, at any time or times, to sell,
in one or more sales, assign, and deliver the whole or any part of the said
securities and property (whether or not the same consists in whole or in part
of negotiable instruments, or chosos in action, or undivided interests in the
property) or any substitutes therefor, or any additions thereto, or any other
property or securities of the undersigned or the right, title, or interest of the
undersigned in or to any property or securities, which have or shall come into
the possession or custody of the bank in any way for safekeeping or any
purpose whatever as aforesaid, at any broker’s board or at public or private
■Ale, at the option of the bank, with or without demand for payment or for
additional collateral security or for other performance and without regard to
any gnch demand, if made, and without advertisement or notice of intention
to sell or of time or place of sale or otherwise, all of which are hereby ex­
pressly waived, the bank, however, approximately simultaneously with the
com m encem ent of the sale or liquidation by it of the said securities or prop­
erty, or any part thereof, to notify the undersigned, either by telephone or




976

STOCK EXCHANGE PBACTICES

telegram addressed to it for the attention of its president or treasurer at the
address hereinbelow subscribed, that it, the bank, is proceeding to sell or liqui­
date some or all of the said securities or property; and the bank may be
the purchaser of any or all property so sold and hold the same thereafter in
its own right absolutely free from any claim or right of redemption on the
part of the undersigned, which is hereby expressly waived and released.
The bunk is hereby authorized, in its discretion, whether this note or any of
said other liabilities be due or not. in its name or in the name of the under­
signed or otherwise, to demand, sue for, collect and/or receive any money or
property at any time due, payable or receivable upon or on account of or in
exchange for, or make any compromise or settlement it deems desirable with
reference to, and/or otherwise realize upon, with or without suit, any o f said
property and securities, and, in so far as said property and securities shall
consist of negotiable instruments and/or any chose or cho9es in action, the
said bank may extend the time of payment of any such instrument or chose
in action as to other parties liable thereon, without thereby incurring respon­
sibility to or discharging or otherwise affecting any Usability of the under­
signed; and the undersigned hereby waive presentation, protest, and notice of
nonacceptance and/or of nonpayment of any such negotiable instrument to
which the undersigned may be a party.
The undersigned will pay all expense of every kind of the enforcement of
this note, or of any of the rights hereunder, and hereby agree to pay to the
bank on demand the amount of any and all such expense incurred by it.
The bank is authorized at any time and from time to time, at its option, to
appropriate and apply any or all of the net cash receipts from any of said
property and securities, and/or any or all of any balance of deposit account of
the undersized with the bank and/or any or all moneys now or hereafter in
the hands of the bank ;ind belonging to the undersigned, to the payment in
whole or in part of this note or of any of the said liabilities or any of said
expense, returning the surplus, if any, to the undersigned or whoever may be
entitled thereto; and notwithstanding the holding by the bank of said security
for the payment of this note and said liabilities, or any sale, exchange, enforce­
ment, collection of. realization upon, or compromise, or settlement, actual or
attempted, with reference to any of said property and security, the undersigned
shall be and remain liable for the payment in full, principal and interest, of
this note and of all said other liabilities, including any expense as aforesaid,
except only to the extent that the same or any security or the proceeds thereof.
If at any time the collateral held by the batik as security for the payment of
this note shall decline to such an extent as to make the market value o f the
securities deposited as collateral for this loan, in the judgment of the bank,
less than 150 per cent of the principal amount of this note then remaining
unpaid, and the undersigned shall not on demand forthwith furnish such
further security or make such payment on account as shall be satisfactory to
the hank to restore the value of such securities to said 150 per cent, or if any
sum payable under this note or any of said other liabilities for principal,
interest, or otherwise, be not paid when duo, or if the undersigned shall be in
default hereunder for any matter or thing, or if the undersigned, or any in­
dorser or guarantor of this note, or any maker, indorser or guarantory o f anj
of said security, shall become insolvent (however, such insolvency mav be
evidenced) or make a general assignment for the benefit of creditors, or’ if a
petition in bankruptcy shall be filed against, or a voluntary petition in bank­
ruptcy shall be filed by, or if a receiver shall be appointed of the property
or assets, or any thereof, of the undersigned or any such maker or indorser
or guarantor, thereupon this note and/or any or all of said other liabilities
shall, unless the bank shall otherwise elect, be forthwith due and payable. The
bank may pledge any of said security (either alone or with other) to the
United States or to the Federal Reserve Bank of New York, in its own right
or as agent of the United States, to secure deposits or other obligations o f the
bank of any amounts whatever. Upon the transfer of this note, the bank may
transfer any or all of said security and shall be thereafter fully discharged
anTthe transferee vtsted ^ th fli^ iT ith respect to the securitr 80 transferred
wtth^resnSrtTSch
i l theJ )ower and riKhts o f the bank hereunder
w so
t I transferred, but with respect to any security
No delay on the part of
ret,fln a11 rights and Powers hereby given.
hereunder shall operate as ^ waWer of a ^now A r^r
•any
01 5ight
or partial exercise of any power or riirtH
.» right , nor shall any single
iiuwer or right hereunder preclude other or further




STOCK EXCHANGE PRACTICES

97 7

exercise thereof, or the exercise of any other power or right. The rights and
remedies herein expressly specified are cumulative and not exclusive of any
other rights or remedies which any holder hereof may otherwise have, or would
have by the law of pledge or lien, without said specification.
The undersigned is to have the right to anticipate and pay off the above loan,
or any part thereof, at any time after 30 days written notice to the bank at
100.25 per cent of the face amount of the part so to l>e paid off, plus accrued
interest on such part to the time of prepayment.
The undersigned is to have the r.ght to substitute from time to time as
collateral securities satisfactory to the bank on a basis acceptable to the bank,
in its discretion, except that there is to be no substitution of the shares of
the United Light & Power ('<>.. regardless of basis, unless such substitution is
agreed to by the bank.
Whenever in the judgment of the bank the market value of the said collateral
shall exceed 100 per cent or the principal amount of this note then remaining
unpaid, the undersigned shall have the right to withdraw so much of tlie
collateral as shall have an aggregate market value equivalent to such excess:
provided, however, that the collateral so withdrawn shall be determined by
mutual agreement of the undersigned and the bank.

Mr. W il l ia m l i . D a l e y . Mr. Chairman, may I report on the mat­
ters that I said I would look up yesterday?
Senator T o w n s e n d . Yes. Mr. Dalev; you may report on the mat­
ters that you were to take up.
Mr. G r a y . Mr. Chairman, I <lo not know that Mr. Dalev was to
take up any matters for the committee. Mr. Daley took the stand
and made a statement. He was cross-examined. It was suggested
to him and he agreed with the suggestion, that if he wanted to
present certain matters the best thing for him to do was to have
the witnesses here this morning. I f it is that that he desires to
report on, why, of course, we ought to hear him.
Senator T o w n s e n d . Have you the witnesses here, Mr. Daley?
Mr. D a l e y . One of the matters I testified to was within my own
knowledge and I said I would get the. records from Cleveland. The
auditor had gone for the day when I called and they have not yet
reached me this morning, on the first item. That was the so-called
unloading of securities by Otis on Continental Shares.
I also talked with Mr. Burwell about furnishing the proof on
Inland Syndicate and determined that the best way to convince
the committee is to show them the actual record under oath o f Inland
Syndicate, which will show that Otis & Co. nor Eaton nor any of
his associates had any interest whatever in that.
Mr. G r a y . Have you got the records here, Mr. Daley?
Mr. D a l e y . I have a wire telling me the fact, and I am just
reporting back to-day, and I of course am having those things pre­
pared. May I finish ?
Mr. G r a y . The committee will bear in mind that Mr. Eaton was
subpoenaed to produce these records a long while ago, and it was
not done until late yesterday afternoon, and in my examination of
Mr. Daley I do not belie.ve there was any suggestion o f their will­
ingness to produce anything.
Senator B u l k l e y . You know perfectly well that y o u can g e t
any evidence that you want from them.* I do not like that kind
of a statement.
Mr. G r a y . Senator Bulkley, I know perfectly well that under the
roles I can ask that Mr. Eaton be reported in contempt of the
Senate, and that a direction can then be given to the Sergeant at




978

STOCK EXCHVNGE PRACTICES

Arms of the Senate to take the proper steps to get Mr. Eaton. I did
not do that, and as I stated to the committee, for the reason that
I did not want to force Mr. Eaton, with the litigation pending, to
take the stand and answer the questions. It was stated that he
wanted to come here and be present. I shall be very glad to afford
him, as counsel for the committee, and I haven’t any doubt the
committee will give him an opportunity to make a statement. He
does not want to do it.
Senator B u l k l e y . I do not know whether he wants to or not, but
you certainly can get him.
Mr. G r a y . I do not want to have any colloquies with Mr. Daley.
I f Mr. Daley will make a statement and end it, that is satisfactory
to me.
Mr. D a l e y . All right; I will do that very quickly. The only
reason I have produced the proof to-day is because o f the way the
committee has produced it, because it is contrary to the fact, and
the burden is on the investigators who are making the charges.
Mr. G r a y . We are not making any charges.
Senator T o w n s e n d . What is the pleasure of the committee?
Mr. D a l e y . May I say one thing further, and then I am ail
through? I understand in this case that Mr. Stock has even issued
a statement to the newspapermen prior to the hearings yesterday
which was so libelous that it was not even printed by the news­
papers. I just want to call that to the attention of the committee.
Mr. G r a y . Have you a copy of that statement ? Let us have it.
Mr. D a l e y . I have not.
Mr. G r a y . Why do you make that statement then if you do not
have what was in it?
Mr. D a l e y . I can produce witnesses who will testify to it.
Senator C o u z e n s . Mr. Chairman, let the witness make the state­
ment. I do not know what he has to say.
Mr. S t o c k . I want to say that I did not issue any statement at all
to the newspapers, beyond the statements of Senator Norbeck as
chairman of this committee. A statement was prepared.
Senator C o u z e n s . By whom?
Mr. S t o c k . By Senator Norbeck. Now, that statement was in
every particular the same thing as I said yesterday. I think it is
unfair to come here and make a statement like that without produc­
ing the statement. I think it is unfair to me.
Senator B u l k l e y . Why don’t you produce the statement and have
it in the record ?
Mr. S t o c k . I had that statement here yesterday.
Senator B u l k l e y . I ask that that be permitted to be put in the
record.
Mr. S t o c k . I will be very glad to get a copy of it. I do not have
one here with me.
Senator C a r e y . Did you give a statement to the press?
Mr. S t o c k . I did not.
Mr. G r a y . Mr. Daley has made a number of statements here.
Senator Carey, that he has not backed up.
Senator W alco tt . I do not think that demand ought to be made
until Senator Norbeck is here, because he is responsible.
Senator B u l k l e y . All right; I withdraw it.




STOCK EXCHANGE PRACTICES

97 9

Senator C o u ze n s . Mr. Chairman, I move that we proceed with
other business and let Mr. Daley send in his documentary evidence
when he has it. All he has now is apparently a telegram.
Senator T o w n se n d . All right, then. What is the pleasure of the
attorney?
Mr. G ray. I am ready to go ahead.
Senator T o w n s e n d . Very well.
M r. G ray. Gentlemen, I wish to recall to your mind the failure o f
Mr. William Fox to appear yesterday and the report that I made
at the meeting of 2 o’clock yesterday afternoon as to my interview
with the physician and also the physician’s written report to me,
which was placed upon the record. The information that was then
secured was that the man was not seriously ill; that he could have
come here, but that it would have been better to permit him to remain
in his room until this morning, when he would be able to come here
beyond any question.
This morning he is not here. I saw his attorney, and his attorney
stated that he was still too ill to come. I have sent a physician to
see him this morning. I just received a verbal report, though I
expect to get a more detailed report, to the effect that he rose and
dressed this morning and then claimed that he was dizzy and has
not left his room.
Having made this report to the chairman, Senator Norbeck, I will,
with the permission of the chairman and the committee, make a
brief statement with respect to what I propose to prove here, and in
the absence of Mr. Fox will have to show it by certain records that
have been examined.
Senator T o w n s e n d . I s it the pleasure o f the committee that Mr.
Gray proceed with his statement ?
Senator C o u z e n s . I move that that be done. We had an under­
standing with the chairman before he went away that that would
be done.
Senator T o w n s e n d . Without objection, Mr. Gray will proceed.
STATEMENT OF WILLIAM A. GRAY, COUNSEL TO THE COMMITTEE.
WASHINGTON, D. C.

Mr. G ray . Mr. William Fox was engaged in the business of con­
ducting certain moving-picture houses. He formed two corporations,
one the Fox Film Corporation, which was formed prior to 1925,
and the exact date of which I can not give you at the moment, and
the Fox Theaters Corporation, which was formed about November
4,1925.
Both o f those corporations were formed with two classes of com­
mon stock, class A common stock, which was the stock that eventually
reached the public, and which had no voting power and no control,
and class B of common stock, which went into the control o f Mr.
William Fox.
In one company he had 100 per cent of class B stock and in the
other company he had 51 per cent of class B stock.
I direct your attention in the first place to Fox Theaters, and we
will show you that at a special meeting of the board of directors in
119852—32—p t 3------13




980

STOCK EXCHANGE PRACTICES

1925 Fox Theaters entered into a contract with Eiselle & King, a
New York brokerage house, for them to sell 500,000 shares o f the
class A common stock at $25 a share, it being understood that they
should be paid $3 a share commission therefrom for the marketing of
that stock.
The agreement is here. A copy of it will be offered in the record.
I will show you that there was then drawn an agreement between
Eiselle & King, this brokerage house, and some individual, evidently
intended to be a male, because the word used is “ his,” the per­
sonal pronoun “ his ” is used in the agreement. But without the
change of the personal pronoun there was substituted the name of
the woman that was intended to originally go into that agreement,
the name of one Taussig. I say that advisedly, because there is some
confusion in the name of Taussig. There are several Taussigs who
trade, but the statement has been made by Mr. Fox, and I think we
can establish it here, that that is his daughter.
That agreement we have, and under that agreement Eiselle & King,
this New York brokerage house that had made this agreement with
Fox Theaters, made an agreement to divide their commission with
her.
We will show you that agreement, and we will show you a photo­
static copy of the check by which she received—the amount is not
clear in my mind, but I think it is $411,000, or something like that, as
her share of the commissions.
I am touching the high spots as I proceed. Mr. Fox had sur­
rounding him many of the members of his family and others closely
associated with him on the board. He had the absolute control of
the stocks of both Fox Film and Fox Theaters. He issued Fox
Theaters stocks when and as he pleased. He gave options to himself
and to others when and as he pleased, and he exercised control of
the stocks as he chose in other directions.
I will show you that he desired to acquire for Fox Film the theaters
known as the West Coast Theaters; that he was unsuccessful in his
first effort; and that when there was a combination formed of those
theaters it was known as the Westco Corporation, and he conceived
a plan to get the stock of the Westco Theaters in exchange for the
stock of Fox Film on the basis of 1 share of Fox Film—and I
think I have the figures accurately in my head—for, I think, seventythree one-hundredths or something like that of a share of Westco
Corporation, which at that time was quoted at $55 a share.
The question arose as to whether or not Fox Film could pay the
cash for that stock, the alternative agreement given to the stock­
holders of Westco Corporation to take that stock in cash. There
then entered into the picture the brokerage firm of Hayden-Stone,
of New York, who went out and bought a great deal of the Westco
Corporation stock at $55 a share with the knowledge—and this was
prior to the time that that knowledge was made public—that they
could ultimately make an exchange of that stock for Fox Film stock
at an advantage.
At the same time an underwriting agreement was entered into be­
tween Fox Film—and I carry a great deal of this in my head; I want
to be sure of my statements—by which Hayden-Stone was to be per­
mitted to market 125,000 share of Fox Film, which was to be offered
to the public; but Hayden-Stone were to underwrite it at an under­



STOCK EXCHANGE PRACTICES

981

writing commission of $3 a share, or, rather, a charge of $1 and then
a commission of $2, which made it a total of $3 a share. And
Hayden-Stone, without ever having to do a stick of work in connec­
tion with the matter, because the entire stock was taken by the stock­
holders of Fox Film, was paid $375,000 by Fox Film, as I picture it,
for doing nothing.
I do not mean that there was not some responsibility to the under­
writing, but the price at which the stock was being offered was so
much lower than the then market price, that there was not any ques­
tion about the stock having been taken or to be taken by the stock­
holders of Fox Film.
Senator W a l c o t t . That would be equivalent to a 12 per cent com­
mission on a hundred dollar par value, $12 on a hundred dollars, or
12 per cent.
Mr. G ray. I have made the calculation here. Senator. It was $100
par value and 125,000 shares. That would be $12,500,000 for the
stock.
Senator W alcott . Yes; and $3 is 12 per cent of 25.
Mr. G ray. $375,000 was the commission. It hardly amounts to 12
per cent.
Senator W alcott. Yes; but $3 is 12 per cent of 25.
Mr. G ray. Fox Film was about $75 a share at that time on the
market.
Senator W alcott . Oh, you said $25 par.
Mr. G ray . N o ; there was no par as to either of these stocks.
I think I am correct as to that.
At the time that Hayden-Stone entered into this agreement with
respect to the underwriting of this stock and knew of the exchange,
they started a short sale in Fox Film, notwithstanding the fact that
they were underwriting the sale of Fox Film stock to the public to
the extent of these 125,000 shares, which short position was covered
when they absorbed the stock of the Westco Co. that they purchased
and exchanged to the Fox Film Co. for Fox Film stock, which was
used for the purpose of covering their short position in the market.
That was in January, I think, of 1928. Fox Film thereafter in
September of 1928 had Hayden-Stone underwrite a sale of 154,000
and some odd shares o f Fox Film stock, a very small proportion of
which Hayden-Stone was compelled to take up under their under­
writing agreement, and in that case they were paid $4 a share for
the marketing of that stock, and for the handling of these various
transactions the entire amount of money that was paid by Fox Film
to Hayden-Stone, with practically no risk, and in fact an opportunity
to Hayden-Stone to sell themselves the stock, was within $9,000 of
$1,000,000 for aiding in the marketing o f Fox Film stock.
In this underwriting syndicate Mr. Fox himself took an interest
of 27,000 shares and our records show that he was under the
agreement, paid $3 a share for his interest in that pool for 27,000
snares interest, or $81,000. Mr. Fox stated to me personally day
before y e ste rd a y —I have all his testimony stenographicallv—that
his check was lor about, if I recollect the figure correctly, $66,000,
and not $81,000. I make that statement in fairness to him.
At the same time, or thereabouts, that these operations took place
there were three separate pools or syndicates operated by the broker­
age firm of Taylor, Thorne & Co., of New York, and Taylor, Thome



982

STOCK EXCHANGE PRACTICES

& Co. had an interest in the underwriting of Hayden-Stone, and the
Haystone Securities Co., which is an affiliate of Hayden-Stone, the
brokerage house, had an interest in the syndicate operation of Taylor.
Thorne & Co.,* there being three different operations. Mr. Fox had
a very heavy interest in these operations in Taylor, Thome & Co.,
his interest being camouflaged by carrying it in the name o f Na­
thaniel King and in the name of Eiselle & King, the brokerage firm,
but Mr. Fox has admitted to me, and the brokerage firm when called
upon to explain why they themselves as a brokerage firm were trad­
ing in this syndicate, indicated that it was Mr. Fox’s interest that
they were holding, and we have the photostatic copies of the checks
that were paid by Eiselle & King to Mr. Fox for the profits of these
operations. The figures we will give you accurately a little later.
In these syndicates it is a remarkable thing that there was no
commission to be charged, at least in one of them, no managing com­
mission, and yet out of one syndicate there was paid $45,000 to
Taylor, Thorne & Co., the managers of the syndicate, who explained
that that was a bonus to their employees, for what purpose we do not
know. That is to say, that there is nothing more than the explana­
tion that it was a bonus for employees.
There was $10,000 paid to Mr. Stevens of Stevens & Legg, who
was a specialist in the stock, without any explanation of why it was
paid, and I have brought Mr. Stevens here for the purpose of
explaining to the committee why he, interested also as a participant
in the pool and specialist in the stock, should have been paid $10,000
for services not indicated.
I take you away from Fox Film to Fox Theaters. And remember­
ing that Fox Theaters were under the control o f Mr. William Fox,
I will indicate to you a series of transactions which we will direct
your attention to. Let me say that Mr. Fox came to me and stated
that his difficulties were caused in his opinion—because there have
been difficulties with respect to these companies that I will direct to
your attention—by the operations of those in New York that desired
to get control of his companies.
In the fall of 1929, when the stock-market crash occurred, there
were all sorts and all kinds of litigation instituted against Fox Film
and Fox Theaters, and applications made for the appointment of
receivers. How that ultimately ended on April 7, 1930, I will teU
you when I get to that part of the picture.
But I asked Mr. Fox on more than one occasion to give to me some
indication as to where I might find any evidence of an attempt on
the part of some of these people, some of the names of which he did
give me, having sold, as he claimed, Fox Theaters and Fox Film
short for the purpose o f ruining his company, but he has been unable
to the moment to give me any information that will be available for
the purpose of securing any testimony.
On our own account, however, in order that there might be no ques­
tion about it, we have gone into every brokerage house in New York
City where we knew that these stocks were extensively dealt in and
where the people that he named might possibly have done business,
and we can find no evidence of any such concerted action. W e find
transactions; we find short sales, but no evidence o f any con irted




STOCK EXCHANGE PRACTICES

983

But in our investigation we went into the house of Michael J.
Meehan & Co., one of the houses that he indicated might have been
cooperating to destroy him, and there we find a short account of
461.000 shares of Fox Theaters. We find, however, in looking into
that, that Mr. Fox secured from the Fox Theaters an option on
600.000 shares of Fox Theaters stock at a price; that Mr. Fox then
gave to Mr. Meehan that same option that he secured from Fox
Theaters; that Mr. Meehan started operations in Fox Theaters in
the market, and you have heard some of this—I am corrected and told
that the operation ran to Bradford Ellsworth, whom I have also
finally located, and he is here to-day, who was an operator in the
Michael J. Meehan’s house. However, the operation was cared for
by Meehan’s and appears on his books first as a small operation that
I have just passed over, a 894 account, and this larger operation
known as the 433 account.
Instead of taking a small short position to protect that option,
which you have heard so many traders come here and tell you is the
proper thing to do, in order, if the market goes doAvn, they will be
protected, and in order, if the market goes up, that they may sell to
their own advantage and exercise the option, Meehan & Co. in his
account sold 461,000 out of the 500,000 that they had on option.
To show that it was a pure short-trading account in which Mr.
Fox not only furnished the stock on the option, but furnished stocks
which I will tell about in a moment, and in which Mr. Fox had an
interest in the profits of the short sale trading account, they did not
seek to take the option at the price mentioned in order to cover their
short sales, but, desiring to carry the stock on to a point where, in
anticipation of a breaking market, they might cover to advantage,
they needed to borrow 125,000 shares of stock in order to protect the
maintenance of their short position, where did they get it? They
went to Mr. Fox for it. Mr. Fox had Fox Film buy 125,000 shares
of Fox Theaters stock from Fox Theaters, 100,000 shares at one
date and 25,000 at another date; had them put in the name of Jack
Leo, one of his men, and had Mr. Jack Leo on the same date turn
that stock oyer to the Meehan concern to be used to cover their short
position until they were ready to cover it in the market, using both
of his theater companies for that purpose. Then, the transaction
appears on the books of Fox Film as a loan of the stock to Michael
J. Meehan & Co., Michael J. Meehan & Co. giving to Fox Film
$4,300,000 in cash, the usual borrowing-of-stock transaction, the
same as if they were two brokers dealing with each other.
Now, then, when Fox Film paid back the first payment of $550,000
of that loan to Meehan, none of the stock was returned. That was
on April 9, 1929. When Fox Film paid back to Meehan the second
payment of $2,400,000, 75,000 shares of the 125,000 that were loaned
were returned to Jack Leo. Whether we are going to be able to
show whether Fox Film ever got it back or not, I am not sure, but
I believe they did. I think that is the inference to be drawn.
When the final payment of $1,350,000 was made, clearing up the
$4,300,000 loan, instead of the remaining 50,000 shares that had
been loaned by Fox Film coming back to Fox Film, or even going
to Leo, it was, by a bookkeeping transaction in the Meehan firm,
shunted into the short account. They did just exactly as they




984

STOCK EXCHANGE PRACTICES

leased with this stock, and it did not make any difference what they
id, there was not anybody to question them.
Senator W alco tt . Mr. Gray, who was interested with Meehan?
Mr. G r a y . I am coming to that. That pool had a number of
interests in it. We will give you the entire participation, Senator.
The persons who were interested in that pool, and the amount of
their participation—that is to say, the amount to which they agreed
that they would become liable in the event of loss, were: J. J.
Raskob, $750,000; William F. Kenny, $750,000; Mrs. Elizabeth
Meehan, $250,000; Joseph E. Higgins, one of the operators of
Meehan’s, whom you have had on the stand, $250,000; Bradford
Ellsworth, another operator who is here, $250,000; Walter P.
Chrysler, $750,000; Nicholas F. Brady, $750,000; and Mr. William
Fox, $750,000.
There was paid to Michael J. Meehan & Co., in managing these,
$215,306.92. I had intended to let the accountant give you these
details, but I am answering your question.
There was paid to Bradford Ellsworth, for some reason, $24,915,
and, deducting those two figures from the gross profit, left a profit
of $1,937,762.46 for distribution among those wno were interested
in the pool.
There were trading transactions in this stock at all times. Mr.
Fox had accounts in 22 brokerage houses, and in some brokerage
houses as high as seven accounts. We have had to examine them all.
They were in his name, in the names o f all the different members o f
his family, and in the names of all of his employees.
In connection therewith, we will show you that in the other ac­
count, in Meehan’s, the 394 account, which was a smaller account, on
one day the syndicate manager gave instructions to either buy or
sell—I am not going to refer to my papers to see which way it was—
10,000 shares of Fox Theater stock, at the same time Mr. Fox giving
the order to do just the opposite to that which the syndicate manager
did, and that that trade went right from the house, through an inter­
vening house or houses, but has been traced right through from the
one house where the buy order was made, to the other nouse where
the sell order was made, making it a pure wash sale of 10,000 shares,
through five houses, in order to camouflage the transaction.
Mr. Fox said—and I think he is the type of man that will admit it
to the committee if he is here—that he bought and sold his own stocks;
that he manipulated them—he is proud of it—that he manipulated
them on the market; that he traded and kept a market just fo r the
purpose of keeping the price up in order that he might sell his stocks
to the public; that as long as the stock exchange in New Y ork does
not see fit to interfere with it, he would do it again.
But Mr. Fox admits that he thinks short selling is a rotten thing
to do, but that he does it right along, and as long as the stock ex­
change permits him to do it, he will continue to do it; and that when
he went out of Fox Film and Fox Theaters, in April, 1930, he formed
a trading corporation of his own, known as the All-Continent Cor­
poration, and that he has very largely and heavily traded, and still
does, when he can, short in that account. That appears already
through the fact that when this committee first had its hearings, and
I was present, we received from the New York Stock Exchange, as of
the date of April 8,1932, a stated short position, and we found a very

§




STOCK EXCHANGE PRACTICES

985

large position of All-Continent shares, and wanted to know who it
was, and made the investigation, and it brought it back into Mr. Fox.
There are many other miscellaneous things, but X will come to one
other thing Fox did. Fox traded in Loew’s stock—another movingpicture house. He bought for Fox Film, from Loew’s, 400,000 shares
of stock, his desire being to accumulate the control of Loew’s for Fox
Film, Loew’s being the strongest, apparently, on the face of it, and
the most substantial organization oi the three. I might say to you
that Loew’s is selling on the market at $16 a share, while these others
are selling next to nothing. By that I mean a dollar a share, or
under.
He then went out into the market and bought 37,500 shares, and
then started to deal in Loew’s, principally on the accumulating side,
until he had 660,900 shares of Loew s stock, and the most oi those
transactions—not all of them—appeared on the books of Fox Film,
thus indicating that, for Fox Film, he was dealing in Loew’s. I am
not questioning that transaction as one which Fox took any ad­
vantage o f to his own benefit, but Mr. Fox was dealing in Fox
Theaters, and there is not a line on the books of Fox Theaters to show
that he was dealing for Fox Theaters or that he had any authority
to do it ; that the company ever put up a dollar of money, until the
point of November 19,1929, which I will reach after I tell you what
happened before that time.
Mr. Fox dealt in hundreds of thousands o f shares of Fox Theaters.
He claimed that he was doing it for himself, and that he was doing
it for Fox Theaters. I have asked him how he could differentiate
in these various accounts, in these various brokerage houses, in these
numerous accounts between that which was his and that which was
the Fox Theaters, and up until Wednesday afternoon he could not
tell me. And yet on November 19, 1929, he had his Fox Theaters
Corporation adopt a minute approving his dealings in Fox Theaters
for Fox Theaters—and bear in mind that this was after the crash and
when the stock had dropped in price—and had Fox Theaters take
off his hands 210,000 shares of Fox Theaters, he claiming, and his
board of directors ratifying it, that those deals had been for Fox
Theaters.
Senator C ouzens. Have you any record at that time as to how
many stockholders there were?
Mr. G ray . That is impossible for me to tell you, although Stand­
ard Statistics might give it. There were many stockholders in the
public, but they held all class A stock. They had no voting power
and no control of any kind whatsoever. That was all in one man,
William Fox.
Senator C ouzens. As I understand, you do not know how many
stockholders there were or the amount o f stock held outside?
Mr. G ray . I can not tell you now. We will endeavor to get that
information for you during the course of the day.
Senator W alcott. What was the market price and the purchase
price of that transaction ?
Mr. G ray . The difference is what I can give you, and probably
I can give you the exact figures. We can give you the market on
the day, the day of the minute. I will answer your question, Sena­
tor. These 210,300 shares cost $6,153,774.33, or an average price of
$29.02. The market value on November 19, 1929, had a range from



986

STOCK EXCHANGE PKACTICES

13% to 13%. Taking the average between those two, the loss to
Fox Theaters in taking over its own stock on that day—that is, the
difference between what they paid Fox for it and what they assumed
on their books and what they could have bought it in the open
market for—was $3,314,724.33.
The C h a i r m a n . That represents the loss to the stockholders by
that transaction?
Mr. G ray. The stockholders of Fox Theaters, by that transaction.
Senator W alcott. They were paying about 120 per cent above the
market price for it—29 as against 13.
Mr. Gray. About 125 to 127 per cent above the market price; he
claiming, of course, and having his directors ratify it, that he had
been dealing for Fox Theaters and there was not a line on the
books. I call your attention to the fact that when he was dealing
with Loew’s for Fox Films, the entries went on the books. A s a
matter of precaution on the same day they adopted a minute ratify­
ing his handling of Loew’s stock.
Senator W alcott. Even if that had been true it would not justify
the purchase by Fox Theaters at 125 per cent above the market.
Mr. G ray. It was not alleged to be a purchase. It was alleged
to be an adjustment and settlement of his transactions on behalf
of Fox Theaters, but no man in the world except him knew whether
he was buying for Fox Theaters or himself, and this was right after
the crash. What might have happened if there had not been a
crash, might have been an entirely different story.
Sen ator W alcott. A s an officer and trustee f o r h is stock h old ers,
does it not mean that he is entirely responsible f o r that loss to the
stockholders ?

Mr. Gray. In my opinion, he is, and he is afraid he is, too.
Senator C ouzex s. Have you any record of what that stock cost
him, when he turned it over to Fox Theaters?
Mr. Gray. We have photostatic copies of all his brokerage
accounts, and they have all been analyzed.
Senator C otjzens. Have you summarized them?
Mr. G ray. They have been generally summarized. I have given
you the cost price of that. The cost price of that stock averaged
29.2.
Senator C otjzens. I mean in dollars, what was the aggregate ?
Mr. G ray. I will give you that, too.
Senator Couzens. Y ou need not repeat that.
Mr. G ray. $6,153,774.33.

I recall it.

Along this line, I said to the committee yesterday, and I say now,
that we have been able to see Mr. Fox’s New York State income-tax
report. Though the State income tax which he pays is different
from that which he pays to the United States Government, the
income-tax report is made up in the same way as the United States
Government income-tax report. We have been able to trace— not
all, because we have not had the time, but numerous transactions
which entered into these things that were dumped—and I use that
word advisedly—on Fox Theaters itself. We have been able to
trace them from the dumping to Fox Theaters, back through the
brokerage houses, so that we thoroughly identify the transaction as
being one which Fox Theaters took over, and we have been able to
find about six instances that we can definitely say—and, therefore,



STOCK EXCHANGE PRACTICES

987

we assume that there are many others—he entered as a credit; that
is, shows as a loss on his own personal income-tax return. In other
words, as far as Fox Theaters were concerned, he said, “ These were
your dealings. Pay me the loss, and you assume it.” But when he
reported to the Government, he said, “ They were my dealings. I
lost the money. I want credit for it.”
Senator C ouzens . Y ou mean when he reported to the State?
Mr. G ray . T o the State. In that connection, Mr. Fox was under
subpoena, and he came into my office with his counsel, and, as his
counsel said to the committee yesterday, spent from half past 10 on
Wednesday morning until the middle o f the afternoon with me,
answering questions and making statements. W e reached the point
where I asked him about his income-tax return.
Senator C ouzens . T o whom ?
___
Mr. G bay . I asked him this about his income-tax return to the
United States Government, and he said to me that those things
were all handled by his accountants, and he could not tell me any­
thing about them. I suggested to him that his income-tax return
indicated—and pointed out to him some of these transactions—that
he had sought credit—and I was then talking about the United
States income-tax return, which I have not yet seen, but I suggested
then to him that his income-tax return—because I knew what his
income-tax return to the State of New York showed—established a
loss in these things which he had turned over to Fox Theaters. He
said he did not know whether it did or not; that if it did, it must
have been his accountant’s mistake. I asked him as to who his
accountant was, and he indicated it was Mr. Leitstein, one of his
confidential men. I asked him who the accountant was that made
up the statement for the Fox Theaters, to get them to take over this
stock, and he said it was Mr. Leitstein that did that. So, we went
up against the position of having the accountant who did one, do
the other for Mr. Fox. I said, “ I would like to have Mr. Leitstein
present to-morrow morning, Thursday morning, in Washington, at
10 o’clock, with your income-tax returns, that is, your copies thereof,
and your other records upon this question.” We were getting along
very agreeably. I said, “ Will it be necessary for me to subpoena
him, or will you have him there to-morrow at 10 o’clock ? ” He and
his counsel—and I have, on occasions, to take the word of people—
said that he would be here yesterday morning at 10 o’clock, and at
half past 11 on Wednesday night one of the accountants talked to
Mr. Leitstein, and Mr. Leitstein definitely assured him that neither
he nor any of his records would be in Washington at 10 o’clock.
That advice came to me before midnight, and before I left New
York, and I had two men ready to serve Mr. Leitstein at the break
of day on Thursday morning, but Mr. Leitstein has mysteriously
disappeared, and he has never been found since. That is the status
of Mr. Leitstein, Mr. Fox’s confidential accountant.
We reached the point where, following Mr. Fox’s various vicissi­
tudes from November and December, 1929, down to April, *1930, as a
result o f the desire of Mr. Harley Clark, who has also broken four
or five appointments with my men, and then got away from New
York before he could be subpoenaed and went to Chicago, whom I
sent a subpoena to Chicago for, but he could not be found in any o f



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STOCK EXCHANGE PRACTICES

his usual haunts, and I talked to his personal private secretary over
the long-distance phone from New York myself, as a final attempt
to get hold of him, on Wednesday afternoon, and explained to her
that I wanted Mr. Harley Clark in Washington Thursday morning
at 10 o’clock. He might be back, and he might not be back, and
if he came back he would get my message. I have heard nothing
from Harley Clark, but I can prove all the things I am about to
teJJ you.
Senator C o u zen s. Who is he?
Mr. G r a y . Mr. Harley Clark was then an owner of a number of
theater groups that ultimately became merged in another corpora­
tion, known as the General Theaters Equipment (Inc.), that are
now in the hands of a receiver in New York City. Mr. Harley
Clark, owning General Theaters Equipment in April of 1930, mad^
an offer to Mr. Fox—there was an agreement entered into. Whether
I am going to be able to give you the written agreement touching
the subject or not I do not know. I think I know perhaps where it
is available. I will not say definitely that I can, though. There
was an agreement entered into, the sum and substance of which
was—because it was carried out—that Mr. Fox was paid $15,000,000
by Mr. Harley Clark for his B stock in Fox Films and Fox Thea­
ters. Mr. Harley Clark borrowed that $15,000,000 on those stocks
from the Chase National Bank. It was immediately paid back to
the Chase National Bank as soon as the financing was completed.
Mr. Fox got $15,000,000 in cash, and he got an obligation of the Fox
Film Co., or the General Theaters Equipment, for $3,000,000 in addi­
tion, which has since been paid. His counsel was given $1,000,000—
not me. I did not represent him. His friends and associates and
family that surrounded him were given varying bonuses. Jack Leo
got half a million dollars; another one of the Leo’s half a million
dollars. What for? Just for bonuses. Weren’t they being paid
salaries? Yes. How much? Fifty thousand dollars a year. But
these were just bonuses.
Mr. Fox was nominally employed, but has never since done any
work for five years, by Fox Film, because we then have all these
organizations controlled by one organization, and they acted in the
name of one when they wanted, and in the name of another when
they wanted. He was employed for five years at the rate o f half
a million dollars a year. That agreement was on April 7 or 8, 1930,
and since then Mr. Fox has been paid, for the two years he has
done nothing, half a million dollars a year.
Mr. Fox was also given an interest in the financing. That is to
say, if something in the way of “ gravy ” could be gotten out o f the
financing, Mr. Fox was to have a 10 or 20 per cent interest—at
least a 10 per cent interest, and probably a 20 per cent interest if he
could get it. The financing plan was this. It is a little involved-----Senator C o u zen s. Did you say the $15,000,000 was originally se­
cured from the Chase National Bank by Harley Clark?
Mr. G r a y . Yes.
Senator C ou zen s. For the purpose of paying Fox?
Mr. G r a y . For the purpose of paying Fox, cash.
Senator C o u zen s. What security did Clark put up for the
$15,000,000?
J
F
F




STOCK EXCHANGE PRACTICES

98 9

Mr. G r a t . B stock of these two corporations. In other words, it
passed through Harley Clark and the Chase National Bank, and
$15,000,000 came back.
Senator C ouzens . D o you know whether the Chase National Bank
had any other securities than the B stock of Fox for the $15,000,000
loan?
Mr. G b a t . They had the note of the General Theaters Equipment
Co., which at that time was good, but that $15,000,000, Senator, was
paid back within a few days.
Senator C ouzen s. But they had the General Equipment note and
the Fox Theatre B stock?
Mr. G b a t . The Fox Film and the Fox Theatres B stock for
security.
- Senator W alcott. The B stock was the voting stock?
Mr. G r a t . The B was the voting stock.
Senator C ouzens . Did it have any market value at that time?
Mr. G r a t . N o , sir. It never was marketed.
Senator C ouzens . H ow would the Chase National Bank figure its
value when it made that $15,000,000 loan?
Mr. G r a t . I am sorry, Senator, but I can not tell you what thought
they had in their mind, except that I will show you the develop­
ments, and you may draw your own inferences from that.
Fox Film owed $103,000,000—let me say that Fox Film and Fox
Theatres were at one time prosperous concerns, and Mr. Fox—pos­
sibly I should not characterize him, but he has been publicly charac­
terized as a genius, and publicly characterized as a dreamer. A t any
rate, he involved Fox Film in obligations amounting to some $75,000,000, in the purchase of various organizations throughout this
country, and some $20,000,000 in the purchase of organizations in
England, without, apparently, any arrangement made for financing
them, ana thus stepped into the maelstrom of trouble that he got into
at the end of 1929 and the beginning of 1930.
Senator W alcott. What is his origin? Where does he come from?
What is his nationality?
Mr. G r a t . I am sorry, Senator. I would not want to answer that
question, because it is a personal one with respect to Mr. Fox, unless
I knew, and I do not know.
Senator W alcott . I was wondering whether he is an American
citizen. It does not matter.
Mr. G r a t . I can not answer that question with any accuracy, Sena­
tor, and therefore I would rather not attempt to answer it.
Senator W alcott . It is not important.
Senator C ouzens . Is that the first name he has had ?
Mr. G r a t . It is the first name I know him under, Senator.
The financing was done in this way: $55,000,000 of short term—
that is, one year—6 per cent notes were issued by Fox Film, and
taken at a slight discount by Halsey, Stuart & Co. Forty-eight
million dollars was still required. That $48,000,000 was. raised in
this manner: 1,600,000 shares of Fox Film were issued and sold by
Fox Film to Fox Theaters for 660,900 shares of Loew’s stock that
you have heard me mention heretofore as having been bought by
Fox for them, and which then had a real value.
There were other considerations that entered into it, because the
Loew stock was worth more than the Fox Film stock. There was



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STOCK EXCHANGE PRACTICES

an adjustment of some accounts involving $27,000,000, and the
passage of the $8,000,000 in cash, and some bookkeeping entries to
the extent of $19,000,000, but we can let that pass out of the picture
and follow the history of the 1,600,000 shares of Fox Film stock.
That stock was valued at $30 a share. That market for it on the
day the transaction took place was about 47 or 48. So that Fox Film
gave to Fox Theaters, for Loew stock—I will go slowly with it, so
that you can follow it—1,600,000 shares, plus other considerations,
of Fox Film stock, at $30 a share. Immediately Fox Theaters sold
that 1,600,000 shares of Fox Film stock to General Theaters Equip­
ment, the Harley Clark group, for $30 a share. O f that 1,600,000
shares, 1,000,000 remained with the General Theaters Equipment,
and was ultimately marketed, and we are not concerned with that
for the moment. I do not know whether they have it. I can not
say. There was no distribution of it; 200,000 of the remaining
600,000 were handed to Halsey, Stuart at $30 a share.
Senator Couzens. I s that the concern that has the famous “ Old
Counsellor ” ?
Mr. G ray. Yes, sir.
Senator Carey. They recommend to the widows and orphans what
to buy.
.
Mr. G ray. Very frequently. I am not criticizing them in this
transaction, except to indicate to you that besides buying $55,000,000
worth of notes they got, in addition to that, 200,000 shares of stock
at $30 a share, which was then worth on the market, $48 a share,
thus getting a profit o f $18 a share on 200,000 shares. A matter ot
calculation shows that to be $3,600,000. Two hundred and forty
thousand shares of stock were distributed among a group consist­
ing—I think I can name them all offhand—of Chase Securities Co.,
Pynchon & Co., West & Co., Hammond & Co., and Eric & Drevers.
That group did some other financing, because, you see, they needed
altogether $103,000,000, while $55,000,000 came from Halsey, Stuart.
In consideration of that other financing, which I will develop for
you in a moment, 240,000 shares of that 600,000 were handed to that
group at $30 a share, thus giving them a profit of $18. When I say
giving them a profit of $18,1 am approximating, because the market
had a range that day. It gave them a profit of that much per share
on 240,000 shares, or something over $4,000,000.
O f course, the real value of that stock at that day, had i t been
sold outright, would have made for General Theaters Equipment, or
for Fox Film, or for Fox Theaters, at any place it happened to stop
before it got that far, that difference of seven million and odd dollars,
w h ich went to these financiers.
Meanwhile, the Government stepped in and raised a question about
Fox Film’s right to hold 660,900 shares, under the Clayton act, of
Loew stock, and an action was instituted in the courts. As a result
of it, a consent decree was entered. A new corporation, called the
Film Securities Corporation, entered into the picture, and the Loew
stock was put in the name of the Film Securities Corporation, and,
as a part of the necessary financing, the Film Securities Corporation
issued debentures amounting to $20,000,000; first preferred stock
amounting to $10,000,000 par value; some common stock that had
the voting control, and some four or five hundred thousand shares
of common stock that had no voting control.



STOCK EXCHANGE PRACTICES

991

All of that went into the hands of that group that did the financing
and got 240,000 shares of Fox Film. Loans were made practically
to tiie full value of the debentures, and the first preferred stock,
which money, of course, ultimately found its way into this financing,
and paid the debts of Fox Film.
Senator W alcott. Do you think that was a consideration of these
bonus stocks?
Mr. G ray . It was all practically one transaction—that the bonus
was given to them as a consideration for the financing? There is no
donbt about it.
To complete the picture, four of the concerns that entered into that
venture have since passed into the great beyond of business, having
ultimately and absolutely failed.
Senator Couzens. Halsey Stuart is not one of them.
Mr. G ra y . N o. Halsey Stuart was in the group on one side, but
West & Co., Pynchon, Hammond, and—I wul not name the other
group—and Chase Securities. Pynchon has failed. West has failed.
I am corrected. Therefore, I will retract my statement. I had been
so advised. Probably I had misunderstood. But two of them, West
& Co*. and Pynchon, have failed. Pynchon was the concern through
which practically all of the trading was done at any time that they
wanted to keep up the market in any of these securities.
To complete the picture, I will jump a year ahead, and indicate to
you that when the $55,000,000 1-year debentures became due, Halsey
Stuart passed out of the picture, and they were assumed by the
other group. The 240,000 shares of Fox Film stock that that group
got were marketed immediately or continuously from that date on
until they were disposed of at market prices. I am advised that
Halsey Stuart are still holding their 200,000 shares, and they never
marketed them.
Senator Couzens. Are they a corporation or a partnership ?
Mr. G ra y . I can not answer your question, Senator, except that I
may say this to you. They are a bond and investment house.
Senator Couzens. Yes; I know, but I was wondering whether they
were incorporated or a partnership ?
Mr. G ra y . I will ascertain that for you to-day, and put it all in
the record. But if they are members of the New York Stock Ex­
change, they may not be a corporation. They must be a partner­
ship, or individual. That is the picture, and we can prove it by all
our documents.
If the committee desires the time to be shortened, I will offer in
evidence certain documents to establish some o f those spots that I
have indicated to you, and I will then proceed to call other witnesses
to develop certain angles of this which I have talked to you about.
If the committee desires an absolute demonstration of the correctness
of these figures, of course, that will take some time. I will put Mr.
Watson on the stand, under whose supervision this work was all
done, and will give you, figure for figure, the facts.
May I inquire, Mr. Chairman, as to whether you want me to do
that in detail, or shall I offer these various documents? O f course,,
if Mr. Fox is able to be here this afternoon, I will be very glad not
only to examine him, but permit him to make any statement he
wants, if the committee approves, with respect to the matter. But




992

STOCK EXCHANGE PRACTICES

may I suggest, Mr. Chairman, that this statement has been made
on the record. I might now offer to you these photostatic copies
of checks, agreements, documents, and papers, which will corrob­
orate the story, and then I have Mr. Hoyt here from Hayden-Stone;
I have a representative from Taylor-Thorne & Co., where the syndi­
cates were operated. I have Mr. Bradford Ellsworth here, from
Meehan’s.
I have here Mr. Best, a member o f the firm of Meehan & Co.,
whom I would like to put on the stand, and I have several others
here to take up these various angles that run away from the Fox
end of it, for the purpose of proving them to you.
Senator Couzens. May I ask counsel if he anticipates that any
of these witnesses he has here will contradict or deny any o f these
statements he has made ?
Mr. Gray. I do not, sir.
Senator Couzens. In your private conversations with them, they
have not disagreed with your statements?
Mr. G ray. N o ; but there are some witnesses, Senator, such as Mr.
Stevens, of Stevens & Legg, who was the specialist in the stock of
Fox Film, while it was being traded in the syndicate, and who was
also a participator in the syndicate, and who got $10,000 for some­
thing besides. I met him only yesterday afternoon and I have not
yet asked him as to why. It is not a matter of agreement or disagree­
ment, but it is a matter of my wanting him to tell the committee
why those payments were made to him.
Senator Couzens. Mr. Chairman, I suggest that Mr. Stevens be
put on the stand.
The C h a i r m a n . Before that, there is a request here from counsel
that certain papers be put in the record.
Mr. G ray. I have certain papers which I think should be put in
the record to corroborate the statement I have made.
The Chairman. I f there is no objection, it will be so ordered.
That will complete the record on that.
Senator W alcott. Mr. Chairman, before we get to the next wit­
ness, I have two questions I would like to ask. One was with respect
to this operation through the purchase of Loew’s stock. Was that
coincidental with the short-selling pool?
Mr. G ray. There was no short-selling pool in Loew’s, Senator
Walcott.
Senator W alcott. I understand.
Mr. Gray. I can give you the dates. That is the best way to
answer the question for you.
Senator W alcott. It would be interesting to know the relation­
ship between these two operations, and as to how far the price of
one was rigged against the company to be purchased. Secondly,
were there any statements—you said that there was a period there
when there were certain statements put out booming the film busi­
ness. Were there any statements put out coincidentally with the
advance in Fox Films, favorable to Warner Bros?
Mr. Gray. Favorable to Fox Films?
Senator W alcott. Well, to the whole business.
Mr. G ray. Mr. Fox-----Senator W alcott. I have been told____




STOCK EXCHANGE PRACTICES

993

Mr. Gbay. I have some abstracts here from some statements made
by a gentleman speaking for Mr. Fox from the moving-picture plat­
forms of the theaters, and the dates of them, to show you also what
lie said at that time; but, Senator, there is no association between
the purchase of the Loew stock by Fox for Fox Theaters, and any
of tne short selling which was in the Fox Theaters stock and not
in the Loew stock. The Loew stock appears only as an incident, in
their endeavor to get control, and in their using of the Loew stock,
which was owned by Fox Theaters, in the refinancing of the whole
proposition.
Senator W a l c o i t . That, you think, was not used in order to de­
press the stock-----Mr. G b ay. No; Loew’s stock was not used in any way to affect the
question o f the market.
Senator W a l c o t t . I think that there ought to be developed for
the record-----Mr. G bay. If the date is material, on the matter of Loew’s, on
March 28, 1929, Fox Theaters purchased from the stockholders of
Loew’s themselves 400,000 shares of Loew stock at a price of $50,000,000. That was the nucleus of that accumulation oi stock. Then
we have here records from the Fox Theaters books, showing what
items of entries were made with respect to the purchase of other
stocks and the sales of some of the Loew stocks, and other financial
charges that entered into the transaction, showing the entire dealings.
Thev have been analyzed to show the accumulation of 660,900 shares
of the stock which was made one of the bases that was used for the
purpose of financing the new corporations.
I might say, too, something that I omitted, and a thing which is
important, because it involved the reports that were made by this
new group. I believe I could even analyze them for you myself, but
it is a matter of accounting, and I would very much prefer an
accountant to tell you about that. But on April 7 or 8, 1930, this
new group took over Fox Films and Fox Theaters. Fox Filins, as
of the end of 1929, were carrying on their books a certain surplus
and a certain reserve. To give you quickly the picture, at three
different ])eriods of time statements were given out with respect to
the financial position of Fox Films at the same period of time, to
wit, the end of December, 1929, and they vary with respect to the
statement of the reserve and the surplus to the extent, in one* case,
of at least nearly $6,000,000. In other words, they gave out a state­
ment—it did not suit their purpose, and they gave out another. That
did not suit their purpose, and they gave out another one. Then they
gave out an earnings statement for the first six months of 1930, in
which they carried into the reserves certain matters that they desig­
nated as extraordinary expenses, so that they might not show, and
therefore reflected in their earnings statement, which, of course, went
before the public, who were buying and selling all these stocks—
reflected earnings of a certain number of dollars, whereas, as a mat­
ter of fact, the sheets were criticized by a member of the New York
Stock Exchange at that time as being untrue, incorrect, and, if they
liad been true or correct, his statement was that the earnings would .
show themselves to be in cents, and not in dollar?
That man was John W . Pope, who is now dead. Mr. Pope was a
statistician, and I think was then, and even in his memory is recog


994

STOCK EXCHANGE PRACTICES

nized to-day as one of the ablest statisticians in the New York district.
He had a mind for analyzing situations, and he studied the situation,
and he sent a private wire This is ail public record now, and, there­
fore, I might refer to it. He sent a wire to the members o f the
brokerage house of Eastman, Dillon & Co., with which he was con­
nected, all over the country and to his customers and clientele, to
sell their Fox stock; that he did not like the looks of the picture;
and that their statements did not reflect the true condition. For that,
charges were brought against him before the New York Stock
Exchange. I have the record of that case here. I have those various
statements that were issued to the public, and I have Mr. Pope’s
defense. He went before the stock exchange and proved his case and
was exonerated. All that shows the frenzied financing, and appar­
ent financing, and the information that is given to the public about
it, and when you get all through with it, you same to the conclusion
that the public never knows anything about what is going on.
Senator Caret. The stock exchange still continued to list the stock,
did it?
Mr. G ray. The stock exchange still continued, and does continue,
to list the stock.
Mr. R eass. Mr. Chairman-----Mr. G rat. I am not through presenting my case, Mr. Reass.
Mr. R eass. I want to address myself to the chairman.
Mr. Gray. I f the Chair desires me to interrupt my presentation
and my work and listen to you, I will not object to it.
Mr. R eass. I f the chairman says he does not want to hear me, that
is the end of it.
Senator Couzens. I suggest that Mr. Gray finish his story first.
The C h a i r m a n . Mr. Reass has something regarding which he de­
sires to address the Chair.
Mr. R eass. I understood Mr. Gray was making a presentation o f
facts that he intended to prove.
The Chairman. I f you are addressing yourself to the proceedings
here and what Mr. Gray is saying, you will not be heard at this time.
I thought possibly you had something to report about Mr. F ox’s
absence. That is why I wanted to know the subject matter. I f you
have nothing, just keep your peace until we get through. Can Mr.
Fox be here this afternoon?
Mr. R eass. I have been here since this morning, and all I got was
the report of the doctor when I got here.
The Chairman . We are conducting this hearing. You be seated.
Mr. R eass. Yes; I am sorry.
The Chairman. Go ahead? Mr. Gray.
Mr. G ray. Mr. Stock desires to give me a full report from the
doctor now, if the committee will permit me to find out something
about it.
(At this point Mr. Gray conferred with Mr. Stock in a low voice,
at the conclusion of whicn the following occurred:)
The Chairman. Mr. Fox will have an opportunity to answer all
this.
M r. Reass. You do not know what I am going to say, Senator. I
was going to make a request of you. I f you do not want to hear me
that is the end o f it.




STOCK EXCHANGE PRACTICES

99 5

The C h a irm a n . I asked you what the subject matter was, and you
rambled off-----Mr. R eass. There is no use of your getting abusive about it.
The C h a irm a n . You made a stump speech here yesterday. We
do not want another to-day. I f you have a request to make, make it
in 10 words. Make it and let us see what it is.
Mr. R eass. With that mental attitude, what can I expect in the
way of a favorable and judicial consideration of the matter I want
to present? I am here merely as counsel. Mr. Fox is ill. Un­
fortunately, he can not come here. He made a complete statement
to Mr. Gray-----The C h a ir m a n . We are going to get a speech again, are we, in­
stead of a request?
Senator T o w n s e n d . What is your request ?
Mr. R eass. My request, Senator, was this. In view of the fact
that what has been said here is in the nature of an opening state­
ment of counsel, and in view of the fact that the widest kind of
publicity is given to it, will you hear a statement from me with
respect to some of these matters which have reference to Mr. Fox,
and which I will be able to show—for instance, with respect to this
201,000, I want to draw your attention to what he told me about
that-----Mr. G ray . Mr. Chairman, we are not trying Mr. Fox. We are
simply putting a state of facts on the record.
Mr. R eass. That is all I wanted to ask. I f you do not want to
hear me-----The C h a ir m a n . The request will not be granted at this time.
Mr. G ray . I have just received a report, not only from my own
physicians—that is, those who acted on behalf of myself as counsel
for the committee—but Mr. Fox’s physician also, and they all say
that they find nothing the matter with Mr. Fox now; that he had a
good night’s rest, and they see no reason why he could not come
here; that the only thing that they know in his own statement that
he is dizzy, but they find no indications of it.
Mr. R eass. I have a statement here, Mr. Gray, in writing.
Mr. G ray . That just came to me a few minutes ago.
Mr. R eass. I got this this morning from the doctor.
Mr. G ray . I got this just now from your doctor, so you are two
hours earlier than I am.
M r. R eass. T h a t m ay be so. I exp ected that.
The C h a ir m a n . Proceed, Mr. Gray.
Mr. G ray . I will offer to the committee, and ask that it be placed

upon the record, a copy of an agreement dated November 11, 1925,
between the Fox Theaters Corporation and John C. Eisele and
Nathaniel King, copartners doing business under the name of Eisele
& K ing; Taylor-Thorne & Co.; and Willington & Co., being the three
concerns that marketed the original marketing of 500,000 shares of
stock of the Fox Theaters Corporation. I nave referred to that
and explained what it is. I will not read it, unless the committee
desires me to.
(The document referred to is as follows:)
This agreement, made the 11th day of November, 1925, by and between Fox
Theaters Corporation, a corporation organized and existing under and by
119852—
—32—pt 3- ■ 14



996

STOCK EXCHANGE PRACTICES

virtue of the laws of the State of New York, hereinafter designated as the
“ corporation,” party of the first part, and John C. Eisele and Nathaniel King,
copartners doing business under the firm name and style of Eisele & King;
Taylor, Thorne & Co.; and Wellington & Co., hereinafter designated as the
“ brokers,” parties of the second part, witnesseth:
Whereas the corporation has an authorized stock consisting of 4,000,000
shares without par value, divided into 3,900,000 shares of class A common
stock without voting power, and 100,000 shares of class B common stock with
voting power, but identical with respect to rights to dividends, all as more par­
ticularly set forth in the certificate of incorporation; and
Whereas the corporation has authorized the sale of 500,000 shares o f said
class A common stock to the brokers at $25 per share in the manner herein­
after specified, under which said brokers have an option to purchase said
500.000 shares of stock, on the terms and conditions hereinafter set forth, it Is,
in consideration of the premises hereof and of $1 to each of the parties hereto
by the other in hand paid, receipt whereof is hereby acknowledged, agreed as
follows:
First. Corporation hereby grants to the brokers the exclusive option to pur­
chase all or any of 500,000 shares of its class A common stock, at the
price of $25 per share, on the terms and in the manner hereinafter set forth.
Second. The option and right herein granted to the brokers shall be in force
and effect to December 15, 1925, only. If at the end of said period the said
brokers shall not have purchased the said full 500,000 shares o f stock, then and
in that event the said brokers shall be entitled to only such number o f shares
as they shall have actually purchased up to the expiration of the said period,
at which time all rights and options granted herein to said brokers shall cease,
terminate, and come to an end, without further act of any kind, nature, or
description on the part of either party hereto. The corporation will not issue
any stock in addition to said 500,000 shares of class A stock, and the shares of
class A and class B common stock issued or to be issued in payment for its
properties upon its organization, without the written consent o f the brokers
during the said option period.
Third. The brokers in selling to the public shares of stock purchased here­
under shall offer in all advertising announcements the full 500,000 shares of
stock to the public at an initial price of $25 per share, without reservation or
limitation. All advertising matter, announcements, and publicity shall be
issued and paid for by the brokers in connection with the sale of said shares
of stock to the public, and the brokers agree to pay all expenses in connection
with the sale of said stock to the public.
Fourth. As and when the said brokers shall receive payment for said shares
of stock they shall deposit to the credit of the corporation with the Bankers
Trust Co. at No. 16 Wall Street, in the city of New York, against the delivery
by it of said shares to them, the amount of such payment to which the corpora­
tion is entitled hereunder, to w it: $22 net per share, said brokers retaining out
of such gross payment of $25, $3 commission per share to which the brokers
shall be entitled; it being agreed that with reference to anv funds that shall be
received by the brokers in connection with the sale of such stock to the public,
that the relationship between the brokers and the corporation shall not be that
of debtor and creditor, but that such funds to the amount of $22 net per share
shall be held by said brokers for the benefit of the said corporation as a trust
fund which shall not be commingled with the general funds of the brokers, and
until deposited with said Bankers Trust Co. as aforesaid, the proceeds realized
from the sale of said stock to the public shall be regarded as trust fund only
in the hands of said brokers, for the sole use and benefit of the corporation
Fifth. The corporation shall not issue any stock In addition to the said 500000
shares of the class A common stock, and the shares of class A and class B
common stock issued or to be issued in payment for its properties upon its
organization, without the written consent of the brokers during the period of
one year following the date hereof, at a price to net the corporation less than
$25 per share.
J* is specifically understood and agreed between the parties hereto
that the brokers have entered into this agreement in reliance upon tl'.e perforniaFreeJ?en^
November 10. 11)25, between the corporation
and William Fox for the transfer to the corporation of the stock and other
properties therein designated upon the terms therein set forth.




STOCK EXCHANGE PRACTICES

997

la witness whereof the parties hereto have hereunto set their hands and
seals the day and year first above written.
Fox T h e a t e r s C o r p o r a t io n ,
By W i l l i a m Fox.
Eisele & K ing,
By N a t h a n i e l K in g .
By John C. Eisele.
T a y l o r , T h o r n e & Co.,
By G e o f f r e y H. C o n n e i x .
W ellington & Co.,
By H. G. W e l l in g t o n .

Mr. G ray. Accompanying that is another agreement, of which I
will offer a copy, between these three concerns that were doing the
marketing—namely, Eisele & King, Wellington & Co., and TaylorThorne & Co.—and Carolyn Leah Tauszig, which was an agreement
under which they were to pay, from the commissions that were
earned or, rather, we will put it this way, that the commissions that
were earned were to be distributed as follows: Eisele & King, 45
per cent; Taylor-Thorne & Co., 20 per cent; Wellington & Co., 10
per cent; and Carolyn Leah Tauszig, 25 per cent.
I direct the committee’s attention to the fact that though the^ name
of Carolyn Tauzig appears in the agreement, she did not sign it, nor
did anybody else on her behalf, and that she is referred to as one of
the male gender throughout the entire agreement. I mentioned the
fact that she is his daughter.
(The document referred to is as follows:)
Memorandum of agreement made the 11th day of November, 1925, between
Taylor, Thorne & Co., party of the first part; John C. Eisele and Nathaniel
King, partners as Eisele & King, party of the second part; Wellington & Co.,
party o f the third part; and Carolyn Leah Tauszig, party of the fourth part,
witnesseth:
Whereas the parties of the first, second, and third parts are members of a
syndicate holding the option until December 15. 1925, to purchase all or any
of 500,000 shares of class A common stock of Fox Theaters Corporation, and
desire the party of the fourth part to join in a syndicate to deal in, purchase,
sell, and acquire shares of stock of said Fox Theaters Corporation, and to lend
his credit to said syndicate in the manner hereinafter provided; and
Whereas the party of the fourth part is desirous of entering into such syndi­
cate, it is agreed among the parties hereto as follows:
First. That the commissions to be earned by the parties of the first, second,
and third parts as a result of said option on 500,000 shares of class A common
stock o f said. Fox Theaters Corporation, shall be shared among the parties
hereto in the following manner:
The said Eisele & King shall receive 45 per cent thereof;
The said Taylor, Thorne & Co. shall receive 20 per cent thereof;
The said Wellington & Co. shall receive 10 per cent thereof; and
The said Carolyn Leah Tauszig shall receive 25 per cent thereof.
That the said payments shall be made as and when same are received from
the proceeds of sale of said stock to the public. That as against the gross
amount of commissions earned in said syndicate, there shall be charged only
the actual disbursements of the syndicate involved in the sale of said stock to
the public which shall be reasonable in amount, including advertising, pub­
licity, and legal expenses.
Second. That the parties hereto shall each contribute to a fund a sum
equal to 50 per cent of the total amount of the commissions distributed among
them, with which fund the parties hereto shall acquire and deal in class A
common stock of the said Fox Theaters Corporation, and shall for a period of
six months from the date of acquisition of the first shares of stock acquired
under this agreement, continue to deal in, purchase, sell, and acquire said
shares of class A common stock of said Fox Theaters Corporation, but shall
not at any time have to their credit more than 50,000 shares.




998

STOCK EXCHANGE PRACTICES

Third. Eisele & King and Taylor, Thorne & Co. are to be the joint managers
of the account and may buy, sell, loan, borrow, or otherwise trade in the stock,
except that the other parties hereto shall daily receive reports of the trading
transactions involved herein, and neither Eisele & King nor Taylor, Thorne & Co.
shall be held accountable except for lack of good faith. At the termination of
the account the profit or loss shall be divided pro rata among the participants
in the proportion which their participations bear to the aggregate of all par­
ticipations, and any unsold stock remaining in the account at the time of disso­
lution by reason of termination thereof, shall be distributed among the par­
ticipants in like manner upon payment by them of their pro rata share o f the
cost thereof. The parties hereto shall each take up on demand of said Eisele &
King or Taylor, Thorne & Co. at any time his or its pro rata share of the stock
which has been accumulated on balance for the account, and in any event
agrees to supply a sufficient margin at all times to enable the syndicate to
carry the pro rata share of the stock on hand of each member thereof.
Fourth. Nothing in this agreement shall be construed as making the par­
ticipants partners with the managers or with one another, nor shall any par­
ticipant be liable for an amount of stock greater than the amount o f his par­
ticipation as expressed in this acceptance of this agreement, or for an am ount
of money greater than the cost of his participation at the average cost price
to the syndicate.
In witness whereof, the parties hereto have hereunto set their hands and
seals the day and year first above written.
T a y l o r , T h o k n b & Co.,
By G k o f f r b y H. Bonnexx.
E is e l e & K in o ,

B y ------------------- .
W e l l in g t o n & Co.,
By W ellington & Co.

Mr. G ra y . In connection with that, I will place upon the record a
photostatic copy of a check dated January 7, 1926, check No. 3453,
on the Mechanics & Metals National Bank of the city of New York,
drawn to the order of “ Caroline Leah Tausig,” for $411,185.37,
signed “ Taylor, Thorne & Co.” who had charge of this distribution;
and the indorsements thereon being “ Caroline Leah Tausig,” and
then underneath it, “ For deposit only, Mona F. Tauszig.”
(The document referred to is as follows:)
No. 3453.

N ew Y ork ,

January 7,

1926

T h e M e c h a n ic s & M e t a l s N a t io n a l B a n k of t h e C i t y o f N e w Y o r k
T a y l o r , T h o r n e & Co.

.

Pay to the order of Caroline Leah Tauszig_______________________$411,185.37
the sum of $411,185 and 37 cents.
T a y l o r T h o r n e & Co
(Indorsements on back of check:) Caroline Leah Tauszig. ’For deposit only.
Mona F. Tauszig.
D—Received payment—D through the New York Clearing House, Jan. 9,
1926. The Colonial Bank, N. Y. 102d St., branch D.

Mr. G ra y . I will need from Mr. Fox an explanation o f the rela­
tionship, because he has stated Mona F. Tauszig is his daughter
also, and whether there are two separate daughters, or whether they
are one and the same, we do not know. Mona Fox is the name in
which he carried a very large number of his brokerage accounts.
Senator C o u z e n s . Have you examined the New York State in­
come-tax returns in this case, or have you looked into them?
Mr. G ra y . This is back in 1925. The answer to your question di­
rectly, Senator, is no. In the less than 2 weeks or 10 days we have
had, we would like to have gone a great deal further in this matter
as to detail, but we have done the best we can.




STOCK EXCHANGE PRACTICES

99 9

Senator C o u z e n s . I d e s i r e t o a n n o u n c e a t t h i s t i m e t h a t w h e n
th is c o m m it te e h a s a f u l l m e e t in g I w i l l e n t e r a m o t io n t o r e q u e s t
the submission t o t h i s c o m m i t t e e o f a l l t h e i n c o m e - t a x r e t u r n s o f t h e
individuals i n v o l v e d i n t h i s m a t t e r .
The C h a i r m a n . Before putting the motion-----Senator C o u z e n s . I do not desire to have it put now.
The C h a i r m a n . I may say for your information that I went oyer
with the drafting clerk this morning pretty carefully the wording
of our resolution, and he is of the opinion that we have plenty of
authority, under our resolution, to go into these matters.
Senator C o u z e n s . I t h i n k t h a t i s q u i t e c o r r e c t , b e c a u s e I w a s a
party to h e l p i n g t o d r a f t t h e i n c o m e - t a x l a w s , a n d I k n o w t h a t i s
The C h airm a n . I am speaking of the resolution under which
committee is operating here, which he drafted. He insists that this
committee has ample authority to go into that matter, and the motion
will be placed in the record.
Senator C ouzens. We would have to make a request on the Treas­
ury Department to supply the information we desire, and that was
the motion I desired to enter.
Mr. G r a y . I will offer, together with those other papers, a copy of
the operations and distributions of the profits among these three
concerns, and Carolyn Leah Tauszig, showing the amount of the
profits and the distribution to her.
(The statement referred to is as follows:)
(Taylor, Thorne & Co., Eisle & Kins:, Wellington & Co., and Caroline Leah
Tauszig)
S chedule 2

Statement of distribution of profit from■syndicate operations in Fox Theaters
Corporation stock
T aylor, T h orne

& Co.

Commission of $3 per share on allotment of 89,000 shares___
20 per cent of profit in $4 account__________________________
Commission received by them account of subscrip­
tion to 100,000 shares_________________________$300,000.00
20 per cent of expense account__________________
5,399. 70
Check herewith________________________________
28,948.30

$267,000.00
67,348.00

334,348.00

334. 348. 00

Eisle & K ing
Commission of $3 per share on allotment of 200,250 shares______
45 per cent of profit in No. 4 account___________________________
Commission received by them account of subscrip­
tion to 178,750 shares________________________ $536,250.00
Commission rewived by them account subscrip­
tion to 111,250 shares for account Caroline Leah
Tauszig--------------------------------------------------------- - 333. 750.00
45 per cent of expense account__________________
12,149.34
Due from Eisle & King_______________________________________




882,149. 34

600,750.00
151,533.01

129,866.33
882,149.34

1000

STOCK EXCHANGE PRACTICES
WELLINGTON A CO.

Commission of $3 per share on allotment of 44,500 shares------------- 500.00
10 per cent of profit in No. 4 account___________________________
33,674.00
Commission received by them account of subscription
to 55,000 shares--------------------------------------------------- $165,000.00-------------------2,609.85 ------- - - - - 10 per cent of expense account------------------------------Due from Wellington & Co------------------------------------- --------------525.85
167,690.85 167,690.86
CAROLINE LEAH TAUSZIG

Commission of $3 per share on allotment of 111,250 shares-------- 333,750. 00
25 per cent of profit in No. 4 account-----------------------------------------84,185.00
25 per cent of expense account---------------------------------- $6,749.63 ---------------Check herewith-------------------------------------------------------- 411,185.37 --------- -----417,935.00 417,985.00
The above is approved.

Caroline Leah TAtrsna.

Mr. G r a t . I will offer a copy of a schedule o f costs expended or
incurred by the different concerns, and a charge of those costs in
the proper proportion as against those who were entitled to the
profits, which contains the approval of Fox’s daughter.
(The statement referred to is as follows:)
(Taylor Thorne & Co., Eisle & King, Wellington & Co., and Caroline Leah
Tauszig)
Schedule 3

Fox Theaters Syndicate expense account
Paid by Taylor, Thorne & Co.:
Photo Record Bureau, advertising____________________________
Doremus & Co., advertising----------------------------------------------------F. H. Mitchell, stenographer__________________________________
J. H. McMullen, telephone calls_______________________________
Glenn & Ganter, legal-----------------------------------------------------------Doremus & Co., advertising___________________________________
Paid by Eisele & King:
McCarter & English, legal-----------------------------------------------------Glenn & Ganter, legal-----------------------------------------------------------Counsel fees, legal-----------------------------------------------------------------

$1.15
10,370.47
7.35
10.30
800.00
100.00
5,009.25
5,000.00
6,000.00

Total-------------------------------------------------------------------------------- 26,998.52
Division of expense:
"
Taylor, Thorne & Co., 20 per cent_____________________________ 5,390.70
Eisele & King, 45 per cent------------------------------------------------------ 12, 149.34
Wellington & Co., 10 per cent_________________________________ 2,699.85
Caroline Leah Tauszig, 25 per cent____________________________ 6,749.63
Total---------------------------------------------------------------------------------- 26,998.52
The above is approved.
(Signed)
Cabouke Leah Tatjsmg.

Mr. G r a y . I will call Mr. Stevens. Mr. Stevens, will you take
the stand? I will ask him about certain things in connection with
this and then I will put on the stand the representative o f TaylorThorne & Co. to explain the entire transaction to you.




STOCK EXCHANGE PRACTICES

1001

TESTIMONY OF BYAM K. STEVENS

The C h a i r m a n . 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?
M r . S t even s . I do.
The C h a i r m a n . State your name and address for the record.
Mr. S tevenb . Byam K. Stevens, Cedarhurst, Long Island.
Mr. G r a y . Mr. Stevens, are you a member of the brokerage firm of
Stevens & Legg, in New York?
Mr. S te v e n s . I am .
Mr. G r a y . That firm was in existence also under that name in
1927 and 1928?
M r . S t even s . It was.
Mr. G r a y . And during the period of time in the fall of 1927 and
the spring of 1928 it is a fact, is it not, that you were the specialist
in the handling of Fox Film stock on the floor of the exchange ?
Mr. S t even s . The firm was.
Mr. G r a y . The firm was. Was it you or another member of the
firm who actually held the book and acted as a specialist ?
Mr. S t e v e n s . The senior partner had the book most of the time.
Mr. G r a y . Who was the senior partner?
Mr. S t e v e n s . Samuel B. Legg. He died in 1929. I had it a very
short time. I had only been on the stock exchange for six months
when this syndicate was formed, and I did not have the proper
experience at the time to handle the book.
Mr. G r a y . S o it was handled principally by Mr. Legg at that
time?
Mr. S t e v e n s . That is correct.
Mr. G r a y . Let me ask you, just by the way, for a moment—you are
not entirely familiar with all the syndicate’s deals, are you?
Mr. S t e v e n s . I only know that we joined this syndicate.
Mr. G r a y . Then I will ask you only about your participation. I
will show the other by some one else. You know that the firm of
Stevens & Legg, a brokerage house in the city o f New York, became
participators in a syndicate handling Fox Film stock, which syndi­
cate was managed and controlled in the office of Taylor, Thome &
Co., another New York brokerage house? That is true, isn’t it?
Mr. S t e v e n s . That is correct.
Mr. G r a y . D o you know that your participation was an agree­
ment to put up, if necessary—and probably you did put it up—
$60,000 in margin, as a result of which you made"a profit of $42,361.50,
getting back from Taylor, Thorne & Co. $102,361.50?
Mr. S t e v e n s . That is correct.
M r . G r a y . N o w , th a t w as y ou r profit as th e p a rticip a to rs in th e
pool?
Mr. S t e v e n s . That is correct.
Mr. G r a y . The records of the pool-----Mr. S t e v e n s . Mr. Gray, I would like to bring out another matter

right there.
Mr. G r a y . Yes.
Mr. S t e v e n s . Our participation was for 5,000 shares. I f at the
time o f the formation of this syndicate we, as a firm or as an indi­
vidual had taken out 5,000 shares of Fox Film and kept them for a



1002

STOCK EXCHANGE PRACTICES

year and a quarter, at which time we got out of the syndicate, and
sold them, then our profit would have been over two and a half times
as large as our syndicate profit.
Mr. G r a y . We are not complaining about the amount of the profit.
I f you paint that picture, I might indicate to you also that if you had
taken them up and kept them a little longer, you would not have
had any profit but a decidedly heavy loss. So, you see, that has no
relation to the question.
The account of the distribution in that syndicate shows that
Stevens & Legg, your firm, and the specialist in this stock on Feb­
ruary 27, 1928, while the pool was still in operation, and a month or
two before it was closed, were paid $10,000?
Mr. S t e v e n s . Yes.
Mr. G r a y . What for?
Mr. S t e v e n s . That was an unsolicited amount. It was given to us
by the syndicate manager in appreciation for the work that we had
done in running an orderly market.
Mr. G r a y . What do you mean by running an orderly market?
Mr. S t e v e n s . We maintained a quarter per cent market in Fox
Film all during that period.
Mr. G r a y . What do you mean by maintaining a quarter o f a per
cent market in Fox Film?
Mr. S t e v e n s . We saw to it that-----Mr. G r a y . Let me help you. You saw to it that the price did
not go above the certain figure, or below a certain figure ?
Mr. S t e v e n s . N o , sir. We saw to it that there woiud be no sudden
and violent jumps; that there would be an orderly market; that
there would be sales take place every quarter o f a per cent up or
down, as the case may be.
Mr. G r a y . Let us see if that is clear to me, and whether it is
clear to the committee. As the specialist in the stock, and an inter­
ested participator in the pool, you so handled the trading on the
stock market as to see that there were no violent fluctuations in this
stock, and that if there were any sales, and any movement up or
down, that it did not go more than a quarter of a point at a time.
Mr. S t e v e n s . That is correct.
Mr. G r a y . How do you do that? We are very, very, very much
interested in knowing how the specialist in a stock can stop a stock
from going up, or stop a stock irom going down, and can regulate
the price of the stock on the market, when the public is buying
and selling it, within a quarter of a point. That is very interesting,
and we would like to know all about it.
Mr. S t e v e n s . I did not say that we kept the stock from going up
or going down. I said that there would be a sale every quarter
of a per cent.
Mr. G r a y . That is to say-----Mr. S t e v e n s . That is done by offering your stock—if the stock
is going up, if the last sale was 5 7 and a buyer comes into that
stock, to see that it does not sell at 58, all you have to do on the
floor of the New York Stock Exchange is to offer 100 shares at 57fy*
Mr. G r a y . Yes.
v*'
Mr. S t e v e n s . The buyer, if he takes the stock, makes a sale.
Mr. G r a y . Yes.




STOCK EXCHANGE PRACTICES

1003

Mr. S t even s . On the down side, you put in a bid the same way.
I have no control over the market whatsoever, except to see-----Mr. G r a y . In order to stop the stock from going to 58, you would
offer it at 57%?
Mr. S t e v e n s . T o maintain an orderly market, I did that.
Mr. G r a y . Whose stock are you offering at 57% ?
Mr. S t e v e n s . The syndicate’s.
Mr. G r a y . And when you want to make a market, or maintain
a market on the other side, you buy for the syndicate ?
Mr. S t e v e n s . That is right.
Mr. G r a y . And you, as the specialist, I suppose, had unlimited
discretion in that respect ?
Mr. S t e v e n s . I did not have unlimited discretion.
Mr. G r a y . Suppose the market began to show signs of breaking
away from you. What would you do?
Mr. S t e v e n s . I had very small discretion, within limits. My dis­
cretion was 1,000 shares for each point.
Mr. G r a y . One thousand shares for each point. O f course, you
knew, being the specialist, what the general market was in that
particular stock?
Mr. S t e v e n s . I did not know-----Mr. G r a y . Y ou knew what bid and offered instances there were
on your books ?
Mr. S t e v e n s . That is true, sir.
Mr. G r a y . And that knowledge was of great advantage to you,
was it not?
Mr. S t e v e n s . One moment, sir. Half the time, in an active market,
the market is controlled by the brokers from other commission
houses, and not necessarily by the specialists. On all orders away
from the market, the specialist has it on his book.
Mr. G r a y . In other words—we have had this before, but to em­
phasize it—when a person puts in an order to buy or sell at the
market, the specialist does not get it, very frequently.
Mr. S t e v e n s . That is right.
Mr. G r a y . But every order, if it is put in an eighth or a quarter of
a point from the market, one way or the other, goes on your books ?
Mr. S t e v e n s . Yes; usually.
Mr. G r a y . S o that you have absolute information. Don’t you
think that is a decided advantage to you, or the syndicate officers
with whom you are operating, or for whom you are operating, to
have that information, in order to make your purchases and sales?
Mr. S t e v e n s . They did not get any information with reference-----Mr. G r a y . But you were doing buying and selling?
Mr. S t e v e n s . That is quite correct.
Mr. G r a y . And you had the book ?
Mr. S t e v e n s . Yes.
Mr. G r a y . And you had the information?
Mr. S t e v e n s . That is quite correct.
Mr. G r a y . Y ou do not mean to say to this committee that I, as
a specialist, kept the information from myself as a broker. You
could not do that, could you ?
Mr. S t e v e n s . A s far as that was concerned, any commission house
broker that had an order, or has an order to execute, can come in




1004

STOCK EXCHANGE PRACTICES

to the specialist and get the same information that I had at that
time.
Mr. G r a y . Y ou do not mean to tell me that'the stock exch ange
rules permit you to disseminate the information upon your sp ecia l­
ist’s books?
Mr. S t e v e n s . T o a commission house broker who has an order
to buy or sell. He has the right to ask the specialist the approxi­
mate size of the market.
Mr. G r a y . In other words, i f he wants to sell at a certain price,
he has a right to know whether there are any bids in there at that
price, or about that price, on the buy side.
Mr. S t e v e n s . On the buy side.
Mr. G r a y . Certainly. I think we understand it. You said your
$10,000 was for extraordinary services in maintaining a market
Was there an agreement that you were to be paid something extra?
Mr. S t e v e n s . N o , sir.
Mr. G r a y . In other words, this syndicate, gratuitously— a n d , if a
syndicate has any heart, out of the kindness or bigness of its h e a rtjust handed you $10,000?
Mr. S t e v e n s . It was an unsolicited amount.
Mr. G r a y . Did any letter accompany the check?
M r. S t e v e n s . N o, sir.
M r. G ray . Just the check.

I n oth er w ord s, th ey u n derstood ------ -

Mr. S t e v e n s . At that time—and for 17 years prior to this time—
my father and the firm had been making their offices with Taylor,
Thorne & Co., and I have known Mr. Taylor all my life. I was
brought up with his boys. It was purely and simply a friendship
proposition, and he presented us with this check about the middle of
the participation in the syndicate.
Mr. G r a y . It is not that transaction but the. system we w a n t to
know about more than anything else. That is all unless the members
of the committee want to ask him anything.
Senator C a r e y . Mr. Stevens, is there any rule o f the stock exchange
which prevents a specialist from being a member of a pool?
Mr. S t e v e n s . I never heard of one.
Mr. G r a y . It is one of the things I have in mind that should be
corrected. I have never gone into those things we have i n mind
publicly. I think the time to present them to you is w h en w e get
through.
Senator W alco tt . Did not Mr. Whitney testify about that?
Mr. G r a y . Mr. Whitney testified that a specialist had no right
whatever to ever show a broker or anybody else the information
contained in his books, and that if it could be called to their attention,
they would discipline the specialist immediately.
Senator W

alcott .

B y im m ediate expu lsion.

Mr. G r a y . Yes; yet it is done, and has been done, and there has
been a lot of testimony here about it, from one man and another.
The stock exchange, as far as I am informed, has taken no action.
Senator C a r e y . Mr. Whitney does not know about it ?
Mr. G r a y . Mr. Whitney not only knows al>out it, because he is
getting a copy of this testimony as fast as he can get it, but Mr.
Whitney s auditors and men have checked up on every bit o f work
we have done in New York City since we have been there. M v men
do not get out of a brokerage house 10 minutes when the "stock



STOCK EXCHANGE PRACTICES

1005

exchange auditors are there back of them. You might as well know
that, privately and publicly. I do not question their right to do it.
Senator C o u ze n s . Mr. Gray knows that the stock exchange could
not exist if it did not permit these things. There would not be
business enough to sustain it.
Mr. Gbay. Senator, my personal views are a little to the contrary.
I believe the stock exchange could exist and that these transactions
could be properly conducted—that is, the people’s interest could be
properly conducted.
(At this point Mr. Reass arose from the committee table to leave
the room and the following occurred:)
Mr. G r a y . Will you find out if Mr. Fox can be here at 2 o’clock?
We would like to have him here.
I believe it could be conducted and could be conducted on a
proper plane, but it would eliminate organized gambling with inside
information.
Senator C o u z e n s . I insist that there would not be enough business,
if it was legitimate, to maintain the stock exchange.
Mr. G r a y . Y ou may be absolutely correct, Senator Couzens.
That is all.
Mr. S t e v e n s . I would just like to make the statement that never at
any time, while we were members of the syndicate, or at any other
time, have we as specialists ever given the exact information that was
on any o f our books, ever.
Senator C o u z e n s . May I ask the witness what he means by
“ exact ” ? He must mean that he gave them inexact information.
Mr. G r a y . Will you answer Senator Couzens?
Mr. S t e v e n s . I f a commission-house broker, Senator Couzens,
came and asked for the approximate market, or how he could buy
5.000 shares, I would give him a rough estimate of what there was
that he could get there. I never have given, or the firm has never
given, the exact information as to what is on a specialist’s book.
Senator T o w n s e n d . You mean you would not say that there were
just 5,111 shares. You would say there were about 5,000?
Mr. S t e v e n s . “ You could probably buy, at the present moment,
5.000 shares a point and a half up.” That is the way I would answer
the question of the commission-house broker.
Senator T o w n s e n d . You might have 5,200?
Mr. S tevens. Absolutely.
Senator C o u z e n s . Are you authorized, under the rules, to give
them that information ?
Mr. S t e v e n s . I believe you are; yes, sir.
Mr. G r a y . The vice in this particular case, Senator, is that he was
the one that was doing the dealing, and he was the one who knew
the prices. He had the exact information. In other words, it is the
system by which that is done, that we are interested in.
Will the representative from Taylor, Thorne & Co. take the
stand, please?




1006

STOCK EXCHANGE PRACTICES

TESTIMONY OP WILLIAM J. GALLIGAN, BEPBESENTING TAYLOB,
THORNE & CO.

The C h a i r m a n . Y ou do so lem n ly sw ear th a t y o u w ill tell th e truth,
the w h ole tru th , and n oth in g b u t the tr u th r e g a r d in g th e matter
now u nder in vestigation b y the com m ittee, so h elp y o u God?
Mr. G al l ic ax . I do.
Mr. G r a y . Mr. Galligan, where do you reside?
Mr. G a l l ig a n . Westfield, N. J.
Mr. G r a y . Are you a member of the brokerage firm o f Taylor,
Thorne & Co.?
Mr. G a l l ig a n . N o, sir; I am n ot.
Mr. G r a y . Were you?
Mr. G a l l ig a n . I was employed by them at the time of 1927.
Mr. G r a y . I think it was at my suggestion that some one who was
familiar with this matter come to Washington to explain it, that
they asked you to come down ?
Mr. G a l l ig a n . That is right.
Mr. G r a y . In what capacity were you employed by them, a t that
time ?
Mr. G a l l i g a n . I was in charge of their trading in this Fox Film*
Mr. G r a y . You had three separate syndicates operating in Fox
Film stock, in Taylor, Thorne & Co.’s office. Is that correct?
Mr. G a l l ig a n . I think there were two in Taylor, Thorne, and
one was W. R. K. Taylor & Co.—the last one.
Mr. G r a y . In other words, a change in the name of your firm?
Mr. G a l l ig a n . Yes.
Mr. G r a y . That is right. I ask you when the first s y n d i c a t e was
formed ?
Mr. G a l l ig a n . July 6, 1927.
Mr. G r a y . And it operated up until what date ?
Mr. G a l l ig a n . April 9, 1928.
Mr. G r a y . Have you a memorandum of the participators i n that
syndicate ?
Mr. G a l l ig a n . I have. You h ave a co p y o f it.
Mr. G r a y . I have a copy of it; and I show you a p a p e r t h a t I
shall hand to the stenographer, and ask you to make comparison, and
ask you whether or not this list shows the participators in t h e pool)
the margin which they put up, the profit which they received, and
the total amount that was paid back to them when th a t p o o l was
concluded. Will you look at that and tell me whether th a t is s o ?
Mr. G a l l ig a n (after examining paper). That is the comparison.
Mr. G r a y . That is correct, is it?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . I will offer this and ask that the stenographer put it

upon the record, and in passing, I direct your attention to the fact
that there are participators in this pool under the name o f Kuser,
9 or 10 different members of the family; that Mr. Kuser was a vice
president—am I right?
Mr. G a l l ig a n . Director.
Mr. G r a y . Director of Fox Film, and had either 9 or 10 members
of his family in this pool; that William Fox was the largest par­
ticipator in this pool, and put up $120,000 as margin, made a profit
of $84,723, and had returned to him $204,723; that another contribu­



1007

STOCK EXCHANGE PRACTICES

tor was Nathaniel King, of the firm of Eisele & King, who had just
one-half of the contribution that Mr. Fox had. I ask you whether
or not, Mr. Galligan, that Nathaniel King participation was King’s,
Eisele & King’s, or Fox’s?
Mr. G al l ig a n . I really do not know .
Mr. G r a y . Y ou do not know?
Mr. G a l l ig a n . N o, sir.
Mr. G r a y . That is one of the things I want to ask Mr. Fox, because
I do not know myself. But, as I have stated in other transactions, I
am able to establish that he operated in King’s name, and the checks
went over to him. Mr. Watson, the accountant, tells me that since
I have talked with him—not to-day, I mean, but since I have taken
up this angle with him, it has been verified as belonging to Eisele &
King, a brokerage house. Stevens & Legg, represented by Mr.
Stevens, who was just on the stand, was a participator to the extent
of a margin of $60,000.
Mr. G a l u g a n . That is correct.
Mr. G r a y . We even have here—what significance it has, I do not
know—the People’s Brewing Co., contributing to the extent of
$24,000.
(The statement referred to is as follows:)
Fox Film Syndicate distribution account

Johanna Kuser________
Olivia Kuser.................
Walter G. Kuser______
Harry A. Brown______
Walter I. Clayton.........
Fred Kuser....................
K. V. Kuser, jr..............
Adela M. Kuser______
Bobert C. Kuser...........
William Fox__________
Nathaniel King_______
Taylor, Thorne & C o...
8tevens & Legg_______
C. 8. Payson..............
J. 8. Dean......................
T. R. Vreeland..........
C. F. Starbahn.............
W. H. T aylor...............
Peoples Brewing Co—
M. P. Cowles.............. .
A. R. Knser...................
f. M. Warburg........ .
Tobey & Kirk...............
A. G. Boesel..................
H. F. McConnell & Co.
W. c . Heppenheimer...
Wm. Bayne & Co_____
Wm. Russell.................
D. W. Maloy.......... .
J. L. Kuser....................
P. A. Foerderer............
J. 8. Rippel & Co.........
Total....................

Margin

Profit

Total

$6, 000.00
2.400.00
2.400.00
2.400.00

12,000.00

$4,236.15
1.694.46
1.694.46
1.694.46
847.32
847.32
847.32
847.32
847.32
84,723.00
42.361.50
42.361.50
42.361.50
16.944.60
8.472.30
8.472.30
4.236.15
2,541. 72
16.944.60
4.236.15
50,833.80
21,180.75
12,706.45
8.472.30
8.472.30
8.472.30
4.236.15
4.236.15
847.32
4.236.15
4.236.15
8.472.30

$10,236.15
4.094.46
4.094.46
4.094.46
2.047.32
2.047.32
2.047.32
2.047.32
2.047.32
204,723.00
102.361.50
102.361.50
102.361.50
40.944.60
20.472.30
20.472.30
10.236.15
6,141. 72
40.944.60
10.236.15
122,833.80
51,180.75
30,708.45
20.472.30
20.472.30
20.472.30
10.236.15
10.236.15
2.047.32
10.236.15
10.236.15
20.472.30

600,000.00

423,615.57

1,023,615.57

.,
,,
,

1 200.00
1 200.00
1 200.00
1 200.00
1 200.00

120, 000.00
60,000.00
60,000.00
60,000.00
24.000.00
12 000.00
12 000.00
6, 000.00
3.600.00
24.000.00

.,

6,000.00

72.000.00
30.000.00
18.000.00
12, 000.00
12, 000.00
12, 000.00
6, 000.00
6, 000.00
1. 200.00
6, 000.00
6, 000.00

Mr. G r a y . I hand you another paper, and ask you whether or not
thig represents a copy of the syndicate agreement that was signed
by the participators in that pool ?




1008

STOCK EXCHANGE PRACTICES

Mr. G alu g an . Yes, sir; it does.
Mr. G ray. I will oner that.
(The statement referred to is as follows:)
T a y l o b , T h o r n e & Co.,

July 6, is*t.
S ir: W e are forming an account, in which we shall participate, and
o f which we shall be the manager, for the purpose o f dealing in the class A
stock of the Fox Film Corporation.
The account shall be terminated six months from the date hereof, with the
discretion in the manager to continue same for an additional six months, or
terminate same at any time in its discretion.
As the manager, we shall have the sole management and entire conduct
o f the business and affairs o f the account with all usual powers, including
the right, on behalf o f the account, to make or procure loans and to pledge
any of such stock, and/or obligations o f the account participants therefor, to
pay all commissions and expenses of every nature, and for the account to
purchase, sell, repurchase, resell, or hold shares o f the class A stock o f Fox
Film Corporation, in such amount, at such price, and in such manner as we
may deem advisable, and generally to act in all respects as, in our opinion,
may be to the best interests o f the account, provided only that the account
shall never at any one time own or be committed for a net long position in
excess o f 50,000 shares at an average cost price to the account not to exceed
$60 per share.
The manager will form an advisory committee from the participants, will
give such committee a weekly statement o f the account, and w ill follow any
advice given by unanimous decision o f such committee in all matters in con­
nection with handling the account.
The manager, notwithstanding its relation as such, as a participant in this
account, shall enjoy all the rights and benefits granted to and imposed upon
any other participant. It shall in no wise be liable for any error o f judgment,
or mistake o f law or fact, or failure of any party contracting with it to live up
to his agreement, nor shall it be liable for anything save fo r its own failure
to exercise good faith.
Upon the signing o f this agreement, each participant shall be required to
deposit immediately with the manager 25 per cent o f the total amount of
his participation based upon the number o f shares subscribed to by him at an
average cost price of $60 per share; and each participant shall, at the request
o f the manager, at any time, or from time to time during or upon the ter­
mination o f this account, take up and pay fo r in full at the cost thereof to
the account, his percentage o f any shares o f such class A stock held fo r the
account, or for which it may be committed; and shall meet his other obliga­
tions, if any, when called upon by the manager.
Stocks so taken up by the participants during the life o f the account shall
be for carrying purposes only and shall be subject to recall by the manager
at any time at the price so taken up.
This agreement shall be binding upon the respective participants, their suc­
cessors, executors, administrators, and assigns, but no partnership relation
shall arise herefrom.
The manager will make no charge to the account for its services In forming
and managing his account, but it will charge to the account all the expenses
incurred by it in connection with the formation of the account, the purchase,
carrying, marketing, and sale o f such stock, including legal expenses, interest
charges, commissions, and the usual brokerage.
At the expiration o f the account, the manager shall distribute to the par­
ticipants prorata in proportion to their respective percentage interests therein,
the shares or cash remaining in its hands, and the participants shall share
prorata in such shares and the profits or losses o f the account, after allowing
for all expenses incurred by the manager, and the apportionment and distribu­
tion by the manager of the said shares and profits or losses shall be conclusive
upon the participants.
Your participation in this account, and the margin to be deposited by you
upon the signing hereof, is set after the place for your signature in accepting
tills agreement.
1 w
Please note your acceptance of this participation by signing the inclosed
duplicate, of this letter and returning same to us
Yours very truly,
’ ______________
D ear

Number of shares,---------. M argin,______.



’

M ti n a ° e r -

STOCK EXCHANGE PRACTICES

1009

Mr. G b a y . In this pool, I direct your attention to the fact that the
manager is to make no charge to the account for its services in form­
ing and managing the account, but will charge to the account all
the expenses incurred by it in connection with the formation of the
account, the purchase, carrying, marketing, and sale of such stock,
and so iorth. That is correct, is it not ?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . And, of course, in addition to any participation that
the firm itself may have, the firm, or its members, are paid the reg­
ular brokerage commission. That is right, is it not ?
Mr. G a l l i g a n . That is correct.
Mr. G r a y . Wherever there is a commission paid for operating the
syndicate as its manager, it gets one plus the other. That is cor­
rect?
Mr. G a l l ig a n . Correct.
M r . G r a y . I w ill ask leave to have th a t agreem en t filed o f record.

In this distribution there appears to have been a charge of bonuses
to employees of $45,000. Will you tell me why Taylor, Thorne &
Co., out o f the money in this syndicate, paid its employees $45,000 ?
Mr. G a l l ig a n . Well, it was their money to do with as they wanted.
Mr. G r a y . I suggest to you that it was not the money o f Taylor,
Thome & Co., but it was the money of the different participants
in the syndicate.
Mr. G a l l i g a n . Mr. Gray, I do not agree with that, because the
participants agree to this charge.
Mr. G r a y . What did your employees do that justified you in pay­
ing them a bonus of $45,000?
Mr. G a l l ig a n . Worked until the wee hours of the morning-----Mr. G r a y . On this alone?
Mr. G a l l ig a n . Breaking their necks to keep up with the work of
that tremendously busy time.
Mr. G r a y . In other words, that work did not devolve on them on
account of this syndicate alone?
Mr. G a l l ig a n . No.
Mr. G r a y . But on account of the busy market?
Mr. G a l l i g a n . That is right.
M r . G r a y . Y ou used $45,000 o f th is sy n d ica te’s m o n ey to h elp p a y
your em ployees a bonus?
Mr. G a l l ig a n . I do not think that is the correct way of stating it.
Mr. G r a y . In other words, you think you had the right to do it ?
Mr. G a l l ig a n . It was the firm’s money to do with as they chose.
Mr. G r a y . Was it actually paid to your employees?
Mr. G a l l ig a n . It was actually paid, every dollar o f it, to our em­

ployees.
Mr. G r a y . You were in the room when Mr. Stevens testified with
respect to the $10,000 that he got, and you knew he was the specialist.
Can you give us any better explanation of the $10,000 paia to him
than the one he gave ?
Mr. G a l l i g a n . I don’t think I can, Mr. Gray.
Mr. G r a y . Did you have anything to do with the making o f the
payment to him?
Mr. G a l l i g a n . No ; I did not have anything to do with it.
Mr. G r a y . Did you know about it?
M r . G a l l ig a n . I knew about i t ; yes.




1010

STOCK EXCHANGE PRACTICES

Mr. G ray. What was it for ?
Mr. G a l l i c an . Just as he explained, for maintaining the market
in this stock, for extraordinary work that he did in connection, with
this account.
M r . G r a y . W h ic h he could n ot h ave done i f he h a d n ot b een th*
specialist?
Mr. G a l l i g a n . I would not say that.
Mr. G r a y . Why the hesitation?
M r . G a l u g a n . N o ; bu t i f w e h a d our ow n broker in there-------Mr. G r a y . And he knew as much as the specialist, o f co u rse, he

could have done the same thing?
Mr. G a l l i g a n . I f we had our own broker in there, and he sp e n t
his time in there, I think he could have done just as well.
Mr. G r a y . Yes; i f he had the same knowledge Mr. Stevens d id ?
Mr. G a l l i g a n . That is right.
Mr. G r a y . It is for that combination of knowledge plus ability
that you paid the $10,000 ?
Mr. G a l u g a n . I do not think that the question o f the knowledge
is paramount, because, if knowledge is not abused, it is not material.
M r . G r a y . B u t kn ow ledge is k n ow led ge , a n d p o w e r , is it n o t —
w ell, th at is academ ic.
Mr. G a l l i g a n . It is academic.
Mr. G r a y . There is no use pressing

that with you. Let me
see how much additional information you have. You took stock,
by the way, in this syndicate, from William Fox, did you not!
Mr. G a l l i g a n . I believe that is right.
Mr. G r a y . Twenty thousand shares under an o p tio n ?
Mr. G a l l i g a n . I believe that is right.
Mr. G r a y . In other words, a part of the stock you used f o r the
purpose of your dealings came from William Fox?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . I ask you whether or not you sent a letter out, that I
am going to read to you—and I want the committee to hear—under
date of October 5,1927, while this pool was operating. [Beading:]
Dear Sirs : A s the manager o f the Fox Film Corporation, class A common
stock group, we wish to inform you, as a member, that we have obtained an
option on 10,000 shares o f the class A common stock, at $72 a share, this
option being contingent upon the average cost at which the account can
purchase stock—being increased from $60 to $65 a share.
We believe that the said change in cost price Is advisable, not only to
obtain this option, but also on account o f the steady improvement o f the
company since the beginning o f the 1927-28 season.
We, therefore, request that you authorize us to amend the latter part of
the third paragraph o f the Fox Film Corporation, class A, common stock group
agreement, dated July 6,1927, so that it will read:
“ The account shall never at any one time own or be committed fo r a net
long position in excess o f 50,000 shares at an average cost price to the account
not to exceed $65 per share.”
W ill you sign the inclosed duplicate copy o f this letter and return it to us
at your earliest convenience, as our authorization for making this chance
in the cost price o f this stock.
8
I.

Very truly yours,




T aylor T horne & Co., Manager.

STOCK EXCHANGE PRACTICES

1011

Was that letter sent out ?
Mr. G a l l ig a n . Yes. The date of it, you said, was October 5.
My cony is October 4.
Mr. G r a y . Either one date or the other.
Mr. G a l l ig a n . One date or the other. It is the same letter.
Mr. G r a y . At that time, your syndicate was being furnished with
confidential information by William Fox as to the earnings of the
companies during the time your syndicate was operating, is that
true?
Mr. G a l l ig a n ; That is true.
Mr. G b a y . From week to w eek?
Mr. G a l l ig a n . T h a t is true.
M r . G b a y . I n advance o f the tim e th e p u blic g ot it?
Mr. G a l l ig a n . That is true.
M r . G b a y . I offer th at letter and ask th a t th at be m ade a p a rt o f
the record.

Do you know whether this option of 20,000 shares you got from
Fox was his personal stock, or the company’s stock?
Mr. G a l l ig a n . I have not any idea.
Mr. G b a y . Do you know whether or not his interest in that
pool-----Mr. G a l l ig a n . I know that we got it from him personally.
Mr. G b a y . D o y ou know w hether h is interest in the p o ol was h is,
or w hether it was the co m p an y ’s ?
Mr. G a l l ig a n . All I can tell you is that he signed for it. Who
it was for, I really don’t know.
M r. G b a y . That is all on that pool, is it not ?
Mr. G a l l ig a n . That is all on that pool.
Senator G oldsbobough . I would like to suggest that when we
adjourn, we adjourn to meet in this room, at the hour you decide
upon. That room of the Interstate Commerce Committee is very
crowded. It is very much more pleasant here, and it takes very
little time to get across from the Senate Office Building to the
Capitol.
The C h a i r m a n . Are you all through, Mr. Gray ?
Mr. G b a y . I will have to ask you to come back, Mr. Galligan. I
will have to ask you about the other pools.
The C h a i b m a n . We will adjourn to meet here at 2.30.
(Whereupon at 1 o’clock p. m. a recess was taken until 2.30
o’clock p. m.)
AFTERNOON SESSION

Pursuant to the expiration o f the noon recess the committee met
and resumed the hearing in Boom 301, Senate Office Building, at
2.30 o’clock p. m.
The C h a i b m a n . The committee will come to order.
Mr.. G b a y . Mr. Chairman, I would like to have this gentleman
sworn and have him put his statements on the record. I f he wants
to make a statement, I think it should be under oath.
Senator W alco tt . That is a good thing, Mr. Chairman.
119652—32—pt 3------ 15




1012

STOCK EXCHANGE PRACTICES

TESTIMONY OF BENJAMIN REASS, ATTORNEY F0RWILLIA1C FOX,
NEW YORK CITY
T h e C h a i r m a n . Y o u d o solem nly swear that y o u w ill te ll the
truth, the w hole truth, and n oth in g b u t the truth re g a rd in g the mat­
ter that y ou are to te s tify to b e fo re the com m ittee, so n elp y o u God!

Mr. R ea ss . Yes, sir. Thank you. I say that the reporter has
handed to me-----The C h a i r m a n . Give your name and address and occupation fo r
the record.
Mr. G ray . What is your business?
Mr. R e ass . My name is Benjamin Reass. I am a lawyer. My
office is at 100 Broadway, New York.
I say that the reporter has handed to me a stenographic statement
o f a statement that was made by Mr. Gray to this committee, and
I would like to read it to you as it came to me from the reporter a
few minutes ago. Mr. Gray said:
I have just received a report, not only from my own physicians, that is, those
who acted on behalf o f myself as counsel for the committee, but Mr. FoS*s
physician also, and they all say that they find nothing the matter with Mr.
n ow ; that he had a good night’s rest, and they see no reason why h e could
not come here; that the only thing that they know is his own statement that he
is dizzy, but they find no indication* o f it.

I immediately phoned Doctor Hornaday-----Senator B u lkley (interposing). When was that statement made,
Mr. Reass?
Mr. G ray . This morning.
Mr. R eass . About 25 after 12 to-day while I was in this room.
I immediately phoned Doctor Hornaday, a house physician o f the
Mayflower Hotel, a gentleman whom I never had the pleasure of
meeting until yesterday morning about 9.30 when I found him in
attendance with Mr. Fox. I phoned him from this building. He
said to me that it is absolutely untrue; that he had not made any
statement to that effect. He also said to me that the only statement
he made was the one he had delivered to me this morning that was
sent to me here while I was in attendance on this committee.
I then asked him with respect to the statement o f the tw o phy­
sicians that purported to have made a report on behalf of the com­
mittee. He said those two physicians were there yesterday and con­
firmed his diagnosis; that they were not there to-day, but th a t one
o f them had phoned to him.
Now, I say in the light of that situation that statement contained
in this report is false.
Mr. G ray . Have you finished?
Mr. R eass . Yes, sir; that is all I w ant to say about that, sir.
Mr. G ray. Did Doctor Hornaday tell you that it w as Doctor
Tewksbury that telephoned to him?
Mr. R eass . He did.
Mr. G ray . Did he tell you that he told Doctor Tewksbury iust
exactly what I have reported there?
Mr. R eass . He did not. He said
Mr. G ray. What did he tell you he told Doctor Tewksbury?
Mr. R ea ss . He told me he told Doctor Tewksbury what he said
m this report to me.
J
u




STOCK EXCHANGE PBACTICES

1013

Mr. G hat. This morning ?
S eabSi Y gs.
Mr. G ray. What did he say to you he told Doctor Tewksbury?
M r. R e a 88. I d id not ask h im that.
Mr. G r a j . Oh, you didn’t ask him ?

Mr. R eass . I didn’t question him.
,
Mr. G r a y . Then when you state that the statement that I made is
false, which was to the effect that all three doctors agreed that this
man could come to-day, that he had had a good night’s rest; that his
temperature was normal and that the only thing that he complained
of was that he was dizzy, and that that was his own statement, you
do not know whether Doctor Hornaday told Doctor Tewksbury that
or not, do you?
Mr. R eass . I do not, of course.
M r. G bay . A n d yet you com e here, w hen y ou are a law yer, a n d
have the tem erity to m ake the statement that that statem ent th at I
made is false, when you d o n ot kn ow w hether that is true or n ot—
isn’t th at true?

Mr. R eass . I would say that the statement that you made which
is reported here and which I read to you is untrue.
Mr. G b a y . And yet you do not know what the conversation between Doctor Tewksbury and Doctor Hornaday was, do you ?
Mr. R eass. But I know what Doctor Hornaday said, and Doctor
Hornaday says it is not true, and he is here to swear to it.
Mr. G b a y . Well, you put Doctor Hornaday on the stand i f y o n
want to.
Mr. R e ass. Well, of course, I am going to. That is what I
brought him here tor. That is all I want to do, is to get Doctor
Hornaday to take the stand.
M r. G ray . I th ou gh t y ou w ere tr y in g to d o som eth in g else.
Mr. R eass . Well, we will see about that. Doctor Hornaday.TESTIMONY OF DE. F. A. HORNADAY, WASHINGTON, D. CL

The C h a i r m a n . D o you solemnly swear th a t you will tell the truth,the whole truth, and nothing but the truth regarding the matter th a t
you are to testify to before the committee, so help you God?
Doctor H o r n a d a y . I do.
Mr. G r a y . Doctor Hornaday, I presume that you are a physician
practicing in Washington?
Doctor H o r n a d a y . Yes.
Mr. G r a y . You are connected with the Mayflower Hotel?
Doctor H o r n a d a y . Yes, sir.
Mr. G r a y . Y o u know of your report o f Mr. Fox’s condition yes­
terday, o f course?
Doctor H o r n a d a y . Yes.
Mr. G r a y . Did you see him this morning?
Doctor H o r n a d a y . Yes.
Mr. G r a y . When?
Doctor H o r n a d a y . First at 9 o’clock.
Mr. G r a y . Since?
Doctor H o r n a d a y . T w ice since.
Mr. G r a y . When d id you see him last ?
Doctor H o r n a d a y . A b o u t 1 o ’clock.



1014

STOCK EXCHANGE PRACTICES

Senator W alcott . Where is he?
Doctor H o r n a d a y . He is in room 582 of the Mayflower Hotel.
Mr. G r a y . What is his condition now?
Doctor H o r n a d a y . His condition is somewhat improved over yes­
terday. He still complains of being dizzy. He has remained in bed.
His temperature is normal, pulse is normal, and his blood pressure
is normal, but he complains of the dizziness and of falling over and
tendency to fall over when he gets out of bed.
Mr. G r a y . In other words, the only thing that you can find the
matter with him is what he tells you is the matter with him; that is
correct, is it not, Doctor?
Doctor H o r n a d a y . Well, no; what he tells me concerning his
dizziness I have to accept.
Mr. G r a y . What else did you find to-day to be the matter with
him yourself as a physician ?
D o cto r H o r n a d a y . H e has a m atter w hich he w o u ld p re fe r to keep
in confidence.
Mr. G r a y . Keep your voice up.
Doctor H o r n a d a y . He has a matter which he would prefer giving

in confidence. He is willing for me to state it publicly if he must,
but would rather have it given in confidence.
Mr. G r a y . I will not ask you to state anything that you as a
^doctor have been advised by him as to his condition that he prefers
to keep private. We are not interested in that. Whatever that may
be, that is something that has been the matter with him all the time
or for some time past, is it not?
Doctor H o r n a d a y . Yes.
Mr. G r a y . It is nothing that happened to him yesterday?
Doctor H o r n a d a y . Nothing that happened to him yesterday, but
it is the result of a long, continued condition.
Mr. G r a y . Yes; I understand that.
Doctor H o r n a d a y . Yes.
Mr. G r a y . But to-day, Doctor, so that we may understand each
other and the committee may be properly informed, the only thing
that you know to be the matter with him is what he tells you is the
matter with him; that is true, is it not?
Doctor H o r n a d a y . No; it is not.
Mr. G r a y . Well.
Doctor H o r n a d a y . We examined his urine last night and found it
loaded with sugar.
Mr. G r a y . Yes.
Doctor H o r n a d a y . He is a diabetic of some standing.
Mr. G r a y . Yes.
Doctor H o r n a d a y . And he has given me to-day a report which he
had not turned over to me until to-day showing that a week ago he
had a blood sugar of 334, which is a serious condition. I have net
taken a blood-----Mr. G r a y (interposing). But that is nothing that happened to
him yesterday?
D o cto r H

ornaday.

N o.

Mr. G r a y . And it is possible that the dizziness and the other things
that you did find the matter with him are the result of that condition J
Doctor H o r n a d a y . Yes.




STOCK EXCHANGE PRACTICES

1015

Mr. G r a y . But to-day when you examined him and found that
disease, he being a diabetic, from which he has been suffering, you
find what?
Doctor H o r n a d a y . I find that when he tells me the height of his
blood sugar----Mr. G r a y . Yes.
Doctor H o r n a d a y . That if lie were my private patient over a
period here in town he would be in the hospital right away until
that blood sugar would be lowered.
Mr. G r a y . Yes.
D octor H o r n a d a y . H e is at a p o in t where i f he is subjected to a n y
m ental, em otional, or nervous strain h e is a p t to becom e a severe
diabetic.
Senator W alcott . I s he tak in g in su lin ?
Doctor H o r n a d a y . H e is not.
Mr. G r a y . H o w lo n g has he h a d the con dition ?
Doctor H o r n a d a y . H e has this m o rn in g been put on a rigid

diabetic diet.
Mr. G r a y . H o w lo n g h as he h a d the co n d ition ?
Doctor H o r n a d a y . Several years.
Mr. G r a y . Several years?
Doctor H o r n a d a y . Yes. But not blood sugar of this height.
Mr. G r a y . But, Doctor, as a matter of fact, from your examina­
tion of him this morning and aside from the history that he has
given you with reference to his diabetic condition, and aside from
His statement to you that he is dizzy, you, from your examination,
find nothing the matter with him, do you ?
Doctor H o r n a d a y . Found su gar in his urine, which confirms his
diabetic condition.
Mr. G r a y . Confirms his diabetic condition ?
Doctor H o r n a d a y . His diabetic condition is such that, having re­
gard only for him as my patient, I would be very much opposed to
nis appearing where he would have severe nervous or mental strain.
Mr. G r a y . Yes. Did you talk to Doctor Tewksbury over the tele­
phone?
Doctor H o r n a d a y . I did.
Mr. G r a y . Suppose, instead of my asking you, you just relate to
the committee your conversation with Doctor Tewksbury to-day.
Doctor H o r n a d a y . I told Doctor Tewksbury, just as I told in the
certificate here, that I had seen him and his pulse and temperature,
blood pressure, were normal, but he still complained of being dizzy;
that while he was better. I thought that he still was not in condition
to be out of bed; that the tenderness over his gall bladder persisted
and the tenderness over the appendix region persisted—not very
great, but still he had those symptoms, and I felt that he would be
better off physically, if he could remain in bed to-day.
Mr. G r a y . That tenderness, of course, you learned of from his
telling you about it ?
Doctor H o r n a d a y . N o ; by my—yes.
Mr. G r a y . Y ou can n ot do it oth erw ise?
Doctor H o r n a d a y . H e flinches.
Mr. G r a y . He flinches?
Doctor H o r n a d a y . Yes, sir; he flinches.




1016

STOCK EXCHANGE PRACTICES

Mr. G r a y . In other words, it is the thing that he says and does
that conveys that information to you?
Doctor H o r n a d a y . Yes.
Mr. G r a y . Did you not tell Doctor Tewksbury that he had a good
night’s rest last night?
Doctor H o r n a d a y . I did.
Mr. G r a y . N o w , let me say to you frankly that the message came
to me from Mr. Stock from Doctor Tewksbury to the effect that you
had said that you saw no reason why he could not be here at 2
o ’clock this afternoon.
Doctor H o r n a d a y . There is a mistake somewhere, because I did
not say that. I did not say that.
Mr. G r a y . All right; you think that he ought to be in a hospital?
Doctor H o r n a d a y . Yes.
Mr. G r a y . And I suppose you think that he should have been
there long ago?
Doctor H o r n a d a y . Yes.
Mr. G r a y . You know, of course, that during the past few years
while he has had this condition he has been—if he has told you
that—active in business?
Doctor H o r n a d a y . Yes.
Mr. G r a y . Yes. You think, however, it might be a particular
strain on him to come here and testify before this committee?
Doctor H o r n a d a y . I think this, that he probably has not had this
high blood sugar all the time. As a matter o f fact, it has been down.
He gave me other reports showing it had been down two or three
years ago, but he has not been treated for it. He has treated himself
very largely, which he should not do, of course.
Mr. G r a y . Has he been in a doctor’s hands?
Doctor H o r n a d a y . He has not, except to have-----Mr. G r a y (interposing). Not till he comes to Washington to
testify?
Doctor H o r n a d a y . Yes.
Mr. G r a y . I see. That is all.
Well, that is the situation. Doctor Tewksbury, of course, told us
there may have been—they are both reputable physicians. O f course,
there is a possibility that he misunderstood Doctor Hornaday.
The C h a i r m a n . Let the record show that he has not been urged
to come here to-day.
Mr. G r a y . N o ; nobody has disturbed him at all. A ll this fuss is
being raised bv his lawyer.
Mr. R eass . Well, but all this is being broadcast. You know, I told
you quietly about the difficulty.
Mr. G r a y . Y ou are n ot the kin d th a t a n y b o d y can te ll a n y th in g
t o qu ietly . Y o u fly o ff the h an dle w hen a n y b o d y starts t a l k i n g to
you.
The C h a i r m a n . That is the end of that.
Mr. R eass . That is the end here, of course.
Mr. G r a y . Y ou are excused, if Mr. Fox is not, and I want him

to-morrow morning, if he is well enough to appear.
The C h a ir m a n . Have you any testimony as to the condition of
Mr. Foxs accountant, who is ducking this hearing ?
Mr. R eass . I have not.




STOCK EXCHANGE PRACTICES

1017

The C h a i r m a n . Can’t you bring some doctors to show that he is
not able to be here?
Mr. G r a y . I have had two detectives looking for him since day
before yesterday, after Mr. Fox and his lawyer pledged me their
word they would have him here.
Mr. R eass . Of course, there is no use of m y undertaking to
continue.
M r. G ray . N ot a bit.

Mr. R eass . Not at all.
Mr. G b a y . Not a bit. I just asked you if you would have him
here.
Mr. R eass . Nobody would pay any attention.
The C h a ir m a n . That is all right; I just asked you whether you
could bring some doctors here to show that the accountant is not
able to be here.
Mr. R eass . Nobody expects an answer to that question, of course.
Mr. G r a y . Mr. Galligan.
TESTIMONY OF WILLIAM J. GALLIGAN, OF TAYLOR, THORNE &
CO., WESTFIELD, N. J.— Resumed

Mr. G r a y . N o w , Mr. Galligan, there was, then, a second pool
formed at the office of Taylor, Thorne & Co. ? W ill you tell the com­
mittee the dates during which that ran, please ?
Mr. G a l l ig a n . We did not call them pools, Mr. Gray; we called
them syndicate accounts.
Mr. G r a y . We understand that Mr. Whitney and a few other
of you gentlemen in New York differentiate between a pool and a
syndicate account, but some of the traders who make their money in
these things frankly call them pools. But whatever name it was
called by, won’t you tell us when it happened ?
Mr. G a llig a n . That was the one dated April 5 ,1 9 2 8 ?
Mr. G r a y . Yes; and continued until August 31, 1928. That suc­
ceeded the first pool. Did any of the profits or stock in the first
pool pass into the second pool ?
Mr. G a l l ig a n . I think that you will find that a great many mem­
bers of the first syndicate account took a participation in the second
account.
Mr. G r a y . Yes.
Mr. G a l l ig a n . N o w , does th at answ er y o u r qu estion ?
Mr. G r a y . Yes. Now, Stevens & Legg, the specialists, were in that
second pool, were they not?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . And they put up the margin o f $50,000?
Mr. G a l u g a n . Correct.
Mr. G r a y . Mr. Fox was in that pool, was he not, Mr. William Fox?
Don’t look for his name. He hid it under the name of Eiselle &
King, didn’t he ?
M r . G a l u g a n . I don’t kn ow anything about Eiselle & King’s par­
ticipation.
Mr. G r a y . Well, I will prove that. I will show the checks.
Eiselle & King were in there for the participation in it, and a mar­
gin of $200,000 was put up; is that not correct?
Mr. G a l u g a n . That is correct.



1018

STOCK EXCHANGE PRACTICES

Mr. G rat . That is correct. On the question o f the figures; In the
first place, you bought 5.000 shares of class A common stock o f the
Fox Film Corporation from the Haystone Securities Corporation,
did you not?
Mr. G a l l ig a n . Yes, sir.
_ .
Mr. G r a y . And the Haystone Securities Corporation is a n affiliate
of Hayden & Stone, a stock brokerage house in New York; isn’t that
true?
Mr. G a l l ig a n . Yes, sir.
Mr. G r a t . And did you know that ju st immediately prior to the
formation of your pool the Haystone Securities Corporation, or
rather Hayden & Stone, had underwritten an issue o f Fox Film?
Mr. G a l l ig a n . Yes, sir.
Mr. G r a t . And did you know that within four days after you
arranged your syndicate the Hayden & Stone concern underwrote
another issue of Fox Film in September of 1928? You closed on
August 31.
Mr. G a l l ig a n . That is the last one, is it not, that you are talking
about?
Mr. G r a t . Yes; the $154,000.
Mr. G a l l ig a n . Yes. That is correct.
Mr. G r a t . A s a matter o f fact you h a d options on 50,000 shares of
Fox Film from the Haystone Securities, d id you not, at different
prices, ranging from 80 to 84*4?
Mr. G a l l ig a n . Well, the 80 was a purchase.
Mr. G r a t . That was a purchase?
Mr. G a l l ig a n . Yes.
Mr. G r a t . And options run 45,000 more from 80 to 84^ ?
Mr. G a l l ig a n . That is correct.
Mr. G r a t . The pool, as a matter of fact, if you have y o u r records
there, please verify this, bought and sold so as to evenly balance the
account 193,550 shares; is that correct?
Mr. G a l l ig a n . I d id n ot cou n t it u p , b u t I im a g in e your a u d ito rs
have.

Mr. G r a t . Yes; they have. You w ill accept that figure?
Mr. G a l l ig a n . Well, I don’t know of any other figure. I imagine
it must be about right.
Mr. G r a t . Have you got the figure of the profit in the p o o l?
Mr. G a l l ig a n . I nave that; yes, sir.
M r. G rat. The distribution amounted to how much m oney?

Mr. G a l l ig a n . The margin returned, do you want that figure?
Mr. G r a t . No; the profit was $149,269.59?
Mr. G a l l ig a n . That is probably correct, for the reason that two
of the members of the pool took down stock instead o f money. So
that my figure in money here is slightly under your figure.
Mr. G r a t . In other words, the actual money was $122,959.93 ?
Mr. G a l l ig a n . That is correct.
Mr. G r a t . And the distribution of the stock brought the profits
up to one hundred and forty-nine thousand and some odd?
Mr. G a l l ig a n . That is right.
Mr. G r a t . There are one or two things I would like to know about
that. You know Mr. Bradford Ellsworth, don?t you?
Mr. G a l l ig a n . I met him for the first time to-day.
Mr. O r a t . You knew h im b y reputation in New York?



STOCK EXCHANGE PRACTICES

1019

Mr. G a l l ig a n . I knew o f h i m ; yes, sir.
Mr. G r a y . Y ou knew he was a trader ?
Mr. G a l u g a n . I do n ’t kn ow th a t I co u ld answ er th a t. I knew
lie was connected dow n in the S treet, and in w h a t ca p a city I d id n ’t
know.
Mr. G r a y . During the operation of this pool, does your record
show that you gave a put to Mr. Ellsworth?
Mr. G a l l ig a n . I haven’t got that paper with me, but I have recol­
lections o f a put that he did get.
Mr. G r a y . Yes. Now, so mat the committee may, if they do not
understand what a put is, it means that you agreed to buy from Mr.
Ellsworth within a certain time a certain amount of stock at a cer­
tain price. That is true, isn’t it ?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . And in this instance you gave Mr. Ellsworth the put at
$90 a share, while the market was then about 81; isn’t that true ?
Mr. G a l l ig a n . I really can not answer that. I think Mr. Ells­
worth would really be better able to answer it.
Mr. G r a y . What I would like to know is why a syndicate operat­
ing in Fox Film stock that would go to Mr. Ellsworth and give him
a put on 5,000 shares of the stock at $90 a share when the price of
the stock was 81 and a fraction, or give him an opportunity to make
on his put approximately we will say 8 points on 5,000 shares, or
$40,000.
Mr. G a l l ig a n . Pardon me, Mr. Gray. What was the date of
that put?
Mr. G r a y . June 11, 1928.
Mr. G a l l ig a n . What was the price of the stock on the stock ex­
change on that date?
Mr. G r a y . On that day—June 4 was the date o f the put. June 11
Was the date of its exercise.
Mr. G a l l ig a n . What was the price of the stock on June 4, please*
Mr. G r a y . I am advised that it was in the low 80’s. I direct youi
attention to the fact that you had an option to purchase the stock
from the Haystone Securities Corporation during that period of
time from 80 80y2 to 84% and that the price range in June ran dur­
ing the whole month from 72 to 89y2. What I really want to know
is why was he given a put? Why was one man given an opportunity
to make that much money? What did he do for you, publicity?
Mr. G a l l ig a n . N o; n ot th a t I know o f.
Mr. G r a y . What was it?
Mr. G a l l ig a n . What I want to know is what is the actual price
of that stock the day that put was given, because-----Mr. G r a y . The actual price on the day he exercised it was $81 a
share.
Mr. G a l l ig a n . No; I am not talking about that; I am talking
about the day that he received it.
Mr. G r a y . I haven't the exact record and I do not want to guess
at it, except to say to you that the price ranged and it went up from
the beginning to the end of June from 72 to 89%. Therefore, it was
much less than the price of the put. You can not answer why he
got it, can you?




1020

STOCK EXCHANGE PRACTICES

Mr. G a l l ig a n . N o. It may not have been eight points difference
though. I do not think that you will find that the actual difference
between the price at which the stock was selling the day the put was
given and the price of the put was any eight points.
M r. G ray . I know , but w h y was it given to h im ?
th in g f o r a syndicate to do.

I t is an unusual
. . . . .

Mr. G a l l ig a n . Mr. Gray, I had nothing to do with giving him
that put.
Mr. G r a y . And your answer is you do not know?
M r. G a l l ig a n . N o ; I d o n ot kn ow .

Mr. G r a y . All right; we will ask him. Do you know Mr. Galli­
gan, whether or not—you have told me you did not know whether
the $200,000 subscription of Eisele & King was Fox’s—do you know
whether or not one hundred and fifty thousand of that was taken
down by Eisele & King and whether they allowed the other fifty
thousand to pass into your third syndicate f
Mr. G a l l ig a n . Mr. Gray, you could tell that by our canceled
checks.
Mr. G ray. Yes. Well, I do not have your canceled checks, but I
will offer in the record and if it is necessary I will prove th is fact
a little later, because it has been admitted to'me by M r. F ox. ^ I will
offer a check o f Eisele & King, dated September 7, 1928, which was
eight days after this syndicate closed, to the order of William F ox.
It is a check numbered 61710, Newark, N. J., drawn on the National
Newark & Essex Banking Co., at Newark, N. J., for $150,000, which
bears the indorsement by stamp “ For deposit only to the credit of
William Fox.”
(The check submitted by Mr. Gray is here copied in the record in
full, as follows:)
Eisele & K ino,
Investment Securities,
Xcicark, N. J S ep tem b er 7, 1928.
No. 61710
Pay to the order of William Fox
Eisele & Kinjr
50,000 Dol’s 00 Cts
Dollars
National Newark & Essex Banking Co.. Eisele & King, Newark, N. J.
$50,000.00.

(The above check is indorsed as follows:)
For deposit only.

W i u i a i i Few.

Also indorsement of the National City Bank o f New York.
Mr. G r a y . And then I will offer in evidence—first let me ask the
question: What was the profit out of this transaction to Eisele &
King on that two hundred thousand subscription ?
Mr. G a l l ig a n . $19,993.48.
Mr. G r a y . Therefore, I offer a check for exactly that amount
drawn on September 7, 1928, the same date as the other check.
No. 61711, drawn on the National Newark & Essex Banking Co., at
Newark, N. J ., to the order of William Fox, signed by Eisele & King,
for exactly $19,998.48, which was the profit that Eisele & K ing made
out of this syndicate transaction, bearing the indorsement by stamp
“ For deposit only to the order of William Fox.'’
(The check submitted by Mr. Grav is here copied into the record
in full, as follows:)




1021

STOCK EXCHANGE PRACTICES
E tsh le & K i n o .
I n v e s t m e n t S e c u r it ie s ,

No. 81711.
Pay to the order of William Fox
48 Cts
Dollars.

XciParlc. 2i. J., September 7,1928.
fCioele & King
19993 Dol’ S
E i s e l e & K in o .

National Newark & Essex Banking Co., Newark, N. J.
$19,992.48.

(The above check is indorsed:)
For deposit only.
W il l ia m

Fox.

Also by the National City Bank of New York.
Mr. Ghat. N ow , all that lvuser family were in that pool, were they
not, or the most of them ?
Mr. G a l l ig a n . Well, there was quite a few of them.
Mr. G r a y . And Hayden, Stone & Co. were in that pool, too, were
they not?
Mr. G a l l ig a n . I ju st can n ot find a n y record o f th a t.
Mr. G r a y . That is at the bottom of your list.
Mr. G a l l ig a n . Wait a minute now—yes.
Mr. G r a y . Now I show you what purports to be a copy of the
syndicate agreement in that case and ask you whether that is a cor­
rect copy. I am wrong—Senator Bulkley directs my attention to
the fact that the check which I said was one hundred and fifty thou­
sand is not one hundred and fifty thousand; that the thing which I
took for a one is a part of the machinery of the stamp, and the
check is fifty thousand. I will show the remainder of that two
hundred thousand deposit, when I come to it, went into the third
syndicate for the benefit of Fox, but I am mistaken as to the amount.
Mr. G a l l ig a n . That is the copy that was made up.
Mr. G r a y . I will offer and ask to have placed in the record a copy
of the syndicate agreement in that case.
(The document presented by Mr. Gray is here printed in the
record in full, as follows:)
F O X F IL M

CO Rl'OK ATIdN

C L A S S A CO M M ON

ST O C K TR A D IN G

GROUP

A p r i l 4. 1928.
Confidential.
Dear Sirs : We are forming a group, in which we will participate and of
which we will be manager, to purchase and sell, in the market or otherwise,
exchange, or otherwise trade in, and make contracts in reference to capital
stock of Fox Film Corporation class A common stock.
We have agreed to purchase for the group 5,000 shares of the class A
common stock of Fox Film Corporation, at $80 per share, and in consideration
for so doing are to receive, without expense to the group, options on the class
A common stock of the Fox Film Corporation at the following prices:
r.,000 shares---------------------------- 83
5,000 shares----------------------------80%
Do________________________83%
Do_______________________ 81
Do________________________84
Do___________ _____ ______21 %
Do------------------------------------ 84%
Do_______________________ 82
Do_______________________ 82%
The group is to be formed for an aggregate maximum liability of 75,000
shares and is to continue for a period of six months from the date hereof,
with the right on the part of the managers to terminate the same at any time
in their discretion. The members of the group shall be Uable for the losses
and expenses of, and shall be entitled to participate in the net profits of the
group (subject to the distribution of such portion thereof to Taylor, Thorne &




1022

STOCK EXCHANGE PRACTICES

Co. as is hereinafter provided) pro rata in proportion to their respective
interests in the group. Members of the group shall, upon 24 hours* notice
from the managers, from time to time, pay for and/or take up at the then
net cost to the group, all or any part of their respective portions o f securities
acquired for the group account. All such securities taken up prior to the
termination of the group shall be for carrying purposes only and shall remain
subject to recall and disposition by the managers during the life o f the
group.
The members of the group shall also be obligated, on like notice from the
managers, to advance their pro rata share of any margin required as col­
lateral under any loan arrangements effected by the managers to carry any
securities in the account; and in this respect the managers are h e r e w i t h
making an initial call for margin equivalent to $10 a share on the maximum
commitment of each participant.
Any member of the group may, if he so desires, elect to carry his pro rata
share of the group securities, and to the extent that he does so shall n o t
be liable i n connection with any loan arrangements effected by the m a n a g e r s
for carrying the balance of such securities.
As compensation for services rendered in connection with the formation
and management of the group, Taylor, Thorne & Co. (irrespective of its
participation as a member of the group) shall be entitled to receive, on termina­
tion of the group, 10 per cent of the net profits of the group as determined by
the managers, the balance of the net profits of the group, whether represented
by cash or securities, to be divided among the members of the group pro rata
in proportion to their respective interests therein. It is understood that
in determining the net profits of the group any securities then distributable
to the members of the group will be appraised by the managers at the then
market value, and that such determination of the net profits shall be con­
clusive. In case, on the termination of the group, there shall remain any
securities in the group account to be distributed to the members thereof,
Taylor, Thorne & Co. shall have the right at its option, in lieu o f receiving
10 per cent of the net profits as aforesaid, to take such securities upon
payment of the then net cost thereof to the group account.
The managers will form an advisory committee of participants, consisting
of a representative of Hayden, Stone & Co., and Mr. Nathaniel King, and
Col. A. R. Kuser. The managers can call upon the members o f this com­
mittee for their advice on any and all matters in connection with the handling
of this account.
The managers will have full power to act in all group matters, including
power to determine if and when and to what extent any option contracts shall
be entered into or exercised, and to determine at what price or prices, in
what amounts, at what times, and in what manner shares of the above*
mentioned stocks or receipts therefor shall be acquired or disposed of, whether
in the market or at public or private sale or by special agreement. The
managers are also expressly authorized to borrow or themselves advance
moneys without notice for any of the purposes of the group, and to pledge as
security therefor any of the assets of the group and/or the obligations of the
members of the group.
The participant further agrees that if, during the life of this group, he
desires to sell any of his holdings not included in the group account, he will
do so only through the group account.
In the event of the default of any member or his failure to comply with the
terms of this agreement, the managers shall have the right to exclude him
from further participation hereunder and to sell and dispose of his interest
in the group at public or private sale, in any manner for the account o f the
group; but such members shall not thereby be released from his obligation
hereunder. A default by one member shall in no way release another from
his full obligation, and any loss resulting from such default shall be charged
to the group as a group expense.
Nothing herein contained shall constitute the members of the group partners
with the managers or with one another, or render them liable to contribute
more than their ratable amount as herein provided, or render the managers
liable for the subscription or default of any member.
Any notice hereunder from the managers to any member shall be deemed
to have been duly given if mailed or telegraphed to such member, directed
to the address furnished by him.




STOCK EXCHANGE PRACTICES

1023

We confirm tliat we have allotted to you a participation of 5,000 shares in
the group above described, subject to your immediate acceptance, to be executed
on a duplicate of this letter inclosed for the purpose.
-------------------- »
Very truly yours,
Managers.
Hie foregoing is hereby approved and accepted.

Mr. Gkay. I ask you whether or not that paper that I hand you is
a true copy of the option given by these pools to the Haystone Securi­
ties Corporation.
Mr. G a llig a n . That looks like the copy that was made up in my
office.
Mr. G ray. I have that and ask that that be compiled in the record,.
The C h airm an . There* being no objection, it will be made a part o f
the record with the other papers that counsel has requested go in.
(The last document presented by Mr. Gray is here printed in the
record in full, as follows:)
A p r i x 4, 1928.
Deab Sirs: The undersigned, as managers of “ Wesco Corporation stock—
Pox Film Corporation class A common stock, purchase group,” confirm the sale
to you on March 29, 1928, of 5,000 shares of class A common stock of Fox
Film Corporation (hereinafter culled stock) at a price equal to $80 per share,
for Immediate delivery against payment to us in New York funds.
As such managers we also confirm the grant to you on March 29, 1928, of the
following options, namely:
(а) An option to purchase from us 5,000 shares of stock at $80.50 per share,
at any time on or before June 10,1928; and
(б) In case such 5,000 shares of stock are so purchased, a further option to
purchase 5,000 additional shares of stock at $81 per share at any time on or
before July 10, 1928 ; and
(e ) In case such 10,000 shares of stock are so purchased, a further option
to purchase 5,000 additional shares of stock at $81.50 per share at any time
on or before August 10, 1928; and
(d) In case such 15,000 shares of stock are so purchased, a further option
to purchase 5,000 additional shares of stock at $82 per share at any time on or
before September 10, 1928; and
(e) In case such 20,000 shares of stock are so purchased, a further option to*
purchase 5,000 additional shares of stock at $82.50 per share at any time on o r
before October 10, 1928; and
(f) In case such 25,000 shares of stock are so purchased, a further options
to purchase 5,000 additional shares of stock at $83 per share at any time on o r
before November 10, 1928; and
(g) In case such 30,000 shares of stock are so purchased, a further option to
purchase 5,000 additional shares of stock at $83.50 per share at any time on or
before December 10, 1928; and
(h) In case such 35,000 shares of stock are so purchased, a further option to
purchase 5,000 additional shares of stock at $84 per share at any time on or
before January 10, 1929: and
« ) In case such 40,000 shares of stock are so purchased, a further option to
purchase 5,000 additional shares of stock at $84.50 per share at any time on or
before February 10, 1929.
In case any such option is exercised by you, we will make delivery of the
shares called for thereby to you at the office of Hayden, Stone & Co., No. 25
Broad Street, New York City, against payment therefor in funds payable
through the New York Clearing House.
If the foregoing expresses the understanding between us, kindly sign in the
space provided below and return the inclosed copy of this letter to us.
Very truly yours,
H aystone Securities Corporation.
Managers of Wesco Corporation stock, Fox Film Corporation class A common
stock, purchase group.
Confirmed.




1024

STOCK EXCHANGE PRACTICES

Mr. G ray. In order to complete the record—you may or may not
know anything about the matter—I am offering a letter which can
be properly identified as W. R. K. Taylor & Co., letter dated June 15,
1928, to Eisele & King, which was while this pool was in operation,
to whom Fox was covering his transactions.
(The letter referred to and read from by Mr. Gray is here printed
in the record in full, as follows:)
M e ssr s. E i s e l e & K i n g ,

W. R. K. T a y i x w & Co.,
New York, June 15, 1928.

Newark, N. J.
: We wish to advise that we are to-day in receipt o f a c h e c k in
the amount of $100,000 from Mr. William Fox and we inclose herewith copy oi
our letter to him as acknowledgment of same.
Very truly yours,
J. J- H etnbioh.
G e n tle m e n

Mr. G ray . He was associated with your firm, was he not?
Mr. G alligan. That is right.
Mr. G ray . And then another letter, dated June 15, 1928, the same
day, to Mr. William Fox [reading] :
We acknowledge receipt of your communication, inclosing check for $100,000
which you forwarded to us as per the request of Mr. King.
We wish to advise that we have credited this check to the Fox Film class A
•common stock group, account of Messrs. Eisele & King, being their additional
margin of $10 a share on their participation on 10,000 shares in the said group.
Very truly yours,
W. R. K. Ta.\xob & Co.

Those, I think, definitely identify that Eisele & King transaction
with Fox.
(The letter last submitted and read from by Mr. Gray is here
printed in the record in full, as follows:)
J u n e 15, 1928.
Wiluam F o x ,
New York, N. Y.
D e a b Siks: We acknowledge receipt of your communication, inclosing check
for $100,000, which you forwarded to us as per the request of Mr. King.
We wish to advise that we have credited this check to the Fox Film class A,
common stock group, account of Messrs. Eisele & King, being their additional
margin of $10 a share on their participation on 10,000 shares in the said group.
Very truly yours,
W. R. K. T aylor & Co.

M r.

Mr. G ray . Then there was a third syndicate, Mr. Galligan?
Mr. G alligan . That is right.
Mr. G ray. By the way, these syndicates, of course, were operated
purely and simply for the purpose of making money, were they not ?
Mr. G alliga n . N o, sir; they were operated for the purpose of
keeping a good market in the stock. The money of the firm was
put in there with other participants because they felt that they had a
situation that offered a good investment.
Mr. G ray . Of course, you were not averse to taking profits?
Mr. G alligan . Hardly.

Mr. G ray. N o ; but your statement is that the purpose of the
syndicate was to keep the market up?
Mr. G alligan. Not to keep the market up.
Mr. G ray. To keep a good market?
Mr. G alligan. To keep a good market.
Mr. G ray . All right.
Mr. G alligan. In other words, the sponsorship of the stock.



STOCK EXCHANGE PRACTICES

1025

Mr. G ray. I will come back and ask you about that, what you mean
by that, but I want to get this first.
Mr. Fox was then distributing this stock to the public, was he not?
Mr. G alligan. He sold some stock through us.
Mr. G ray. Well, he was generally distributing it to the public?
Mr. G alligan. Not generally distributing. I can not quite agree
on that term.
Mr. G ray. Well, he was distributing it to the public, then? I will
take the word “ generally ” out,
Mr. G alligan. He was; through us.
Mr. G ray. Through you. And at the same time you were main­
taining a good market ?
Mr. G alligan. Yes, sir.
Mr. G ray . In order that you might get a proper price for the stock
you were distributing it to the public?
Mr. G alligan. Not necessarily. We might-----Mr. G ray (interposing). Well, then, I wish you would tell this
committee, when you say you were maintaining a good market and
you were assuming the sponsorship for the stock, just exactly wrhat
you mean, in plain language, so that we can understand it.
Mr. G alligan. I mean this, that after all, the general market situa­
tion is governed by conditions at that particular time. I mean that
if some news of importance, whether of domestic or international
importance, was announced to cause the stock market to react, this
account that we were operating for stood ready to protect the market
by buying stock each quarter per cent down.
Mr. G ray . And to keep it from reacting as it would otherwise
naturally react to the news that you talk about— right ?
Mr. G alligan. Well, to keep it from wide fluctuations.
Mr. G ray. N ow , why did you want to keep it from wide fluc­
tuations ?
Mr. G alligan. In the first place-----Mr. G ray (interposing). Let me see if I can give you the answer
to it. So that Fox might distribute to the public at the proper price ?
Mr. G alligan . No; I would not say that.
Mr. G ray. W ell, then, you give me the proper answer instead of
niy hunting for it.
Mr. G alligan. I would not say that, Mr. Gray.

The people who
went into these syndicate accounts put their money up with us and
were willing to buy the stock.
Mr. G ray . I am not talking about the sales to them. They were
all interested in the proposition.
Mr. G alligan. No; I am talking about the purchases for the
account.
Mr. G ray . Oh, yes ; go ahead.
Mr. G alligan. And regardless of what transpired after that they
were willing to make a purchase of that stock at certain times as the
market needed protection?
Mr. G ray . If the natural reaction had taken place and you had
not assumed the sponsorship and kept a good market, why, Fox
Theaters or Fox Films, either one, when they were selling their stock,
would never have been able to get the price from the stock that they
did get, would they ?
Mr. G alligan . Mr. Gray, I think that is problematical.




1026

STOCK EXCHANGE PRACTICES

Mr. G r a y . Problematical?
Mr. G alligan. I think so.

Mr. G ray. In other words, you think if the market dropped five
points you could still get five points higher out of the public s
^
Mr. G a l l i g a n . When you say we could get “ out of the p u b lic,’
what do you mean ?
Mr. G r a y . Well, now, let me take a concrete illustration : Y o u are
handling certain o f these stocks in the—Fox calls it m a n ip u la tio n ;
I will prove that a little while later—but you are handling certain
of these stocks in your sponsorship and you desire to keep a good
market at a price around 84. Some news comes out that would cause
a natural reaction in the market; and the news, if you did not keep
up your sponsorship, might cause Fox stock to drop to 78. I f it
dropped to 78, you could not sell any to the public for 84, could you?
Mr. G alligan. We would not attempt to sell any.
Mr. Gray. Of course you wouldn’t, but you could not. Answer
me that, yes or no—you could not, could you ?
Mr. G alligan . We would not attempt to.
Mr. G r a y . No; but by keeping your market good and k e e p i n g
up your sponsorship you can maintain the price at 84 and stop that
natural reaction or wide fluctuation, whichever you choose to call it,
down to 78; and you can still continue to sell Fox Film to the public
for 84, can’t you ?
Mr. G alligan . N o, sir.
Mr. G ray. All right, then; I guess I am wrong in all m y logic
and reasoning. We will let it go at that. That is the best explana­
tion you can give this committee of what you call sponsorship and
keeping a good market, is it ?
Mr. G alligan. Well, I will elucidate a little more if I have not
made it clear enough.
Mr. Gray. Go ahead.
Mr. G alligan. When these accounts were formed each participant
signed a liability of a certain amount. He was willing to put his
money into that security and, if necessary, keep it indefinitely. No
one knows at the inception of one of these accounts what the course of
the market is liable to be, because it is governed entirely by factors
beyond the control of any individual or group.
Mr. Gray. G o ahead. I am waiting for the explanation o f what
keeping the good market and sponsorship means, and the effect of
it and the purpose of it.
Mr. G alligan. Well-----Mr. G r a y (after a pause). In other words, if it is not w h a t I said,
you tell what you think it is or admit that it is what I sa id a n d we
are through.
Mr. G alligan. N o ; I can not admit what you said, Mr. Gray.
Mr. Gray. I know it is pretty tough to do it. So I am w aiting
for you to tell me what you think it is.
Mr. G a ll i g a n . N o ; it is not a question of being pretty tough to
do i t ; it is a question of getting the right answer for you.
Mr. G r a y . All right; we will wait for you.
Mr. G alligan. When you say that by our buying, holding the
market up, it enables us to sell stock at a higher price than we other1 d° n°t agree with that explanation.
Mr. Gray. You do not think th at is just a natural, proDer
statement?
^



STOCK EXCHANGE PRACTICES

1027

Mr. G a ll i g a n . I do n ot, sir.
Mr. G r a y . That one follows after the other as day follows the
night?
M r . G a l l ig a n . I don ’t th in k so.
Mr. G r a y . All right.
Mr. G a l l ig a n . For the reason that

it is possible after a purchase
is made for an account that you are unable to sell it due to general
market conditions. When I say general market conditions, we all
know that the market is controlled by economic factors.
Mr. G r a y . The New York Stock Exchange? And the market-----Mr. G a l l ig a n (interposing). The market; the market I am talk­
ing about.
Mr. G r a y . It may enter into it somewhat, but from what we have
discovered down here that has got very little to do with it.
Mr. G a l l ig a n . W e l l , I don ’t th in k so.
Mr. G r a y . Well, come back and tell me again—we haven’t got
it yet—what you mean by keeping a good market and assuming a
sponsorship for the stock.
Mr. G a l l ig a n . By keeping a good market I mean being in a
position to buy or sell at any time.
Mr. G r a y . W h ich ever y ou need to do in order to keep th e m arket
from either goin g u p to o fa r or dow n too f a r ; is th a t r ig h t?
Mr. G a l l ig a n . Not— I won’t say to keep it from going up too
far or down too far, because that process is liable to happen anyway.
It might go down. I can not stop it from going down.
Senator B r o o k h a r t . Were you buying and selling both at the
same time?
Mr. G a l l ig a n . No—well, I mean there are intervals between.
They are not done simultaneously. Is that what you mean, Senator?
Mr. G r a y . T o answer Senator Brookhart, in these pools you sell
exactly the same amount you buy.
Mr. G a l l ig a n . Yes.
Mr. G r a y . Certainly you do.
Mr. G a l l ig a n . Yes; that is right.
Mr. G r a y . So that when you quit you balance your accounts. So
I guess that is the best you can tell us about that.
Now, I take you to the third pool. The third pool, the date of the
operations is what?
Mr. G a l l ig a n . April 5,1928, to August 31,1928.
Mr. G r a y . No; that is the second one.
Mr. G a l l ig a n . Here, I have it. August 31, 1928, to October 30,
1928.
Mr. G r a y . In other words, the day you closed your second syndi­
cate you started No. 3 one; is that right?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . N o w tell me first o f all whether or not—we have seen
that $50,000 came out to Fox in the Eisele & King transaction in the
second syndicate—whether or not you find $150,000 remaining in the
third syndicate in the name of Nathaniel King.
Mr. G a l l ig a n . There is one hundred and fifty thousand in the
name of Nathaniel King, that is right.
Mr. G r a y . And the participators there were pretty much the
participators that were in the other, were they not ?
Mr. G alligan . Yes. they were.
119852— 32— 1*T 3------ 1G




1028

STOCK EXCHANGE PRACTICES

M r . G r a y . T h ere are som e ch an ges?
Mr. G a l l ig a n . There are some changes, b u t

for most part they
were the same.
Senator B r o o k h a r t . Why do you close the o ld p o o l and start a
new one?
.
Mr. G a l u g a n . Well, I believe that the old one expired by lim ita ­
tion.
.
Senator B r o o k h a r t . That was just by agreement, was it not*
M r . G a l u g a n . Just a second, Senator, and I will answer that
question for you. [After referring to papers.] The second one had
not expired, but it had balanced its position and stopped. So there
was not any need of continuing it. Probably some of the partici­
pants wanted to get out. There might be several reasons for it, and
we just-----Mr. G r a y . Just quit and started a new one?
Mr. G a l l ig a n . Closed it and started a new one. There are some
changes in the participants in the other account that started the
same day.
Mr. G r a y . In the distribution you charged $5,000 for th e expense.
It was a round figure and no itemization of it. What was that for,
do you know?
Mr. G a l u g a n . It went into our profit and loss account, d id i t not,
Mr. Gray?
Mr. G r a y . It was charged as $5,000 expense against the syndicate.
That is the only thing that we have.
Mr. G a l u g a n . Yes; but I think it went into the profit and: loss
account.
Mr. G r a y . Y ou mean b y that that you took $5,000 out of the funds
to put in your charge that you may have spent that you d i d not
otherwise detail in the report?
Mr. G a l u g a n . I do n ot believe th a t is th e ex p la n a tio n .
Mr. G r a y . Well, you make the explanation then, please.
Mr. G a l l ig a n . Which account are you talking about?
M r . G r a y . I am ta lk in g abou t th is th ir d sy n d ica te, w h ich c o n ta in s
an item o f $5,000 th at y ou r firm to o k fr o m th e m on eys a n d c h a r g e d
it ju st to expense.
Mr. G a l u g a n .

I w ant to k n o w w h a t i t m ean s.

Might I ask the question of whether that did not
appear as a credit in our P. & L. account?
Mr. G r a y . It appears as a credit in your distribution to your firm.
Mr. G a l u g a n . Yes; that is right.
Mr. G r a y . In other words it charged the syndicate $5,000 for
expense ?
Mr. G a l u g a n . Pardon me; I don’t think it is charged.
Mr. G r a y . Oh, Yes; it was charged to the syndicate and credited
to your firm.
Mr. G a l u g a n . The reason I bring this u p is this, th a t w e h a d a
participation with Hayden-Stone in one of those-----Mr. G r a y (interposing). I am coming to that. That is some­
thing separate. I am going to ask you about that. It has nothing to
do with this. I f you can not explain it, say so.
Mr. G a l u g a n . I really don’t know.
Mr. G r a y . All right. Now, as a matter of fact, that syndicate
stepped into the Haystone Securities Corporation’s underwriting o f
154,000 shares in September of 1928 of the Fox Film stock and made




STOCK EXCHANGE PRACTICES

1029

a profit from their interest in the underwriting of $25,000; isn’t that
correct?
Mr. G a l l ig a n . That is right.
Mr. G r ay . Yes. In other words, William Fox was a partici­
pator—I want the committee to get this—William Fox was a par­
ticipator in the underwriting syndicate of the Haystone Securities
Corporation, for which they were paid over six hundred and some
odd thousand dollars for doing practically nothing, he receiving a
profit of at least 66, and we figure it $81,000 from that, and then
William Fox had $150,000 participation in this pool of Tay’.orThome’s or W. R. K. Taylor & Co., which pool that he was in­
terested in was also interested in the Haystone Securities Corpora­
tion underwriting and made $25,000 out of that in addition to go
to this syndicate or pool for purposes of distribution—that is cor­
rect, isn’t it?
Mr. G a l l ig a n . That is correct.
Mr. G r ay . All right.
Mr. G a l l ig a n . I think there was a big liability in that commit­
ment.
Mr. G bay . You mean there might have been?
Mr. G a l l ig a n . You sign up for it, Mr. Gray.
Mr. G hay . Y es.
Mr. G a l l ig a n . And if the stockholders do not take it, you are
responsible for it.
Senator W alcott . Was that commitment a firm underwriting?
Mr. G a l l ig a n . A s far as our firm was concerned ?
Senator W alco tt . No; as fa r as Hayden-Stone w as concerned?
Mr. G a l l ig a n . Oh, j e s .
Mr. G r a y . I am going to put Hayden-Stone’s representative and
a member of the firm on the stand and ask him all about that.
Senator W alcott. Did your firm have a firm underwriting?
M r. G alligan . W e h ad a p art o f it.
Senator W alcott. Participation?
Mr. G a llig a n . Participation in the Hayden-Stone underwriting.
M r. G r a y . Now, I show you w h at p u rp orts to be a co p y o f the
agreement in that syndicate and ask y o u w hether that is a correct
copy.
M r. G alligan . T h a t looks like a c o p y that w as p repared in ou r
office.
M r. G r a y . I ask that this be m ade a p a rt o f the record.
The Chairm an. Without objection, it will be so ordered.

(The document here submitted by Mr. Gray is printed in the
record in full, as follows:)
FOX FILM CORPORATION CLASS ▲ COMMON STOCK TRADING GROUP

(Confidential)
August 31, 1928.
Dhah Sib : We are forming a group, of which we will be managers, to pur­
chase and sell, in the market or otherwise, exchange, or otherwise trade in, and
make contracts in reference to capital stock of Fox Him Corporation class A
common stock.
We have agreed to purchase for the group 10,520 shares of the class A com­
mon stock of the Fox Film Corporation at $91 per share, and in consideration
for so doing, are to receive, without expense to the group, options on the class
A common stock of the Fox Film Corporation at the following prices. 7.500
shares at 91%.



1030

STOCK EXCHANGE PRACTICES

The group is to be formed for an aggregate maximum liability o f 75,000
shares and is to continue for a period of six months from the date hereof, with
the right on the part of the managers to terminate the same at any time in their
discretion. The members of the group shall be liable for the losses and ex­
penses of, ami shall be entitled to participate in, the net profits of the group
(subject to the distribution of such portion thereof to W. R. K. Taylor & Co.
as is hereinafter provided), pro rata in proportion to their respective Interests
in the group. Members of the group shall, upon 24 hours notice from the man­
agers, from time to time, pay for and/or take up at the then net cost to the
group, all or any part of their respective portions of securities acquired fo r the
group account. All such securities taken up prior to the termination of the
group, shall be for carrying purposes only and shall remain subject to recall
and disposition by the managers during the life of the group.
The members of the group shall also be obligated, on like notice from the
managers, to advance their pro rata share of any margin required as collateral
under any loan arrangements effected by the managers to carry any securities
in the account, and in this respect the managers are herewith making an Initial
call for margin equivalent to $15 a share on the maximum commitment o f each
participant.
Any member of the group may, if he so desires, elect to carry his pro rata
share of the group securities, and to the extent that he does so shall not be
liable in connection with any loan arrangements effected by the managers for
carrying the balance of such securities.
As compensation for services rendered in connection with the formation and
management of the group, W. R. K. Taylor & Co. (irrespective of its participa­
tion as a member of the group) shall be entitled to receive on termination of
the group, 10 per cent of the net profits of the group as determined by the
managers, the balance of the net profits of the group, whether represented by
r>agh or securities, to be divided among the members of the gAoup pro rata in
proportion to their respective interests therein. It is understood that in de­
termining the net profits of the group, any securities then distributable to the
members of the group will be appraised by the managers at the then market
value, and that such determination of the net profits shall be conclusive. In
ease, on termination of the group, there shall remain any securities in the
group account to be distributed to the members thereof, W. R. K. Taylor & Co.
shall have the right, at its option, in lieu of receiving 10 per cent of the net
profits as aforesaid, to take such securities upon payment of the then net cost
thereof to the group account.
The managers will form an advisory committee of participants, consisting
of Mr. W. It. K. Taylor and Mr. Nathaniel King. The managers can call upon
the members of this committee for their advice on any and all matters In
c o n n e c t i o n with the handling of this account.
The managers will have full power to act in all group matters, including
power to determine if and when and to what extent, any option contracts
shall be entered into or exercised, and to determine at what price or prices,
in what amounts, at what times, and in what manner, shares o f the abovementioned stocks or receipts therefor shall be acquired or disposed of, whether
in the market or at public or private sale or by special agreement. The
managers are also expressly authorized to borrow, or themselves advance,
moneys without notice, for any of the purposes of the group, and to pledge
as security therefor any of the assets of the group and/or the obligations o f the
members of the group.
The participant further agrees that if, during the life of this group, he desires
to sell any of his holdings not included in the group account, he will do so
only through the group account.
In the event of the default of any member or his failure to comply with
the terms of this agreement, the managers shall have the right to exclude Mm
from further participation hereunder and to sell and dispose of his interest
in the group at public or private sale, in any manner for the account of
the group but such members shall not thereby be released from his obligation
hereunder. A default by one member shall in no way release another from
his full obligation, and any loss resulting from such default shall be charsed
to the group as a group expense.
Nothing herein contained shall constitute the members of the group partners
with the managers or with one another, or render them liable to contribute
more than their ratable amount as herein provided, or render the managers
liable for the subscription or default of any member.




STOCK EXCHANGE PRACTICES

1031

Any notice hereunder from the managers to any member shall be deemed
to have been duly given if mailed or telegraphed to such member, directed
to the address furnished by him.
We confirm that we have allotted to you a participation of 10,000 shares
in the group above described, subject to your immediate acceptance, to be
executed on a duplicate of this letter inclosed for the purpose.
Very truly yours,
T. T. Co., Managers.

Mr. G r a y . And I want to direct the committee's attention to this,
that it appears in this syndicate agreement, and to say to you that
Mr. Fox told me that he did not even know it was there-----The participant further agrees that if, duriug the life of this group, he desires
to sell any of his holdings not included in the group account, he will do so
only through the group account.

Thus the man that went into that had 110 right to sell anywhere
else any of the stock which he owned in Fox Film.
Now, as a matter of fact, however, you knew that Mr. Fox, from
your association with him, did you not, was carrying a general
trading account at Eisele & Kings?
Mr. G a l l ig a n . I assumed that he was. I never had any definite
knowledge of it.
Mr. G r a y . And the amount of money that Mr. Fox or Nathaniel
King was entitled to in this case, which happened to be the profits
plus his investment, went right into the trading account at Eisele &
King’s on the books of Nathaniel King ?
Mr. G a l l ig a n . I didn’t know it.
Mr. G r a y . Didn’t know that. All right.
Just one thing more to complete the picture: The profit was small,
was it not, twenty-four thousand-----Mr. G a l l ig a n . Y ou mean on King’s profit ?
Mr. G r a y . I d o n ot mean y o u r m anagem ent fees. Y o u r m anage­
ment fees plus you r p rofit was $24,339.36, was it n ot?
Mr. G a l l ig a n . You have the figures there. I haven’t got that.
Mr. G r a y . Yes, but the profit on the deal itself was-----Mr. G a l l ig a n . One hundred eighty-two thousand.
Mr. G r a y . $182,804.27 ?
Mr. G a l l ig a n . That is correct.
Mr. G r a y . Now I would like to ask you: Your firm, together with
Wellington Co. and one other firm whose name I do not recall, were
the original sponsors—Eisele & King—for the distribution of 500,000
shares of Fox Theaters stock—do you recall that ?
Mr. G a l l ig a n . I have a memorandum of it here.
Mr. G r a y . We have already put upon the record—if you were
here this morning you heard it—the agreement between those three
firms on Fox Theaters.
Mr. G a l l ig a n . Yes.
Mr. G r a y . We also find a very peculiar agreement by which those
three concerns agreed in the distribution of their profits, for the
commission, to pay Caroline Leah Tausig, a daughter of Fox, 25 per
cent of the commission. Why was that done ?
Mr. G a l l ig a n . I don’t know, Mr. Gray. I had nothing to do
with that account.
Mr. G r a y . Y ou know it was d one?
Mr. G a l l ig a n . N o w I d o n 't w a n t to a d m it so m eth in g th a t I d o n ’t
know .




103*2

STOCK EXCHANGE PRACTICES

Mr. G r a y . I don’t want you to.
Mr. G a l l ig a n . I know there was an account in which she was
interested. What percentage—you said 25 per cent?
Mr. G r a y . Yes, 25 under the agreement.
Mr. G a l l ig a n . I can not say as to that. I am not familiar with
that. I knew there was an account.
M r . G r a y . Will you tell me why that combination of brokers,
having been given by Mr. Fox, who held all the voting stock o f the
Fox Theaters, the right to dispose of 500,000 shares of stock, should
hand back 25 per cent of their profits to Mr. Fox’s daughter?
Mr. G a l l ig a n . You will have to ask Mr. Fox’s daughter.
Mr. G r a y . All right, I expect that is all we want to ask this
gentleman.
Senator G oldsborough . I would like to ask the witness a question.
Did I understand you to say it was not the sole purpose o f the
creation of pools to make money?
Mr. G a l l i g a n . N o, I d id not say that, Senator.
Senator G o ld sb o ro u g h . I understood Mr. Gray to ask you that.
Mr. G r a y . He said that was not the principal purpose.
Mr. G a l l ig a n . That is right.
Mr. G r a y . The principal purpose was to keep a good market and
to act as the sponsors for the stock. But I have yet to be able to get
him to define to my satisfaction, what keeping a good market and
acting as sponsors for the stock means. He would not accept my
definition.
Senator G oldsborough . Well, you can say they are not created to
lose money?
Mr. G a l l ig a n . That is right.
Mr. G r a y . May I say to you, Senator Goldsborough, that we run
into some instances where they were created and were willing to lose
while they could dump the stock on the public by keeping the
price up. lose money in the pool itself but make a very much
larger amount by their distribution of the stock to the public. We
run into them where they were created and expected to lose money.
Mr. G a l l ig a n . There was nothing like that in these trading
accounts, Mr. Gray.
Mr. G r a y . N o ; I do not think it was in your trading accounts.
You wanted to keep the price up so that Fox could sell the stock.
Mr. G a l l i g a n . N o ; the earnings justified the price o f the stock.
Mr. G r a y . We do not want to get back into that. You are sure
you are not thinking about the publicity that Fox gave over the
movie stage?
Mr. G a l l ig a n . No.
Mr. G r a y . All right, Mr. Hoyt.
TESTIMONY OF RICHARD F. HOYT, REPRESENTING HAYDEN
STONE & CO., NEW YORK CITY
’

Mr. G r a y . I f Mr. Hoyt will be more direct in answering questions
I think we will get along very quickly.
.
C h a ir m a n . Y o u 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




STOCK EXCHANGE PRACTICES

1033

Mr. H oyt . I do.
Mr. G ray . State your full name, please.
Mr. H oyt . Richard F. Hoyt.
Mr. G ray . Where d o you live ?
Mr. H oyt . New York City.
Mr. G r ay . Where in New"York?
Mr. H oyt . 206 East Sixty-fiftli.
Mr. G ray . Mr. Hoyt, you are a member of the firm of Hayden,
Stone & Co. in New York, are you not?
M r. H oyt . Yes, sir.
M r. G r a y . Y ou have been such f o r h o w lo n g ?
Mr. H oyt . Twelve or thirteen years.
Mr. G r ay . Hayden, Stone & Co. are a partnership, and members

of the New York Stock Exchange?
Mr. H oyt . Yes.
Mr. G r a y . Hayden, Stone & Co. were the concern who, when Mr.
Fox was ultimately permitted to get the control of the Westco Cor­
poration, handled some of the financing?
Mr. H oyt . Yes.
Mr. G r a y . Will you tell us, if you please, so that we may under­
stand it, what the Westco Corporation was, first?
Mr. H oyt . The Westco Corporation was a corporation formed to
acquire approximately two-thirds of the stock of the West Coast
Theaters Corporation.
Mr. G r a y . I will have to ask you to keep your voice up. The
Westco Corporation was a corporation formed to get control by
getting about two-thirds of the stock of the West Coast Theaters
Corporation?
Mr. H oyt . Yes.
Mr. G r a y . The West Coast Theaters owning a number of moving
picture houses in the West?
Mr. H oyt . On the West Coast.
Mr. G r a y . The Westco Corporation, or the Westco Company,
whichever it was, did get that control?
Mr. H oyt . Yes, sir.
Mr. G r a y . Mr. Fox wanted that, didn’t he?
Mr. H oyt . 1 think so.
M r. G r a y . A s a m atter o f fa c t, y ou r con cern , in th e first instance,
i f I recall m y ta lk w ith y o u the oth er d a y , b lock ed h is co n tro l, and
ultim ately helped him to get it, and financed i t ; is th a t rig h t?
Mr. H oyt . We joined forces with Gore Bros., who owned a large

part of that company, and bought out the stock for a group of First
National franchise holders. We bought out Mr. Sol Lessor’s hold­
ings. Putting Lessor’s and Gore’s holdings together into the Westco
Corporation, gave Westco Corporation about two-thirds of the
ownership of the outstanding stock of the West Coast Theaters. We
issued for the Westco stock, voting trust certificates, the voting
trustees being the two Gore brothers, myself, Mr. John R. Dillon,
who is now a member of my firm, and Mr. Robert Leiber, who was
the president of the First National Pictures Corporation.
Mr. G r a y . Your next step was your deal with Fox. Tell us briefly
what that was.
Mr. H oyt . In approximately December, 1927. I went to Mr. Fox,
and told him that wo were prepared to sell the stock of the Westco



1034

STOCK EXCHANGE PRACTICES

C orporation to him at $55 a share, and he immediately said he would

buy it.
M r. G r ay . H ow was the arrangem ent m ade b y w h ich th a t tran s­
action was carried ou t?
Mr. H oyt . First, the verbal understanding was that he w as t o buy

that for cash.
M r. G ray . Y e s ; and then?
Mr. H oyt . Before any contracts were finally signed, Mr. Fox a p ­

proached me, as a member of the firm of Hayden, Stone & Co., and
asked me if I would agree to underwrite some Fox Film securities
to increase the treasury cash balances o f the Fox Film and h elp them
to make this purchase.
Senator F letcher . H ow many shares of the Westco Co. were
there?
Mr. H oyt . Approximately 295,000.
Senator F letcher . No par value?
M r. H oyt . N o p a r value, I think.
Mr. G r a y . G o ahead.
Mir. H oyt . On January 2 1,1 92 8 , we signed two agreements.

One
agreement was as representing the Westco stockholders, by which the
Fox Film Corporation agreed to pay $55 a share for the Westco
shares, or, in the alternative, to issue three-quarters of a share of
Fox Film A stock to such Westco stockholders as would exchange
on that basis.
Mr. G r a y . Let me first, so as to sever some o f these th in g s, address
myself to the underwriting syndicate. Have you g o t the agreem en t
there?
M r. H oyt . I w ill ju st m ention that n ow , i f y o u w ish.
M r. G r a y . Yes.
Mr. H o y t. The second agreement was of the same date, by w h ic h
Hayden, Stone & Co. undertook to form a syndicate which, w o u ld
underwrite 125,000 shares of Fox Film A stock, to be offered t o th e
Fox Film A stockholders at $75 a share. Hayden, Stone & Co. w ere
to receive a manager’s fee o f $1 and the underwriting syndicate an
underwriting commission of $2 per share. The purpose of that was
to raise part of the money necessary to purchase tne Westco holdings,
and it was hoped that enough Westco shares would be exchanged so
that that would provide all the money that was necessary.
Senator F letcher . The Westco Co. and the Fox Film w e re b o t h
listed on the New York Stock Exchange?
Mr. H oyt . The Westco Corporation had never been listed.
Mr. G ray . Was it afterwards listed?
Mr. H o y t. Never. It was owned b y the franchise holders, who
were the stockholders of the First National and had been bought in
the first instance to protect the First National Co. on its outlet for
films.
The C h airm an . Was it listed on any other stock exchange than
the New York Stock Exchange?
Mr. H oyt . I think never.
Mr. G r ay . In the Fox Film underwriting syndicate, you did n o t
take over any of the stock, did you?




1035

STOCK EXCHANGE PRACTICES

Mr. H oyt . It ultimately proved that the stockholders took prac­
tically all that stock.
Mr. G ray . Is this list which I give you here a list of the partici­
pators in that syndicate?
Mr. H oyt . This is what I gave; yes.
Mr. G ray . I ask that this be made a part of the record, with no
regard being paid to the memorandum that is on the bottom show­
ing the participators in this 125,000-share underwriting syndicate in
January, 1928, and I direct the attention of the committee to the
fact that the Haystone Securities Corporation were interested in
54,000 of that 125,000, and the Taylor, Thorne Co.. the concern about
which we have just heard testimony, had an interest of 20.000 shares.
I also invite your attention to the tact that the Shermar Corporation
had an interest of 5,000 shares; Kuhn, Loeb & Co., brokers; Lehman
Bros., brokers; Hallgarten & Co., brokers, all were interested in this
pool underwriting.
The list referred to is as follows:
E x h ib it

M em oranda, Hayden,

II I

Stone d- Vo.. 125.000 sh are* Fo,r Film
Underwriting Syndicate, January, /•''-*

Corporation

Hayden, Stone & Co________________________________________________
Haystone Securities Corporation___________________________________
Taylor, Thorne & Co______________________________________________
Theodore Schulz & Co______________________________________________
Watite Corporation_______________________________________________
Blair & Co_______________________________________________________
Shermar Corporation______________________________________________
Lehman Bros______________________________________________________
Kuhn, Loeb & Co_________________________________________________
Glenny, Monro & Moll______________________________________________
Hallgarten & Co___________________________________________________
1st Wisconsin Co__________________________________________________
Motion Picture Capital_____________________________________________
W. S. Aagaard & Co________________________________________________
W e r th e im & Co____________________________________________________

1, 500
54,000
20,000
5,000
2,500
5,000
5,000
5,000
5,000
2,000
3.000
:>, 000
5,000
3,000
6,000

Total_______________________________________________________ 125,000

Mr. G r a y . I ask you who, if you know, is the Shermar Cor­
poration?
Mr. H oyt . I think Mr. Albert Wiggin has the ownership in it.
Mr. G ray . It is Mr. Albert Wiggin’s personal trading company,
is it not?
Mr. H oyt . I do not know that. I know he is interested.
Mr. G r a y . Don’t you know that he and his family are the only
ones interested?
Mr. H oyt . N o ; I do not know.
Mr. G r a y . Who is Mr. Albert Wiggin ?
Mr. H oyt . Chairman of the board of the Chase National Bank.
Mr. G r a y . With respect to this Havstone Securities holding of
54,000 shares, did you subdivide that after this list was created, and
give anybody else a subsidiary interest in your holdings ?
Mr. H oyt . I have given you the record.
Mr. G r a y . I know it, but I want you to testify.




1036

STOCK EXCHANGE PRACTICES

Mr. H ott. I would have to refresh my memory. I "will be very
glad to do it, if you will give me the record.
Mr. Gray. T o whom did you give that interest? (After confer­
ring with an associate.) I am informed—so I will correct my state­
ment—that that was in another account, and not in this account-that
there was a subdivision to the Shermar Corporation, and Oscar
Gubelman.
(The statement referred to by Mr. Gray was not handed to the
reporter.)
Mr. Gray. You made $375,000 on that; is that right!
Mr. H oyt. The underwriters and ourselves—the whole syndicate;
yes.
Mr. G ray. The whole syndicate?
Mr. H oyt. Yes.
Mr. G ray. A s a matter of fact, of course, Fox Films paid that?
Mr. H oyt. Yes.
Mr. G ra y . Though we understand what risk you may have as­
sumed, or believed that you did assume, when you entered into the
underwriting agreement, there was actually, of course, no work that
had to be done Dy you at all? You took over no stock?
Mr. H oyt. I had to do a great deal o f work, Mr. Gray.
Mr. G ray. What did you have to do with the underwriting, after
entering into that agreement?
Mr. H oyt. I had to form another syndicate to take over 109,000
shares of stock, so that that would not be pressed on the market and
destroy the main underwriting.
Mr. Gray. That 109,000 shares of stock arose from the exchange of
Westco for Fox Film; is that right?
Mr. H oyt. Yes.
Mr. Gray. In other words, what you did was to take over approxi­
mately what— 81,000 shares of Westco?
Mr. H oyt. One hundred and nine thousand.
Mr. G r a y . One hundred and nine thousand shares o f Westco at
$55 a share.
Mr. H oyt. Yes.
Mr. G r a y . Which were exchanged for how many shares o f Fox
Film?
M r. H oyt . Three-quarters o f a share— eigh ty th ou san d a n d o d d
shares.

Mr. Gray. Eighty thousand and odd shares; so that you had to
protect the syndicate underwriting interest as against that, and you
had to protect your own stock as against the syndicate underwriting?
Mr. H oyt. Yes.
M r. G r a y . W h en y ou w ere perm itted to u n derw rite th a t at $75
a share what was its p rice on the m arket?
Mr. H oyt . I think somewhere between 77 and 8 1 ; along in th a t

range.
Mr. G r a y .
Mr. H o y t .
Mr. G r a y .
Mr. H oyt.
Mr. G r a y .




In January of 1928?
I have not a record of the transactions.
Was it not in the eighties entirely?
It may have been.
We will put the range in, so as to show where it

w as.

STOCK EXCHANGE PRACTICES

1037

I ask you whether or not, when you knew that you were going to
take this Westco Corporation’s stock which you could turn in for
Fox Film stock—and whether or not, when you knew that there was
going to be put on the market Fox Film stock at $85 a share, you did
not, m your firm, start a short account and sell Fox Film stock?
Mr. H oyt . N o , sir.
Mr. G r a y . Did you have an account in which you sold Fox Film
stock?
Mr. H oyt . The facts as to that account-----Mr. Gray. Suppose you tell it in your own way, and let the com­
mittee draw the inference as to whether it was short or not.
Mr. H oyt . I and my partners owned substantially over 20,000
shares of Westco Corporation shares* We had, on January 21, signed
an underwriting committing our firm to some $9,000,000 of Fox
Film A stock in case the stockholders did not take it. Four days
after this underwriting agreement, or these underwriting agreements
were signed—I think on January 25—we started selling Fox Film
stock on the New York Stock Exchange, as against the very large
commitment we had in this situation, and during the period of a
few weeks we sold about 19,000 shares of Fox Film stock. O f that,
we owned substantially the same amount in our Westco shares,
which, under a contract which we had, were exchangeable into Fox
Film shares.
Mr. G ray. Y ou were asked about the range in January. The
range was 82 low and 88*4 high. Did you sell the stock that you
sold through this account, in January, and within that range?
Mr. H oyt . I have given you a list of all the transactions.
Mr. G ray. I do not think you have.
Mr. H oyt . Yes. I have given you all that. I know’ that we started
selling January 25, and you have a record of the prices.
Senator F letcher . What year was that?
Mr. H oyt . 1928.
Senator W alcott. Were you able to deliver Westco stock on the
sale of Fox Film, on the exchange agreement?
Mr. H oyt . B y exch an gin g it w ith the com pa n y i f we h ad needed
t o ; yes.

Mr. G ray. In order that we may determine, by a short cut, whether
that was an account in which you were able to make any money;
did you make money in it?
Mr. H o yt . I assume so, because we ultimately exchanged that
stock for—we purchased Westco shares in the open market, and
exchanged those into Fox stock at $55 a share; $55 is less than
three-quarters o f the price of $80.
Senator W alcott. A s against $77.
Mr. G ray. I ask you whether or not you made within a few
dollars of $150,000 on that transaction.
Mr. H oyt . I have given you the record.
Mr. G ray. Y ou have given us the figures in two items. The first
one is $146,262.62, and the other is $3,298.24—the total of those two
figures. Mr. Hoyt, when you started that account—we have in front
of us here a transcript of it from the books—were they not, as a.
matter of fact, all short sales?




STOCK EXCHANGE PRACTICES

1038

M r. H oyt . I n the sense that th at account w as n o t long of any
stock.

Mr.

G ray.

Yes.

M r. H oyt . But the people who owned that account, H a y d e n ,
Stone & Co., were long1of Westco shares, which we knew w ere ex­

changeable into Fox Film shares.
Mr. G r a y . Therefore, the question I asked you in the first in­
stance, I repeat to you again. Is it not a fact that you went out
and sold Fox Film' shares short, with the knowledge of the fact
that you were going to be able to exchange the Westco shares which
you owned for Fox Film shares, so as to make your short sale an
advantage, a financial advantage?
Mr. H o y t . Yes.
M r. G r a y . T h a t is what I want to establish.

Mr. H o y t . Except that I object to the expression, 44selling Fox
Film short.” I owned it.
M r. G r a y . Y ou d id not ow n them .
by exchanging.

Y o u anticipated o w n in g them

Mr. H o y t . All I had to do was to take a piece of paper to the Fox
Film Co., and I owned Fox Film shares.
Mr. G r a y . What was the next thing you did with respect to Fox
Film shares after January, 1928 ?
Mr. H o y t . Shortly after that, Mr. Fox let us know that the people
who held the Westco shares, by a much larger extent than he antici­
pated, were asking for cash for those shares, instead of exchanging
them into Fox Film stock, and I might call attention to the fact
that these people had the same opportunity to have exchanged and
sold in the market as we did, if they chose to.
Senator B r o o k h a r t . Did they nave the same information about
what was going on on the inside?
Mr. H o y t . Exactly. Notices had gone out as to the exchange, and
were in their hands at this time.
Senator B r o o k h a r t . You had told them all these things you knew
yourself ?
Mr. H o y t . Yes, sir; without any question. Mr. Fox came to me
and said that he wanted me to ao something to take care o f the
Westco stockholders who were coming in and asking for cash. We
had this underwriting, and we wanted it to be successful. W e had
looked into the Fox Film Co. and believed in it. We thought the
shares were attractive at the value they were quoted at, so I went
around to the people who had done business with me in New York,
and told them that I believed in the Fox Film stock at these prices,
and recommended that they join in a syndicate which we formea
to buy 109,000 shares of Westco stock, which represented those stock­
holders who had asked Fox Film Co. for cash. That syndicate was
formed. You have a list of the participants, and we bought that
stock, thereby avoiding the necessity of the company paying out that
amount of cash.
Senator W a l c o t t . Who were the accountants who passed on the
Fox Film transactions for you ?
Mr. H o y t . We had an audited statement of the Fox Film Co.
I have forgotten the name of the firm of auditors. Naturally, I per-




STOCK EXCHANGE PRACTICES

1039

sonally had looked into the business and felt that it was good at
that time.
Mr. Gray. You organized, then, a syndicate for the purpose o f
dealing in what—Fox Film stock?
Mr. H oyt . A syndicate to b u y Westco shares for cash and convert
them into Fox Film stock.
Mr. Ghay. And trade in them?
Mr. H oyt . And then sell those shares when, as, and if the market
would make it possible.
Mr. Gray. Who was in that syndicate?
Mr. H oyt . You have a list.
Mr. Gray. I do not know whether we have a list or not. I think,
rather than inquire with respect to it, except as to several ones, I
will put this list, which shows the result of the operations o f this
pool, in the record, if the chairman will permit. I want to indicate
that the participators in it were: Grenville Clark; B. M. Baruch;
Jackson & Curtis; Lehman Bros.; Shermar Corporation; White,
Weld & Co.; Wertheim & Co.; Charles D. Barney & Co.; O. L.
Gubelman; Edlyn Realty Co.; Chadbourne, Stanchfield & Levy;
Gore Bros. (In c.); Amster Investing & Trading Association; Glenny,
Monroe & M oll; Robert Lieber; Abbott, Hoppin & Co.; Kuhn, Loeb
& Co.; and Haystone Securities.
(The statement referred to is as follows:)
Hayden, Stone & Co.—F o x Film, a syndicate summary, March 1, to Sep­
tember 10, 1928
Sales-------------------- ---------- ------------------Purchases--------------------------------------------

52,316
4,100

$5, 205, 008. 88
329,620.00

48,216
Deliveries to syndicate at W. R. K.
Taylor---------------------------------------------- 35,000

4,875,388.88
28,441.00

„
83,216
7,719,488.88
Receipts:
From conversion of 109,000 shares
W e s c o S t o c k , purchased from
Wesco Deposit Account at Hayden
Stone & Co_____________________ 81,750 $5,905,000.00
From syndicates at W. R. K. Taylor.
1,466
113,927.70
83, 266
Dividends received________________________
Interest-----------------------------------------------------

6,108, 927. 70
1,150.00
16,938.81
---------------------

Miscellaneous expense___________________________________

1,610,561.18
18, 088.81
1,628,649.99
767.16
1,627,882.83

Net trading profit—Managers’ commission to Haystone Se­
curities Co_________________________________________

404,404. 80

Profits for distribution________________________ ________

1,223,478.03




1040

STOCK EXCHANGE PRACTICES
Hayden Stone A Co., account 703. F o x Film

A *’

“

Sales

Purchases
81Ji- H\

1928—Mar. 1 ...
Mar. 2 ...
Mar. 5 ...
M ar.6...
Mar. 7 ...
M a r.8 ..
Mar. 12..
Mar. 13..
Mar. 15.
Mar. 18Mar. 19.
Aug. 8 . .
Aug. 27..
Aug. 28..
Aug. 30-.
Sept. 4 ..
Sept. 5 ..
Sept. 6 ..
Sept. 7 ..
Sept. 10.

81Ji-82H

500 $41,000.00
600 49.407.50
48.632.50
600

8QH-&IH
80H
80 -80^

600

80J4-82H

79 -79H

7<K-7*X

76J4

100

300
400
900

100

48.795.00
8.070.00
24.135.00
31.805.00
70.105.00
7.670.00

80X- 81$
81#

400
700
290
325
100

81M

100

8,101.00
8.101.00

79}*- 79Ji

300

23,778.00

79^-79!
85H- 85
86- 87!

200

91 • 92%
91H-W X

95J4- 98}*

99H-106
10314-105

104K-106H
4,100

329,620.00

3,800
1,600
2,900
4,700
9,141
9,300
16,500

15,879.50
68,333.00
103.662.00
338.638.00
146.666.00
270,866.50
454.047.00
938,773.99
970,29a SO
1,719,365.00

52,316

5,205,008.88

800
1,200

S7H- 90Ji

Total-

$33,054,00
57,682.00
20,502.51
26,368.88

82H- 82K

82H- 83Ji
82U- 82H

Hayden, Stone <£ Co., account 703, participations
Participa­
tion
Grenville Claik................................
B. M . Baruch..................................
Jackson & Curtis.............................
Lehman Bros....... ...........................
Sbermar Corporation------------------White Weld & Co............................
Wertbeim & C o . . . . . . .....................
Chas. D . Barney & C o ...................
O. L. Gubelman..............................
Edlyer Realty C o ....— . — . -------Chadboume, Stanchfield <fc L evy..
Gore Bros. ( I n c .) ...;- ...- — -----a mater Investing & Trading Assn.
Olenny Monroe & M oll-------------Robert Lieber..................................
Abbott Koppen & C o.....................
Kuhn, Loeb & Co...........................
Haystone Securities.........................

150.000
250.000
150.000
500.000
375.000
750.000
500.000
500.000
125.000
400.000
500.000
250.000
200.000
100,000

20,000
100,000
1,000,000
1,130,000

Deposits

Profits

$30,000.00
50,000i 00
128,48a 00
428,193.33

$26,279.90
44.838.11
26,172.52
87,24a 90
65,437.94
131,361.77
87,575.07
87,573.85

321.126.67

150.000.00
100, 00a oo
100, 00a oo

107.066.67
80,ooaoo

.
5o,ooaoo

100 000.00

40.000.00

ao.ooaoo
4,000.00

.

20 000.00

856,46a 00

1,498,786.67

Profit.
TotaL -

21,811.96

70,056.65
87,57a 06
44.838.11
35,029.03
17,514. 28
3,587.05
17,935.25
174,481. 41
194,174 17
1,223,478.03
404,404.80

7,000,000

4,064,113.34

1,627,882.83

Mr. G r a y . Let me ask you this. Lehman Bros.; White W eld &
Co.; Wertheim & Co.; and Charles D . Barney & Co. are all broker­
age houses, are they not ?
Mr. H o y t . Yes.
Mr. G r a y . The Shermar Corporation is Mr. Wiggin, as you have
indicated, who was the chairman of the board of the Cnase National
Bank?
Mr. H o y t . Yes.
Mr. G r a y . D o you know O. L. Gubelman ? Who is he?
Mr. H o y t . An individual client of Hayden, Stone & Co.
Mr. G r a y . You know him also as being an operator for the Chase
Securities, do you not ?
Mr. H o y t . My relations with him have been as a customer doinff
business with us.
&
Mr. G r a y . For whom? For himself?




STOCK EXCHANGE PRACTICES

1041

Mr. H o y t . For h im self.
Mr. G b a y . A s far as you know ?
Mr. H o y t . Yes.
Mr. G r a y . Haystone Securities is an affiliate of Hayden & Stone,
is it not?
Mr. H o y t . Yes.
Mr. G r a y . For trading purposes?
Mr. H o t t . N o . The business of Hayden, Stone & Co., consisting
largely of commission transactions, the business of Haystone Securi­
ties, which is affiliated, was to take large underwritings, or the pur­
chase of securities involving commitments which we did not wish
the brokerage house to have.
Mr. G r a y . In other words, where it was something separate and
aside from the commission business, and represented either an invest­
ment or an underwriting, or trading, you used the Haystone Securi­
ties Corporation?
Mr. H o y t . Yes, sir.
Mr. G r a y . The figures in this sheet show that the gross profit was
$1,627,882.83, of which the managers, which were Hayden, Stone &
Co. Isn’t that true?
Mr. H o y t . Yes.
Mr. G r a y . Of which the managers received $404,404.80 for con­
ducting the operation ? What was the purpose—I think you stated
it, but 1 would like to hear it again—o f that particular syndicate?
Mr. H o y t . The purpose of that syndicate was to make an invest­
ment in the shares of Westco and exchange those shares for Fox
Film, and avoid the necessity of the Fox 1 ilm paying for them in
cash.
Mr. G r a y . Was one of your objects to make money from the
transactions?
Mr. H o y t . I believed that the Fox Film Company was doing so
well that over a period of time those shares would sell at a higher
price than this syndicate bought them at, and that we would make
a profit.
M r . G r a y . Which y o u did?
Mr. H o y t . Which I so represented to the people who went in it.
Mr. G r a y . Was Fox, either under his own name, or anybody else’s
name, interested in that syndicate?
Mr. H o y t . Not to my knowledge; but I would like to point out
that while we sold a few shares during that spring, part o f the syndi­
cate’s holdings, at a profit, later the stock sold at a price where there
was no profit, and it was not until August and September that the
market value reached a price where we would be able to sell on the
stock exchange and make the profit that Mr. Gray has indicated.
In other words, this was a large investment carried for a period of
seven or eight months in a rising market before we could make that
profit.
Mr. G r a y . What was the next operation that you engaged in for
Fox Film?
Mr. H o y t . In September of that same year Mr. Fox again came
to me and indicated that he was expanding his business, buying ad­
ditional properties, and he wished to issue more stock in order to
finance these purchases. After some negotiation with him, I signed



1042

STOCK EXCHANGE PRACTICES

a contract whereby Hayden, Stone & Co. undertook to organize a
syndicate to underwrite 153,000 shares, I think, at $85 a share.
~ Mr. G ray . What was the market on the stock at that time I
Mr. H oyt . I don’t know.
Mr. G r a y . Don’t you know it was around 109?
Mr. H oyt . Very likely.
Mr. G r a y . And you entered into an agreement to underwrite
153,000 at $85 a share?
Mr. H oyt . Yes.
M r. G r a y . D id y o u have to take som e o f th a t stock u p ?
Mr. H oyt . No, sir.
M r. G r a y . Y ou g o t $4 a share f o r th at w ork , d id n ’t y o u ?
Mr. H oyt . Very likely. The price was high.

Mr. G r a y . In other words, y o u got something like $612,000 or
$614,000 for taking that syndicate?
Mr. H oyt . Yes.
Mr. G r a y . Y ou divided that money among the various
participants?
Mr. H oyt . Yes.
Mr. G ray . I show you a list and ask you whether that is a lis t of
the participants, with the proportionate amounts set opposite their
names?
Mr. H oyt . Yes.
Mr. G r a y . William Fox was one of those who was interested in
the underwriting of his own stock which he gave you to sell, is that
right?
M r. H oyt . H e d id n ot g iv e us any stock to sell.
M r. G ray . He gave it to you to underwrite, or entered into an

agreement with you to underwrite it?
Mr. H oyt . Yes.
Mr. G r a y . He intended to offer it in the market, and you p r a c ­
tically guaranteed that he would get $85 a share for it?
M r. H oyt . T h a t the com pa n y w ou ld g e t it.
Mr. G ray . That the company would get it.

We are using the
word “ he ” because we have already demonstrated that the com pany
was Mr. Fox. He had 27,000 shares interest in that, did he n ot?
M r. H oyt . Tw enty-seven thousand.
Mr. G r a y . The distribution was made to the others after a certain

amount was taken out for Hayden, Stone & Co., or Haystone Se­
curities, whichever was handling it?
Mr. H oyt . Hayden, Stone & Co., or Haystone Securities in the
first instance, took the entire commitment. Then we subsyndicated
it through this underwriting.
Mr. G r a y . In the division o f your profits, you kept the $ 1 and
distributed the other $3, did you not?
Mr. H oyt . As this syndicate was arranged.
Mr. G r a y . S o that Fox’s profit out of that transaction should h ave
been three times twenty-seven thousand, or $81,000?
Mr. H oyt. Correct.
Mr. G ray . At the same time that these various operations o f yours
were going on, the Taylor, Thorne syndicate, as has been shown,
was keeping up a good market and having the sponsorship f o r the
stock, and they had an interest in your syndicate, too, didn’t they?




1043

STOCK EXCHANGE PRACTICES

Mr. H oyt . T h ey had part o f the u nderw riting.
Mr. G eay . T hey had a p art o f the u nderw ritin g.
(The list referred to is as fo llo w s :)
H a yd en , S to n e

& Co., September, 1928.

Memoranda Fox Film Corporation Class A Underwriting Syndicate
S hares

S hares

Hayden, Stone & Co_______ _
Haystone- Securities Corpora­
tion _________________
_
Charles Hayden______________
Bichard F. H oyt_________
_
Eleanor H o y t_____________
Mrs. C. B. S h e r w o o d -_______
Lester W a tso n _____
______
Clarkson Potter______
C. M. Connfelt______________
Prescott B i g e l o w _______ ___
W illiam F ox ______________ _
Kuhn Loeb & Co____________
W. B . K. Taylor & C o . ______
Blair & Co_________
_ __
Lehman B ro s..
_____
W hite W eld & Co____ ______
Col. A . B. Kuser_______ __ _
W ertheim & Co_________ _____
Shermar Corporation. ____
Theo. Schulze & C o_________
Hallgarten & Co____________
Chadbourne
Stanchfield
&
L e v y ------------------------- _ _

1, 000
19, 344
5,000
9,100
900
1,200
800
800
800
800
27,000
10,000
10,000
5,000
5,000
5,000
5, 000
4, 000
4,000
3,000
3,000

C. D. Barney & C o -------Glenny Munro & M oll------------W . S. A agaard & Co-------------M errill Lynch & C o----------------M. A. B oyle (E . M. B aruch) —
Eisele & K i n g ------------- _ Jackson & Curtis-------------------W atson & W hite-------------------Oscar G u b e lm a n .------ -----------Am ster Trading & Investment
Corporation-----------------------Grenville Clark
_ —
Abbott Hoppin & Co_
D. C. Jackling------ ------------------R. H. Munson---------------------W. H inckle Smith _ _______
C. S. B r a g g --------------------------Robert Lieber------ ------------F elix Rosen —
----------------J. A. D owns __ ------------- —
(Jore Bros. (In c.) _ _ -------T o ta l-------

—

—

3,000
2,000
2,000
2,500
2,000
5,000
1,500
1, 000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
500
200
1,000
1,000
153,444

3,000

Senator W al c o t t . Mr. Hoyt, I would like to know what percent­
age of cash you asked these various participants to put up to protect
their interest in the underwriting.
Mr- H o y t . We had a substantial cash margin. I have given the
accountants all the figures. Some of the participants took up their
securities in full and paid for them.
Mr. G r a y . Mr. Hoyt, Senator Walcott is talking about the under­
writing, and you are talking about the distribution.
Mr. H o y t . The underwriting participants never had to put up any
money.
Senator W a lco tt . They put u p no money, then?
Mr. H o y t . No, sir.
Senator W al c o t t . Y ou carried th em on the u n d e rw ritin g ?
Mr. H o y t . We knew they were financially good for it if the shares
were delivered.
Mr. G r a y . The papers which I have put in the record show the
amount to which they each assumed responsibility.
Senator W alco tt . D o you remember, on this syndicate or the
previous one, how much stock you had left to dispose of? You said
you had something over, and formed a secondary syndicate.
Mr. G r a y . They had none in the underwriting.
Mr. H o y t . Both underwritings, substantially, were completely
successful.
Senator W alco tt . You had nothing left over?
Mr. H o y t . All the stock was taken, through stockholders’ rights.
Senator W alcott . So that your underwriting did not leave you
with anything on hand?
119652— 32— bt 3------ 17




1044

STOCK EXCHANGE PRACTICES

Mr. H o y t . Correct.
Mr. G r a y . A s a matter of fact, Senator, so that you may under­
stand it, taking the first one, which is the simplest one, Mr. Fox
offered to the stockholders of Fox Film the right to subscribe to
125,000 shares of the stock at $75 a share. At the same time, he
entered into an agreement with Hayden, Stone & Co. that if Hay­
den, Stone & Co. would underwrite that issue of 125,000 shares, and
then take over all that the stockholders did not subscribe to-—and
there was not much danger, because the stock was in the eighties at
that time—that he would pajr them a commission of $3 a share. All
they had to do was to enter into the agreement, and agree with the
other participators that they would give them a part of their agree­
ment, set the situation up, and wait, and then the Fox Film stock­
holders all came in and took the stock, and they did not have to do
anything but get their check for $375,000.
Mr. H o y t . Mr. Gray, may I make the statement that, in m y opin­
ion, if Hayden, Stone & Co., or some other responsible banking house,
had not underwritten these shares, Mr. Fox would have been un­
able to sell one share on his offering to stockholders.
Senator W a l c o t t . On his rights?
Mr. H o y t . Yes.
M r. G r a y . W h y ?

Mr. H o y t . The stock would not have stayed above the m a rk et
price, because it meant putting 125,000 shares suddenly u p o n the
market without an outsider’s recommendation, whom p eo p le b e ­
lieved in, and who knew the value of this enterprise.
Senator W a l c o t t . That is what I am trying to get to. What did
Hayden, Stone & Co. do to tempt the existing stockholders o f Fox
Film to take up all of their rights?
Mr. H o y t . As a matter of fact, you do not do very m u ch .
Senator W a l c o t t . Y o u sometimes do.
Mr. H o y t . Y o u are in the background. Whenever w e underwrite
an issue of securities, our customers and clientele and other b a n k in g
houses in Wall Street know that we have looked in to th is bu sin ess
and we have gotten audited statements from them, and w e h a v e
gotten hold of the treasurer and examined his accounts, and w e h av e
studied the general set-up of the industry in relation to the c o m ­
petition, and that, having done that, we say we are willing to u n d e r ­
write the shares at this price, and we believe they are worth m ore
money. That is the background that makes the public in g e n era l
subscribe. Without that sort of recommendation, there w o u ld n ot
have been one share sold on this underwriting.
Senator W a l c o t t . I understand that, but I understand-----Mr. H o y t . A s a matter of fact, this stock had sold, w ith in a v ery
brief period, much below this price.
Senator W a l c o t t . I understand; and the losses were tremendous.
But you must have put up over your name, Hayden, Stone & Co., some
very strong statements in order at this time, at the very peak o f the
market, to make a lot of stockholders take up their rights on their
Fox holdings.
Mr. H o y t . I do not recall whether we issued any circulars a t th at
time, or not.
Senator W a l c o t t . You must have. It is always done on an under­
writing. You must have done it, or they would not have had you as



STOCK EXCHANGE PRACTICES

1045

underwriter. You must have done it, to let the public know you were
the underwriters.
Mr. H oyt. The company’s statement to its stockholders carries
the offer of shares, the dates of subscription, and says that Hayden,
Stone & Co. have underwritten this issue.
Senator W alcott . It is those statements that are responsible for
a good deal of mischief. I was wondering whether you nave a copy
of that.
Mr. G r a y . We have not, Senator, a copy o f the statement. I made
the statement—and I am going to ask Mr. Hoyt whether it is true,
or not, and I want to put it in the bald form. Hayden, Stone & Co.
did nothing, did they, but agree to underwrite ?
Mr. H oyt. I had spent about three or four years in this business.
I had investigated Mr. Fox’s business from top to bottom, the income
capacity of it. its financial condition, and the method by which he
was going to finance.
G r a y . Not in anticipation of this underwriting?
__
r
«Mr.
r rr
Mr. H oyt. Yes.
Mr. G r a y . Y o u mean you knew, three or four years before, that
he was going to come to you ?
Mr. H oyt. I say I had studied the industry for three or four years,
but I had spent a couple of months on this particular job.
Mr. G r a y . Like any other student, you had prepared yourself to
be in a position to get along in your business or profession, and when
it reached this stage, and they gave you the underwriting, answering
the inquiry Senator Walcott made, you yourself did nothing. What­
ever was done was done by Fox Film and all you had to do was to
collect your commission?
Senator G lass. What Hayden, Stone & Co. did, as I take it, was
to put the prestige of your house behind this enterprise ?
Mr. H oyt. Yes.
Mr. G r a y . But you actually did nothing else ?
Mr. H oyt. I f you cover a building with insurance, and it does not
bum down, the insurance company that gets the premium does not
do anything.
The C h airm an . Does it not do something in case it burns down?
Mr. H oyt. Y es, sir; and we pay if the stockholders do not take
the stock.
The C h airm an . What did you yourself have to do ?
Mr. H oyt. In this case, the fire did not happen. The stockholders

did take the stock, but there are many instances of these
underwritings-----The C h airm an . You recommended this stock to the public at
what price?
Mr. H oyt. $75 a share.
The C h airm an . What is it worth to-day?
Mr. H oyt. It sold after that shortly, and was worth over $100 a
share.
The C h airm an . Y ou did not answer m y question.

Mr. H oyt. To-day it is worth $1.50 a share, because after that time
this company went out and bought properties for $100,000,000, far
in excess o f their value. But when we left the Fox Film business,
after this underwriting, it did not owe a dollar in the world to any­
body, and had a good income capacity.



10 4 6

STOCK EXCHANGE .PRACTICES

Senator F l e t c h e r . How long did your underwriting obligation
last?
Mr. H o y t . A matter of probably 45 days.
Mr. G r a y . Your entire underwriting obligations lasted longer
than that?
M r . H o y t . I mean each one. The first underwriting was January
21, which probably lasted 45 days, and was taken by the stockholders.
Senator F l e t c h e r . And terminates when the stockholder-----Mr. H o y t . When the stockholder has taken the stock under the
offering, or has refused to take it, in which event the underwriter has
to take it, and the company gets the money. Then, we had this
syndicate which had bought mis stock because the Westco people
were not taking it, and we carried that through for a period, until
September. It was finally able to be sold in the market at a profit
In September we had a second underwriting, as Mr. Gray has
pointed out, of 153,000 shares of stock, which probably lasted tor 45
days, and in that event the stockholders took it. That was the last
business we did, and when we had finished that business the film
company had no debts. It had plenty of capital, and was making
good money, and the stock afterwards sold at much higher prices.
Senator G l a s s . Who financed the film company after you quit?
Mr. H o y t . That I am not familiar with.
M r . G r a y . S en ator, I stated th a t f u lly o n th e record th is m o r n in g .

I gave that whole story.
Senator G la ss . All right.
Mr. G r a y . I will be glad to advise you with reference to it. I
do not suppose you want me to do it again, but I will be glad to
acquaint you with the situation when we adjourn.
I want to ask one more question o f Mr. Hoyt. During your
various transactions—first, the underwriting o f 125,000 shares; sec­
ondly, the handling o f this Westco proposition, the organization
o f that syndicate that sold and traded in the Fox Film stock after
the Westco was exchanged for it; and lastly, the operation by which
you underwrote 153,444 shares in September. 1928, all or which
matters lasted a period of 10 months or so, wnat was the profit to
Hayden, Stone & Co.?
Mr. H o y t . I do not know, but you have all the statements there.
Mr. G r a y . In one instance your profit on the 125,000 shares was
$375,000, is that right?
M r . H o y t . T h e profit o f th e sy n d ica te, o u t o f w h ich w e p a i d all
th e other p articipants.
Mr. G r a y . I am properly corrected. It w a s the profit o f the

syndicate, acting through Hayden, Stone & Co.?
‘ Mr. H o y t . Yes.
Mr. G r a y . The profit on the other underwriting in September,
1928, was four times 158,000, or a matter o f about $612000 or
$614,000?
5
Mr. H o y t . Yes.
Mr. G r a y . In which some others were interested a lso ?
Mr. H o y t . Yes.
x'
Profi£ m connection w ith th e o p eration b y w h ich
y o u traded, th e exact figures o f w h ic hare in th e record h e r e was
th t

nd

t°?




$1>687»000 to those w h o w ere in te r e s te d in

STOCK EXCHANGE PBACTICES

1047

Mr. H o y t . Spread out all over these various interests.
Mr. G r a y . Tne manager’s fees were $404,404 in that transaction
also. I am summarizing. These have already been stated.
Mr. H ott . Yes.
Mr. G r a y . We do not have your brokerage fees, but, at the same
tune, whereever those tradings went through Hayden, Stone & Co.,
they, of course, charged what was required to be charged, and they
charged the proper brokerage fees for the transactions themselves.
Mr. H o y t . Yes.
Mr. G r a y . Then, your profit in the short account—what I call
the “ short account”—was $150,000. when you exchanged your
Westco stock for the Fox Film stock?
Mr. H o y t . Yes.
Mr. G r a y . That was all within 10 months. I think that is all
I want to ask.
Senator F le tc h e r . What did you do on the stock exchange, to
keep up the price of the stock?
Mr. H o y t . A few desultory transactions. I f the market was
weak, we bought a few shares. I f the market was strong, we sold
a few; but there was no plan or system.
Senator F l e t c h e r . Y ou watched the stock market a ll the time?
Mr. H o y t . Mr. Gray, may I restate that my way? You stated
it yours.
M r . G r a y . I have n o objection . I th in k y o u recogn ize th a t a ll
we w a n t are the facts.
Mr. H o y t . My view

of this thing is that Hayden, Stone & Co. ar­
ranged to supply the Fox Film Co. with the proceeds of 125,000
shares of stock; at $75 a share, or roughly $9,000,000. On that trans­
action the total profits to the underwriters, which consisted of a
large group, were $375,000, somewhat less than 4 per cent on the
amount of money that this corporation was provided with. Had I
gone out and bought $9,000,000 of bonds from this company, which
might have been due in 15 years, I would have made a profit of
6 to 7 per cent on those bonds, and that sum of money, which might
have Deen half a million dollars, would have to be charged off over
the period of the life of the bonds, and the corporation would be
involved in paying interest charges on those bonds, and its credit
involved, and at the end of 15 years it would have to pay the discount
over again. We, by our plan, provided this company with $9,000,000
in cash. The total underwriting is less than 4 per cent. Tne com­
pany has the use of that money forevermore, as capital, free from
any interest charges on bonds or preferred-stock dividends, and I
consider that is a very small fee for the benefit of the stockholders
of that company in assuring them that they have that money.
Senator G l a ss . Suppose you had gotten twice that for what you
did. They were not children you were dealing with.
Mr. H o y t . N o ; but I take it I am being criticized for the amount
of profit.
Mr. G r a y . Y ou are not being criticized. We simply wanted the
facts in order that they might fit in with the rest of the Fox story.
You misunderstood the situation.
Mr. H o y t . The second underwriting also showed a profit? which
we will not discuss. The profit that we made for this syndicate of
109,000 shares had nothing to do with the corporation in any way,



1048

STOCK EXCHANGE PRACTICES

shape, or form, except that it avoided the necessity o f that company
having to pay cash, which Mr. Fox did not want to pay out. We
got a group of people who were willing to speculate in the rise
or fall of these shares, and they bought this stock, and they owned
it. They sold a few shares early in the transaction. The market
went down, and they had no profit on it. In the fall, on the rising
market, it went up, and whatever that profit was, it was & specula­
tive profit by an investor in those shares, and had nothing to do with
the Fox Film Co., and Mr. Fox had no interest in it.
Senator C a r e y . It has been testified here that Mr. Wiggin, who
was the chairman o f the board of the Chase National Bank, had a
private corporation called the Shermar Corporation.
Mr. H o\i. W e have done business with tne Shermar Corporation
off and on for some years. W e know that Mr. W iggin is interested
in it, but the exact amount of his participation I do not know.
Senator C a r e y . He was in these pools.
Mr. H o y t . The Shermar Corporation underwrote things o f this
character with us frequently.
Senator C a b e y . Ana they put up no money to com e in to t h i s f
Mr. Ho i t . At any time when we were landed with a n u n d erw rit­
ing, we delivered it to the people and they took it.
Senator C a r e y . I s it customary for the larger bankers in New
York to go into these pools when they are organized? I mean the
heads of the larger banks?
Mr. H o y t . I do not know. This transaction, in o u r office, w as
quite unusual. We had no intention of doing it. We did i t t o h elp
Mr. Fox, because we believed in his situation, and believed i n the
company, and we knew that the underwriting was going to be i n bad
shape unless this load was lifted off the market.
Senator C a r e y . Do you know of other pools in which th is S h erm a r
Corporation has been interested ?
Mr. H o y t . No; I do not.
Mr. G r a y . Mr. Hoyt, you say you do not know of any other pools
they were interested in. Is it not a fact that the Shermar Corpora*
tion, through Hayden, Stone & Co.—whether you call them pools
or syndicates, or whether you get into underwriting agreements"
have been frequently extended the opportunity to join, from Hayden,
Stone & Co., or the Haystone Securities Corporation, in transactions
of this type ?
Mr. E loyt. I said that this was a very unusual transaction in our
office, which it is, but that on underwritings we frequently h a d the
Shermar Corporation as a participant.
Mr. G r a y . Y es.
Mr. H o y t . I had already stated that.
Senator F l e t c h e r . Y ou h a d Kuhn, Loeb & Co. in this?
Mr. H o y t . Yes, sir.
Senator F l e t c h e r . Did they do a great deal o f th a t s o r t o f
business ?
Mr. H o y t . They participate in practically all of our underwritings.
Senator B r o o k h ar t . Do they put up any money, or d o t h e y just
come m and get a share?
Mr. Hoyt. For this sort of underwriting, no money is put ud
Senator B r o o k h a r t . By anybody ?
^



STOCK EXCHANGE PRACTICES

1049

Mr. H o yt . By anybody, u n til the date has expired for the stock­
holders to take their rights. I f they do not take this stock, the
underwriters give a check for it the next day, and get “ landed”
with it, and that happens often.
Senator C a r e t . Were you borrowing from the Chase Bank at that
time to carry this pool?
Mr. H o y t . The syndicate account borrowed from the Chase Bank
for the account of some of these participants. We ourselves took our
stock up and paid for it. The Shermar Corporation, my recollection
is, took up its stock and paid for it.
Mr. G b a y . Y ou are talking about the p o ol.
Mr. H o y t . The only one where any money w a s involved.
Mr. G r a y . The Shermar Corporation took its stock over a n d p a id
for i t .
Senator F l e tc h e r . When did this stock begin to f a ll?
Mr. H o y t . N o t fo r about tw o years— n ot fo r a lo n g w h ile.
Mr. G r a y . It just depends on what time you are talking about.
We have been discussing, Senator Fletcher, a period of time running
from December, 1927, until September o f 1928. Senator Fletcher
then asked when the stock began to fall, and hastily Mr. Hoyt said
a couple of years later. But I think Mr. Hoyt will agree with me
that the stock started to crash just about one year and one month
later, or in October of 1929, and from then on until April of 1930
Hr. Fox was in court with numerous applications for the appoint­
ment of a receiver. That will answer your question, Senator, and
I think Mr. Hoyt will say that is correct.
Mr. H o y t . Yes.
The C h a i r m a n . We will have a short executive meeting of the
committee when we recess. We will now recess subject to the call
of the chairman, in the hope that we can meet to-morrow morning
to hear Mr. Fox. Is that right ?
Mr. G r a y . I am nowhere near through the presentation of this
Fox case.
The C h a i r m a n . Very well. The committee will meet in this room
to-morrow morning at 10 o’clock.
(Whereupon, at 4.15 o’clock p. m., the committee adjourned to
meet to-morrow, Saturday, June 18,1932, at 10 o’clock a. m.)







STOCK E X C H A N G E P R A C T IC E S

S A T U R D A Y , JU N E 18, 1932
U n it e d S t a te s S e n a t e ,
C o m m itte e o n B a n k i n g a n d C u r r e n c y ,

Washington, D. G.
The committee met, pursuant to adjournment on Friday, June 17,
1932, in the hearing room of the Committee on Banking and Cur­
rency, Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Carey, Couzens, and Fletcher.
Also present: William A. Gray, Esq., counsel to the committee.
The C h a i r m a n . The committee will come to order.
M r. G r a y . Mr. Chairman and gentlemen o f the committee, there
have been handed to the chairman, which I will put upon the
record, tw o certificates, one from Doctor Hornaday, and one from
Doctor Mallory. These are both under date of June 18 [reading] :
M

ayflow er

H

otel.

Washington, D. O., June 18, 19S2.
To whom it may concern:
This is to certify that I have this morning examined Mr. W illiam F ox and
And that his temperature and pulse are norm al but that his dizziness con­
tinues and that he has a severe headache.
His blood sugar was 250 milligrams per 100 c. cs. this m orning in spite
of a very low food intake for several days and a strict diabetic diet for
24 hours.
In m y judgment the subjection o f Mr. F o x to any severe nervous or mental
strain at this time would have a strong tendency to cause him to develop
acidosis or serious increase in his blood sugar or both, w ith m aterial danger
to his health or life. I am inclosing herewith a certificate from D r. W illiam
J. Mallory, o f 1720 Connecticut Avenue NW., who, in my opinion, is the forem ost
diabetic specialist in the city.
F. A. H o r n a d a y , M. D.,

Attending physioicm.
W a s h i n g t o n , D. C.,

June 18, 19S2.

To whom it may concern:
This is to certify that I examined Mr. W illiam F ox about 6 o’clock p. m.

January (Ju n e?) 17, 1932, and found his temperature 98 (subnorm al) pulse
66 soft and weak, blood pressure 110 systolic 70— diastolic (low). There w as
definite tenderness in the region o f the gallbladder and the appendix.
The blood-sugar test in the morning o f June 18 w as 250. H is condition
is such that, in my opinion, he is unable to attend to business, and any stress
or anxiety at the time would be a serious danger to him. I have, therefore,
advised that he remain in bed, w ith nurse in attendance and follow strictly
the physician’s instructions.
W illiam J. M allory , M. D.

So, it is evident, Mr. Chairman, that you will not have the pleasure
of listening to Mr. Fox this morning.
Is Mr. Bradford Ellsworth here ?



1051

1052

STOCK EXCHANGE PRACTICES

TESTIMONY OP BRADFORD ELLSWORTH, NEW HARTFORD, CONN.

The C h airm an . 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. E llsworth. I do.
Mr. G ray . Mr. Ellsworth, try to keep your voice up. Your full
name is Bradford Ellsworth?
Mr. E llsworth. Yes, sir.
Mr. G ray . You live where?
Mr. E llsworth. New Hartford, Conn.
Mr. G ray . What is your business?
Mr. E llsworth. I am an independent operator in the stock market.
Mr. G ray . You are an independent operator in the stock market;
you have been so for how long?
Mr. E llsworth. Five or six years.
Mr. G ray . A great deal of your association has been with the firm
of M. J. Meehan & Co. ?
Mr. E llsworth. Most of it.
Mr. G ray. You have been, as a matter of fact, the pool manager
for M. J. Meehan & Co., or pool manager in connection with pools
and syndicates that have been operated through the house of M. J.
Meehan & Co., have you not?
Mr. E llsworth. To a large extent,
Mr. G ray . In the last five years, generally speaking, would you
tell the committee, if you please, in how many different pools you
have managed and operated through M. J. Meehan & Co., approxi­
mately ?
Mr. E llsworth. No, I can not.
Mr. G ray. You think they are too numerous?
Mr. E llsworth. They are too numerous.
Mr. G ray. Would you say 100, at least?
Mr. E llsworth. Oh, no.
Mr. G ray . Fifty?
Mr. E llsworth. No. Of the most important ones, I suppose 5 or 6.
Mr. G ray. H ow many others that are not so important?
Mr. E llsworth. I could not tell you that.
Mr. G ray . By the way, you operated, or were supposed to be the
manager of the radio pool that was operated there in the spring
of 1929, were you not, about which we had testimony here?
Mr. E llsworth. Yes.
Mr. G ray . Were you in the country when you were operating that?
Mr. E llsworth. I was not.
Mr. G ray . Where were you?
Mr. E llsworth. In Europe.
Mr. G ray. In other words, you were in Europe from the time the
pool was begun until the time the pool was finished?
Mr. E llsworth. I was.
Mr. G ray . Did you get your manager’s commission?
Mr. E llsworth. I did.
Mr. G ray. From whom?
Mr. E llsworth. From the syndicate.
Mr. G ray . You did not do any managing *
Mr. E llsworth. No; I did not.
'



STOCK EXCHANGE PRACTICES

1053

Mr. G r a y . Will you tell me why you got vour managers commis­
sion ?
Mr. E llsworth. That was the only manager’s fee I was paid
during the time I managed pools for M. J. Meehan & Co. It might
have been because my association with the pool drew in two or three
important members of the pool.
Mr. G r a y . In other words, so that it may be perfectly clear to
this committee, you, as an independent operator, were engaged
nominally as manager of this pool, though you were in Europe, in
order that your connection with it might insure the presence in the
pool and the participatioin in it, of a few important people that
were wanted ?
Mr. E llsworth. I say that might have been the reason.
Mr. G r a y . Who was it that wanted those people—Meehan, wasn’t,
it?
Mr. E llsworth. Mr. Meehan was the organizer of the pool.
Mr. G r a y . Meehan ran it, didn’t he?
Mr. E l l s w o r t h . Yes.
Mr. G r a y . Certainly. All right. We will leave Radio, and come
back to Fox. I want to direct your attention to several operations
in Fox Theaters stock that took place in the house of M. J. Meehan
&Co. Are you familiar with an account that was known as account
No. 394 there ?
Mr. E l l s w o r t h . Yes.
Mr. G r a y . What was your association with that account?
Mr. E l l s w o r t h . I believe I was manager of that pool.
Mr. G r a y . In that pool, there was no written syndicate egreement,
was there?
Mr. E l l s w o r t h . I don’t think so.
Mr. G r a y . I ask you whether or not the participators in that pool,
together with other interests, were as follows: William Fox, 26 per
cent; Elizabeth Meehan, 18y> per cent; Bradford Ellsworth. 18
per cent; J. H. Higgins. 18y2 per cent; and Earl Rodney, I8V2 per
cent?
Mr. E llsworth . That is correct.
Mr. G r a y . That was a small pool. I mean by that, there was not
a very large number of participators?
Mr. E l l s w o r t h . That is right.
Mr. G r a y . Try to keep your voice up. please. Elizabeth Meehan
is the wife of Michael J. Meehan, is she not?
Mr. E llsworth . She is.
Mr. G r a y . Mr. Joseph Higgins is also an independent operator,
as you are? That is true, isn’t it?
Mr. E llsworth. He is a member of the exchange in New York.
Mr. G r a y . I s he now ?
Mr. E l l s w o r t h . Yes.
M r. G r ay . What exchange?
Mr. E l l s w o r t h . The curb.
Mr. G r ay . The Curb Exchange. Mr. Earl Rodney is a member
of another brokerage firm, is he not?
Mr. E l l s w o r t h , xes.
Mr. G r a y . He is a member of Burnham, Herman & Co., is he not?
Mr. E l l s w o r t h . At that time he was.



1054

STOCK EXCHANGE PEACTICES

Mr. G r a y . My records show—and I would like to ask you whether
it is correct—that that pool operated from August 29,1928, down to
October 7 of the same year. Is that correct?
Mr. E llsworth. I have not the figures, and I have not looked at
them. I suppose it is correct.
Mr. G r a y . It was in 1928 when they operated?
Mr. E l l s w o r t h . Yes.
Mr. G r a y . I direct the committee’s attention to the fact that this
was at the same time as these trades in Taylor, Thorne & Co., where
there were pool operations taking place, and at the same time as these
operations that were testified to yesterday as having occurred in
Hayden, Stone & Co., were taking place.
The profit in that was $483,308.35, is that correct?
Mr. E llsworth. You have the figures, Mr. Gray. I have not seen
them.
M r. G r a y . D o you recall that as b ein g correct?
Mr. E llsworth. I recall it was over $400,000.

Mr. G r a y . How was that pool operated, and where did it get its
stock ?
Mr. E l l s w o r t h . It was on an option.
Mr. G r a y . From whom?
Mr. E l l s w o r t h . Mr. Fox.
Mr. G r a y . From William F ox ; and an option for how many shares
of stock?
Mr. E llsworth. I think over 100,000—125,000.
M r . G r a y . 125,000, w asn ’t it?
Do y o u recall th e p rice?
Mr. E l l s w o r t h . I do not.
M r. G r a y . D o you k now where M r. F o x g o t th at stock ?

Mr. E l l s w o r t h . My impression is that it was stock that remained
unsold from his offering through Eisele, King & Co.
Mr. G r a y . In other words, your impression is that it was stock
that Fox Theaters had been offering through Eisele, King & Co., and
it was that which remained and had not been taken up by the public?
Mr. E llsworth. Y es; that I believe to be true.
Mr. G r a y . So that you mean that the stock itself w a s Fox Theaters
stock, or Fox stock—that is to say, did it belong to Fox Theaters, or
did it belong to Fox?
Mr. E llsworth. As it came to us, it belonged to Fox.
Mr. G r a y . A s it came to you, it belonged to Fox. Did you exercise
your option in that case?
Mr. E l l s w o r t h . Part of it, I believe.
Mr. G r a y . Did you start to sell the stock short before you e x e r c is e d
your option?
Mr. E llsworth. Against the option, yes.
Mr. G r a y . Against the option. I am going to direct your atten­
tion—by the way, in this particular pool, and in the other pools
you mentioned, there was a great deal of stock, or a great deal sold,
wasn’t there?
Mr. E l l s w o r t h . Yes.
Mr. G r a y . What is the purpose of that?
Mr. E l l s w o r t h . The large purpose in any operation o f that
tit 1S
stock above the option price, if possible.
M r. G e a t . W h y d o y ou engage in a lo t o f other s e llin g a n d other
buyin g, m between the tune that y ou start you r p o o l o p e ra tio n s, and



STOCK EXCHANGE PRACTICES

1055

the time that you ultimately dispose o f the stock which you have
an object in selling!
Mr. E l l s w o r t h . Sometimes it is necessary to b u y stock.
Mr. G r a y . W h y ?
Mr. E l l s w o b t h . I f the market goes off, you buy the stock.
Mr. Gray. As a matter o f fact, Mr. Ellsworth, don’t you recall,
wd does not this account show, that you bought and sold thousands
of shares of stock, day in and day out, at practically the same prices ?
Mr. E l l s w o r t h . No; Mr. Gray. By that you mean to say that I
caused an unnatural activity in the stock to attract purchasers?
Mr. G b a t . Yes.
Mr. E l l s w o b t h . N o ; that is not true.
Mr. G r a y . Y ou h a d to d o w h a t has been called m a n ip u la tin g th e
market, d id y o u n ot?
Mr. E l l s w o b t h . I often

had to take stock, buy stock. I f I got to
a hard spot in the market, where there was a stock offered, I would
buy it and attempt to sell it at a higher price.
Mr. G r a y . Y ou mean you would buy it to stop the stock from
dropping below a price that would affect the success of your opera­
tions?
Mr. E i x s w o b t h . That w o u ld be one side o f i t ; yes.
Mr. G r a y . In this particular transaction, I want to direct your
attention to the fact that while your pool was operating, on October
28,1928, M. J- Meehan & Co. gave to the firm o f Heller & Levinson
an order to sell 10,000 shares of Fox Theaters stock at 28i/>, and to
clear the trade; and at the same time, on the same day, William Fox
gave Normberg & Dixon, now Loci), Wallsl>erg & Co., an order to
Buy 10,000 sharees at 28%. Do you remember that transaction?
Mr. E i x s w o b t h . I do not recall the transaction.
Mr. G r a y . I direct your attention to the fact that, though on the
tape, in reporting stock exchange transactions, there seems to be no
signficance as to those two transactions, one being a buy, and one
being a sale, that, as a matter of fact, the tracing o f the particular
transaction through five different brokerage houses establishes the
fact that the sale was a sale to Fox, and the purchase of Fox was
a purchase from the syndicate itself; in other words, that it was
a pure wash sale. Do you recall it?
Mr. E l l s w o b t h . I do not recall it; but if I may be allowed to
speak fo r just a moment— —
Mr. G r a y . It has been directed to your attention. I would like
to have any explanation you can give us.
Mr. E i x s w o b t h . Very frequently during the operation of the Fox
syndicates—this one that you spoke o f yesterday—Mr. Fox bought
stock in the market from* a syndicate. Etis associates bought stock in
both syndicates.
Mr. G r a y . Yes.
Mr. E i x s w o b t h . It might very easily happen that Mr. Fox
would call me up and ask me how I was getting on, and I would say
44Bad.” H e said, “All right. I will buy 10,000 shares, and you
can sell them to me from the syndicate.” Whether it happened or
not, I do not know. It was not a wash sale. It was an actual sale,
and change o f ownership from the syndicate to Mr. Fox. What Mr.
fox did with the stock, I do not know. He may have given it to
some friends, or kept it himself.




1056

STOCK EXCHANGE PRACTICES

Mr. G r a y . Whether he again, on some other day, sold , and the
syndicate bought back?
* Mr. E l l s w o r t h . He might have.
Mr. G r a y . In other words, Mr. Fox would call you up and say,
“ How are you getting along? ” and you indicated to him you were
not getting along so well, and he would say to you, “ Well, I will
go out and buy 10,000 shares from the syndicate.” So, as a m atter
of fact, he would put in an order to buy, and you would put in an
order to sell?
Mr. E l l s w o r t h . Yes.
M r. G r a y . S o that w hether y ou w ou ld ca ll it a w ash sale o r not,
that is what happened, and very lik ely afterw ard s, even th ou gh
the transaction w ent th rou gh as a real tran saction , som e tim e the
n ext d ay, o r the d a y a fter, o r w hether it becam e p ro p e r t o d o the
th ing, in accordance w ith y ou r ligh ts, M r. F o x w o u ld sell it , and
you w ould bu y it?

Mr. E l l s w o r t h . I h ave n o k n ow led ge o f h im s e llin g it.
Mr. G r a y . You mean you don’t remember that this particular
stock was sold back?
Mr. E l l s w o r t h . I say he might have sold it back, Mr. Gray. I do
not know that he did. He might have bought that stock, and given
it to some friends of his, or some associates of his, which often
happens. Members of syndicates frequently buy stock.
Senator F l e tc h e r . What would you call a wash sale?
Mr. E l l s w o r t h . A particular wash sale, Senator, has no real
significance, unless it is done to deceive the public. That is, un­
natural activity or no natural activity has taken place in the stock,
and any traders who are watching the tape action o f stock, seeing
large amounts go out at a rising price, would think the stock was
going up, and therefore follow the tape, and buy the stock. One
wash sale, however large a proportion, would have no significance
whatever. A continued washing—that is, if the stock was selling
at $20 a share, and is moved up to $25 a share, with no real change
of ownership, is a fraud on the public. A sale of this kind is not
a fraud on the public. It is a direct change of ownership, and not
made to deceive the public in an unnatural rise of the stock.
Senator F l e t c h e r . H o w could this rise in the stock take place
that way on the stock exchange without there being some change
of ownership?
Mr. E l l s w o r t h . I can explain by instances—the only instance I
know of in my experience in the Street of wash selling. There was
a young man opened an account in M. J. Meehan’s uptown office.
I have forgotten the name of the stock. It was an inactive stock,
where the fluctuation could be made wide'. Mr. Meehan received
an order from his branch manager, who took this account, to buy
or sell 500 shares of this stock at a price. He went into the crowd,
and he met another broker with an order in the same stock at the
same price. Mr. Meehan spoke to this broker and asked him, “ Who
are you working for? ” It was the same man Mr. Meehan had a
sell order for. Both of them refused to execute the order, and threw
the account out of their office. That was an attempt to wash stock
up, which Mr. Meehan and the other broker____
Senator B r o o k h a r t . What difference was there between that, and
this one Fox pulled off ?
’



STOCK EXCHANGE PRACTICES

1057

Mr. E llsw or th . The difference in that, Senator, is this. That was
an attempt to deceive the public.
Senator B ro o k h ar t . What was this other?
Mr. E llsw o r th . By w a sh in g th at stock u p , to different levels, and
make activity in the stock.
Senator B r oo k h ar t . Was

not this other an attempt to deceive the
public?
Mr. E llsw o r th . It was not. It was a direct change in the owner­
ship from the syndicate to Mr. Fox.
Senator B r oo k h ar t . And then from Fox back to the syndicate.
Mr. E l l sw o r t h . N o, Senator. I do not know that. I don’t think
so.
Senator B r oo k h ar t . You know Fox did not keep it. He got rid
of it in some way or other.
Mr. E l l sw o r t h . He may have given it to friends or associates.
Senator B r oo k h ar t . And they sold it to the syndicate, or some­
body else?
Mr. E l l s w o r t h . They may have.
Senator B r o o k h ar t . What is the difference? That is a more covered-up fraud, but it seems to me just as bad a fraud as the other.
Mr. E l l s w o r t h . I do n o t kn ow th a t h e d id sell it back.
Senator T o w n s e n d . The syndicate received all its stock from. Mr.
Fox originally, did it not?
Mr. E l l s w o r t h . Originally.
Mr. G r a y . N o w , Mr. Ellsworth, another thing that we discovered,
which is, in a sense, connected with wash sales, is that from August
29 down to the time your pool closed, there was an aggregate of
76,200 shares of stock that were bought by the syndicate and sold
by the syndicate on successive days at exactly the same price. I will
give you an illustration of what I mean, and then I want to ask
you for your explanation. The very first day, August 29, the syndi­
cate sold 100 shares at 27ys and bought 100 shares at 27% ; sold 300
at 27^4 and bought 300 at 27*4; sold 300 at 27% and bought 300 at
27y2; sold 100 at 28 and bought 100 at 28, n o; that item comes in on
the 30th. Those other three are on the same day. Then, we find
five illustrations on the 30th, four on the 31st, and so on. On one
day, September 10, we find one item of a sale o f 11,100 at 32, and
a purchase by the syndicate of 11,100 at 32—not sales to somebody
else of the same amount at the same price, at the same time, but dur­
ing the day, when the day concluded, there was a sum total of 11,100
shares the syndicate had sold at 32, and a sum total of 11,100 shares
the syndicate had bought at 32. Can you explain those transactions ?
If you would like to see the sheet, I would be glad to show it to you.
Mr. E l l s w o r t h . It is not necessary for me to see the sheet. In
no case were they wash sales.
Mr. G r a y . Y ou m ean b y th a t th a t in n o case w as there a m e etin g
of tw o people a ctin g fo r the syndicate, one b u y in g and the oth er
selling?
Mr. E l l s w o r t h . No.
Mr. G r a y . What were they?
Mr. E l l s w o r t h . Most of the

trading, outside of what the syndi­
cate did, was done by traders on the floor. By a close analysis of
all the sales that took place in Fox Theaters—in those days; not




1058

STOCK EXCHANGE PRACTICES

any more—you will find that the traders on the floor create the
activity.
.
Mr. G r a y . Have they discretionary orders to act for your p o o l?
Mr. E l l s w o r t h . Oh, no. They act for themselves. They are
independent traders.
Mr. G r a y . H o w did their trades get into the syndicate accounts
Mr. E l l s w o r t h . We buy from them, and sell to them, at different
prices and at different times.
Mr. G r a y . Then, you will concede that it happens that when the
syndicate is trading, it may buy 10,000 shares at a price during the
day, and it may sell 10,000 shares at the same price during the
day.
Mr. E l l s w o r t h . It may.
M r G r a y . What is the purpose in that? There is nothing but
a loss of commissions, is there?
Mr. E l l s w o r t h . The original purpose is to sell the stock. We
do not want to take it back.
Mr. G r a y . Is not the purpose in that just to keep the activity in
the stock boiling?
Mr. E l l s w o r t h . No.
Mr. G r a y . Then, why would any sane man sell 1 1 ,1 0 0 shares o f
stock at 32 during the day, and buy 11,100 shares o f stock at 32
during the day, losing his broker’s commissions on his sales and
buys?
Mr. E l l s w o r t h . There were other sales besides that on that day,
were there not ?
Mr. G r a y . None so far as your syndicate was concerned—now,
wait a minute. I will not say there were none as far as your
syndicate was concerned, but out of the sales on that day, those
sales, in the quantities I have indicated, on the days named, are
purchases and sales by your syndicate, and for the syndicate at
exactly the same price.
Mr. E l l s w o r t h . H o w large a volume was there in the stock on
that day that you say the syndicate bought?
Mr. G r a y . I can not answer that question.
Mr. E l l s w o r t h . Probably 50,000 to 60,000 shares.
Mr. Gray. Suppose there were a hundred thousand shares. What
difference does it make with reference to your syndicate buying
and selling stock at the same price during the day?
Mr. E l l s w o r t h . It makes quite a difference, because it is a coinci­
dence, and not a trade occuring at the same moment.
Senator C o u z e n s . A s a matter of fact, to be perfectly frank, the
purpose is to create an activity in the market, is it not? *
Mr. E l l s w o r t h . It is a following you create, Senator, by the
traders on the floor. Without the traders on the floor following an
operation of the stock, the stock would have gotten nowhere. An
analysis of the stock that was sold by the syndicate would show that
the traders were buyers in the stock, and not, to a large extent the

no profit, but rather an expense in commissions.



STOCK EXCHANGE PRACTICES

1059

Mr. E l l s w o r t h . There is an expense in commissions, but it is not
a phoney trade, Senator.
Senator C o u z e n s . What is the object of a man buying and selling
on the same day, at the same price, unless it is to create a fictitious
market ?
Mr. E l l s w o r t h . We tried to sell it. We do not want to buy it
back. Sometimes we have to buy it back.
Senator C o u z e n s . Why do you buy it back ?
Mr. E l l s w o r t h . To keep it from going down.
Senator C o u z e n s . So that, in elfect, these are really phoney trans­
actions, because there is no other object in mind except to get a
fictitious market?
Mr. E l l s w o r t h . In the net result—how much stock, in all, did
we sell?
Mr. G r a y . I am going to show you your entire transactions.
You bought, in the entire pool, during the entire life of the pool,
215,500 snares. In addition to that, you took from Mr. Fox, on
the option, 125,000. You received, in all, 146,100 from outside
sources. You bought in the market 215,500, and you actually sold
321,800. As a matter of fact, the sales of the character such as I
have indicated to you, amount to 70,200 shares, which is a matter
of 35 per cent of the shares which you bought in the market. In
other words, 35 per cent of the transactions in the buys were trans­
actions which I have indicated to you, so you can take that as an
average percentage during the time the pool was operated.
Senator C o u z e n s . I see no necessity lor so much verbiage when
anybody with any intelligence understands-----Mr. G r a y . I think so, Senator, except that I want to get it on the
record as clearly as I can.
I direct your attention to an account that was operated after this
operation concluded, and in the same stock, Fox stock, and in M. J.
Meehan & Co.’s brokerage house, the account being known as account
433. D o ‘you recall that ?
Mr. E l l s w o r t h . Yes, sir.
Mr. G r a y . That operation started as one that was to be conducted
against an option also, did it not t
Mr. E l l s w o r t h . Yes, sir.
Mr. G r a y . Y o u know, as a matter of fact, in that case, that Mr.
William Fox secured from the Fox Theaters Co. an option to buy
500,000 shares of stock at $20 a share, for the first 200,000 and $27
for the next 150,000, and $28 a share for the following 150,000, do
you not?
Mr. E l l s w o r t h . I do not.
Mr. G r a y . The reason I ask you, Mr. Ellsworth, as to whether you
know it or not, is this. Is it not a fact that right thereafter, Mr.
Fox granted to you, doing it in writing, and in a communication
addressed to M. J. Meehan & Co., as your agents, an exactly similar
option ?
Mr. E l l s w o r t h . Mr. Fox gave me an option?
Mr. G r a y . Yes. We will offer for the committee, and ask that
it be placed in the record, a certified copy of the minutes of the
meeting o f the board of directors of the Fox Theaters Corporation
held on the 6th day of December, 1928. I shall not bother read­
119852— 32— pt 3------ 18




1060

STOCK EXCHANGE PRACTICES

ing it. It grants to him the option such as I have indicated by my
questions.
(The statement referred to is as follows:)
At a meeting of the board of directors of Fox Theaters Corporation held at
the office of the company on December 6, 1928, duly convened, the following
resolution was duly passed:
“ Resolved, That the company grant unto William Fox an option to purchase
500.000 shares of the class A common stock of Fox Theaters Corporation, the
said option to be operative for six months from the date hereof at the
following prices and in the following manner:
“ For the first 200,000 shares at $26 per share; for the next 150,000 shares
at $27 per share; for the next 150,000 shares at $28 per share, the said
stock when delivered to be listed on the New York Curb Exchange, the
said option to expire at the end of said six months' period unless extended
by mutual consent.”
I, the undersigned, secretary of Fox Theaters Corporation, a New York
corporation, do hereby certify that the foregoing is a true and correct excerpt
of a resolution duly passed at a meeting of the board of directors o f said
company held on the 6th day of December, 1928.
New York, December 7, 1928.
C. S. L e k n e b , Secretary.

Mr. G r a y . Then I show you a photostatic copy, under the same
date, December 6, 1928, of a letter addressed to M. J. Meehan &
Co. by William Fox, and ask you whether or not that is the option
that was given to Meehan as your agents for that 500,000 shares
of stock?
Mr. E l l s w o r t h . Yes: it is.
Mr. G r a y . I will oner that and ask that it be placed in the
record.
(The statement referred to is as follows:)
F ox Studio,

New York City, December 6,1928.
Messrs, M. J. Meehan & Co.,

New York
I hereby grant you an option to purchase from me 500,000
shares of class A common stock of Fox Theaters Corporation on the following
terms: Two hundred thousand shares at $26 per share; 150,000 shares at
$27 per share; 150,000 shares at $28 per share.
This option shall be effective for a period of six months from the date
hereof, at which time this option shall expire unless extended by mutual
agreement.
If at any time during said period your operation shall require a loan to
you of shares of Fox Theaters Corporation class A stock, I agree to loan
to you 200,000 shares in the aggregate.
If at any time during said period you are short an amount b ey on d the
200.000 shares, you wiU take up for cash such excess at the above stipulated
prices. You are to request delivery of such excess shares each day.
Yours truly,
Gentlem en:

W iix ia m

F ox.

Mr. G r a y . I direct the committee’s attention to the fact that the
prices are exactly the same, for the very same quantities; that the
option is effective for a period of six months from the date. I t is
provided that—
I f at any time during said period your operations shall require a loa n to
Z™
° f p ?x theaters Corporation class A stock, I agree to loan to
you 200,000 shares in the aggregate.
200^fl0ft'
taid P®ri°d you are short an amount beyond the
_shares, you will take up for cash such excess at the above stimulated
are *° r®QUest delivery of such excess shares each day.




STOCK EXCHANGE PRACTICES

1061

I will establish, for the benefit of the committee, that when Mr.
Fox agreed to loan 200,000 shares of Fox Theaters, he owned
only 4,300.
Senator C o u z e n s . I s t h a t t h e t r a n s a c t io n t h a t w a s t r a n s f o r m e d
into a pool ?
Mr. Gray. Yes, sir. I am going to show you all the details.
Senator C o u z e n s . Is that the same pool whose members you mentic 1
‘
"
Now, then, what was the reason, if you were going to operate
for the purpose of selling the stock with respect to which Mr. Fox
gave you an option, for there being any understanding or agree­
ment as to the loaning of stock? Why did you need stock to be
loaned ?
Mr. E l l s w o r t h . To maintain a position.
Mr. G r a y / What do you mean by that?
Mr. E l l s w o r t h . To make the operation successful. In case of
any emergency, or anything happening in the market, it is neces­
sary to keep a short position in order to be able to buy stock.
Mr. G r a y . If you had a short position, and you wanted to cover
it, you could exercise your option, could you not ?
Mr. E l l s w o r t h . I could.
Mr. G r a y . But, instead of that, you wanted to be sure that you
were in a situation where, if you did not care to exercise your
option, you could be assured that sufficient stock would be borrowed,
so that you could maintain your short position. That is it, isn’t it?
Mr. E l l s w o r t h . Correct.
Mr. G r a y . N o w , when an operator has an option, he protects
his position in the very first instance by selling a proportion of
that stock upon which he has an option, short, does he not ?
Mr. E l l s w o r t h . Against the option.
Mr. G r a y . Against the option. But usually that is not over
what—10 per cent?
Mr. E l l s w o r t h . Oh, no. It might be any amount. He might
sell the whole option.
Mr. G r a y . I f you sell your whole option short, then you are
not maintaining a position simply for the purpose of waiting for
the market to go one way or the other, are you ?
Mr. E l l s w o r t h . It is customary, Mr. Gray, in an operation of
this kind—it is customary in every large bond syndicate or stock
syndicate, to get a short position, even if it is a commitment. No
t>ond issue by the largest bankers in New York has ever been issued
without overselling the bond issue, so that they can maintain a
market.
Senator B r o o k h a r t . A s you sell this stock to the public, do you
inform the public that you are going to take a short position on it?
Mr. E l l s w o r t h . We do not take a short position, except against
an option, Senator ?
Senator B r o o k h a r t . D o you inform the public? I never heard
of it until it was brought out in this committee.
Mr. E l l s w o r t h . No; the public are not informed that there is
an option out on stock.
Senator B r o o k h a r t . So it is a fraud on the public every time.




1062

STOCK EXCHANGE PRACTICES

Mr. E l l s w o r t h . I would not say that; no, sir. In this particular
instance, if I may be allowed to say so, this stock, 500,000 shares, was
icciiori lw the Fox Theaters Corporation to buy several chains of
;nt theaters in New York and Brooklyn, and in other small
cities.
Senator C o u z e n s . Do you call New York and Brooklyn small
cities?
Mr. E l l s w o r t h . And other cities, I should say, Senator. To that
extent, it was a similar operation to that which was described here
yesterday by Mr. Hoyt in taking over the Westco, except that there
was no obligation to buy that stock of Mr. Fox, except a moral obli­
gation that we assumed, to sell as much stock as we possibly could
to pay for those theaters. We went into this operation after discuss­
ing it with Halsey, Stuart & Co., the bankers-----Senator C o u z e n s . Do you call Halsey, Stuart & Co. bankers ?
Mr. E l l s w o r t h . They are not members of the stock exchange.
Senator C o u z e n s . Do you call them bankers?
Mr. E l l s w o r t h . I believe that is what they call themselves.
Senator C o u z e n s . They call themselves that.
Mr. G r a y . I want to reply to a question of Senator Couzens’, which
he put yesterday. You asked whether Halsey, Stuart & Co. was a '
corporation or a partnership. They are a corporation.
Senator C o u z e n s . I did not think they would hazard their opera­
tions other than through the corporate form.
Mr. G r a y . Being protected through the corporate form.
Finish, if you want to, Mr. Ellsworth.
i l W W U V V , * * **•

VV OM-J

W ,

~

# ,

M r. E l l s w o r t h . T o that extent, it was very m uch like an u n d er­
w ritin g, w ith out an ob ligation to b u y the stock.

Mr. G r a y . In other words, in the case of an underwriting, the
underwriters absolutely agree to buy the stock, and, we will say, run
some risk if the price is not a price at which they can be assured that
somebody else is going to take it over.
Senator C o u z e n s . In that connection, the witness said they had no
agreement, only a moral obligation to take the stock.
Mr. G r a y . Y ou mean by that, Mr. Ellsworth, that it is an option,
and you may or may not exercise it ?
Mr. E l l s w o r t h . It is an option, and we may or may not exercise it.
Mr. G r a y . Legally, Mr. Fox can not compel you to take the stock,
and when you speak of your moral obligation, you mean you assume a
moral responsibility to relieve Mr. Fox of that stock?
Mr. E l l s w o r t h . A s much as possible.
Mr. G r a y . As much as possible of it. I will show you that they
did not take it, but took only a portion of it.
Senator C o u z e n s . That is not important, is it ?
Mr. G r a y . You will find that it is rather important, because we
will show you where that stock came from.
Senator F letcher . What price was fixed ?
Mr. E l l sw o r t h . The option prices?
Senator F l e tc h e r . Yes.




STOCK EXCHANGE PRACTICES

1063

Mr. E llsworth. I am familiar with the operations as far as the
first part of February, 1929, was concerned.
Mr. G r at . Y ou mean you were not in town then?
Mr. E l l sw o r t h . I was abroad.
Mr. G r a t. S o that when this option was given to Meehan, as your
agents, you were in Europe and did not even know anything about
it, is that correct?
Mr. E llsworth. N o; not when it was given.
Mr. G rat . I beg your pardon.
Mr. E llsworth. The option was given in December. I was in
New York up until February.
Mr. G r at . You mean you left in February?
Mr. E llsworth. Yes.
Mr. G rat . I misunderstood you. I thought you meant you came
bade in February.
Mr. E l l s w o r t h . N o. I left in February.
Mr. G r a t. S o that you were familiar with the operations up until
February?
Mr. E llsworth. Yes.
Mr. G rat . Are you now familiar with the figures in connection
with the transactions?

Mr.

E l l s w o r t h . N o ; I am not.

I have not seen the account since

then.

Mr. G r a t . In other words, you would not be able to tell the
number of shares that you dealt in, those that you bought, and those
that you sold?
Mr. E l l s w o r t h . No.
Mr. G r a t . Nor the profit that was made?
Mr. E l l s w o r t h . Yes; I know the approximate profit.
Senator C o u z e n s . What was it?
life. E l l s w o r t h . About $2,000,000.
Mr. G r a t . $1,937,762.46.
Senator C o u z e n s . Was that ail made before you went to Europe,
or afterwards?
Mr. E l l s w o r t h . I think when I left we had our maximum position
in the stock.
Senator C o u z e n s. Y ou made no money after you went to Europe?
Mr. E l l s w o r t h . After I left, they bought stock supporting the
market on the way down, above the option price—I think in almost
all cases above the option price, and finally called the stock. The
feet that the stock was bought back above the option price, indicates
very clearly that it was not a short operation. The press has said
this morning that it was a short operation. It was not, and had
Ho semblance of being a short operation.
Mr. G r a t . I will discuss that with you after I present that part o f
the picture.
Mr. E l l s w o r t h . It is only fair to the gentlemen who were in that
operation—Mr. Brady, who was a very dear friend of mine, and who
is now dead, never engaged in a short operation in his life. Mr. Raskob has testified, I believe, that he never engaged in a short operation
in his career in Wall Street. Mr. Chrysler, whom I was responsible
for getting in that operation, would not have come into such opera­
tions if he thought it was a bear operation. It was not. It was an



1064

STOCK EXCHANGE PRACTICES

attempt to sell stock which we thought to be good, and that would
sell very much higher, to pay for a chain of theaters which Mr. Fox
was adding to the Fox Theaters Corporation.
Mr. G ray. I will present the facts with respect to the stock trad­
ings a little later, and the committee can draw its own conclusion
as to whether or not it was a short transaction.
Senator C o u z e n s . When you referred to Messrs. Brady, Baskob,
Kenny, Chrysler, and so forth, these men did not buy the stock for
investment, but just for operation, to make money?
Mr. E l l s w o r t h . Mr. Brady bought stock during the life o f the
syndicate for investment.
Senator C o u z e n s . He kept it for investment?
Mr. E l l s w o r t h . He kept it for investment. Some of the asso­
ciates in his office bought stock.
Senator C o u z e n s . But the other gentlemen, Mr. Raskob, Mr.
Kenny, and Mr. Chrysler, did not buy it for investment?
Mr. E l l s w o r t h . I believe Mr. Chrysler bought some.
Senator C o u z e n s . For investment?
Mr. E l l s w o r t h . About Mr. Kenny, I do not know.
Senator Couzens. Did they keep their stock for investment, or did
they trade it?
Mr. E l l s w o r t h . I do not think they traded it, beyond buying the
stock. I do know about Mr. Brady and some of his associates.
Mr. G ray . He could have bought some stock anywhere else— from
the syndicate, or otherwise—but in this matter, all they did was to
put up their required margin, permit you to operate m the stock,
and when the syndicate or pool was closed, they got a check for their
profits. That is all they did in this, is it not?
Mr. E l l s w o r t h . In th is operation?
Mr. G ray . Yes.
Mr. E l l s w o r t h . Besides that, they bought. I only mention that
fact to show that we all believed in the stock.
Mr. G ray . We are talking about this operation.
Senator Couzens. That is what I mean. I am afraid the witness
did not get my question correctly, or did not answer it correctly.
When they went into this operation to which counsel refers, they
went into it for speculative purposes, rather than investment pur­
poses?
Mr. E l l s w o r t h . In this particular operation.
Senator C o u z e n s . Yes. That is what I wanted to get at.
Mr. G ray. A s a matter of fact, in this operation Mr. Baskob actu­
ally put up $750,000. Mr. Chrysler put up $750,000. Mr. Brady put
up $750,000, but none of the rest of you ever put up a cent, did you?
Mr. E l l s w o r t h . We d id not have to, because our money w a s in
those offices.
Mr. G ray . In other words, you mean that so far as Mrs. Elizabeth
Meehan, Joseph Higgins, and yourself were concerned, there was
money of yours in other accounts in the office, and you did not have
to put up any cash?
M r. E l l s w o r t h . Y es.

Mr. G ray. Was that true with respect to Mr. Fox, also?
Mr. E l l s w o r t h . I think Mr. Fox had a large account with Meehan
at that time.




STOCK EXCHANGE PRACTICES

1065

Mr. Grat. In addition to the profit that was made, that we nave
talked about, Mr. Meehan got $215,306.92 for operating the pool,
did he not? Would you say that is about the correct figure?
Mr. E llsworth. Yes.
Mr. G ray. Ten per cent?
Mr. E llsworth. The firm got a managing fee, not Mr. Meehan.
Mr. G ray. In addition to that, in all these three hundred thous­
and-odd shares that were traded in, Meehan & Co. got their broker­
age commission; that is correct, isn’t it?
Mr. E llsworth. Yes, sir.
Mr. G ray. In addition to that, there is an item that is not clear
to 11s, Mr. Ellsworth, that we would like to ask you about. There is
a payment to you, not indicating wliat it is for at all, of $24,915.
Can you explain it?
Mr. E llsworth. I do not recall the payment to me. There was
no payment to me except for some expenses that should have been
charged against the syndicate. It may have been incurred before
the syndicate started—which I paid myself, and the syndicate paid
me when it was closed.
Mr. G ray. What kind of expenses could they have been?
Mr. E llsworth. It might have been for pviblicity.
Mr. G ray. What kind of publicity ?
Mr. E llsworth. I am hesitating, because I can not give you the
name o f the man that I think I paid the money to. It was a news­
paper syndicate.
Senator. Coubens. D o you know the name of the syndicate?
Mr. E llsworth. I can not recall that, so I hesitated.
Senator Couzens. Do you know the name of the man ?
Mr. E llsworth. I think his name was Brown.
Senator Couzens. Was he a resident of New York?
Mr. E llsworth. That, I do not know.
Senator Couzens. Did you come in contact with him?
Mr. E llsworth. Yes; I saw him.
Senator Couzens. Do you know how much you paid him?
Mr. E llsworth. $24,000, evidently, by the figure, if that is what
it was. I don’t recall what it was for, but that is what it must have
been. It was not paid to me for any services.
Mr. G ray. In the operation of this pool, in which you concede
these gentlemen, of course, went in for the purpose of making a
speculative profit, and which you state was to aid Mr. Fox to raise
money and distribute his stock in connection with his desire to obtain
other theaters, why should you spend $24,000 with any newspaper
man for publicity?
Mr. E llsworth. To put the stock properly before the public, and
its earnings.
Mr. G ray. What stock did you want to put before the public?
Mr. E llsworth. Fox Theaters.
Mr. G ray. What Fox Theaters stock? You did not own any Fox
Theaters stock.
Senator Couzens. No; but he had an option.
Mr. G ray . I am going to show what he did with that option,
Senator Couzens, if you will permit me.
Mr. E llsworth. It does not make any difference whether I owned
it or not.



1066

STOCK EXCHANGE PRACTICES

Mr. G ray . In other words, it became necessary to get the public
interested in Fox Theater stock, so that you, in your manipulation
by your trades in the market, could do what you wanted to do with
it ; is that right ?
Mr. E l l s w o r t h . That is hardly fair.
Mr. G r a y . You express it in your language.
Mr. E l l s w o r t h . We were offering stock which we firmly believed
in, and we believed that the public would make money out of it. It
was a speculative investment. We thought the stock should sell
somewhere around $60 a share, on the earnings that were given to us
by the Fox Theaters Corporation, and if you can call the attention
of the public to the fact that a stock is selling at $30 a share which
you think should sell at $60, and will sell at $60, you are doing the
public a favor.
The C h a i r m a n . What is the stock worth now ?
Mr. G r a y . $1.50, yesterday.
Mr. E l l s w o r t h . Probably about a dollar and a half.
Senator C o u z e n s . Why would you want to be such philanthropists
to the public if you had stock at 30 or less, that was worth 60?
Mr. E l l s w o r t h . At no time did I want to be a philanthropist; 1
wanted to make money, just the same as we all did, out of the stock,
but we did not want to sell the public a bum stock. We thought we
were selling them a good stock.
Senator C o u z e n s . That stock you were getting at less than 30 was
worth 60. Why did you want to sell it at such a low price?
Mr. E l l s w o r t h . I did not say it was worth 60 at that time, but it
would be worth 60.
Senator C o u z e n s . In how long?
Mr. E l l s w o r t h . In the career of the company.
Senator C o u z e n s . That might be 20 or 30 years hence.
Mr. E l l s w o r t h . We thought it would come within another year.
It should have come.
Senator C o u z e n s . I f it should have gone up 100 per cent within
a year, why did you want to dispose of it? Why didn’t you wait
for the year, and get the 100 per cent on your investment ?
Mr. E l l s w o r t h . My business is not waiting on stock. My business
is to take stock under option and sell stock.
Senator C o u z e n s . Does not that belie your confidence in the stock?
Mr. E l l s w o r t h . N o , sir; not if I can turn my money over fa s t
enough.
Mr. G r a y . Mr. Ellsworth, having indicated that picture, I ask you
whether or not it is a fact that what you did was to start in and sell
that stock short on December 4, 1928, and keep on selling, and sell­
ing, and selling short, taking such a position that, on January 17,
1929, this pool was 466,310 shares of stock short, and did not own a
dollar’s worth ?
Mr. E l l s w o r t h . Short against the option.
Mr. G r a y . No matter what you were short against, what you did
was to keep on selling and increasing your short position day bv dav.
^■ivir
at (^a*e y°u were short 466,310 shares. Is that right*
Mr. E l l s w o r t h . Against the option.
*
i -, r‘ .
Y ou had n o t a dollar’s worth of stock, except w h a t v o u
Mi* r$ ht *° Se
t
‘ he option, is that right?
P
y
Mr. E l l s w o r t h . We could get it at any moment.



STOCK EXCHANGE PRACTICES

1067

Mr. Gbat. Y ou could get it at any moment, but what you were
doing was selling the stock short, were you not?
Mr. E llsworth . Against the option.
Mr. G bat . Y ou were selling it short, were you not?
Mr. E llsworth . Against the option. They are two different
tilings.
Mr. G bat . All right. Let us see whether there is any difference.
Mr. E llsw oeth . One is a bear operation, to depress the stock, and
there was no attempt to depress this stock, certainly.
Senator F letcher . Was the effect of this selling to depress the
stock?
Mr. E llsw oeth . No, sir.
Senator F letcher . Did it depress the stock ?
Mr. E llsw orth . The stock went up.
Mr. G b at . I f you say you were selling against the option, I want
to ask you why it was that on December 17, 1928, while you were
accumulating your short position, and while on that date you were
short 170,370 shares, and you wanted stock, why you did not exercise
your option, instead of getting Mr. William Fox to furnish you on
that date 25,000 shares, loaning it to you from the Fox Film Co.,
and why, on the date of January 9, 1929, which is all part of the
same transaction, when your account showed that you were short
428,205 shares, you got Mr. Fox to get you an additional 100,000
shares o f Fox Theater stock owned by the Fox Film Co., and loan it
to you, to let you carry it in your account, as against your short
position?
Mr. E llsw o r th . The question is rather long for me to answer.
Mr. G b a t . In a nutshell, it is this. Why didn’t you get your
stocks from your option stock, if that is what you were selling against,
instead o f borrowing stock and keeping your short position?
Mr. E llsw o r th . Unless I am mistaken, this option had six months
to run.
Mr. G b a t . Yes.
Mr. E llsw o r th . It was when the option was about two months
old, was it not?
Mr. G b a t . Yes.
Mr. E llsw o rth . Anything could happen in the next four months.
Mr. G b a t . I f the stock went down, you wouldn have covered it in
the open market, and not used your option ?
Mr. E l lsw o rth . I would have had to, to protect those who had
bought the stock.
Mr. G b a t . So that if this stock had dropped, what you would have
done would have been to cover your short position in the open mar­
ket, divide the profits, and never exercised your option. Isn’t that
right?
Mr. E llsw o rth . I f I had been forced to, I would have.
Mr. G b a t . Then, you were not trying to help Fox ged rid of his
500,000 shares of stock, were you ?
Mr. E llsw o rth . That is an unfair interpretation.
Mr. G b a t . Everybody can put his own interpretation on it.
Mr. E llsw o r th . I have already said we were trying to sell Mr.
Fox’s stock, for the purpose of buying a chain of theaters, and that
is true.



1068

STOCK EXCHANGE PRACTICES

Senator C o u z e n s . W h y didn’t you take up that portion o f the
option, instead of borrowing stock ?
Mr. E l l s w o r t h . Because, as Mr. Gray will probably bring out, we
did have to buy back some o f that stock above the option price. If
some upheaval had occurred, we would have had to stay there and buy
that stock to protect those who had bought the stock from the syndi­
cate, which we did. The operation was a fairly large success for
Mr. Fox, and for the syndicate. We only had to take back about
a third of the stock.
Senator C ouzens. I still am at a loss as to why you should borrow
stock, instead of exercising the option.
Mr. E l l s w o r t h . We borrowed the stock to maintain a short po­
sition, so that we could buy stock in the open market, and then we
could return that stock if we bought the stock in the open market.
Senator C o u z e n s . That did not nelp Mr. Fox in disposing o f h is
option stock.
Mr. E llsworth . That is the chance Mr. Fox had to take. We
can not sell stock without some obligation to those who buy the
stock.
Mr. G ray. Nevertheless, you having an option up, you borrowed
fifty thousand from Block Maloney & CoJ
Mr. E l l s w o r t h . I don’t know; the borrowing is done in the back
office.
Mr. G ray. The records in the back office show this, that you bor­
rowed from Block Maloney 54,000 shares; from Naumberg & Dixon,
another brokerage house, another 1,200; from Josephthal & Co. a
thousand shares: from Loucheim, Mitten & Co. 7,500 shares; from
J. S. Bache & Co. 22,500 shares, and from Clark, Childs & Co.—
my recollection is that is a banking house; whether they are mem­
bers of the exchange or not I do not know. I represented them at
one time-----Mr. E l l s w o r t h . They are brokers on the stock exchange.
Mr. G ray . Ten thousand shares. I will ask you the same question
with respect to all of them: Why did you not get those shares out of
your option?
Mr. E l l s w o r t h . For the same reason I spoke of before.
Senator C o u z e n s . Did you have to p a y anything for those several
borrowings?
Mr. E l l s w o r t h . The value of the stock.
Senator Couzens. Did you have to pay anything for the privilege
of borrowing it?
Mr. E llsworth. N o premium; no, sir. It amounts to somebody
else carrying stock for you.
Mr. G ray . In other words, you borrowed it at what thev call a
flat rate?
Mr. E l l s w o r t h . Probably at that time it was an excess rate: not
at a premium rate.
’

but you receiT6d
.o M o M t a l t w fhares?

F°*

^

Ifr . E llswokth . I do not recall that.

Mr.

G

ray

.




I mean, Meehan Co.

C°‘ *4’300’000>* *

STOCK EXCHANGE PRACTICES

1069

Mr. E l l sw o r t h . Meehan & Co. never was a partner in that. I
don’t know where they borrowed stock. That is their business.
Mr, G h a t . The stock w as borrow ed fr o m one house with which Mr.
Fox had accounts ?
Mr. E l l s w o b t h . I don ’t k n o w ; I have n o t the slig h test idea.
Mr. G rat. D o you know anything about the repayment of that
loan and what happened to that 125,000 shares of stock that be­
longed to Fox Film, Fox Theater stock?
M r. E

llsw o bth.

N o ; I do n ot.

Mr. G bat . I will establish that a little later. I told the committee
what happened to it, yesterday.
How m u ch of th at stock th a t y o u h ad an o p tio n to b u y , d id y o u
buy?
Mr. E l l s w o r t h . Something under 300,000 shares, I believe.
Mr. G bat . It was exactly 300,000, was it not?
Mr. E l l s w o r t h . I d o n ’t k n ow . I th in k it w as a ro u n d 300,000.
Ton h a v e th e figures.
Senator B r o o k h a r t . Are all of these transactions that you have
described regular under the rules of the stock exchange? Are they
aproved by the Stock Exchange?
Mr. E l l s w o r t h . Yes.
Senator B r o o k h a r t . That is regarded by the stock exchange as
honest and legitimate business?
Mr. E l l s w o r t h . None of these transactions occurred on the New
York Stock Exchange.
Mr. G b a t. So that there will not be any confusion about that: all
of this buying and selling that we are talking about occurred on
tiie New York Stock Exchange?
Mr. E l l s w o r t h . None of it.
Mr. G bat . The New York Curb Exchange—I am sorry; the curb
exchange being a different exchange in New York and handling
stocks that are listed on that exchange and not listed on what they
call the big board, or the New York Stock Exchange.
Senator B r o o k h a r t . Are the curb rules any different?
Mr. E l l s w o b t h . With a v ery few exceptions they follow the New
York Stock Exchange.
Senator B r o o k h a r t . This w ou ld a ll be a p p ro v ed , then, as regular
business?
Mr. E l l s w o r t h . I f they had been listed there; yes, sir.
Senator F l e t c h e r . This stock w as not listed on the New York
Stock Exchange?
Mr. E l l s w o r t h . No, sir. It is not now.
Mr. G b at . I think that is all that I want to ask Mr. Ellsworth.
There are one or two small matters that I am going to put special
witnesses on to ask about.
Mr. E l l s w o b t h . May I correct one thing?
Mr. G b at . Anything you want to state, Mr. Ellsworth.
Mr. E l l s w o b t h . Yesterday in talking with one of the witnesses
here you inferred that I received a put from Mr. Taylor, which is
correct, on 5,000 shares of Fox Film.
Mr. U b a t . At 90?
Mr. E l l s w o b t h . When the stock was selling at 84.
Mr. G b a t . So that the committee may understand you, that w as
the Fox Film syndicate that was operated by Taylor-Thome & Co.



1070

STOCK EXCHANGE PRACTICES

and has nothing to do with these Fox Theater transactions, and it
was at a period of time which antedates the time we have been talk­
ing about by several years. In other words, it was when the Fox
Film was first being handled.
Now, go ahead, Mr. Ellsworth.
Mr. E l l s w o r t h . What happened was this: Mr. Taylor came to
me to interest me in Fox Film stock—I had not been a member of
the syndicate—and induced me, or tried to induce me, to buy Fox
Film stock, which I was glad to do. The stock was not selling at
84 or 85, as stated here yesterday; it was selling at 90 when I bought
the stock. I told Mr. Taylor I would buy the stock, would pay
5,000 or 10,000 shares of stock, if he would give me a put on 5,000 of
it at the price I paid for it, which he did. I lost, I think, about
$12,000 on the transaction, and did not make a profit of $80,000, as
I could have if it had happened as described here yesterday.
Mr. G r a y . You mean by that, that in addition to having a put
which we produced testimony with respect to yesterday, you had
also another transaction with him at the same time of which the
put was a part?
Mr. E l l s w o r t h . No; not with him.
Mr. G r a y . Did you not say you bought more from him ?
Mr. E l l s w o r t h . Not from him; I bought it on the market. I
think I bought 10,000 shares on which he gave me a put on half of
it. I lost money on the whole deal; I think, $12,000.
Mr. G r a y . But if you had not the put you would have had a great
deal heavier loss ?
Mr. E l l s w o r t h . Yes.
Mr. G r a y . So on the put itself that we were talking about yester­
day—we did not know anything about the other part of the transac­
tion—did you make or lose money?
Mr. E l l s w o r t h . I lost commissions and taxes.
Mr. G r a y . Everybody pays that when they sell. Did you make
or lose money on your coverings in the market ?
Mr. E l l s w o r t h . I lo s t m o n e y .
Mr. G r a y . I am talking about that put, alone. I want you to
separate the transactions.
Mr. E l l s w o r t h . As already stated, I put it back to him at the
same price at which I bought it.
Mr. G r a y . And did not exercise your right to buy on the market.
Mr. E l l s w o r t h . I did buy on the market. I had no right to buy
on the market. I told him that I would buy on the market, which
I did.
M r . G r a y . Y ou sim p ly broke even on the tran sa ction ?
Mr. E l l s w o r t h . On that particular 5 ,0 0 0 .
Mr. G r a y . I want to be fair to the witness, as well as

to the testi­
mony presented. The only testimony we presented in respect
to it was this, that on the day that Mr. Ellsworth had his put at 90,
stock was seeing in the low 80’s. The range of prices during that
k*!? rtWES ?
j i.
put was at 90, and therefore i f he
had gone out and bought the stock at any price down within that
ra? f ?
have made the difference between the price o f 90____
Mr. E l l s w o r t h . Pardon me, Mr. Gray. The range o f the stock




STOCK EXCHANGE PRACTICES

1071

Mr. E l lsw o r th . From the 1st to the 8th, 84% to 92%.
Mr. G r a y . Y ou are now telling us that instead of buying it as w e
surmised you did yesterday, what you did was to cancel the put and
did give it back to him at the price at which he gave it to you ?
Mr. E l l s w o r t h . No ; I bought stock at 90.
Mr. G r a y . At the same price?
Mr. E l l s w o r t h . And put it back to him without profit to myself,
but a loss of commissions and taxes at 90.
Mr. G r a y . In other words, you bought it at the same price at
which he gave you the put.
Mr. E l l s w o r t h . I bought at 90 and put it to him at 90.
Mr. G r a y . There was no profit?
Mr. E l l s w o r t h . N o ; a loss.
S en a to r C a r e y . Y ou broke even on th e p u t b u t lo st $ 1 2 ,0 0 0 on
your oth er purchase?
Mr. E l l s w o r t h . Correct.
The C h a i r m a n . He did say that if it had not been for that put

he would have had a larger loss.
Mr. G r a y . The chairman directs my attention to the fact that
you said that if it had not been for the put you would have had a
larger loss.
Mr. E l l s w o r t h . Y e s .
Mr. G r a y . Why do you make that statement, if you only lost
your tax and commission ? Where is the differentiation ?
Mr. E l l s w o r t h . Y ou have confused the entire transaction. I
bought 5,000 shares in the market and put it back to Mr. Taylor
at the price at which I bought it, which was 90.
Mr. G r a y . What did you buy it for—at 90?
Mr. E l l s w o r t h . At 90, and put it back to him at 90. Besides
that, I bought other stock which I told him I would buy and on
which I tooK a loss of $12,000.
Mr. G r a y . That does not explain your statement, that if you had
not had the put your loss would have been much greater.
Mr. E l l s w o r t h . Certainly it would have been greater. I f I had
sold the stock, how much it would have been I can not tell you.
Probably I sold the other stock I bought at 88.
The C h a i r m a n . In other words, the witness admits that the put
was to his benefit. That is the whole point in it, anyway, is it not?
Mr. G r a y . That is all.
Mr. E l l s w o r t h . I made no money on it.
Mr. G r a y . That is all, Mr. Ellsworth.
(Witness excused.)
TESTIMONY OF P. J. HIGGINS, SCARSDALE, N. Y.

(The witness was duly sworn by the chairman.)
Mr. G r a y . Y ou reside where?
Mr. H ig g in s . Scarsdale, N. Y.
Mr. G r a y . Your name is P. J. Higgins?
Mr. H ig g in s . Yes, sir.
Mr. G r a y . D o you have an association with M. J. Meehan Co.?
Mr. H ig g in s . I am a partner in the firm.
M r . G r a y . I w an t to establish b u t one th in g b y th is w itness.




1072

STOCK EXCHANGE PRACTICES

You recall this account No. 433 dealing in the Fox Theater
stocks ?
Mr. H ig g in s . In a general way; yes.
Mr. G r a y . We have here a photostatic copy of a check under
date of April 12, 1929, check No. 5316, on the Guaranty Trust Co.
of New York, signed “ M. J. Meehan & Co.” to the order of P. J.
Higgins for $322,960.41, indorsed “ pay to the order of William
Fox, P. J. Higgins,” and also indorsed “ for deposit only, William
Fox.”
I ask you whether that photostatic copy is not the photostatic
copy of a check which represents the interest of William Fox hi
account No. 433 and represents in its amount the amount o f his
profit from the transaction?
Mr. H ig g in s . That is right.
M r . G r a y . Why w as it draw n to you?
Mr. H ig g in s . For the purpose of concealing from the clerical force
the participants in this account.
Mr. G r a y . I want the committee to get that clearly—“ For the
purpose of concealing from the clerical force the participants in
this account.”
Mr. H ig g in s . Yes, sir.
Mr. G r a y . In other words, you did not want either the clerical
force or the public to know that Mr. William Fox was dealing in
this deal when you were selling Fox Theater stocks short; is that
correct ?
Mr. H ig g in s . The public would not have access to that. There
were other checks drawn in the same manner, drawn to my order
on this account that of Mr. Brady and Mr. Kenney. The other par­
ticipants received credit in their accounts for their participation.
Mr. G r a y . In other words, there was no necessity for drawing
a check, because he had another account on the books, and you
simply transferred the credit over to that other account?
Mr. H ig g in s . That is right.
Mr. G r a y . Why the concealment?
Mr. H ig g in s . Well, we had a clerical force of probably three or
four hundred people and we did not feel that we wanted them to go
around and divulge who were the participants. They were all men
of prominence and we thought it was only just to them to keep
their names from being bandied around the street.
Mr. G r a y . According to Mr. Ellsworth, you gentlemen— not
entirely altruistically, of course—were aiding Mr. Fox to sell some
of his stock in order that he might buy certain theaters. W hy not
broadcast the fact that Mr. Kenney and Mr. Ellsworth and the
others were helping him in this proposition?
Mr. H ig g in s . The syndicate was managed by Mr. Ellsworth.
Senator G oldsborough . Y ou would not have regarded that as good
publicity ?
Mr. H ig g in s . We were not interested in publicity of any kind.
We are only brokers, agents, in this transaction.
Mr. G r a y . Mrs. Meehan was not a member of it?
Mr. H ig g in s . She is not a member of the firm.
Mr. G r a y . She is the wife of M. J. Meehan.
Mr. H ig g in s . Also a customer of M. J. Meehan & Co.




STOCK EXCHANGE PRACTICES

1073

Mr. G r a y . And, of course, she would go to her husband; she would
not go down to some other brokerage house.
Mr. H ig g in s . Surely.
Mr. G r a t . Of course, that is very natural, if she was spending her
husband’s money.
Mr. H ig g in s . Her own money, either.
Mr. G r a y . Where does she get it %
Mr. H ig g in s ^ Mrs. Meehan has had money for a long time.
Mr. G r a t . Since “ Mike” made it. We a ll call him Mike. We
all understand that.
I want to have this check placed upon the record.
(The check referred to, dated April 12, 1929, to the order of P. J.
Higgins, and signed by M. J. Meehan & Co., is here printed in the
record as follows:)
It J. Meehan & Co., 61 Broadway.
Gubanty T rust Co.

of

New Y obs

Ko. 8316
Now Yoke, April 12,1929.
Pay to the order of P. J. Higgins the sum of $322,960 and 41 cents.
t822#90 41/100.
M. J. Mhbhaw & Co.
(On the back thereof appears the following:)
Pay to the order of William Fox, P. J. Higgins.
For deposit only, William Fox.

(Paid).

,

Received payment through the New York Clearing House.
Prior indorsements guaranteed, April 24 1929.
T he National City B ank or New Yoke,
N. C. Ieneestey, Cashier.

Mr. G r a t . Many other questions might be asked about this account,
but it would be a repetition of what I asked Mr. Ellsworth, except
as to one thing. Are you able to tell me of the borrowing of that
125,000 shares of Fox Theater ?
Mr. H ig g in s . Just in a general way; that is all.
Mr, G r a t . Do y o u kn ow w here lie g o t th e stock ?
Mr. H ig g in s . Where Mr. Fox got it ?
Mr. G r a t . Yes.
Mr. H ig g i n s . N o , s i r ; I d o not.
Mr. G r a t . We w ill prove th at in another w a y .
That is all, unless the committee members wish to ask you any­
thing.
(Witness excused.)
TESTIMONY OF WALTER BEST, BELLAIBE, LONG ISLAND

(The witness was duly sworn by the chairman.)
Mr. G r a t . What is your full name?
Mr. B e s t . Walter Best.
Mr. G r a t . Are y o u connected with M. J . Meehan & Co.?
Mr. B e s t . Just as an employee.
Mr. G r a t . Do you recall a loan of 25,000 shares made by the Fox
Film, 26,000 shares of Fox Theater stock, to this 433 account on
December 18, 1928?
Mr. B e s t . Not a loan by Fox Film.



1 074

STOCK EXCHANGE PRACTICES

M r. G ray. Y

ou

say, not a loan by Fox Film?

^Bibst N o sir*

Mr. G r a y . I s it not a fact that as against the loan of those shares
money was given to the Fox Film Co.?
Mr. B e st . No, sir.
Mr. G r a y . Who was it given to ?
Mr. B est . To a man named Jack G. Leo.
.
Mr. G r a y . In other words, you did not know the Fox Film Co.
in that transaction ?
M r. B e s t . N o , sir.
Mr. G r a y . But a man named Jack G . Leo loaned this account

25,000 shares of Fox Theater stock on December 18, 1928, and the
same Mr. Jack G . Leo loaned this account on January 9,1929,100,000
shares of stock?
Mr. B e st . Yes.
Mr. G r a y . You did not know, then, that the Fox Film Co. carried
on its books a cash transaction with you as against that loan of
stock of $4,300,000?
Mr. B e st . N o , sir.
M r . G r a y . Y ou kn ew n oth in g abou t th a t?
Mr. B est . Absolutely nothing.
Mr. G r a y . Have you got the certificate numbers

o f the stock that

was loaned to you?
M r. B e s t . I have n ot them w ith me.
them.

I believe y o u p eop le have

Senator G oldsborough . The Mr. Leo of whom you speak is a
member of the Fox concern?
Mr. G r a y . A brother-in-law of Fox, member of the board of direc­
tors of the Fox Film Corporation, and vice president o f Fox
Theaters.
Senator G oldsborough . What relationship?
Mr. G r a y . Brother-in-law, I think. W e will tie them all up in
a very little while. I want to get these odds and ends out o f the way
while I have these men here. He is the man who, when Fox sold
on April 7,1930, got a bonus—nobody knows why—of $500,000—just
a bonus, that is all.
I want to ask you whether or not you have checked up with the
accountants of George K. Watson on your bools the figures o f the
return payments and the thing that happened to the stock when
it was ready to be returned, wnatever that thing was, and the cer­
tificate numbers. You have done that, have you not?
Mr. B est . Mr. Benton pointed out to me that the numbers o f the
50,000 shares which were received into our office as part o f this call
or this option were identical with and included in the 75,000 shares
which we had previously delivered to Mr. Leo in return for the stock
borrowed.
Mr. G r a y . Let us get that straight. These figures are from vour
books, of course?
J
Mr. B est . Yes.

to be correct ?
M r . B est . $550,000?




you know that

STOCK EXCHANGE PRACTICES

1075

Mr. G bat . Yes. Suppose I give you the second transaction, and
maybe it will bring it back to your mind. On April 11 repaid
$2,400,000, making a total of $2,950,000 that was paid, and 75,000
shares o f stock out of the 125,000 that was loaned to you was given
back to Mr. Leo?
Mr. B e st . Yes; th at is correct.
Mr. G r a y . When you paid back the remainder of the loan, $1,350,000, there was and should have been due to Mr. Leo 50,000 shares
of stock?
Mr. B e s t . That is true.
Mr. G r a y . I am addressing my question, now, to that 50,000.
What actually happened was that there was a bookkeeping entry
made in Meehan’s firm that the 50,000 never went back to Leo, but
that it was transferred immediately into this 433 account, was
it not?
Mr. B e s t . That is correct.
Mr. G r a y . And that 50,000 accepted as part of the stock delivered
under an option that Mr. Fox had given to Michael J. Meehan &
Co. as agents for Bradford Ellsworth—that is right, is it not?
Mr. B est. Yes.
Mr. G r a y . I will say to the committee that I am going to prove
that stock belonged to the Fox Film Co., which Leo handled in
this way.
The 75,000 shares of stock that you delivered to him had certain
certificate numbers, of course?
Mr. B e s t . Yes; I h ave ju s t stated.
Mr. G r a y . Y ou called o n Fox to d eliver 50,000 m ore shares u n der
the o p t io n , d id y o u n ot?
Mr. B e s t . Yes.
Mr. G b a y . And, as a matter

of fact, that 50,000 shares that were
delivered to the 433 account under an option that Mr. Fox had
given to M. J. Meehan & Co. as agents for Bradford Ellsworth were
50,000 o f the shares coming out of the 75,000 that you had just
returned to Leo. That is true, is it not?
Mr. B e s t . Yes.

Mr. G b a y . Y o u checked u p th e certificate n u m bers?
Mr. B e s t . The certificate numbers are correct.
Mr. G b a y . So that the 100,000 of the 125,000 shares of stock which
I will show belonged to the Fox Film Co., and they paid for it in
cash, stocky of the Fox Theaters Co., went back into the opera­
tions o f this 433 account under the option that Mr. William Fox
got from the Fox Theaters, not Fox Film, and gave to M. J. Meehan
Oo. as agents for Bradford Ellsworth?
Mr. B e s t . Fifty thousand went into that account.
Mr. G b a y . That is all.
Senator W a l c o t t . Was that a loan account, or was it taken with­
out security ?
Mr. B e s t . You mean, the 125,000 shares?
Senator W a l c o t t . Yes.
Mr. B e s t . We borrowed 125,000 shares of stock for which we paid
the then market value—full value. That was in accordance with the
terms o f the agreement.
S en a to r W a l c o t t . D id you g e t fr o m th a t oth er account th e 50,000
shares w h ic h you a re speakin g o f ?
119852— 82— f t 3-------19




10 76
M r. B est . N o .
on the loan.

STOCK EXCHANGE PRACTICES

W e transferred a balance o f 50,000 ■which w as due

Senator W alco tt . That was due, was it?
Mr. B est. That was due; yes. That is, instead of returning it to
Mr. Leo we transferred it to the 433 account to take care of the shares
which were called on their option. That was probably done on in­
structions of, or some arrangement with, Mr. Fox or Mr. Leo. At
the same time we paid Mr. Leo a check for the entire amount, $1,350,000, I believe, we received from Mr. Fox $1,350,000 for that trans­
action.
Mr. G r a y . Not in cash. Oh, you mean that you paid it to h im fo r
the 50,000 shares of stock on option ?
Mr. B est. Yes.
Mr. G r a y . In other words, the $50,000 was valued at the sam e
figure, so that when you repaid to Mr. Leo $1,350,000, you got back
from Mr. Fox 50,000 shares of the stock under the option to purchase
500,000?
Mr. B est. That is true.
M r. G r a y . A n d it ju s t so happened that the o p tio n p rice w as also

$1,350,000?
Mr. B est. Yes, sir.
Mr. G r a y . But there were checks p a id ?
Mr. B est. A check was paid to Mr. Leo.
Mr. G r a y . And a check w as received from Mr. Fox.
Senator W alco tt . What I ain trying to get at is this. Leo bor­
rowed some stock and paid for it a certain price. When the company
got it back did the company get it back at the same price?
Mr. B est. Originally that stock was borrowed, I think, at a price
of 32. As the price varies there is either a mark up or a mark down
in the loan value to keep that loan at the actual market price. It
iust happened that the stock had been marked down to 27, which
happened to be the price at which these 50,000 shares were called
from Mr. Fox.
Mr. G r a y . I want, while you are here, to show you a photostatic
copy of another account entirely which is in the name o f William
Fox. I just got word about it this morning, and I want to get the
significance of it. On Fox’s personal account o f October 26, 1928,
there is an item o f 10,000 shares of Fox Theaters A and a credit on
that of $300,000. There is nothing to show us whether that is
delivery or whether it is sale. Can you tell me which it is?
Mr. B est. It looks to me as if it is a straight delivery for $300,000.
Mr. G r a y . In other words, it looks to you as if, out of that a ccount—-this being a purely William Fox personal account—you de­
livered to him 10,000 shares of Fox Theater stock?
Mr. B est. Yes.
Mr. G r a y . Do you know where it went?
M r. B est . N o , s ir ; I d o not.
item.

T h is is the first I have seen o f th at

M t. Gray. I think that is all that Mr. Best can tell us.
^w ltness 6XCUS6CL)




STOCK EXCHANGE PRACTICES

10 77

TESTIMONY OF GEORGE K. WATSON, CERTIFIED PUBLIC
ACCOUNTANT, PHILADELPHIA, PA.

(H ie witness was duly sworn by the chairman.)
Mr. G r a y . Mr. Watson, you are a certified public accountant?
Mr. W a t so n . Yes, sir.
Mr. G r a y . With your principal office in the city o f Philadelphia?
Mr. W at so n . Yes, sir.
Mr. G r a y . You have been in business h ow lo n g ?
Mr. W at so n . Twenty years.
Mr. G r a y . Will you try to keep your voice up? You were en­
gaged as the committee’s accountant in this case for the purpose of
making certain audits and investigations of books in New York
city?
Mr. W at so n . Yes, sir.
Mr. G r a y . And you have been cooperating with me in the doing
of that work since the second day of May ot this year ?
Mr. W at so n . Yes.
Mr. G r a y . I am going to direct your attention, first, because this
is a matter that was just before us, to this 433 account in the broker­
age house of M. J. Meehan & Company. You did have your account­
ants working under you make an investigation of that account, did
you not?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . It was done under your supervision?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . And under such check-ups as you thought proper to
make after the work was actually finished?
Mr. W a t s o n . That is correct.
Mr. G r a y . I want you to tell us—and I say to the committee that
I have got the actual accountants on that work here, if anyone
wants to question them with reference to it, and all of the work
sheets— I want you to tell us about this transaction o f the loaning
of 125,000 shares of stock into that account, and I want you not
to confine yourself to the transaction as it appears on the books of
M. J. Meehan & Company, but also the information you got from
the examination o f other books. You did examine the Fox Theater
books?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . And the Fox Film books?
Mr. W a t s o n . Yes.
M r . G r a y . J u st in a n arra tiv e fo r m , g iv e us th a t tran saction , w ill
you p le a se ?

Mr. W atson . Under date of December 18, 1928, 25,000 shares of
stock, and under date of January 9, 1929, 100,000 shares of stock,
was apparently borrowed by-----Mr. G r a y . Mr. Watson, the great trouble with lawyers and ac­
countants and others of that ilk is that when they get on the wit­
ness stand they are apt to keep their voices down, when they can
talk just as loudly as I do in doing the questioning. So will you not
keep your voice up so that every one interested may hear?
Mr. W atson . This account was created by the borrowing under
date of December 18, 1928, 25,000 shares o f stock, and on January



1078

STOCK EXCHANGE PRACTICES

9, 1929, of 100,000 shares of stock by Meehan from Jack Leo for
an aggregate payment o f $4,300,000.
Mr. G r a y . By the borrowing, you mean the simple lending of
stock as against a certain amount of money, the stock to be returned
and the loan repaid ?
Mr. W a t so n . The stock was placed in a stock borrowed account
by Meehan.
Mr. G r a y . It appeared that way in his books ?
Mr. W a t s o n . Yes.
Senator B r o o k h a r t . What was this stock borrowed for?
Mr. W a t so n . T o cover a short. They created a short and they
borrowed the stock rather than picking it up on the option.
Senator F l e t c h e r . Was cash actually paid for it, or just a book
entry ?
Mr. W a t s o n . Yes; actually delivered cash.
Senator B r o o k h a r t . D o they do that in all the borrowings?
Mr. W a t s o n . Yes, sir: They delivered $4,300,000 cash. A t the
same time the Fox Film Corporation purchased from the Fox
Theaters 125,000 shares of stock the Theaters Corporation originally
issued as of December 17, 25,000 shares at 25, and as of January 9,
1929,100,000 shares at 25. Both of these blocks of stock were issued
in the name of Jack Leo, paid for by the Film Company through
the Theaters Company.
Mr. G r a y . Let us get that clear. On December 17, 1928, Fox
Theaters issued 25,000 new shares of their own stock and sold that
stock to the Fox Film Co. for a cash consideration and took the
certificates in the name of Jack Leo. That is right, is it not?
Mr. W a t so n . That is right.
Mr. G r a y . And on January 9, 1929, Fox Theaters issued 100,000
shares of new stock again and sold it to Fox Film for a cash con­
sideration, and the certificates were issued in the name of Jack Leo.
Mr. W a t s o n . Yes.
Mr. G r a y . On the same date, that is to say, on December 17,1928,
that 25,000 shares that was bought by Fox Film and put in the
name of Leo was loaned to Meehan & Co.?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . And on the same date, January 9, 1929, the Fox Film
Co. bought 100,000 shares of Fox Tneaters and put it in the name of
Leo, and that was loaned to Meehan?
Mr. W a t s o n . Yes.
Mr. G r a y . S o that we have got a transaction where the Fox Film
owned 125,000 shares of stock, the Fox Theaters and Fox Film put
it in the name of Leo, or somebody did, and it passed through to
Meehan & Co.?
Mr. W a t s o n . Yes.
Mr. G r a y . What do the Fox Film books show with respect t o the
amount of cash paid by Meehan?
Senator B r o o k h a r t . Let me get the date of that last transaction,
please.
Mr. G r a y . January 9,1929.
Mr. W a t so n . It shows up as a balance due.
Mr. G r a y . Does it show directly on the Fox Film books, o r on
any security account?
' Mr. W a t s o n . On the books.



STOCK EXCHANGE PRACTICES

1079

Mr. G b a t . That stock remained with M. J. Meehan Co. until
what date? I want you to trace the loan and the course that the
stock took thereafter.
Mr. W atson . On April 11 Fox Film repaid, or Jack G. Leo ret
paid, to Meehan $2,400,000, but there was delivered to Jack G. Leo
75,000 shares of stock.
Mir. G r a y . Prior to that time was there not another payment of
$550,000 also?
Mr. W atson . Under date of April 9, $550,000 was repaid, at which
time there was no stock returned.
Mr. G b a y . They still have 50,000 shares of stock. What was done
with that?
Mr. W atson . Under date of April 18 there was a repayment of
$1,350,000 and 50,000 shares were transferred on the books of Mee­
han to the 433 short account.
Mr. G b a y . In other words, your examination of the books of Mee­
han show that though the loan was repaid that stock was neither
handed back to Leo nor given to the Fox Film Corporation who
were the actual owners thereof ?
Mr. W a tson . That is right.
Mr. G b a y . It passed into the 433 account. Did it go into the 433
account as part of the option ?
Mr. W a tson . Yes.
Mr. G b a y . Let me stop to ask about that option for a minute,
though I think it is on the record. We have an option that Fox
Theaters, not Fox Film, gave to William Fox to buy this stock,
500,000—is that right?
Mr. W a t s o n . Yes.
Mr. G b a y . And we have got an option that Fox gave to M. J.
Meehan as agent for Bradford Ellsworth for that same 500,000.
So that what Mr. Fox did, because he had entire control of the
situation, was to take 50,000 shares of Fox Theater stock that be­
longed to Fox Film, who had actually paid cash to Fox Theaters
for it, and used it as part of his own stock, just as if he owned it,
and delivered under the option that he gave Meehan. That is right,
is it not?
Mr. W a t s o n . Yes.
Senator W alcott . What do the books of the company show as to
the authority for that exchange ?
Mr. W a t so n . I have seen no record authorizing Fox to loan the
company’s stock.
Senator W alcott . That could have been authorized by the Fox
Film Corporation. Was it?
Mr. W atso n . It could have been, but it was not.
Senator W alcott . You know that?
Mr. W a t so n . Yes, sir.
Senator W alcott . That is my point.
Mr. G b a y . You examined all the books, and the report was made
to you that there was absolutely nothing in the Fox Film’s books to
show any authority given to do that thing?
Mi*. W atson . That is right. We examined the minute books.
Mr. G r a y . But it is a fact, however, that the Fox Film Co.’s books
do show that the money was received by them on the loan ?
Mr. W a t s o n . Yes.



1080

STOCK EXCHANGE PRACTICES

M r. G r a y . S o o f course there was a ta cit a p p ro v a l there, a n d Fox
cou ld have done that o r even had a m in ute adopted i f he d esired ?

Mr. W a t s o n . The loaning of the stock was at a price higher than
the option price. The loaning was at 32 to 35, otherwise there would
not have been $4,300,000.
Senator W a l c o t t . We have gotten it up to April, 1929. What
was the price variance from January, the time o f the previous
transaction, to April, 1921; that is, the market price?
Mr. W atson . Fox Theaters?
Senator W alcott . Yes. It w ou ld sh ow an enorm ous differential
there.
Mr. G r a y . I have the complete record here, but I will let the
witness answer it. O f course, Senator Walcott, the prices may mean
something; but I have been treating it from the angle of the trans­
action irrespective of the price.
Senator W a l c o t t . Somebody had to be responsible for that differ­
ence also. There is a big difference in there.
Mr. G r a y . We will show you that the stock was higher and the
stock stayed around where William Fox could use it.
Senator W al c o t t . Yes; that seems to me a very important point.
Mr. W atson . The range of price—I have here a schedule o f the
high and the low and the dates of the high and low by months. I
do not have it every day. In the month of J anuary, 1929, the high
was, on the 5th of January, 37%, and the low, on the 31st, was 3S%.
Mr. G r a y . Now, February?
Mr. W atson . On the 6th the high w as 3 3 % . The lo w w as, on the
16th, 28.
Mr. G r a y . And March?
Mr. W atson . March, the high on the 4th was 3 2 % . The low
was 28%.
Mr. G r a y . And April?
Mr. W atson . The nigh at 3 0 % and the lo w at 2 7 ^ .
Mr. G r a y . I intended to put this in evidence for another purpose,
because I wanted to direct the committee’s attention to the fact thftt
while that short pool was operating, the price was being driven
down from a high of 37 to a low of 30 in those few months.
Senator W alcott . That is what I wanted to tie in there, because
you have got a variation there of from high in January to low in
April of only 10 points, whereas if you watch Steel and A . T . & T.,
you will find a different story.
Mr. G r a y . The entire picture, when it is finished, w ill show you
a different story, Senator.
Now, having given back that 75,000 shares to Jack Leo have you
been able to trace at all that 75,000 shares as ever going to the Fox
Film Co?
6 s
Mr. W atson . No.
Mr. G r a y . Did you trace 50,000 of it anywhere?
Mr. W atson . T es.
Mr. G r a y . Where?
Mr. W atson . Back into the 433 account.
Mr! WATOo^°Yes!




by the certificate numbers, did

y o u n o t?

STOCK EXCHANGE PRACTICES

1081

Mr. G b a t . In other words, 50,000 shares of the 75,000 was returned
when a part of the loan was paid off and handed back under Mr.
Fox’s option; is that correct?
Mr. W a t so n . That is right.
Mr. G b a t . Then the next 50,000 shares, when was the final payment
made of $1,350,000?
Mr. W a t so n . On April 18, 50,000 shares were by general entry
transferred from the stock loan account to the 433 account.
Mr. G b a t . In other words, instead of giving out the certificates of
Stock and getting them back again, we simply have a bookkeeping
entry transferring that 50,000?
Mr. W a t so n . Y e s.
Senator C a b e y . H o w d id th ey enter th a t on the b o ok s o f th e com ­
pany that owned th is stock ? D i d th ey sh ow a n y tr a n sfe r o r a n y ­
thing?
Mr. W a t s o n . The Fox Film Co.?
Senator C a b e y . Yes.
Mr. W a t so n . T h e y ow ned stock and th e y ju s t loa n ed it a t a b o o k
credit for a cash advance, and w hen th e y p a id b a ck th e cash , th ey
charged the account w ith the cash and g o t th e stock back.
Sen a to r C a b e y . Did it finally get back to the Fox Film C o .?
Did
they ev er g e t the stock back?
Mr. W a t s o n . They got stock back , Senator. They did not get the
stock back which they loaned; they did not get the identical
certificates.
Senator C a b e y . But they had their stock returned to them?
Mr. W a t s o n . T h a t is a p ecu liar th in g w h ich w e h ave been u nable
definitely to tie u p b y an ex am in a tio n o f th e p o r tfo lio .
Mr. G b a y . This leads us to another manipulation. The
not sh ow anything at all with reference to the loaning o f

books d o
the stock
and do not show anything else with respect to the receipt of the stock
back, but only show the cash ends. Is that right?
Mr. W a t s o n . That is all I have seen.
Mr. G b a y . In other words, the books of the Fox Film show nothing
but the money transaction and contain no information at all with
respect to the stock itself, either the passing of it out or the receiving
of it back?
Mr. W a t s o n . Or the authority.
Senator G oldsborough . Nothing on the minute books?
Mr. G r a y . Nothing on the minute books at all.
Now, go ahead and explain the next transaction that ensued in
answer to the question or the Senator whether they got that stock
back.
Mr. W a t s o n . We are unable to determine from the Film Corpora­
tion books just when the 125,000 shares loaned to Meehan was re­
turned, but since the great majority of the numbers of tita certificates
now in the portfolio were issued by the Theater Corporation on May
8,1929, or subsequent thereto, it is evident that the Fox Film Cor­
poration stock was not returned to the Film Corporation on the dates
they paid the loan.
Mr. G b a y . In other words, as far as the accounts of the Film Co.
are concerned, where you do find any accounts with respect to stock
matters, the stocks are accounted for, that is, the stocks of the Fox
Theaters?



1082

STOCK EXCHANGE PRACTICES

Mr. W a t s o n . Yes.
Mr. G r a y . But you d id not find any entry with respect to those
125.000 except its receipt from the Fox Theaters when they
purchased its
M r . W a t s o n . Yes.
Mr. G r a y . But the portfolio had sufficient stock in to cover that
as well as other entries?
Mr. W a t s o n . Yes.
Mr. G r a y . So that in some way—the exact way not being possible
of determination—that 125,000 shares got back into the portfolio!
Mr. W a t s o n . It got back, but when I do not know.
M r . G r a y . And who used it and what they did with it in the
meanwhile, you have no way o f telling?
Mr. W a t s o n . N o . Some of the two certificates are missing, and
there are two which are involved in this situation.
Mr. G r a y . What do you mean?
Mr. W a t s o n . There are two certificates, I believe for 100,000
shares each—200,000 shares—that I have not identified.
Mr. G r a y . What do you mean by “ missing ” ?
Mr. W a t s o n . Three hundred thousand shares o f stock which Fox
has on option-----Mr. G r a y . That had nothing to do with this other option?
Mr. W a t s o n . No.
Mr. G r a y . In other words, he simply gets an option to buy
300.000 shares of Fox Theaters?
Mr. W a t s o n . Yes.
Mr. G r a y . Tell us that story. That is the next complication.
M[r. W a t s o n . The stock was delivered to—I have forgotten what
bank. After a period of time the bank was instructed to return
200.000 for cancellation. We have a record o f a communication
from the bank to the effect that it was returned; and it was re­
turned and canceled, so far as the records are concerned. The
certificates have never been found, and where the stock lay fo r the
two months odd in between I do not know.
Mr. G r a y . Let us get that clear. Mr. Fox got an option for
300.000 shares of stock and got stock?
Mr. W a t s o n . Yes.
M r. G r a y . B u t he d id n ot actu ally p a y f o r it?
M r . W atson. N o .
Mr. G r a y . And what

actually happened was that he held the
300.000 shares for how long?
Mr. W a t s o n . About two months.
Mr. G r a y . And then he handed 200,000 of it back and had it
canceled; is that right?
Mr. W a t s o n . That is right.
Mr. G r a y . And what he or anybody else did with that stock in the
way o f getting money on it in loans from banks or making any
other use of it by loaning it to any broker or anything o f that kina
we have been unable to find out?
M r . W a t s o n . Yes.
Mr. G r a y . That is one of the things I want to ask Mr. Fox about,
of course.
1
W alcott . Could that have been treasury stock?
Mr. W a t s o n . No; it was option stock.



STOCK EXCHANGE PRACTICES

1083

Senator W a l c o t t . Well, did it come out o f the treasury ?
Mr. W a t s o n . Out o f the unissued stock. Treasury stock is some'
thing else.
M r. G ray . Y ou mean, you do not know whether it was stock they
owned that they may have gotten into their own portfolio, bought
in the market, or whether it was unissued stock?

Mr. W a t s o n . Out o f the unissued.
Mr. G r a y . As a matter of fact, in the 433 account. Mr. Watson,
you did actually find a transaction on October 18,1928, as indicated
in my question to Mr. Ellsworth, involving 10,000 shares, did you
not?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . Just exactly what was that transaction? In other
words, I just want a summary of it as it appears to you after your
investigation was made.
Mr. W a t s o n . A summary o f it may be said to be that on the
same date the pool sold 10,000 shares o f stock, Fox bought 10,000
shares o f stock.
Mr. G r a y . A t the same price?
Mr. W a t s o n . A t the same price.
Mr. G r a t . And by the tracing of those transactions and an actual
accountant’s check-up through five different brokerage houses in
New York, you find that one bought and the other sold; is that
correct?
Mr. W a t s o n . That is right.
Mr. G r a y . In other words, there is no question about the trans­
action being a direct one between the syndicate and Fox?
Mr. W a t s o n . Oh, no; that is right.
Mr. G r a y . Can you find any reason other than the covering up
of the transaction why it should have gone through five different
brokerage houses l>efore it was concluded ?
Mr. W a t s o n . N o ; I would not try to find an answer for it; I
dont know.
Mr. G r a y . Ordinarily, if one house sold and another bought it
would be cleared between those two houses themselves that night
in the stock clearing house, would it not?
M r . W a t s o n . Ordinarily; yes.
Mr. G r a y . But this passed through five different brokers. It is
a fact, is it not, that your examination o f the record and the 433
account shows the maximum position of some 466,000 shares short?
Mr. W a t s o n . A maximum short position o f 466,310 sh ares which
occurred on January 17,1929.
M r . G r a y . Was the account at any time in a long position?
Mr. W a t s o n . N o ; it w a s short. .
Mr. G r a y . And having sold it, they received under the option
how many shares of stock?
Mr. W a t s o n . Three hundred thousand shares.
M r . G r a t . And 50,000 of that came, as you have indicated, from
the 75,000 that was loaned? Fifty thousand came also from that
125,000 through a bookkeeping transaction?
Mr. W a t s o n . That is right.
_
Mr. G r a y , And the other 200,000 were delivered by Mr. Fox
personally?
Mr. W a t so n . As of January 18.



1084

STOCK EXCHANGE PRACTICES

Mr. G r a y . And in order to take care of this position in the account
•with respect to the rest of the stock that they needed, where did they
get it?
Mr. W a t s o n . Bought it on the market.
#
Mr. G ray . In other words, having a short position o f 466,000
shares and having used 300,000 shares under the option to cover,
they bought whatever other shares they needed in the market at such
price as they could buy it for, for the purpose of clearing up and
closing out the account?
Mr. W a t s o n . Largely above the option.
Mr. G r a y . That was because of the fact-----Mr. W a t o n . All above the option.
M r . G r a y . That was because of what fact?
M r . W a t s o n . T o keep th e m ark et u p .
Mr. G r a y . As a matter of fact, when

they covered their short posi­
tion, Mr. Watson, in the market transactions, after their trades were
finished, and they got ready to close, they bought below the price,
did they not-----Mr. W a t s o n . They bought and sold as they went along, and they
needed 300,000 to close the account, and they took up on the option.
Mr. G r a y . But the rest of the stock, outside of the option, th ey
bought at prices less than the prices at which they had sold it?
Mr. W a t s o n . Not all of it.
Mr. G r a y . Show me any instance-----M r . W a t s o n . Y o u can n ot trace pa rticu la r item s, b u t p erio d s fr o m
to 1928— and the last options th ey h ad w ere in 1928— y o u can
n o t tell w hether th ey a p p lied a gain st a n y p a rticu la r acceptance o f the
op tio n stock?
Mr. G r a y . What you mean to say is that they bought a n d sold

1927

stock at all prices?
Mr. W a t s o n . Right.
Mr. G r a y . And they gathered the rest of the stock in the market,
and as a matter of fact the pool, even after the deduction o f man­
ager’s fees and commissions and what was paid Mr. Ellsworth, made
$1,900,000 odd?
Mr. W a t s o n . That is right?
M r . G r a y . S o th ey m u st have b o u g h t i t fo r a less price th a n th ey
sold it--------

Mr. W a t s o n . Yes. The pool made $2,177,934.88.
Mr. G r a y . Is there anything else that has not been developed w i t h
regard to that ?
Mr. W a t s o n . No, sir.
Senator B r o o k h a r t . Were those deals on the stock exchange?
Mr. G r a y . All of them, Senator, except the taking o v e r o f the
option stock which is under the agreement made with Mr. F ox----- Mr. W a t s o n . The curb exchange.
Mr. G r a y . This is all curb exchange, Senator, yes; because Fox
Theaters are listed on the curb exchange alone.
Mr. W a t s o n . There is one point in the 394 account which I believe
you forgot to develop.
M r . G r a y . T e ll us about th at.

Mr. W a t s o n . Fox, of course, claims that the purpose o f this ac­
count was twofold, in his testimony to you: First, that it was to
promote the sale of the stock o f the company, and later his plan



STOCK EXCHANGE PEACTICES

1085

was to accumulate stock for the company looking forward to a
day when there were 210,000 shares ot the stock, and in this 394
account I direct your attention to schedule 2, showing 104,200 shares
bought. He bought at an average price of $29.44 per share, while
at the same time he delivered into the pool 144,300, because the pool
had bought 19,000 on the market at an average price of $26.29. H e
received the money personally for the stock delivered. At least
some of the items purchased have been identified in the aggregate
of 210,000 shares-----Mr. G r a y . We will come to that in a moment, but I want to get
that connection. In other words, through the accounts, in the han­
dling of the Fox Theater stock, both its individual accounts and the
394 account, you will be able and you have traced some of that stock
to an item of 210,000 shares which he afterwards turned over to the
Fox Theater Co.? That is what you mean, is it?
Mr. W a t s o n . I will make it a little clearer if I can. The purpose
of the 394 account was to sell 125,000 shares of his stock.
Mr. G r a y . According to his statement.
Mr. W a t s o n . According to the facts. That is what they did.
At the same time he bought 104,204 shares through his various other
brokerage houses------

Mr. G r a y . How many brokerage houses had he ?
Mr. W a t s o n . Twenty-two, that I know o f.
Mr. G r a y . Twenty-two different houses?
Mr. W a t s o n . Twenty-two different houses.
Mr. G r a y . How many accounts did he have in some houses?
Mr. W a t s o n . Anywhere from one to seven.
Senator B r o o k h a r t . Does that mean that he wanted to sell these
125,000 at a high price and they bi^ in 104,000 at a low price?
Mr. W a t s o n . I can not tell, Senator, what he was thinking. I
only know what he did.
Senator B r o o k h a r t . That is the way it worked out ?
Mr. W a t s o n . Yes.
Mr. G r a y . In other words, though he says he was doing it
the purpose of disposing of them, selling 125,000 shares of s t o c k ,
still he was buying it back some place ?
Mr. W a t s o n . He accumulated 104,000 in other accounts, and *t
least part o f it is stock which went over to the company in the
transaction of November 19, 1929.
Mr. G r a y . We will come to that. Going back to his accounts,
in how many names did he have these accounts, if you recall?
T
Mr. W a t s o n . No; I can get a list of them from my assistants. A
do not remember them all.
Mr. G r a y . And he had an account in the name of Jack Leo ?
Mr. W a t s o n . Yes.
Mr. G r a y . Had an account in the name of Ben Leo ?
Mr. W a t s o n . Yes.
Mr. G r a y . Had accounts in the name o f Taussig?
Mr. W a t s o n . Yes.
Mr. G r a y . Mona Fox Taussig?
Mr. W a t s o n . Yes.
j
Mr. G r a y . Had accounts in the name of his daughters
brothers-in-law ?



1036

STOCK EXCHANGE PRACTICES

Mr. W a t s o n . Yes.
Mr. G r a y . Had an account in the name of a man named AI
Herbert ?
Mr. W a t s o n . Yes. Benjamin Leo, I believe.
Mr. G r a y . How many different names did he have his accounts in,
do you recall ?
Mr. W a t s o n . No. Seven or eight.
Mr. G r a y . Seven or eight different names. He had an a ccou n t
in the name of Hattie Carnegie ?
Mr. W a t s o n . Yes, sir.

Mr. G ray. D o you recall that?
Mr. W a t s o n . Yes.
Mr. G r a y . One in the name of John Zampt ?
Mr. W a t s o n . Yes.
Mr. G r a y . He had accounts in different employees’ names?
Mr. W a t s o n . Yes.
Mr. G r a y . They were all his ?
Mr. W a t s o n . Yes.
Mr. G r a y . And an account in the name of Bessie Livingston?
Mr. W a t s o n . Yes.
Mr. G r a y . That was his sister, wasn’t it ?
Mr. W a t s o n . I believe so.
Mr. G r a y . My recollection is that it was. I want to see if we can
trace that 210,000-share transaction as briefly as possible. You made
an investigation of it, and is this not what you found: In the first
place, that during the entire time while Fox Theaters stock was being
sold on the New York Curb Exchange, Mr. Fox was buying and
selling Fox Theaters stock in these various brokerage houses from
1925 down to 1929; is that correct ?
Mr. W a t s o n . That is right.
Mr. G r a y . Was there anything in the accounts that in anywise
distinguished those accounts so that you could say that this account
was for Fox personally and that this account was for the Fox
Theaters ?
Mr. W a t s o n . There was not. There would be no way that you
could even assume that his company had anything to do with any
of the accounts.
Mr. G r a y . Were you present when I talked to Fox about it
Wednesday afternoon?
Mr. W a t s o n . Yes.
Mr. G r a y . And when in response to my question he said that he
did not know he could make any distinction between them?
Mr. W a t s o n . That is right.
The C h a i r m a n . One account was the account o f his stockholders
and the other one was his own personal account, is that right?
Mr. G r a y . They were all switched in everybody’s name, including
his own.
The C h a i r m a n . I know, but the profits, if it was the Fox Corpo­
ration, would go to the stockholders; if it was Fox personally it
would go to him; is that it? Still the accounts were Fox’s?
Mr. Gray. I will show you, Senator, that he kept the profitable
aCnrru
a dumped
unprofitable ones, if you will permit me?
The C h a i r m a n . In other words, he found a way to distinguish?




STOCK EXCHANGE PRACTICES

1087

Mr. G r a y . He distinguished, but he can not tell us how he did it.
Now, what he did after trading in all those accounts from 1925
to 1929 was to turn a certain number of shares, or rather the accounts
representing a certain number of shares, over to Fox Theaters,
didn’t he?
Mr. W a t s o n . That is right.
Mr. G r a y . Prior to November 19, 1929, was there anything what­
ever on the books of the Fox Theaters to show that they ever author­
ized him to deal in Fox Theaters stock?
Mr. W a t s o n . I have found nothing.
Mr. G r a y . Is there anything on the books of Fox Theaters, I
mean the cash books, ledgers, journals, to show that any of the
Fox Theaters money was ever used for the Fox purchases in these
various accounts of Fox Theaters stock?
Mr. W a t s o n . N o , sir.
Mr. G r a y . Nothing. In other words, down to November 19,1929,
the Fox Theaters records are entirely clear o f any reference to this
stock?
Mr. W a t s o n . That is right.
Mr. G r a y . On November 19, 1929, what happened? Well, what
happened was this, was it not——
Mr. W a t s o n . Subsequent to the break in the market the various
accounts in which these stocks had been accumulated were very much
Undermargined, and brokers wanted money. So the Fox Theaters
Corporation negotiated loans of $9,300,000, which funds were used
to pay $2,000,000 overdue loan in connection with the Gaumont
British Pictures Corporation, and the balance was used to pay the
amount due on Fox’s accounts to the various brokers and lift the
debit balance.
Mr. G r a y . What I asked you, however, was with respect to 1929
on November 19. The books of Fox Theaters show that they adopted
a resolution taking over certain transactions and dealings which Fox
had in Fox Theaters stock, do they not ?
Mr. W a t s o n . That is right.
Mr. G r a y . And as a matter of fact, that involved 210,000 shares,
did it not?

Mr. W a t s o n . Two hundred and ten thousand three hundred.
Mr. G r a y . Some of those transactions involved in those 210,000
shares had been closed, had they not, on the books?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . I mean by that—and let us see if you mean the same
thing—that the transaction had taken place, the books of the brokers
show that the stock had been bought, and the books of the brokers
show that the stock had been sold and that there was a loss in the
transaction ?
Mr. W a t s o n . That is true.
Mr. G r a y . And in making the calculation and in taking over those
transactions that loss of so many dollars and cents was figured in?
Mr. W a t s o n . I believe that is right.
Mr. G r a y . And in other instances the balance, the debit balance
due the brokers was paid and the stock itself taken by Fox The­
aters ; is that right ?
Mr. W a t s o n . That is right.




1088

STOCK EXCHANGE PRACTICES

Mr. G r a y . Did they get some stock?
Mr. W a t s o n . Yes.
Mr. G r a y . D o you know the figure which was paid b y Fox The­
aters for those 210,300 shares of stock ?
Mr. W a t s o n . $6,153,774.33.
Mr. G r a y . And do you know what the number of shares o f Fox
Theaters that Fox Theaters took over that day was worth at the
market on that day?
Mr. W a t s o n . At an average price of that day they were worth
three million three hundred—well, it would be the difference between
these two figures I have. They would take a loss on it o f $3,314,724.33, which was the difference between the value at which the com­
pany took it and the average of between 13% and 13%, the value
that day.
Mr. G r a y . In other words, if Mr. Fox had carried on those trans­
actions as his own, it would have meant a loss o f three million three
hundred and some odd thousand dollars to him, which loss he dumped
on the company by getting the company to take over these transac­
tions and take them as theirs?
Mr. W a t s o n . That is what happened.
Mr. G r a y . Let me suggest also to the committee that if these trans­
actions of Mr. Fox and he was dealing in Fox Theaters stock and
dumped the loss on the company, and if these were transactions of
Fox Theaters, then this company was out that much during his trades
in its own stock on the market for a period o f four years.
Were you able to trace into the New York income-tax return of
Mr. William Fox any of these transactions ?
Mr. W a t s o n . Yes.
Mr. G r a y . I wish you would detail them and explain what con­
nection they have with this matter.
Mr. W a t s o n . There is an item of Richards & Co. o f October 30,
1929, a thousand shares, with a loss o f $22,375.
Mr. G r a y . Yes.
Mr. W a t s o n . Ungerleider, October 30,1929, 4,800 shares, a loss of
$73,812.50.
Mr. G r a y . Yes.
Mr. W a t s o n . Hanan, August to December.
Mr. G r a y . What is that?
Mr. W a t s o n . Hanan.
Mr. G r a y . That is the brokerage house?
Mr. W a t s o n . August till December, 1929, 4,500 shares, $47,00134.
Mr. G r a y . L o ss ?
’
Mr. W a t s o n . L oss, yes. Howard Hansee shows an account 1929,
4,600.
Mr. G r a y . Four thousand six hundred shares?
Mr. W a t so n . Yes.
Mr. G r a y . L oss h o w m u ch ?
Mr. W a t s o n . L oss to the account on August 1, $4,040. Sultzberger, December, 1928, 6,000 shares, loss $31,237.50.
Those items are apparently deducted in his 1929 State tax returns
of New York State.
aggregate*AT*




^ ey

amount to?

Have you g o t the

STOCK EXCHANGE PRACTICES

1089

Mr. W a t so n . I didn’t add them up. About a hundred thousand
dollars.
Mr. Gkay. Oh, no; much more than that.
Mr. W a ts o n . Two hundred and some odd thousand dollars.
Mr. G bat . Let us get that clear: You have traced into the 210,300
shares that were turned over to Fox Theaters who assumed the
responsibility therefor on November 19, 1929, these transactions?
Mr. W a t so n . Yes, sir.
Mr. G r a y . In other words Fox Theaters took them a w a y from
him?
Mr. W a t s o n . Lost them.
Mr. G b a t . I mean Fox Theaters assumed the loss?
Mr. W a t s o n . That is right.
Mr. G b a t . And you have at the same time, by the seeing o f the
copies o f his income-tax reports in his own office in New York,
that is, his State income-tax reports, shown that notwithstanding
that fact he claimed credit for these losses in his own personal
account; is that right?
Mr. W a t s o n . That would appear to be so.
Mr. G b a t . Y ou did not have time, did you, to follow through
the entire number of transactions that he claimed credit for in
the New York income-tax return ?
Mr. W a t s o n . We did not.
The C h a i b m a n . Let me ask, does there a p p e a r t o b e oth ers ?
Mr. W a t s o n . I could not tell that, Senator.
Mr. G b a t . I direct your attention to Fox’s dealings in Loew’s
stock, incorporated, and ask you whether or not he ever purchased
on behalf o f Fox Theaters any Loew’s stock?
Mr. W a t s o n . Yes.
Mr. G b a t . N o w that transaction, at least the first o n e that w e
are going to talk about, did actually appear on the books of Fox
Theaters, didn’t it?
Mr. W a t s o n . Yes, sir.
Mr. G b a t . And he was actually acting for Fox Theaters, was
he not?
Mr. W a t s o n . He was.
Mr. G b a t . What was the first transaction and o f w h a t d a te w o u ld
it appear?
Mr. W a t s o n . I believe the date was March 24.
Mr. G b a t . Have you the sheets there?
Mr. W a t s o n . N o ; I h av e n ot.
Mr. G b a t . Let us have them, please.
Mr. W a t s o n . It was March 24,1928, purchased through the Loew
family 400,000 shares of Loew stock at an aggregate o f $50,000,000.
Mr. G b a t . Let us get that clear. He bought from the fa m ily o f
Loews, who ow n ed the stock in Loew’s (In c ?) ?
Mr. W a t s o n . That is right.
Mr. G b a t . And what was the price?
Mr. W a t s o n . $50,000,000, $125 a share.
Mr. G b a t . For 400,000 shares?
Mr. W a t s o n . That is right.
Mr. G b a t . Have you investigated and can you tell the committee
wha the market price of Loewis (Inc.) was the day he bought that
stock?



1090
Mr.

STOCK EXCHANGE PRACTICES
W a tso n .

The high

w as

Siy2

and

the

low was

75%.

M r. G ray . The low was 7 5 % and the high was 81?

Mr. W a t s o n . And a half.
Mr. G r a y . And on that day Mr. Fox spent $50,000,000 that be­
longed to Fox Theaters (Inc.) to buy 400,000 shares of Loew’s and
paid $125 a share for it?
M r . W a t s o n . That is right.
Mr. G r a y . Or a matter of 44 and a fraction points per share, o r 44
and a fraction dollars per share above the highest price at which it
sold on the market that day—that is right?
Mr. W a t s o n . That is right.
Mr. G r a y . Now, thereafter Mr. Fox dealt in Loew’s stock, d id he
n o t?
M r . W a t s o n . He did .
Mr. G r a y . In these various accounts?
Mr. W a t s o n . Right.
Mr. G r a y . And it is a fact that on the

books o f Fox Theaters
some of those accounts are shown as having been on behalf o f Fox
Theaters ?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . Do they all show?
Mr. W a t s o n . No.
M r . G r a y . They do not? And how much stock did he acquire in
Loew’s for Fox Theaters?
Mr. W a t s o n . In aggregate?
Mr. G r a y . In aggregate.
Mr. W a t s o n . Six hundred and sixty thousand nine h u n d red
chares.
Mr. G r a y . Did he or did he not turn over on November 19,1929, by
the resolution passed by the Fox Theaters all of that Loew’s stock to
Fox Theaters?
Mr . W a t s o n . Passed over all which was in his brokerage accounts?
Mr. G r a y . Yes.
Mr. W a t s o n . One hundred and eighty-eight thousand three h u n ­
dred shares.
Mr. G r a y . In other words, in addition to that which he had p u r ­
chased from Loew’s-----Mr. W a t s o n . Yes.
Mr. Gray. And some of the transactions made in the name o f Fox
Theaters, he turned over 188,000 shares?
Mr. W a t s o n . That is right.
Mr. G r a y . What was that Loew’s stock—I don’t care to have the
price that he paid for it and the price at which the Fox Theaters
could have gotten it that day, but I want the difference. In other
words, how much more did Fox Theaters pay for that Loew’s stock
than they could have bought it for on the market on November 19,
1929?
Mr. W a t s o n . I f they could have bought that much without putting
the price up, they would have paid $5,026,782.50 more than the
market.
Mr. G r a y . In other words, it is perfectly clear that they could not
walk out and buy that much stock and attempt to acquire it or at­
tempt to buy it, without influencing the market first?
Mr. W a t so n . Absolutely not.




STOCK EXCHANGE PRACTICES

1091

Mr. G r a y . But if they had bought that stock that day and could
have bought it at the prices at which it sold, there would have been
a difference of five million and some odd hundred thousand dollars?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . I will say, Mr. Chairman, that this morning we re­
ceived a wire from New York from one of my accountants that is
still working with respect to this transaction of 10,000 shares that I
asked Mr. Best about that appears as a delivery. Mr. Best has testi­
fied that it was a delivery and we have information showing that in
his United States Government income-tax return as of that year,
which I think was 1928, there was a credit taken for that as a sale
and a loss. But I do not want to, not having had the opportunity
to examine into the records and satisfy myself that I can definitely
and positively prove it, present it here now. But I will ask that if I
can establish it definitely and beyond any question I be permitted
hereafter to place it in the record so that it may show in connection
with these other matters, but I hesitate on the information that I
have now to definitely endeavor to prove it.
The C h a i r m a n . Without objection it is so ordered.
Mr. G r a y . I f there is anything else in connection with Fox’s
manipulation of the Fox Theaters or the Loew’s stock in his various
market transactions I wish you would tell it to us, not in too great
detail, before I go to another stage of this matter.
Mr. W a t s o n . There is the account with Manowich Bros.
Mr. G r a y . A brokerage house ?
Mr. W a t s o n . Yes. It contained a long balance of nine thousand
shares.
Mr. G r a y . When?
Mr. W a t s o n . November 19, 1929.
Mr. G r a y . That is at the date this resolution was adopted, is it
not?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . Go ahead.
Mr. W a t s o n . With a balance against it of $292,500, which amount
was accepted by the corporation as cost. This item, however, had
not been purchased from Manowich Bros.; it had been delivered in
to them by Block Maloney from Jack G. Leo account, in which
account the purchase had been made under date of May 16, 1928, at
30, a value of $274,500. This would apparently produce an over­
charge to the corporation in taking the stock at the price at which it
lay m Manowich’s account rather than the cost at which it lies in
Block Maloney’s account of $18,000.
Mr. G r a y . N o w , let us get that clear. Mr. Fox, instead of charg­
ing Fox Theaters exactly what the stock cost him, did this: He
bought it in one brokerage house at '60Vo and then he arbitrarily
shifted it from that brokerage house to another brokerage house and
had the other broker pay his first broker 32 and some odd for it.
So when he turns it over to Fox Theaters he turns it over at the
rate o f 32, which he had his second broker pay his first broker for it.
Mr. W a t s o n . That need not necessarily have been intentional,
however.
Mr. G r a y . Well, it was done, whether it was intentional or not.
Bo you find more than one instance of that?
Mr. W a t s o n . Y e s .
119852— 32— PT 3------ 20




1092

STOCK EXCHANGE PRACTICES

M r. G r at. H ow m any?
Mr. W a t s o n . Well, we

only tried to find a couple of examples.
There is one more that I can get here.
Mr. G r a y . Tell us about the other one.
Mr. W a s s o n . Included in the cost accepted by the corporation
was an item from Richards & Co., 9,000 Theaters Corporation stock,
at a value of $292,500. This stock had also been purchased through
the account of Jack G. Leo at Block Maloney of May 17 at a cost of
thirty-two, $288,000, and have been overcharged in the takeover of
$4,500. We have not attempted to examine the cost of the securities
in all instances.
Mr. G r a t . Do you find in many instances transfers o f stocks
from one account to another and back again and all around through
these various accounts?
Mr. W a t so n . In plenty instances.
Mr. G r a t . Would you find any object or reason for it , le g itim a te
object or reason?
Mr. W a t so n . Well, you could realize that when the account needed
it, he transferred securities from one to the other. No definite,
stated reason why it was done.
Mr. G r a t . In other words, it might have been that one account
was undermargined and another was overmargined and that he
would instruct one broker to shift it from the account that was
overmargined to the other one, so that the other account would be
in better shape?
Mr. W a t s o n . That would be a logical reason.
Mr. G r a t . But in some instances you find it at higher prices th a n
the stock actually cost him.
Mr. W a t s o n . Yes; he w o u ld do that.
Mr. G r a t . N o w , then, after the break in 1929, without giving us
all of the details of what happened, there was a great deal o f litiga­
tion in New York involving Fox Theaters ond Fox Films; is that so?
Mr. W a t s o n . Yes, sir.
Mr. G r a t . There were applications for the appointment o f
receivers ?
Mr. W a t s o n . Fifteen, I believe.
Mr. G rat. The matter was ultimately settled on April 7, 1930,
was it not ?
Mr. W a t s o n . Right.
M r . G r a t . A n d m w h at w a y ?
Mr. W a t s o n . Plan was entered

into whereby Fox Film sold
$55,000,000 worth of debentures.
Mr. G r a t . N o w let us get the first step, however. The first step
was that a group that was known as the Harley-Clark group, that
owned and controlled another corporation known as General The­
aters Equipment (Inc.), bought Mr. Fox’s B stock; isn’t that so!
Mr. W a t s o n . That is right.
Mr. G r a y . I think we have it already in the evidence. I f w e h a v e
not, I want to get the facts. Mr. Fox owned 100 per cent o f t h e B
stock m one of these corporations?
Mr. W a t so n . Yes.
Mr. Grat . Which corporation was that?
Mr. W a t s o n . That was the film stock.




STOCK EXCHANGE PRACTICES

1093

Mr. G b a t . That was the film stock?
Mr. W at so n . I believe it was the film stock.
Mr. G b a t . And in the other corporation he owned over 51 per
cen tof the dass B stock. That B stock had the voting power?
Mr. W at so n . All of it.
Mr. G b a t . H o w much did Mr. Fox sell his B stock for?
Mr. W a t so n . I was told it was $18,000,000.
Mr. G b a t . Let us see if your investigation disclosed—and I also
ask you whether or not you did not hear Mr. Fox tell me on Wednes­
day afternoon of this week some of these figures—he sold his B
stock and got for it first $15,000,000 in cash; is that correct?
Mr. W a t s o n . That is right.
Mr. G b a t . And he also got—these all from the General Theaters
Equipment (Inc.)—a note for $3,000,000 which has since been paid,
making the consideration of eighteen million?
Mr. W a t s o n . Yes, sir.
Mr. G b a t . His attorney in addition to that got one million dollars,
did he not?
Mr. W a t s o n . So we were to ld .
Mr. G b a t . In addition do you recall Mr. Fox stating that Jack
Leo, his brother-in-law, got a bonus of five hundred thousand or a
half a million?
Mr. W a t s o n . I verified that.
Mr. G b a t . And also a man by the name of Sol Wertzel got a bonus
of a half million, didn’t he?
Mr. W a t s o n . Yes, sir.
M r . G b a t . Y ou verified th a t?
Mr. W a t s o n . I saw that.
Mr. G b a t . Who is Wertzel ?
Mr. W a t s o n . Counsel, I believe.
Mr. G b a t . He was one of the officers of
Mr. W a t s o n . Yes, sir.
Mr. G b a t . And in addition to that,

the Fox Film, was he not?

was there any agreement
entered by Fox with respect to the payment of any additional moneys
to him? Do you recall the annuity which he was to get?
Mr. W a t s o n . An agreement was made at the time of the settlement
whereby the Theaters Equipment agreed to cause a contract to be
made between Fox and Fox Film for a period o f five years at a
salary of $500,000 per annum.
Mr. G b a t . And were you present when I asked Mr. Fox on Wed­
nesday afternoon as to whether or not in the two years that have
passed since then he received his half million for it?
Mr. W a t s o n . He said he had.
Mr. G b a t . And he is still to get another million and a half ?
Mr. W a t s o n . That is right.
Mr. G b a t . D o you know either from what Mr. Fox said or from
any investigation whether he has ever done any work, served on the
hoard or helped in any way Fox Filins or General Theaters Equip­
ment since that time?
Mr. W a t s o n . I gathered from his conversation that he had not.
Mr. G b a t . In other words, he has not had to do anything for the
half million a year?
Mr. W a t s o n . Not th a t I know of.



1094

STOCK EXCHANGE PRACTICES

Mr. G r a y . N o w , then, going back to Fox Film, a long while prior
to April the 7th, 1930, do you know whether or not Mr. Fox had
engaged in certain transactions with respect to buying theaters and
theater property that had involved that company in an indebtedness?
Mr. W a t s o n . Yes.

Mr. Gray. T o what extent?
Mr. W a t s o n . By the end of the year prior to April they were in­
volved for over a hundred million dollars’ worth of debt, without any
very definite plans for refinancing, facing them.
Mr. G r a y . In other words, Mr. Fox had bought properties and
incurred obligations for Fox Film Co. to the extent of $103,000,000;
is that correct ?
Mr. W a t s o n . That is right.
Mr. G r a y . And about $20,000,000 of that was incurred in the b u y ­
ing of theaters in England; is that right ?
Mr. W a t s o n . Twenty million.
Mr. G r a y . And as a matter of fact, what he had done was on the
stocks of these various organizations secured loans?
Mr. W a t so n . Yes.
Mr. G r a y . But there had been no definite system or plan o f financ­
ing agreed upon ?
Mr. W a t s o n . That is right.
Mr. G r a y . N o w , then, when General Theaters Equipment took over
this class B stock, what was the financing plan that was adopted?
Mr. W a t s o n . The Film Co. sold to tne Theaters Co. 1,600,000
shares of stock.
Mr. G r a y . Of whose stock?
Mr. W a t s o n . The Film Co.
Mr. G r a y . That is, the Film Co. had issued 1,600,000 shares o f its
own stock and sold it to Fox Theaters?
Mr. W a t s o n . Yes.
Mr. G r a y . For what?
Mr. W a t so n . In conjunction with $27,000,000 of cash and accounts,
to take over Loew’s stock at $75,000,000.
Mr. G r a y . That is about what the stock cost the Fox Theaters,
wasn’t it ?
Mr. W a t s o n . Just about.
Mr. G r a y . And Fox Theaters sold to Fox Film the stock which it
owned of Loew’s 660,900 shares, for $27,000,000 in cash and the ad­
justment of accounts, plus 1,600,000 shares of Fox Film Co. stock?
Mr. W a t s o n . At 30.
Mr. G r a y . At $30 a share. What was the market on Fox Film
stock on the day that that transaction occurred h
Mr. W a t s o n . About 47, I believe.
Mr. G r a y . It ranged from about 45 or 46 to 48, didn’t it?
Mr. W a t s o n . Around there.
Mr. G r a y . When Fox Theaters got that stock at $ 3 0 a share, what
did it immediately on the same day do with it *
Mr. W a t s o n . Sold it to the General Theaters Equipment Co a t
the same price.
1
£ that General Theaters Equipment Co.,who had
of Fox FilmrstS c* S
’ bccame the owncr of J’(i00>000
Mr. W a t s o n . That is right.



sh ares

STOCK EXCHANGE PRACTICES

1095

Mr. G r a y . N o w , then, the financing plan—Halsey-Stuart & Co.
agreed to take over $55,000,000 of 1-vear C per cent notes, did they
not?
Mr. W a t s o n . Of the Film Co.
Mr. G r a y . Of the Fox Film Co.?
Mr. W a t s o n . Yes; secured by the Loew's stock.
Mr. G r a y . Secured by the Loew’s stock. In other words, the
Fox Film, having acquired this Loew’s stock bv this transaction
that we have just described, Halsey-Stuart loaned them $55,000,000
of the security of the Loew’s stock on 1-year notes at G per cent ?
Mr. W a t s o n . That is right.
Mr. G r a y . They did that at a discount, did they not?
Mr. W a t s o n . Y e s.
Mr. G r a y . Having bought them at a discount, what, if anything,
was given by the General Theaters Equipment Co. to Halsey-Stuart
Co. out o f the 1,600,000 shares of Film stock?
Mr. W a t s o n . Sold them 200,000 shares of stock which they owned
at $30 a share.
Mr. G r a y . In other words, out of the 1,600,000 shares out of the
Film stock that the General Theaters Equipment received at $30
a share they sold 200,000 to Halsey-Stuart Co. at a price ?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . And that was all on the same day that the stock was
Worth about from $47 to $48 a share?
Mr. W a t s o n . Oh yes.
Mr. G r a y . So that if it was worth $47 on that day and they took
200,000 shares they got something that was worth three million-—
if my mental calculation is correct—$3,400,000 more than they paid
for it?
Mr. W a t s o n . On that day.
Mr. G r a y . H o w was the other $48,000,000 of indebtedness of the
Fox Film taken care of?
Mr. W a t s o n . There was created a corporation called the Film——
Mr. G r a y (interposing). Not at that time, not Film Securities.
Let me see. A t that time was it not so that a combination consisting
of the Chse Securities, Pynchon & Co., West & Co., Hanan & Co.,
and Erick & Dreevers financed that other $48,000,000?
Mr. W a t s o n . General Theaters provided money as follows:
Sold $30,000,000 unsecured 10-year convertible gold debentures at
a price of $27,000,000.
Sold 350,000 shares of common stock to a group managed by Pyn­
chon & Co. comprising substantially those houses which you men­
tioned.
Mr. G r a y . Yes.
Mr. W a t s o n . Sold 133,000 shares of common stock to HalseyStuart at the net price of $5,606,000.
Sold 133,500 shares to H. L. Clark for a net price o f the same
amount, $5,606,250.
Sold to a house which you mentioned previously 200,000 shares
°f Fox Film Corporation A to a syndicate of—no, sold it to HalseyStuart—200,000 shares at $6,000,000.
Sale o f 240,000 shares of Fox Film class A to a group managed
V Pynchon comprising the same group that you mentioned before.



1096

STOCK EXCHANGE PRACTICES

Mr. G r a y . And these transactions they managed to get together
$48,000,000 to take care of the balance of the debts of the Fox Film;
is that right ?
Mr. W a t s o n . Yes. That aggregates sixty-three million and that
paid the forty-eight million out.
Mr. G r a y . Out of that sixty-three million they paid forty-eight.
Now, then, having given Halsey-Stuart 200,000 shares, or 1,600,000
at $30 a share, what, if anything, did they give to this group th a t I
have mentioned who aided them in financing?
Mr. W a t s o n . They allowed the group to purchase 240,000 shares
of Fox Film, at 30.
Mr. G ray . At $30 a share. And that was all at the same time,
within a few days-----Mr. W a t s o n . That is all part o f the general plan.
Mr. G r a y . When that stock was worth the amount of money we
have indicated. As a matter of fact, your investigation— I w ant
to shorten this a little bit—your investigation carried you t o the
point where you found that a syndicate or pool was organized and
traded in the stock of Fox Films and on that day disposed o f th at
240,000 shares; isn’t that correct?
Mr. W a t s o n . They tried to.
Mr. G r a y . Did they succeed in doing so ?
Mr. W a t s o n . They d i d n o t .
Mr. G r a y . They had to ultimately distribute it a m o n g its m e m b e r s ;
is that right?
Mr. W a t s o n . The syndicate or the members still have som e o f it.
Mr. G r a y . As a matter of fact, your investigation showed you
that Halsey-Stuart probably still has its 200,000 shares?
Mr. W a t so n . They do have.
Mr. G r a y . What happened in 1931 when the fifty-five million o f
short-term notes held by Halsey-Stuart came due ?
Mr. W a t s o n . Well, Halsey Stuart was unable or unwilling, I
would say, to refinance the $55,000,000, and another group had to be
gathered together to take them up.
Mr. G r a y . Was that pretty much the same group that had financed
this other forty-eight million?
Mr. W a t s o n . Very much.
Mr. G r a y . Very m uch.
Mr. W a t s o n . Except Halsev Stuart.
Mr. G r a y . Except Halsey Stuart was not interested in it. Now,
then, this is what happened with respect to that, is it not, that the
United States Government stepped in under the Clayton A ct and
instituted a proceeding in the courts for the purpose of setting aside
that transaction by which the Fox Film obtained 660,900 shares of
Loew’s stock from the Fox Theaters. That is correct?
Mr. W a t s o n . That is right.
Mr. G r a y . And ultimately what they call a consent decree w a s
entered under the terms of which a corporation was formed k n o w n
a? t 5 ! > * r ecurities Corporation, to which this 660,900 sh a re s
o f L o e w s stock was transferred? That is right?
Mr. W a t s o n . That is right.
Mr! WATOON/^s^sirftwenty million o f debentures, did they not?




STOCK EXCHANGE PRACTICES

1097

Mr. G r a y . They issued $10,000,000 of first preferred stock, did
they not ?
Mr. W a t s o n . They did.
Mr. Gray. They also issued some class B stock or voting stock;
is that right?
Mr. W a t s o n . And some common.
Mr. Gray. And also some common class A stock having no voting
power. And it is a fact, is it not, that using those debentures ana
those stocks and such other securities as may have been within the
control of this group, they borrowed enough money for the purpose
of financing thate $55,000,000 that was due to Halsey Stuart; that
is right, isn’t it?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . And the company is now owned—that is, the Fox
Theaters and Fox Films stock is now owned by the General Theaters
Equipment; is that right?
Mr. W a t s o n . Yes, sir.

Mr. G r a y . Fox Film is still in existence as a corporation?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . F o x Theaters is still in existence a s a c o r p o r a t i o n ?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . General Theaters Equipment that still owns all of this
stock is in the hands of a receiver ?
Mr. W a t s o n . Yes, sir.
Mr. G r a y . Well, that is the story bringing it down to date. Of
c o u r s e , Mr. Chairman, I have cut the matter quite short.
I have
s h o w n you, however, the picture, and I could present to you a very
la r g e number of other details.
I could present Mr. Fox’s admis­
s io n s to me to the effect that these manipulations took place, and I
ca n still show to you that he conducted a private account of the
All Continent Corporation after he stepped out of Fox Theaters and
F o x Films; that it was a continuous short account from them down
t o date, dealing in all sorts and all kinds of stocks. But you have
h a d illustrations of that before and I know the demands that a r e
m a d e upon you to-day, and I suggest that I quit at that point,
g i v i n g Mr. Fox the opportunity to make any explanation of answer
a n y questions he wants at any time he wants.
I do not want to be misunderstood at all, and it creates another
thought in my mind: I believe, Mr. Chairman, that Mr. Fox should
be afforded the opportunity at any time he wants to come before this
committee and under oath not only answer any questions that may be
put to him but given the privilege of making any statement he
Wants with respect to any parts of these matters, to offer any proof
to the committee that he wants, either in confirmation or disamrmation o f these things; but I do not think that there should be re­
ceived into this record any statement that he makes ex parte, either
through his attorney that was here yesterday or any other attorney,
or by himself, without an opportunity of being asked any questions,
because it has been my experience before committees that when they
adjourn a session and are not expected to meet again for a while, the
particular individual who may be the subject of inquiry and who
stays away and avoids—I don t doubt that Mr. Fox is sick—he has
not had a doctor for two years for this illness until he got down




1098

STOCK EXCHANGE PRACTICES

here—I suppose that Washington doctors are better—but I have
found from my experience that they will avoid coming here and
answer questions, but when the committee has adjourned and they
can not get him to come before them to testify and be subject to
examination, they sit down and write a long statement that nobody
can ask anything about and send it in, asking that it be carried as
his statement. I do not think that any such statement should be
placed upon the record at any time.
The C h a i r m a n . The committee will adjourn subject to the call of
the chairman, but we expect to have a meeting Monday morning
at 10.30.
(Whereupon, at 12.35 o’clock p. m., the committee adjourned, to
meet again at the call of the chairman.)




STOCK EXCHANGE PRACTICES
THTJBSDAY, JU N E 23, 1932

C om m ittee

U nited S tates S e n a te ,
on B a n k in g *and C urrency ,

W ashington, D . C.

The committee met, pursuant to call of the chairman, on Thurs­
day, June 23, 1932, in the hearing room of the Committee on Bank­
ing and Currency, Senate Office Building, Senator Peter Norbeck
presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Carey, Couzens, Fletcher, and Costigan.
The C h a irm a n . The committee will come to order. Mr. Stock
wanted to put some papers in the record that Mr. Gray had left
with him. You may make your statement, Mr. Stock, and present
the papers.
STATEMENT OF DAVID STOCK, ASSISTANT COUNSEL TO THE
COMMITTEE, WASHINGTON, D. C.

Mr. S t o c k . Mr. Chairman, Mr. Gray in his absence
present t o the committee various matters pertaining to

asked m e t o
publicity in
the Fox matter which he was unable to present due to limitations
o f tim e .

During the week commencing Saturday, October 12,1929, William
Fox made a personal appeal over the Fox Movietone of some 500
Fox controlled theaters throughout the United States uring theater­
goers to invest in the stock o f the Fox Theaters Corporation. This
use of the movie screen for the stock promotion was preceded by
an advertising and publicity build-up generally throughout the
country. The collapse of the stock market following within 10
days drove the price of Fox Theaters stock from 29%, its high of
October 14, to 10 on October 29. The financial condition o f Fox
Theaters Corporation at the time of this screen stock promotion
was such that it appears likely that the stock would have collapsed
even had there been no serious break in the stock market.
On October 11,1929, Fox Theaters ran a full page ad in the news­
papers, in all principal cities in which Fox Theaters were located
announcing the silver jubilee of the William Fox Theaters on Oc­
tober 12. I would like to introduce this full page ad in the record.
It is a full page advertisement and in some newspapers it was run
as a 2-page advertisement.
The C h a irm a n . There being no objection, it w ill be made part of
the record.




1099

1100

STOCK EXCHANGE PRACTICES

(The full page ad is as follows:)
nrr. * f w

yams T»MT%. n m »a t rtrm u rt

I n v i t e d
U

f

^

i r

Celebrate

THE S IL V E R
«J U R I L E E
of thr

W I L L I A M FOX
THEATRES
rn n f r y

•»

F«> l«

H iw i j

1 at IW Sl»rt«i n«or»—» pfeMVr, wfc«,

W tt. m n p , taw*««i]F.
■- - - -

«M

ha> irMrfanard aa
mW kip

!«!• •

i^aMrrol Mt. II )••)*»»*•
rmt thM tfc* F «
. !« it r M>l]r MMimt
Jmkntr

tf. •tliin a fHWr
MMnj (rf MrM>*t4p|rMrrtl

T o m o r r o w , O CTO BER 1 2 t h
and continuing for the entire week*
every Fox theatre throughout the
United Stale* will observe this event
with a splendid entertainment befitting
the attainment o f a quarter century o f
remarkable growth.
▼
▼
*

FAR MORE IMPORTANT
Than evea the eatertalnaient, w ill be *
mcwwifr fraai Wllllwai Fox •(vital roncera t*
the (itara welfare «f every patroa af Fax
Theatres. In 25 yearn the Fox Organization has grown

from a niekleodeon to the most gigantic enterprise in the
world. This unparalleled success could not have been possible
without the whole-hearted response and liberal support ex*
tended to William Fox by the American people. Oa tU l

w rawlea Wllllaai Fax will eHweUwe threaffh
Ihe SHovlelaae itereea af eaeh Fax Theatre hla
plaa la repay yea la aiaferlal profit far this
qwarftnr eeatary af (eaeraaa patraaajge.
ibr Fntare at Thin Empire mt A m w ia « a ( with Wllllaai Pax

Mr. S t o c k . I will also introduce the accompanying page. Those
are photostatic copies of the advertisement running at that time.




110 1

STOCK EXCHANGE PRACTICES

(The accompanying full page ad is as follows:)

la

102 FOX T H E A T R E S

n m g k M l

M i i n M |||a l

New

ire r k

L is te d

B e lo w

uii !■ Hundreds of FO X THEATRES
ThnwghMt (be IJalted SUtesYOU CAM H EAR
The Extraordinary Announcement
To Be M ade by W I L L I A M FOX
The r«IU w in K Local Theatres Celefcrate

FOX

SILVER

JUBILEE

WJL5
«*••*
i •«
* H« ■»«•».♦

*“■»■»»»<»■
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r.!.T?.w.*.rr«

f.y.'Mw
..D C oon
7.?f.

»T * « « TH M TM

fv.*.■ .*?.J!
7JULLui v.l !

SJLZZ.'JZZ

rS'IMt'VTf.".
li'f.l.MV.W':

ffWWMW?
R£r;2i!lJJ£5
JAf.V
f««« n.r.V!
ua
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I jn«

T".« *»**•l#
T»« »»«»
T"*c*f'TOL

T"5.:.v.c.je*
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TV.i*VVT*
T*»*1
TI’K!.7"f,‘T**

C o me nnd

P articipate In a Quarter Centary of Deserved Sneeeai

Senator C a r e y . Mr. Stock, did they not urge people in coming
into their theaters to buy this stock ?
Mr. S t o c k . I am coming to that.
Senator F l e t c h e r . What is the date of that?
Mr. S t o c k . That is October 11, 1929.
On the following day, on October 12, 1929, there were various
publicity items appearing in the newspapers all over the country
announcing the commencement of the Fox twenty-fifth anniversary
and that William Fox was to deliver a personal message through Fox




1102

STOCK EXCHANGE PRACTICES

Movietone News urging the purchase of shares in Fox Theaters
Corporation.
Senator C ou zen s. May that not go into the record without read­
ing, Mr. Chairman?
Mr. S t o c k . I am not going to read them, Senator. I just want
to identify them in the record.
The C h a irm a n . He is just describing them.
Mr. S t o c k . I would like to have this photostatic copy o f the
article appearing in the New York Times of October 12, 1929, also
in the record.
,
(The newspaper clipping presented by Mr. Stock is here copied
in the record in full as follows:)
[The New York Times, Saturday, October 12, 1929]
VOX W H X BROADCAST ON HIS ANNIVERSARY— TO TETX OF FOX THEATERS CORPORA­
TION FROM SCREENS IN 500 OF HIS HOUSES

William Fox, head of several moving-picture enterprises, will celebrate his
twenty-fifth anniversary in the motion-picture field to-day with a message
spoken through Fox Movietone from the screens of more than 500 of his
theaters throughout the country. He will urge the purchase of shares o f the
Fox Theaters Corporation. In anticipation of his message, the shares of all
the Fox enterprises were strong yesterday.
Class A shares of the Fox Theaters Corporation are quoted on the curb
exchange. They pay no dividend. Early this year a Wall Street pool, com­
posed of leading brokers, was organized to distribute the stock, but, after
getting it up to 37%, the pool encountered liquidation and the stock broke to
21%. Its gain yesterday on the news that it would be recommended in all
Fox theaters throughout the country was 1% points, the closing price being

<8 %.

The corporation has two classes of stock, A and B. There are 7,400,000 A
shares authorized. The B stock, which carries the voting rights, is not listed
«nd is all held by Fox interests. Both classes share equally in any earnings.
.Ihe A shares were increased from 3,900,000 shares to 7,400,000 shares on
September 24.
The shares should not be confused with Fox Film A, which, controls the
manufacturing and distribution of the corporation’s pictures. This stock is
listed on the New York Stock Exchange and pays a dividend o f $4 annually.
Yesterday it closed at 100%, up 3% points on the day. Its high point this year
was 105% and its low, 30%.

Mr. S t o c k . At the same time this publicity was appearing dis­
tinguished citizens appeared on the stages of many Fox theaters
throughout the country and testified to the integrity and business
ability of William Fox. Important of these was the appearance in
New York City of Mayor Walker on the stage of the Fox Academy
of Music and before the microphone o f Radio Station W M CA. The
report of the mayor’s tribute to Mr. Fox appears in a photostat
which I am now asking to be identified as an article appearing in
the New York Times o f Sunday, October 13,1929.
(The article presented by Mr. Stock is as follows:)
WALKER PRAISES FOX— ATTENDS CELEBRATION OF PRODUCER’ S 23 YEARS IN MOVIK
FIELD

Mayor Walker appeared on the stage of the Fox Academy of Music, Irving
Place and Fourteenth Street, last night during the vaudeville and picture
program to pay a brief tribute to William Fox on the occasion of the twentyi ftoh^ n,S f rSary of
latters entry into the moviug-picture industry. The
mayor, whose speech was broadcast over Station WMCA, praised Mr. Fox




STOCK EXCHANGE PRACTICES

1103

for his charitable work in connection with the city hospitals as well as for
his achievements in the amusement world and referred to him as “ the kind
of man who makes New York the great city that it is.”
“ I have known William Fox personally for years,” Mr. Walker said, “ and
I admire him for many things. His is a real benevolent and charitable heart.
When I became mayor of this great city it was William Fox who interested
me in the condition of our hospitals and it was through his instigation that we
started a program which, when completed, wil give this city the finest system
of hospitals in the world. I admire him because he is a born New Yorker and
because he loves New York with a devotion that is surpassed by no man.”

Mr. S to c k . On Saturday, October 12, 1929, the same day William
Fox, from his estate at Woodmere, Long Island, had issued a state­
ment for publication generally in tlie press on Monday, October 14,
1929, in which he announced his intention to spend $9,000,000 over a
period of 25 years to reform American education by movies. He
further stated his belief that:
On the theory that every man, woman, and child will be a finer citizen if a
God-fearing one, we shall make talking pictures of the great religious leaders
of the world to be shown on screens in every church.

I now ask that a photostatic copy of the article appearing in the
New York Times October 14,1929, m which that statement appeared
be marked for identification.
(The newspaper clipping presented by Mr. Stock is here copied
in the record in full as follows:)
Fox Aims to Reform Education by Movies—Producer to Spend $9,000,000
Over 25 Y ears to Substitute Visual-Oral Schooling— Similar A id for
Church—Plans Talkies o f Surgeons to Aid M edical Study—Film L i ­
braries fo r Home Use
On the twenty-fifth anniversary of his entrance into motion-picture business
Wiiiian Fox announced on Saturday at FOx Hall, Woodmere, Long Island, for
Publication this morning his program for the next quarter of a century. Dur­
ing that time he plans, by means of talking pictures, to institute a system of
vUtxal-oral education in every school in the country, whereby he hopes to
cot school time by half and standardize teaching; to fill every vacant seat
of the 75,000,000 church and parish house seats in the United States, and to
assist in the dissemination of medical knowledge by having hospitals equipped
Mth apparatus to photograph every major operation which will be accompa­
nied with talk by a specialist and the film of which will later be distributed
throughout the world for the use of medical students, physicians, and surgeons.
To further this project, Mr. Fox said that he was willing to contribute
one-quarter of his personal fortune, an amount estimated to be approximately
$9,000,000. Although allowing 25 years, he hopes to complete the program
Within 5.
plans newsreel thejateb

In addition Mr. Fox announced that a newsreel theater, a hitherto unknown
institution, will be established within two weeks at the Embassy Theater,
Where only newsreels will he shown. He said also that the Fox organization
fcoon would enter the home projection field so that at a nominal cost the lay­
man would be able to project in his home 16-millimeter talking pictures,
selected and rented from the film libraries that the Fox corporation will
establish throughout the country.
Mr. Fox prefaced his remarks with a comment on his own health. Sun­
tanned and apparently hardy, he said that since an automobile accident last
July he had regained his normal health, contrary to rumors of a sustained

Alness.

“ There are 15,000,000 to 20,000.000 school children who are held In schools
during the hours from 9 to 3,” Mr. Fox asserted. “ During this time it has
always seemed a pity that that number should be indoors while the sun is at
^8 height. How then can we conceive of something that will cut the 6-hour




1104

STOCK EXCHANGE PRACTICES

period in half and release the student to play in the sun? We now offer a
plan whereby 1,000,000 classrooms in America will have an abundance of
empty space rather than insufficient seats. Talking pictures will make sucfl
a thing possible.
“ We shall try to install a talklng-picture projection machine in every class­
room in the country. We shall get the best available persons to record a
series of lectures on celluloid and distribute them widespread. On the theory
that one picture is the equivalent of eight words and that each word uttered
by a proved educator is greater in effect than that, it is easily understandable
how valuable a lesson in geography or arithmetic shall be to the student. This
is easily appreciated when such men, for example, as President Butler
Columbia, or Lowell, Hibben, or any other great educator, lectures on a subject
in which he is well versed. It would release teachers from drudgery. It
would establish a higher standard of learning and a swifter means o f dis­
seminating it. And in addition these lectures would be recorded in every
language for international distribution.
“ When a lesson in geography, for instance, is shown, there will be flashes
of the exact location which the speaker describes on the screen at the same
time so that the student not only will hear of the place but actually see i t ”
W OU LD A ID C H U R C H A T T E N D A N C E

In regard to the second phase of this plan Mr. Fox said that a survey of
church attendance had been taken recently which showed that of the 150,000
churches and parish houses in America, 15 per cent of the 75,000,000 seats were
unoccupied on Sundays.
“ On the theory that every man, woman, and child will be a finer citizen
if a God-fearing one,” Mr. Fox explained, “ we shall make talking pictures of
the great religious leaders of the world to be shown on screens in every church.
Imagine Dr. S. Parkes Cadman delivering a sermon in every Protestant church
in the Nation, or Doctor Fosdick or Bishop Manning. The same in the other
churches. Cardinal Hayes or even the Pope for the Catholics, Rabbi Stephen
S. Wise or Dr. Nathan Krass for the synagogues, and hundreds of others.
I believe sincerely that if this program is carried out the attendance in
churches will surpass anything ever before noted.”
The third phase of the program involved the installation of apparatus in
every noteworthy hospital in the world for taking talking pictures upon which
will be recorded the most skilled operations. These films will be used in the
medical colleges of the world where they may be studied repeatedly.
“ Imagine the many famous surgeons performing operations and describ­
ing them at the same time for talking pictures,” Mr. Fox said, “ so that the
future surgeon may see the operation 100 or 1,000 times until it is as clearly
in his mind as in the mind of the expert who performed it.
“ We have made the first of this series already. A film was recorded and
photographed in Chicago of an operation by Dr. Nelson H. Lowry, who per­
formed with a radium knife on a cancerous patient. Doctor Lowry will give a
private showing to-day and then present the picture at the annual meeting of
the American College of Physicians and Surgeons which is now convening in
Chicago. This is the first time in history that a talking picture was made of
an operation. The job will not be completed, however, until every surgeon
will permit his work to be photographed.”
T A L K IN G P IC T U R E S I N

HOME

The motion-picture producer then announced the entrance of the Fox Film
Corporation in the home talking picture business. He said that in the imme­
diate future the Fox Co. would be ready to sell talking motion-picture pro­
jection apparatus to every home in America. This machine will project
16-millimeter talking films the sound track of which is on the celluloid.
The Ainas for use in this apparatus are to be rented at film library depots
to be established at strategic points over the country and the projection ma­
chinery will be sold on a partial-payment plan. The pictures will either be
reduced from the regulation 35-millimeter Fox full-length photoplays or will
be especially produced in the 16-millimeter size.
ventured the opinion that such a move would in no way
insFead
nce in “ otfon-picture theaters, but said it would improve it




STOCK EXCHANGE PRACTICES

110 5

This will come about,” he said, “ because on the first of next year we
snail Install at the Roxy Theater an<l probably in most of our houses through­
out the country, of which there are more than 1,100, our new grandeur screen.
This screen takes up almost the entire proscenium of the theater and presents
a scope of vision that can not be duplicated on the present small one. This,
on the other hand, can not be applied in the home.”
The establishment of a newsreel theater, in winch only sound pictures per­
taining to the news of the day will be shown, possibly for 24 hours at a time
aad at a low rate of admission, was announced by Mr. Fox for the Embassy
xheater beginning October 28. No sound entertainment short films will be
exhibited, only sound newsreels, of which the Fox Movietone News takes
about 4,000 feet each week. This theater will be the first of a chain of simi­
lar ventures to be established across the country. The admission is to be
cents in the afternoon and 35 cents in the evening.
It was admitted that in such a house the full pictorial and sound record
of a complete baseball, football, or other athletic contest might be shown.
Mr. Fox foresaw the possibility of the newsreel theater as a competitor
of the newspaper, and said that sound news Alins could be got out as fast as
t*wspapers. He facetiously suggested the time when reporters might come
to the moving-picture theater to cover the news.
The announcement was also made by Mr. Fox that H. G. Wells will next
*eek begin the recording of a series of three lectures on The History of Civili­
zation, to be used as the first of a program of adult educational films, and the
that Martin Johnson and Commander George M. Dyott, the explorers,
*ill soon depart for Africa and other points to make sound films of animals
“tad peoples for the Fox organization.
deferring to television and the large screen, Mr. Fox said that the big
Knees would revolutionize the picture business just as the talking pictures
*4 recently. He added that television would in no way affect the motioni*ttare attendance, because the largest possible projected television image in
% home could only be as large as the wall of the room in which It is shown,
the new screen would be from fifty to one hundred times as large.

Hr. S t o c k . While all this publicity was going on and during the
Visaing week Mr. Fox through his representatives made his personal
*ppeal over the Movietone News on the screens of some 500 theaters
tfefoaghout the country, urging theater patrons to share in his pros­
perity and invest in the shares of Fox Theaters Corporation.
I would like to introduce into the record a report of one of the
conixiuttee investigators of earning statements appearing during this
period and the ensuing period of Fox Film. This shows that there
were issued by the Fox Film Corporation during this period three
deferent statements of earnings for 11)29. In addition to those three
stfttenients the Wall Street Journal on its own initiative issued a
fourth estimate of Fox Film earnings for the year 1929, the year
ia question, pointing out certain unfair accounting practices and cal­
culating the earnings at a lower figure than any of those issued by
company.
I might say that in this case the Wall Street Journal appears to
Wre used diligence in presenting a true picture of the earnings of
tbe pox Film Corporation, which was handicapped by the confusing
4*racter of information furnished by the officials of the company.
(The investigators’ report presented by Mr. Stock is here copied in
the record in foil as follows:)
[W all Street Jou rn al]

Fox

E a h n in o s S t a t e m e n t i n

1929

Careful examination of files of the Wall Street Journal reveals that Fox
fil» Corporation officially reported a net profit for the year ended December
3928, o f $5,957,218, equivalent to $6.47 a share on combined 920,660 shares
A and class B stock.



1106

STOCK EXCHANGE PRACTICES

On August 14, 1929, Fox Film officially reported for the six ™?“ ths ended
June 30, 1929, net profit of $6,134,337, equal to $6.11 a share on 920,660 snares.
On September 21, 1929, the Wall Street Journal stated: “ Based on showmg
made in first six months, Fox Film should earn this year between $12,000,000
and $13,000,000, or approximately $12 a share on 920,660 shares outstanding.
This article was apparently originated by the Wall Street Journal, based
on conversations with officials of the Fox Film Co.
November 1, 1929, Fox Film officially reported net profit of $8,845,000 for the
nine months ended September 30,1929, or $9.61 a share.
November 4,1929, there was published a statement by Jack Leo, vice president
of Fox Film, stating that earnings for the fourth quarter would exceed $4,000,000, bringing net for the full year 1929 to over $12,000,000.
On December 3, 1929, the Wall Street Journal, in an article headed “ Fox
Film Funds Used to Expand-—Cash and Call Loans Lower,” stated that the
balance sheet as of June 30,1929, issued for the first time in connection with the
listing of 72,760 shares new Fox Film stock on November 28, 1929, revealed a
number of important changes. The article said:
t
“ No announcement regarding means of financing the acquisition of Loews
stock by Fox Theaters has been made. Part of the funds may have come from
the sale of 12,000,000 6 per cent notes by Fox Film last April, which in turn
apparently lent the money to Fox Theaters. It is difficult to gage at present
the effects of the recently filed Government suits against Fox Film (objecting to
purchase of Loew stock).
“ If the Government is able to win its case against Fox the value o f con­
trolling interest in Loew’s, for which a price of over $100 a share was paid, will
be reduced to the market valuation of the Loew stock, at present around 45.
“ Balance sheet of Fox Film as of June 30, 1929, shows item of $12,075,000
notes receivable not current, indicating that Fox Film made this loan to Fox
Theaters.”
On December 9,1929, official announcement was made that William Fox, H. L.
Stuart, and John E. Otterson would act as trustees to work out permanent
financial arrangements for Fox Theaters Corporation, which to date has made
only temporary arrangements for financing purchases of Loew stock.
December 10, 1929: Article, apparently originating in the Wall Street Jour­
nal, headed “ Fox Prospects Seem Doubtful—Necessity for Reducing Obliga­
tions May Ultimately Effect Dividend Payments,” said, “ Picture o f the present
financial position of Fox Film is difficult to form in the absence o f a recent
balance sheet of Fox Theaters Corporation since the expansion plans of the
latter company, backed by the credit of Fox Film, are the fundamental cause
of Fox’s difficulties.
“ Since total current assets of Fox Theaters Corporation on October 31, 1928,
were $1,828,000, against $2,181,000 current liabilities, it is obvious most of the
purchases since that date have been made on borrowed money or by issuance
of stock.
“ Total cost of Loew stock was roughly $54,000,000. It is apparent at the
time that Fox must have received powerful backing, since neither r e s o u r c e s
of Fox Film or Fox Theaters were large enough to handle the transaction. It
now appears that Western Electric Co. loaned Fox Theaters about $15,000,000
to finance the purchase, plus an additional $12,000,000 provided by Halsey
Stuart & Co.
“ Total floating debt of Fox Film and Fox Theaters is said to be between
$80,000,000 and $90,000,000. Present financial position of the company raises
the question of continued dividend payments. It seems probable, unless some
means of permanent financing can be arranged, all earnings might have to be
diverted to reducing indebtedness and the dividend might later be discon­
tinued.”
On January 31, 1930, the Wall Street Journal stated: “Affidavit submitted
by William Fox, president of Fox Film, to Federal Judge Coleman in answer
to petition for receivers gives estimated earnings of Fox Film Corporation for
1929 of $14,700,000.”
After adjustment and taxes, net income available for dividends, on this offi­
cial basis, was $13,573,000.
On March 8,1930, the Wall Street Journal stated: “ Report o f Fox Film and
Fox Theaters Corporation for year ended December 28, 1929. issued with reor£anizftion plan prepared by Bankamerica group, shows $90,739,000 current
ag^i“ ®t combined quick assets of $29,000,000. Together with bonds,
obligations of the two Fox concerns aggregate $161,000,000. This is the first




STOCK EXCHANGE PRACTICES

1107

taae the exact current position of (ho two Fox companies has been revealed
their difficulties began to attract public attention.
Aeearatag to the audit made for the Bankanterica group, net profit of Fox
f ” * * * * $11,848^276 equal to $12.87 a share l'or the year ended December 28,
192&.”
Q» March 18, 1980, the Wall Street Journal published an article headed
Aaalysi* of Pox Earnings.” This article said: “ Net profit of Fox Film Cortoration for year ended December 28, 1929, was apparently about $5,600,000
epial to approximately $6.08 a share on 920,000 shares if deductions from
snrphM aeeount, which according to general accounting practices might have
made from income, are subtracted from net profit reported for the year.
“ Fox reported net after taxes for 1929 of $11,848,000 equal to $12.87 a share.
From surplus account was deducted $4,764,000 for 4obsolescence of silent film,
scenarios, and advertising accessories.' It is customary for other film com­
pares to charge off at least 85 per cent of the cost of films in the first year of
release and it has been stated in the past that a similar policy was followed
nT Fox. Therefore, at least 85 per cent, or more than $4,000,000 of this amount,
J&igM be deducted from the year’s net. in addition, the following charges have
kwa made against surplus account, all of which are fairly chargeable to 1929
imrnm: Expenditures for contracts in acquisition of theaters $192,000; settle­
ment o f claims, $50,000; reserve for contingencies, $2,128,000. Since, according
memorandum attached to the b a la n c e sheet, this reserve was apparently
cammed, it is consequently a charge against income. In addition to this, ap­
proximately $400,000 estimated interest on investment in British holdings which
*'a» capitalized should be deducted from profits.
“ Total o f these deductions is approximately $6,770,000. Subtracting this
ztwmt, from net before taxes of $13.114,000 and subtracting estimated income
of $007,000 leaves net prolit for the year $5,047,000.”
Ob April 26, 1930, the Fox Film Corporation submitted a revised annual
■qmt which was published in the Wall Street Journal of that date, showing
^iwwlidated net profit of $9,4(59,050 which included a special provision of
*2,379,225 for obsolescence of silent films, etc. This profit was equal, for
the year 1929, to $10.28 a share on the combined class A and class B common

■sock.

Tbe difference between these, various estimates for 1929, of which the above
there were at least three official estimates in addition to the estimate
&«wie by the Wall Street Journal resolves into a question of what write-offs
fairly be made to surplus and what 1o income. The situation appears to
that the Wall Street .Journal published all of the official reports made by
v*ri©os interests in the company and in addition made its own analysis of
Pox earnings, in which analysis it placed the earnings at a lower figure than
reported by any official source.
At the time, however, that it made this analysis, it was shown that the
%iM a share estimated earnings which resulted, came about after deducting
from income items which had previously been charged to surplus. That there
justification for this position is shown by the revised official report above
referred to which was later made by the company. It is probable that various
^ountants would disagree as to which charges should be made to income
ar«| which should be made to surplus; but the revised official report would
‘fwlfcate later consideration on the part of the company or its bankers which
resulted In further charges being made to income.
The controversial character of the various accounting theories was dis*
by the Wall Street Journal on March 21. 1930, as follows: “ There may
be gome differences of opinion as to whether or not the entire wiping out of
inventory of silent films should be deducted from 1929 income * * *.
The company’s auditors take the position thnt a substantial part of this charge
iss not applicable to 1929 profits.”
It may also be of significance in this connection that when the 1930 report
'as made, which was discussed on May 20. 1931, in the Wall Street Journal,
!t was revealed that official reports would be presented in two forms, the
fc&Ktorg for the banking group—that is. the Chase Securities and Bankgroup—making more severe amortization charges than the company
•fcetnedi necessary. On this date the auditors for the banking group reported
eftnrimcs for the 52 weeks ended Septeml>er 27. 1930, of $6,592,000 before taxes
Micating earnings of about $2.30 a share for the 2.525,000 shares of class
A and class B stock outstanding for the period after the deduction o f taxes.
At the same time the management, stating that it regarded the charges made
by the auditors as excessive, officially reported a net profit of $10,104,000 for
tvi* 39 -weeks ended September 27, 1930.
119852— 32— pt 3------ 21




STOCK EXCHANGE PRACTICES

1108

Mr. S t o c k . I would like also to enter into the record and have
copied for the committee four booklets which were distributed to
patrons of the motion-picture houses at the time this publicity was
going on and at the time that these movietone talks were given
urging patrons of Fox Theaters to purchase stock in those companies.
The C h a irm a n . I f there be no objection, it will be printed in the
record.
(The four booklets, presented by Mr. Stock are here printed in
the record in full as follows:)
T h e S tory

of

M otion P ictu r es

and th e

F o x T h e a t e r s C orporation

BOOKLET NO. 1

(Copyright by Fox Theaters Corporation, 850 Tenth Avenue, New York City.
Printed in U. S. A.)
The following is an address delivered in behalf of Mr. William Fox, on the
screens of some of the theaters owned or controlled by the Fox interests:
“ Ladies and Gentlemen, this is a Fox Theater that you and I are now in.
This is a Fox program. But here is an interesting addition to your program
for to-day. It is a brief message from Mr. William Fox himself, who, as
you know, is the active head of this, one of the largest amusement enterprises
in the world. I have just come from Mr. Fox’s office and tried there to get him
to talk to you personally. He disclaimed being a speaker but permits me to
repeat his words as accurately as I can from memory just as he delivered
them to me. I suggest that you follow them closely, for this is the first
time in the history of the screen that any such message has been delivered.
It certainly will make history.
“ M R . F O X ’ S M ESSAG E

“ ‘ My friends (remember Mr. Fox is speaking). I have something im­
portant to say to each one of you sitting there in your chair. It will mean
more to you if you will consider that I am talking to you alone; that you
alone weigh the sincerity of my purpose and the value of the invitation you
are about to receive, and you alone make the decision as to whether you will
accept it.
“ ‘ However a great many individual “ you’s ” are hearing these words, for
to-day every chair in the Fox Theaters will be occupied on the average twice.
To-day more than 1,000,0U0 people will listen to these words. This week
more than 7,000,000 people—a number equal to 1 person in every 18 in the
United States.
“ *Twenty-five years ago I started in the amusement business with a capital
of a few hundred dollars. Shortly afterwards a few men gathered around me
as associates who believed in the enterprise and in what we were doing— men
who had the vision to see something of the future of this undertaking. They
have received their reward.
“ *In the meantime the motion-picture industry has grown tremendously.
It is refining its art and improving its machinery of sight and sound reproduc­
tion. It is estimated that sound reproduction alone will increase our patronage
by 30 per cent. The industry has won the good will of the whole people.
There will be over 350,000,000 paid admissions this year to the American
theaters in which we are interested. On the average every man, woman, and
child in the United States will see our performance this year at least three
times.
“ MOTION PICTURES AS 4BIO BUSINESS ’

*“ Since we are not a “ big business ” we must apply the methods o f big
business as far as they are right methods, in order that our growth may keep
pace with the increasing demand for our products, which are amusement,
recreation, and education. By standardized and quantity production we are
supplying the luxury of amusement at the price of a necessity. But is amuseEven during the Great War all governments found amusement
telephoned
troops. Is the automobile any longer a luxury? Is the




110 9

STOCK EXCHANGE PRACTICES
“ T IIK S U I'l'O liT OF CUSTOMEK O W N E R S H IP

“ ‘ Speaking of tin; telephone, wo are in the same situation that the tele­
phone companies and the electric light companies were a few years ago. The
electric light companies were giving light and power to the great cities and to
towns and to many of the farms all over the country. But they were owned
by small groups of capitalists and institutions, often located far distant from
the States where the service was being given. From this fact arose the cus­
tomer ownership campaigns which won for these companies not only addi­
tional capital necessary for them la grow and to increase the amount and
quality of their service* but also the friendly understanding and moral support
of the communities they served, for then their customers to a great extent had
become stockholders.
“ ‘ For the same reasons our management, which serves amusement as a
necessity, prefers to look now and in the future to our customers, our patrons,
for a substantial part of the capital with which to enlarge and improve our
service, and for that support in all our undertakings which spells artistic and
financial success. Our need of your good will as stockholders is even greater
than the need of a light and power or a telephone company, a railroad or a
gas or water company because you may seek your amusement in whatever way
and wherever you will.
“ m r . f o x ’ s s e n s e o f o r m g a t io n t o h i s

patrons

‘“ There is a more personal reason, however, why I want every one of you
who hear these words to-day to join us in the ownership of Fox Theaters
Corporation. Just as originally the progress of our business was made possible
by the faith and cooperative support of my associates, so now the management
realizes its obligations to each of you, our patrons, for our present success.
How can I repay that real debt to so many? Only by inviting you to become
copartners with us. My ideal is a fellowship of 5,000,000 patrons of Fox
Theaters Corporation, each owning at least one share of common stock.
“ ‘ But the debt is not paid by your mere association with us as stock­
holders. Only as the executives of our company increase the value of your
investment in the common stock will this debt be paid and will there be lifted
from me the responsibility that I now willingly assume in advising you to
boy the common stock of Fox Theaters Corporation. In a short talk like this
it lg impossible to explain to you the growing financial strength of this company
or to make you see with our eyes the sources of earning power that can not
yet find expression in the records of income. It may be stated, however, that
developments are under way which can hardly fail of accomplishment, that in
themselves should very materially and permanently increase the value of your
investment in this company.
“ in v it a t io n

to

purchase

fox

theaters

sto ck

“ ‘ Since the company has no preferred stock, the net profits all go to the
common-stock holders, who represent the entire ownership. Our common stook
to bought and sold daily on the New York curb «« m « ‘t and on the Boston
Stock Exchange. Your own bank, banker, or broker can buy our stock for you.
We recommend that you instruct him to buy to-morrow that number of shares
and only that number of shares—whether 100, or 75, or 50, or 25, or 5, or
eren 1 share—which you can afford to pay for in full and put away as a perma­
nent investment.
“ ‘ Will you have that same faith which of old my associates had in this
industry, in this company, and in me? If so, I pledge you that you too shall
receive your reward.’
“ Here ends the message of Mr. Fox. And may I ask you to remember—as
Jon go out after this performance you will be handed at the door a booklet of
tome interesting facts about the motion-picture industry and this company
that there was not time to tell you, and that should be the basis of your judg­
ment o f the wisdom of joining us in the ownership of Fox Theaters Corpora­
tion.”
ONLY A FEW OF FOX PATRONS ABE STOCKHOLDERS

The managers of the various Fox theaters enterprises realize that the daily
attendance at their houses,, as Mr. Fox has intimated in his address reprinted
above, runs from one to two million people, depending on the attractions



1110

STOCK EXCHANGE PRACTICES

booked, holidays, and weather. The executives have carefully examined the
stock books of the Fox Theaters Corporation. These show that the number of
stockholders is less than 6,000. From the list of names and places of residence
of these stockholders, as well as from the disparity between the number of
stockholders and of daily patrons, it is very clear that only a small proportion
of Fox patrons are stockholders. From the address it is evident that what
Mr. Fox would like is to change the character of that ownership so that every
person who attends his theaters and who has made their success and his suc­
cess possible by that attendance should in the spirit of reciprocity share in the
financial rewards of it.
PA TB O N O W N E R S H IP IS

SOUN D B U S IN E S S

It is not merely a fine sentiment; it is sound business. It woujd be to the
dollurs-and-cents interest of each owner-patron to make it his business to
offer suggestions regarding the spirit of employees, the character of the pro­
grams, the quality of the performances and even of the proper conduct of
the business generally, so that the company would be keyed up to a pitch of
satisfactory service that has never been known to the industry.
That is why Mr. Fox has invited you now to participate in the ownership
of the common stock of Fox Theaters C o r p o r a t i o n , and why, in the spirit
of purpose of the invitation, he urges you to purchase through whatever agency
you choose such an amount of stock as you can conveniently pay for, “ to
have and to hold,” being absolutely certain in his own mind that if you will
do this you will profit by it.
H IS T O R IC A L S K E T C H O F T H E M OTION' P IC T U R E

It is now nearly 40 years since Thomas Edison, seeking eyes for his phono­
graph, invented the electric camera, and George Eastman at practically the
same time perfected the flexible firm, so that pictures could be taken of moving
things and could be sent in facsimile to any part of the world in which there
was equipment to show them.
That was the beginning of the motion picture. But these two sister inven­
tions did not make a business out of pictures until about the opening o f this
century.
Twenty years ago the majority of mankind were content, broadly speaking,
to eat, sleep, and work. But since then labor-saving machinery has accumu­
lated for most of us surplus time and savings, so that our lives are now divided
into four parts—we eat, sleep, work, and play. Amusement has become the
fourth necessity of living. The business of providing amusement and recrea­
tion, not only to* the hundred-odd millions in this country but to the rest of
the civilized and to some of the uncivilized world, has grown to be one of
the miijor activities of this generation, and it is still growing.
In the field of commercial amusement the motion-picture industry far ex­
ceeds all others, not only in the number of persons employed but in the amount
of capital invested. The 323,000 persous in tl>e United States who get their
wages from motion pictures exceed the number employed by Henry Ford and
General Motors, which together make more than SO per cent of all motor cars
produced in this country. The present money value of this vast picture
business may be in excess of $2,500,000,000. Probably between one-fourth and
one-tliird of our population depend largely on it for their principal amusement.
This, then, is “ big business.” Expressed iu other terms, it has been com­
puted that there are 20,500 theaters exhibiting motion pictures in the United
States, providing more than 18,000,000 seats, and attended by over 100,000,000
persons each week.
Much of this magnitude is very recent. In 1025 there were 50,000,000 people
a week as against 100,000,000 people a week now attending these theaters.
The increase is due largely to the addition of sound to sight, and to the intro­
duction of colorful music and motion.
The commercial perfection of sound reproduction is barely two years old,
and even yet only 20 per cent of the theaters of this country are equipped
with the necessary facilities. In view of the fact that the attendance of the
average house is estimated to increase at once 30 per cent by their introduc­
tion a continued increase of attendance is assured.




1111

STOCK EXCHANGE PRACTICES

0

FOX TIIK A TI.K S C o ltl‘ ! ’.A T IO \

. Pox Theaters Corporation, form ed in 192"). was quick to realize the new
conditions forced on the exhibitors by the preference of the public for sound
Juno. It met and is meeting this surge of patronage by the construction of
®onses of great seating capacity located primarily with reference to transit
facilities. The largest of those new Fox Theaters—in fact, the largest in the
*o*Jd, with its 6,205 seats—is ltox.v’s. Similar 5,000-seat theaters have been
®oilt and opened in Detroit, Brooklyn. St. Louis, and San Francisco. The
Present construction program calls for theaters of like capacity to be erected
® Philadelphia, Newark, At Ian! a, mid Bust on.
S T A T E M E N T OF E A R N IN G S

The cumulative effect of these policies is clearly reflected in the expanding
Bet profits, all of which l»elong to (lie holders of the common stork and which
•ere, in
192 6
$758,000
192 7
754,000
192 8
1, 745,000
First 6 months of 1920
1,500,000
and it is fair to assume that for the full business year ending October 31, 1929,
they will be upwards of $3,000,000. For the year beginning November 1. 1929,
a“d ending October 31, 1930, the officials of the corporation estimate that the
earnings will be between $4,500,000 and $5,000,000.
The Fox interests originated the idea of talking motion-picture news, and
*ox Theaters Corporation owns a -5 per cent interest in the corporation that
Publishes the Fox Movietone News.
Pox Theaters Corporation recently has acquired a large block of the family
*tock o f Loew’s (Inc.), which has a v e r y substantial chain of theaters that
**08 from one end of the country to the other, and which owns, through sub­
sidiaries, all the capital stock of the Metro-Goldwyn-Mayer Pictures Cor­
poration.
Pox Theaters Corporation, through a wholly owned subsidiary, Fox Metro­
politan Theaters Corporation, has recently acquired approximately 120 theaters
**>and around New York City.
In the statement given above no earnings of the three enterprises just de•eribed
been included.
Fox Theaters Corporation has additional corporate programs mapped out for
ft* continued growth.
We hope, therefore, that you will take advantage of Mr. Fox's suggestion and
&at you will promptly instruct your bank, banker, or broker to purchase in the
°Pen market the number of shares of common stock of Fox Theaters Corpora­
tion which you can conveniently afford to pay for and hold as an investment
(Cut of specimen of Fox Theaters Corporation stock certificate)
____________________19___
(N a m e o f bank, banker, or broker)
(A ddress)

Bay at market for my account____________________shares Fox Theaters
Corporation class A common stock.
(Signed)
"(Address)
BOOKLET

NO.

2

The following is an address by Lawrence Chamberlain, nationally known
investment banker and economist, delivered in behalf of William Fox, on the
■ereen, in theaters owned, controlled, and operated by Fox interests.
“ Ladies and gentlemen; again I bring you the greetings of William Fox.
He wishes to express his appreciation of your response to his message of last
*eek represented by the great number of shares of common stock of Fox
^heaters Corporation that were purchased by some of those who listened to
that message.
“ I was astonished to find, on asking him, our experience teaches us that 8
°r 9 out o f every 10 people who are here to-day were present last week, if



1112

STOCK EXCHANGE PRACTICES

this theater is typical. Therefore, only a brief repetition is necessary o f what
was said then.
.
“ Repeat orders are the highest compliment to any product, and certamiy m
average of 80 to 90 per cent of repeated visits to the theater spells a satis­
fied clientele. But tor the benefit of the other 10 to 20 per cent who were
not present it may be stated that through me Mr. Fox spoke to tne 7 to i
million people who attended the Fox Theaters last week, inviting tnem
become stockholders in Fox Theaters Corporation.
“ He gave as his reason for the invitation the fact that iu the early days
of his career his business had been built up with the cooperation or a rew
associates to whom he feels indebted for his early successes, and that in later
years his greater success has been made possible only by the kind of faitniui
patronage represented by your large and periodic attendance.
“ CU STO M

O W N E R S H IP

W IS E FOB LABUE COBPOBATIONS

“Any company that caters to the public as this company does can make
greater progress through a hearty public response created by the present
tried and proven method of customer ownership which will result in the
cultivation among its patrons of legitimately selfish interest in its welfare,
and it is certain that this company can win your greatest interest and
support only when it belongs to you.
••If it is wise for telephone companies, gas companies, electric-light com­
panies, water companies, and many other institutions of like character, to de­
velop customer-ownership plans, then it must be proper and wise for us to
ask our patrons to become stockholders.
*•It does not seeui fair to Mr. Fox that Mr. and Mrs. Jones or Mr. and Mrs.
Smith patronize his theaters one or more times each week, or 52 or more
times each year, and have the profits of their patronage paid to some Mr. and .
Mrs. John L>oe who do not even like the movies.
“ It is Mr. Fox’s opinion that if the Fox Theaters Corporation ever grew to
such a size as to have 5,000,000 shares of common stock outstanding, and if
these shares were distributed in such way as to permit 5,000,000 patrons each
to own a share of the stock, it would insure and guarantee a most successful
enterprise. He feels he has a reason to expect this large number of share­
holders in view of the fact that from seven to ten million people each week
attend his theaters.
“ H O W O TH E R S H A V E PROFITED

“ In last week’s message it was stated that those who, in the early days of
Mr. Fox’s career, hud the faith and vision to join him in his motion-picture
enterprises had received their reward. This is true not only of men who became
executives of the several companies but also of those who were associated
merely as stockholders. For example:
“ In 1905 a man invested $1,600 in one of Mr. Fox’s companies and during
the last 24 years this man has received upwards of $1,000,000 in dividends.
Although he has not put back any of his dividends into the company, his
investment is now worth over $1,000,000 in addition to the dividends he has
rcccivcd.
“ In 1910 another man invested $5,000 in one of the Fox companies and he
has received in the last 19 years more than one-half million dollars in divi­
dends. He has not reinvested a single dollar of his dividends but the present
value of the same holdings for which he originally paid $5,000 is more than
$1,000,000 in addition to the dividends he has received.
“ In 1915 the president of a large public-utility company invested $25,000 in
the common stock of one of Mr. Fox’s amusement companies and 12 years
afterward sold his holdings for more than $2,000,000.
“ None of these gentlemen were patrons of motion pictures. I f a like total
sum at those various times had been invested in various amounts by numerous
patrons of the Fox theaters and if these patrons had held their stocks as in­
vestments, they would have earned similar profits. With records like these,
Mr. Fox feels justified in recommending his patrons to become stockholders in
Fox Theaters Corporation.
.
“ M B . F O X O B U O A TED TO IN V IT E SH A R E H O L D G B S

“ This customer-ownership idea is not the impulse of a moment nor the
thought of a day but rather the outgrowth of three years of mature delibera­
tion. For more than three years Mr. Fox has argued with himself the pro*



STOCK EXCHANGE PRACTICES

1113

Prtefy of this plan, and only recently has he definitely reached the conclusion
pat not only is it proper hnt that he Is absolutely obligated to invite yon
■w beeome stockholders in the enterprise for the success of which you are
impossible. Nothing would be more gratifying to William Fox than for you
to join him in the ownership of Fox Theaters Corporation, and he strongly
«®es you to instruct your bank, hanker, or broker to buy for you 1. 5. or 10.
was many more shares as you care to purchase, with the understanding, how«rer, that you buy them for cash ami put them away as a permanent investment.
To ghre you the opportunity for further thought in the matter you will
ftedve at the door as you go out to-day booklet No. 2. which contains this
■essage o f Mr. Fox and interesting matter concerning the motion-picture
industry and die Pox Theaters Corpora Iion.
“A final wort. Did ever an industrial leader commit himself mote irre­
vocably to his stockholders than Mr. Fox when last week he said:
“ ‘ Will you have that same faith as my associates of old in this industry, iu
tUs company, and in me?
If so, I pledge you that you, too, will receive your reward.* ”
ONLY

▲raw

OF FOX PATRONS ABB 810CKH 01M B8

The managers of the various Fox Theaters enterprises realise that the daily
attendance at their houses, as Mr. Fox has intimated in his address reprinted
above, runs from one to two million people, depending on the attractions
booked, holidays, and the weather. The executives have carefully examined
Jbe stock books of the Fox Theaters Corporation. These show that the numoer of stockholders is less than 6,000. From the list of names and the places
of residence o f these stockholders, as well as from the disparity between the
Bttnber o f stockholders and of daily patrons, it is clear that a very small
Mrt of oar patrons are stockholders. From the address it is evident that what
Mr. Fox would like is to change the character o f that ownership, so that every
tetson who attends his theaters and who has made their success and his sue*
«as possible by that attendance should in the spirit o f reciprocity share in
the financial rewards of it.
PATBON OWNERSHIP IS SOUND BU8INES8

It is not merely a fine sentiment; it is sound business. It would be to the
*oflars-and-cents interest of each patron to make it his business to offer sugges­
tions regarding the spirit of employees, the character of the programs, the
toality o f the performances, and even of the proper conduct o f the business
feserally, so that the company would be keyed up to a pitch o f satisfactory
■eniee that has never been known to the profession.
That is why Mr. Fox has invited yon now to participate in the ownership
«f the common stock of the Fox Theaters Corporation, and why in the spirit
purpose o f the invitation he urges you to purchase through whatever
ageaey you choose such an amount of stock as you can conveniently pay for
“ to have and to hold,” Iteing absolutely certain in his own mind that i f yon
do this yon will profit by it.
HISTORICAL SKKTOH OP THE MOVING PICTUBB

It i« now 40 years since Thomas Edison, seeking eyes for his phonograph,
fafested the electric camera, and George Eastman, at practically the same
(fee, perfected the flexible film, so that pictures could be taken o f moving
things and could be sent in facsimile to any part o f the world in which there
*as equipment to show them.
That was the beginning of the motion picture. But these two sister inven­
tions did not make a business out of pictures until about the opening o f the
Twenty years ago the majority of mankind were content, broadly speaking,
t* eat, sleep, and work. But since then labor-saying machinery has accumu­
lated for most o f us surplus time and savings, so that our lives are now
tirided into four parts: We eat, sleep, work, and play. Amusement has become
the fourth necessity o f living. The business o f providing amusement and
*eereation, not only to the hundred and odd millions in tills country bat to
fre rest o f the civilized and to some of the uncivilised world, has grown to
of the major activities o f this generation and is still growing.



1114

STOCK EXCHANGE PRACTICES

In the field of commercial amusement the motion-picture industry far exceeds
all others, not only in the number of persons employed but in the amount of
capital invested. The 325,000 persons in the United States who get their wages
from motion pictures exceeds the number employed by Henry Ford and General
Motors which, together, make more than 80 per cent of all motor cars produced
in this country. The present money value of this vast business may be in
excess of $2,500,000,000. Probably between one-fourth and one-third of our
population depend largely on it for their principal amusement.
This then is “ big business.” Expressed in other terms it has been computed
that there are 20,500 theaters exhibiting motion pictures in the United States,
providing more than 18.000,000 seats and attended by over 100,000,000 persons
each week.
Much of this magnitude is very recent. In 1925 there were 50,000,000 people
a week as against the 100,000,000 people a week now attending these theaters.
The increase is due largely to the addition of sound to sight, and to the intro­
duction of colorful music and motion.
The commercial perfection of sound reproduction is barely 2 years old, and
even yet only 20 per cent of the theaters of this country are equipped with the
n